Fee Off-setting Letter

Fee Off-setting Letter in Sun Legend Investment Limited v Ho Yuk Wah David (18 December 2009)

“Mr. Peter Cheng and Mr Stewart Cheng

New World Development Co. Ltd.

32/F New World Tower,

16-18 Queen’s Road C

CENTRAL

Hong Kong

Dear Peter and Stewart,

Re:    Conveyancing Fee – Off-setting Arrangements

Further to our meeting on October 1, 1991 regarding the conveyancing fee off-setting arrangements, I am writing with proposals for our future working relationship with the New World Group.

A.  Basis of the Conveyancing Fee-Off-setting Arrangements

In Hong Kong, solicitors have managed to retain their statutory monopoly over the handling of conveyancing transactions.  Furthermore, they are required by law to charge for their services on the basis of minimum scale fees calculated by reference to a percentage of the consideration.  In addition, solicitors are, in many cases, at liberty to act for both vendors and purchasers, and also on behalf of mortgagors and mortgagees.

Each stage in the conveyancing process (for example purchase and sale agreement, equitable mortgage, formal transfer and legal charge) attracts a separate scale fee.  Even in the case of the conveyance and a mortgage of a single property, the total amount of scale fees payable generally exceeds the fee which would be payable if calculated on the conventional time basis by a considerable margin.  Large developments which generate hundreds of individual transactions based on a single set of precedent documents generate very substantial excess fees, often running into millions of dollars.

Over the years, property clients have come to recognise the substantial size of the profits earned by solicitors on conveyancing work and have sought means by which they can derive some benefit from the system.  Since it would be unlawful for a solicitor either to reduce his scale fees below the statutory minima or to share them with the client in the form of rebates, certain solicitors now operate a system whereby a portion of the surplus of scale fees over notional time costs is allocated to the client in the form of free advice on other areas of law such as tax planning, construction, finance, litigation or China.  Our Hong Kong office consists of over 130 lawyers and is one of the largest and most rapidly-growing local firms.  I enclose an Introduction to Baker & McKenzie Hong Kong which briefly describes the different areas of practice our Hong Kong office offers.  I also enclose a schedule listing the experience of Baker & McKenzie in conveyancing for large property developments in Hong Kong.

One practical problem sometimes encountered is that the client simply does not need enough free legal advice in Hong Kong to absorb the surplus within a realistic period.  We have overcome this problem with some of our clients by making the surplus available to other companies within the client’s group and by providing advice not only in Hong Kong but in certain other jurisdictions through our international network of offices.  I enclose a directory of Baker & McKenzie world wide offices which consists of over 1500 lawyers in 50 offices in over 10 countries throughout the world.

B.  Conveyancing Fee-Off-setting Arrangements Proposal

I would now like to summarise the general principles which underlie the above proposals: firstly, that we are obliged to charge scale fees for conveyancing work payable by the purchasers, which often exceed the amount which would have been payable if calculated on the basis of hourly rates; secondly, that we are prepared to make available an agreed portion of those excess scale fees to absorb fees payable for non-conveyancing work performed by us and our overseas offices generally on your behalf.

I set out below my initial suggestions for putting those principles into practice.  I have tried to keep them as simple and practical as possible and would welcome your comments on them.

1.  I suggest we agree upon a percentage division of the scale fees payable in respect of each major conveyancing assignment.  Within our portion of that percentage split, we will perform in respect of that assignment the full range of conveyancing work normally included in the scale fee.  The agreed balance will be made available to you for your purpose of absorbing fees for other non-conveyancing work.

Because of the variables involved in conveyancing transactions, it is probably not in either party’s interests to agree on a single percentage figure of general application and I suggest we determine the apportionment on a case by case basis.

2.  In the case of your group, our Hong Kong office is of course prepared to make available the conveyancing fee “excess” and allow other fees incurred in Hong Kong to be carried forward against it as from the date when conveyancing work is initially committed to us.

However, given the substantial value of most of your property transactions and the lead times which are often involved, I think we would need to set a limit on the amount of non conveyancing fees which can be carried forward against an anticipated surplus, pending the accumulation of an actual surplus.  We can discuss an initial figure and review it regularly thereafter.

3.   I suggest that non-conveyancing work carried out pursuant to this arrangement is dealt with as follows:

(a) Fees will be incurred in respect of that work at the normal rates applicable at the time it is carried out;

(b) We will endeavour to pre-estimate the level of fees on individual assignments wherever possible, though you will appreciate that such estimates are often difficult and are to be used as guidelines only;

(c) We will regularly inform you of fees incurred against current matters at whatever intervals are convenient to you;

(d) We will bill you in the normal way in respect of any fees incurred in excess of the limit referred to above;

(e)    We will ask you to pay disbursements of non conveyancing matters (Counsel’s fees, etc.) as and when they are incurred.

4.  Assuming the proposals are acceptable to you I suggest we implement them as soon as possible.  We do not as yet have instructions on any property matters likely to yield a scale fee excess though you mentioned that you have a number of projects in mind.

C.  Significant Saving for the New World Group

I would like to demonstrate the above fee off-setting arrangements with the following example.

Based on the assumption that there are 300 units in a property development project and the average size of each of the units is 1,400 sq. ft., and the units are sold at the rate of HK$4,000 per sq. ft., the average price of a unit will therefore be HK$5,600,000.

The estimated conveyancing fees likely to be generated will be as follows:

Fees re sale and purchase agreements –

HK$2,500 x 300 = HK$750,000

Fees re assignments (assuming 40% of the purchases are separately represented)-

HK$31,500 x 300 x 60% = HK$5,670,000.00

HK$15,750 x 300 x 40% = HK$1,890,000.00

    HK$7,560,000.00

Fees re mortgages (assuming 50% of the mortgage work of 60% of the purchasers are handled by the developer’s solicitors and assuming an average loan size of 70% of the purchase price) –

HK$24,600 x 300 x 50% x 60% = HK$2,214,000.00

Therefore the estimated total fees will amount to:

Sale and Purchase Agreements  HK$   750,000.00

Assignments  HK$7,560,000.00

Mortgages    HK$2,214,000.00

      HK$10,524,000.00

40% surplus fees to be used by the New World Group

HK$10,524,000.00 x 40% = HK$4,209,600.00

Based on our experience in implementing the fee off-setting arrangements for other major property developers, we should be able to provide about 40% surplus fees to be used by the New World Group for other non-conveyancing legal work.  In other words, based on the above estimation, Baker & McKenzie’s Hong Kong and overseas offices should be able to provide free legal services to the New World Group for close to the tune of HK$4,209,600.00 which amount should be considered as a significant saving for the New World Group.

As I hope this proposal demonstrates, we are enthusiastic at the prospect of further developing our relationship with the New World Group.  I believe that there will continue to be an excellent match between your legal needs and the services which we are able to provide. 

I will assume a general coordinating role in relation to the allocation and monitoring of matters conducted within this office on your behalf and will also be responsible for implementing, from our side, whatever billing arrangement is eventually agreed between us.

It would therefore be preferable if your instructions in relation to all new assignments were channelled through myself so that we can ensure that they are allocated to the appropriate people. 

Please give me a call when you have had a chance to consider this proposal.

With best regards.

Yours sincerely,

David Ho”

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