Hong Kong Lawyer: Changing times

It is now well-known that conveyancing is no longer the profitable business it used to be. Hong Kong Lawyer spoke with several local solicitors about the decline in the conveyancing market and their views on what the future might hold. All names have been changed to protect the identity of individuals.

It was in 1995 that the conveyancing market in Hong Kong first felt a presentiment that change was on the way. When the then Attorney-General, Mr Jeremy Mathews, suggested that the fixed scale fees for conveyancing be abolished, he was spurred on by the allegation that solicitors were making excessive profits from conveyancing, and that Hong Kong home-buyers were, in effect, tied to a scale of charges fixed on the value of the property rather than the amount of work involved. This allegation was made at a time when astronomical property prices and the bullish property market remained economic pillars of Hong Kong.

Back then, solicitors in Hong Kong were often able to make over $50,000 for one piece of conveyancing work in a new development. Conveyancing was essentially the bread-and-butter business for many solicitors' firms in Hong Kong, and especially for the small and medium-sized law firms in Hong Kong. Many practising solicitors even had the liberty to decide whether or not to take on a particular conveyancing case, depending on the profits they could make out from it.

Mr Szeto, for example, has been practising conveyancing in his Central office for almost five years. He told Hong Kong Lawyer that before 1997, business from conveyancing provided almost one-third of the total profits of his two-partner firm. Now it has shrunk to as low as one-eighth. In the bumper days before 1997, they were getting as many as ninety transactions per month; today, they are grateful to get twenty.

The days when conveyancing alone could form the staple business of a firm are long gone. Nor can conveyancing be relied upon to provide the stable income which could finance the less profitable areas of the business of a small or medium-sized law firm as it might have done in more prosperous times. The sagging conveyancing market is best reflected by looking at the number of land documents received for registration in the Urban and New Territories Land Registries. In the year 1997, the number of agreement of sale and purchase of building units was 205,500, representing a total consideration of $868,019 million. Assignments of building units stood at 220,911 and $790,408 million.

However, the number of agreement of sale and purchase of building units shrank to 98,466 in 1999, and consideration totalling $256,641 million - representing a drop of 52% and 70% respectively. Assignments of building units had gone down to 140,858 and at a consideration of $300,059 million - again a decline of 36% and 62% respectively.

The latest figures released by the Land Registry on 5 June showed that property deals in May had dropped by one-third to 6,124 compared with April; and one-half compared with May last year. A survey published by Centaline Property Agency showed the total value of 31 major private housing estates was estimated at $394.6 million as of 28 May - a figure representing a fall of 54 % compared with 15 June 1997.

Economic Crisis Marked a Watershed
1997 appears to have marked a watershed for the property market and hence all conveyancing solicitors. Figures released by the Land Registry regarding the number and considerations of land documents received for registration by the Department provide statistical support for this change in the market. The financial crisis suffered by Hong Kong towards the end of 1997 was a major contributory factor. When the general economy went into decline, the property market could not remain unaffected.

During the same year, many eagerly awaited the newly-appointed Chief Executive Mr Tung Chee Hwa's housing policies. In his policy address, the Chief Executive unveiled his plans to build a total of 50,000 residential units in the public sector and another 35,000 in the private sector every year. But this policy met with opposition from many lawyers. 'Such a housing policy was an insensitive decision. It is stupid because it totally disregards the laws of economics which apply to the property market', said one.

A Price War is Being Waged
Although the 40-year-old scale fee system remains as a guideline for the consumers of real estate in Hong Kong, it would almost be impossible to find a solicitor charging his client according to such 'guidelines' which remain 'negotiable' as decreed by the Law Society Council in 1997. According to Mr Law, partner of a law firm in Central, the recommended scale fee merely equates to a dead letter behind which any amount of undercutting can take place.

He asked rhetorically, 'When every solicitor in the industry is undercutting his price, do you think a solicitor could even survive by following the so-called "guidelines"?'
Currently, Mr Law's firm is charging a fee of around $6,000 to $7,000 - an amount that he would call 'decent' nowadays. Yet he knows that it also represents an amount which many price-conscious prospective clients would consider 'off-putting' because there are simply too many solicitors within the industry that are charging $2,000 less.

How low has the level of charges fallen? The best reflection can be obtained by comparing prices charged by local solicitors before and after the economic downturn in 1997. Accordingly, for a flat with a value of $3 million, with the fixed scale fee in effect, a solicitor could charge up to $20,000 from a client including all the agreement, assignment and mortgage charges. Today, one can find a law firm located in Central offering to provide a full conveyancing service at around $3,000 to $4,000.

Almost all solicitors practising conveyancing contacted by the Hong Kong Lawyer would say that currently conveyancing does not even have a 'market' in Hong Kong. It is not just that the volume of conveyancing business has fallen, but that market forces have pushed the level of conveyancing charges to a level that will only just cover the costs of disbursements or in some cases, the chargeable hours of the solicitors and their assistants. In other words, most conveyancing lawyers are only just breaking even.

Conveyancing charges may be undercut by many solicitors in order to lure more business, but the overhead cost of conveyancing transactions remains inelastic. All the solicitors contacted by Hong Kong Lawyer point out that the shrinking conveyancing charges do not reflect the actual financial input from the law firms. Some even say the current charges just 'do not make any sense at all'.

According to Mr Szeto, 'In our firm, we are currently charging our regular clients approximately between $4,000 to $5,000 on a normal sale-and-purchase conveyancing case. This amount represents the average $2,000 disbursement cost, and the cost of the time input by the solicitor and his or her assistants.'

In the past, it was argued that the scale fee did not reflect the amount of work involved in a conveyancing case. It now seems that, with the current 'non-binding' scale fee and with fees now negotiable between individual solicitors and client, the charges still do not reflect the actual workload involved - only now the pressure appears to be on the service-providers.

Mr Hon, a sole practitioner who has been practising conveyancing for over ten years, lamented, 'The pressure mounts because liability falls on the shoulders of solicitors if there are faults in the deeds. What if, during the process of examining the title, the solicitor or his assistant makes a mistake? Then he would risk charges of professional negligence and his firm risks being sued by the client. The result could be that the few thousand dollars of the conveyancing fee form only a small portion of the whole value of the property, a value which he might have to fork out as compensation to the client.'

He added that, although one might argue that such risks would be covered by solicitors' insurance providers and that the compensation could be covered by the insurance plan, it would be a 'vicious-circle' situation - because solicitors would be forced to pay higher professional indemnity premiums.

'In effect, any solicitor who is practising conveyancing against the backdrop of the gloomy conveyancing market has been turned into virtual "cheap labour". Since the end of 1997 our firm has been trying very hard to make ends meet. Our plight resembles that of the middle-class property owner - the value of their flats are falling and turning into negative assets. There may come a day when we might have to give up our practice altogether.'

Slight Decline in Number of Registered Firms
Has the state of the economy been bad enough to force firms to close completely? From figures supplied by the Law Society, it can be seen that for the past five years there has been actually been a slight increase in the number of registered solicitors' firms. In 1999 there were a total of 608 and currently there are a total of 618. But this slight increase in registration also corresponded to an increase in the number of firms that closed down. In 1997, a total of nineteen solicitors' firms were wound up; this was followed by thirty in 1998 and twenty-seven in 1999. It may not be possible to connect the increase in the number of firms closing down with the steep decline in the property market, but, given the fact that many firms depended on the profit generated by conveyancing, it may be fair to say that this decline has been a strong influencing factor.

Mr Kong, who heads his firm's conveyancing department, is well-qualified to give an idea of the connection between the abolition of scale fees, the beginning of the financial crisis and the aggressive price war between solicitors. His firm has practised conveyancing in Hong Kong for over three decades. While he only obtained his licence to practise in 1996, he had previously been with the company for over ten years as a clerk.
He admitted that business from conveyancing had been shrinking fastest compared to other areas of practice, and he said that the effects of the downturn were felt during the latter half of 1998 as a direct result of the Asian financial crisis.

Combination of Factors Has Led to Market Decline
The majority of solicitors who spoke t o Hong Kong Lawyer agreed that it is the combination of the discontinued application of the scale fee system and the financial crisis which has had a dampening effect on their conveyancing business. Mr Kong believes that the combination of both has been an important factor. According to Mr Kong, after the discontinuance of the scale fee system, the stock market crashed towards the end of 1997. However, the effect of the scale fee system on their conveyancing business was not felt immediately. There was a time-lag between the abolition of scale fees and the adjustment to a publicly more acceptable level of fees so that the effect on the conveyancing business was slowly and gradually felt by every solicitor in the business.

'Right after the scrapping of the scale fee system, the clients were not generally aware that it had been made non-binding. But after the onset of the financial crisis around October 1997, people were generally hard-hit financially and it was then that they began to be more conscious of the need and option to bargain and ask for a lower fee from us,' explained Mr Kong. In short, the financial crisis and the ensuing economic downturn were catalysts in aggravating the effect of the abolition of scale fee. In the calm before the storm between the abolition of the scale fee and the onset of the financial crisis, there was an 'adjustment period' when the undercutting of conveyancing charges was not as widespread as at present.

Mr Kong is currently charging around $5,000 to $7,000, what he would also call a more 'decent' level. He said this price range would only account for about one quarter of the amount he charged before the year 1997 when the scale fee was not scrapped. Without revealing how far total business profits had fallen because of the decline in conveyancing transactions and the abolition of the scale fees, he said even an average fee of $7,000 could only enable his business to break even. While clients are still bargaining for even lower fees, he said the current fee range in the market had reached rock bottom.

In fact, Mr Law, Mr Szeto and Mr Hon all told Hong Kong Lawyer that the current level of conveyancing fees had bottomed out, and that they could not get any lower as it was simply not possible to charge below cost. All the solicitors were consistent in maintaining a pessimistic outlook toward the property market. They could not see how the market could recover in the short run. The reason behind their attitude is generally in accord - the value of real estate keeps dropping and has not appreciated significantly in the past few years. Property owners can no longer reap a lucrative profit from leasing their flats to tenants and property is no longer considered a good investment in the 'get-rich-quick' culture of Hong Kong.

Property No Longer a Sound Investment
Mr Law provided a similar reason for his pessimistic outlook, 'The value of property has been dropping so dramatically that the market value of a home owner's flat represents only a fraction of the its mortgaged value. People would rather put their cash into the banks to earn interest and the rewards they could accumulate would be higher than those they might earn by investing in a property. During the time when the property market was bullish, as in the recent past, people would put their assets in property because of the prime rate. The value of their money would have declined if they had just deposited it into bank accounts to earn interest. Now the opposite is true.'

From the point of view of home-buyers or end-users, Mr Hon gave a slightly different reason for the downturn of the property market and hence their declining conveyancing business.
'Chinese people have traditionally considered it very important to be able to own a piece of property that they can call home. For example, in the past, people used to "upgrade" themselves from renting a room in a public estate to moving to a flat via the Home Ownership Scheme, and finally, to living in a private property that they could call their own. They knew it was important to have their own roof over their heads and they worked hard towards this goal. But now who wants to work hard to own property, when it is simply not profitable to invest time and money towards owning an apartment which has turned into negative equity and depreciated so much in value?'

During the present doldrums in the property market, the offer of complimentary conveyancing fees seems to have become a marketing tool for many big developers in a bid to lure more home-buyers. As another tactic in the ongoing price war, such offers serve to further squeeze out conveyancing business from the primary market and thus deprive small firms even more.

One solicitor said he knew a client who was about to purchase a new development and who preferred to 'shop around' for a conveyancing solicitor despite the fact that one had been recommended by the developer. However, in the end he gave up his search because the one recommended by the developer offered the lowest charges.

All the solicitors interviewed told Hong Kong Lawyer that the conveyancing business for their small to medium-sized firms derives mainly from the secondary property market, because the dominant developers in the market already have connections with the bigger law firms who can thus siphon off business. While some smaller law firms do go into partnership with estate agents in order to get referrals from them, one solicitor questions its effectiveness, while another resents the need to pay the agencies' commission.

When the scale fees were announced as non-binding in 1997 and the conveyancing market was exposed to the cold wind of market forces, it was widely hailed as a victory by those who supported the notion of free competition. The Consumer Council, one of the strong opponents of price-fixing within the legal industry, immediately called upon the profession to guard against a possible drop in quality and a deterioration in the standard of conveyancing services as a direct result of the scrapping of scale fee. But has the quality of service actually deteriorated? And is any such deterioration a direct result of the scrapping of scale fee?

Decline in Quality of Service
Mr Law believes that the price war has led to a decline in the quality of service, and that clients now 'haven't the chance to get a taste of quality' in conveyancing. He adds that the crux of the problem lies in the relentless price-cutting, and many solicitors are either reducing the manpower a l l o c a t e d t o e a c h c a s e o r 'downgrading' the level of service by hiring less experienced general clerks instead of clerks who have previous experience in conveyancing.

He adds, 'Solicitors cannot cut staff salaries simply because they are forced to charge their clients less during these days of intense competition. Disbursements and other expenses cannot be trimmed, so the natural solution is to simplify the procedures at the expense of quality.'

But if the word 'quality' is interpreted merely in terms of whether or not a client is left with a defective title, then Mr Szeto holds a different view, 'In a situation where we are already facing such intense pressure not to commit any negligence when proving title for our clients, and when we are charging such low fees, we just cannot afford to be cavalier on our procedures. We do not want to get ourselves involved in any unnecessary litigation: it is just not worth it.'

But he does admit that in the past when the systems of scale fees was still in effect, his two-partner firm could still afford to employ one or two more general clerks to assist him. Currently he has three clerks assisting two solicitors. Previously, the ratio was four to one. He described the current situation as resembling an 'elite system' where the staff who remain are the most experienced in the field.

How to Survive?
The cutting of support staff is an obvious response to the decline in business faced by many small law firms in Hong Kong. The main concern for many small firms is one of survival. Lay people might think that the solution lies in switching to other areas of practice or by developing business in another area of law. In fact one might think that if conveyancing is not doing well these days, then solicitors can take up litigation, commercial or IT law. But while this is possible for some solicitors such as Mr Szeto who has increasingly turned his attention to litigation, for others, such a reinvention is not as easy or straightforward as reading a few law books or taking some courses.

For individual solicitors, re-training in another area after years of practising conveyancing is not necessarily a simple matter. Apart from the time they would need to invest in adapting to a new practice, they would probably lose their valued client following which they had worked for years to establish. Those who have specialised in conveyancing for decades would find it especially difficult to adapt to new areas of legal practice, to develop the necessary skills, and then to compete in a tough business environment with younger solicitors.

Simply changing one's area of specialisation is not an easy option either. Litigation is a wide and popular field of practice, but many solicitors have noted a decline in the number of contentious cases. Clients generally prefer to settle out of court or they simply avoid litigation because of the high costs involved.

On the question of survival, Mr Kong takes a more positive view. He pointed out that his company has always considered the necessity of maintaining the conveyancing department despite the current downturn in the property and conveyancing market. Despite a general decline in business, there is still a niche in the market for his company to exist, and he believes it is a market where there is a still a place for the provision of quality conveyancing services.

'It is important during the current climate to maintain a loyal client-base, consisting of clients who do not mind paying more [his firm is charging between $5,000 to $7,000] for your services even though the solicitor next door is charging $3,000. These clients know that they are getting value for money from you. To maintain the so-called "regulars" a solicitor would need to deliver a more personalised service to them; to follow-up their cases closely and report to them regularly during the process. These are the small, but important details, if you like, which give your clients peace-of-mind. It is essential that your clients have confidence in your firm. A good reputation always leads to more referrals.'

In the legislative arena the draft of the Land Titles Bill would introduce a system of title registration as opposed to the current land deed registration system. This will essentially simplify the current complicated procedures for ensuring that the buyer of a property gets a indefeasible title. Under the proposed new system, titles to property acquired by purchasers for value in good faith will not be affected by unregistered claims and property conveyancing procedures in general will be simplified.

The majority of solicitors welcome the idea of the bill, but some maintain a cautious attitude over whether the introduction of the new bill will bring into the industry other conveyancing professionals who will compete with solicitors to provide the same service and further undermine their share of the business. For example, in Canada notaries can also practise conveyancing and in the UK, so can licensed conveyancers.

Conclusion
The winds of change may blow cold, but they may have given the housing market a much-needed shake. Rising property prices eventually hurt the economy and make the SAR a less attractive place in which to do business. The latter point takes on further significance in the light of China's imminent entry into the WTO and the increase in foreign firms wishing to set up here. More realistic property prices and simpler conveyancing procedures may mean a loss of profit to conveyancing solicitors, but it is more important that the SAR develops a sound, sustainable economic base on which to prosper, and that can only come from diversification and the development of high-technology and service industries.

Georgina Lee