Types of leasing arrangements
The principal legislation which regulates leases of premises in Hong Kong, whether business or residential, is the Landlord and Tenant (Consolidation) Ordinance (Chapter 7) of the laws of Hong Kong. Other relevant legislation is to be found in the Conveyancing and Property Ordinance (Chapter 219) and the Land Registration Ordinance (Chapter 128). The law generally recognises contractual agreements (whether oral or written) under which occupation and use of real estate is let for a certain period of time.
There are two types of arrangements:
- A lease; and
- A tenancy agreement.
A lease for a term exceeding three years must be executed as a deed in order to create a legal estate in land. A tenancy agreement for a term not exceeding three years takes effect in possession and does not need to be in writing, although writing is preferable.
Common terms in commercial leases
There are no prescribed form of commercial leases and parties are free to negotiate and agree on the terms of commercial leases. In practice, rent for commercial premises is usually divided into stages throughout the lease term whereby the rent payable would be a fixed rent which will be adjustable such that the rent may increase by a certain percentage in stages, making reference to the turnover or the prevailing market rent, depending on the types of leases. There is, in general, no restrictions over the level of rent that could be charged.
In terms of apportioning costs, the lessor is generally liable for structural repairs whereas the lessee is obliged to keep the property in good and tenantable condition.
Length of lease
Most commercial leases for office use in Hong Kong are for a term of two or three years. Terms for office use over two or three years are negotiable depending on the parties’ bargaining power and/or market conditions. Commercial leases for retail use may tend to be longer than office use.
While most commercial leases contain an option to renew prior to the expiry of the lease term, most landlords do not grant such options. Either party may elect to terminate the commercial lease according to its terms and conditions. Usually, the landlord will reserve a right to terminate and re-enter the premises upon the lessee breaching a condition or a covenant and having failed to remedy such breach within a stipulated notice period.
It is noteworthy that an option to renew has to be expressed and clearly delineated in leases for it to be effective as illustrated in the recent case of Tse Siu Hoi v Lee Dick Gold and Jewellery Limited LDPE 1132/2014. It is desirable to specify by clear terms how the option should be exercised, and how the new rental is to be determined.
Regulation of leases
There are no specific regulations or laws which only apply to particular categories of real estate. All residential, commercial and industrial letting are principally governed by the Landlord and Tenant (Consolidation) Ordinance, the Land Registration Ordinance and the Occupiers’ Liability Ordinance.
Note that the Hotel and Guesthouse Accommodation Ordinance provides for the regulation, control and safety of hotel.
Managing leasing agreements
Security of tenure
Under the Landlord and Tenant (Consolidation) (Amendment) Ordinance 2004, lessees do not have a right to continue to occupy the relevant real estate after the expiry of a commercial lease.
Recovering real estate from a lessee
If there is a time limit provided in the lease, the lessor needs to give oral or written notice within this period of time. If there is no such time limit, the lessor should give notice within a reasonable time before the expiration of the lease.
Many leases include sale and redevelopment clauses which give the landlord a right to terminate the lease by giving a specified number of months’ notice to terminate, if the landlord wants to sell or redevelop the building. Typically, the lessor has to give at least six months’ notice in writing to the lessee. The lease will terminate upon the expiry of the notice.
A lessee may also be forced to leave prior to the date originally agreed if the landlord exercises his right of forfeiture. The landlord must comply with the notice provisions of section 58 of the CPO (relief from forfeiture) unless the forfeiture arises because of non-payment of rent or insolvency.
If the tenant fails to remedy a remediable breach and to make reasonable monetary compensation to the landlord’s satisfaction within a reasonable time of service of the notice, the landlord can proceed to enforce the forfeiture. The landlord can exercise the right of forfeiture either by physically re-entering the property, or by commencing legal proceedings for possession. If the landlord successfully obtains a judgment against the tenant, he/she will be able to apply to the Lands Tribunal or the appropriate Court for a Writ of Possession. Once the Writ of Possession is issued, the court bailiff will recover the possession of the property on the landlord’s behalf.
Termination by third-party
Authorities may invoke the Lands Resumption Ordinance and/or the Mass Transit Railway (Land Resumption and Related Provisions) Ordinance to resume land, including leased property, compulsorily. If such Ordinances are invoked, compensation will be offered to the lessee according to the market value of their interest in the property. For redevelopment purposes, one who meets both the applicable ownership threshold and other statutory requirements can apply to the Lands Tribunal under Land (Compulsory Sale for Redevelopment) Ordinance for compulsory sale of all the undivided shares in the lot. If the application is successful, the Lands Tribunal will make an order to sell the remaining undivided shares in the lot, and the lessee will be offered compensation by the Lands Tribunal.
With the granting of such order for sale, notwithstanding the terms of any lease or the provisions of the Landlord and Tenant (Consolidation) Ordinance, all tenancies are terminated on the date on which the purchaser of the lot became owner of lot; and the affected tenants are required to deliver up possession of those properties immediately upon the expiration of six months immediately following the date above. It should be noted that if an order for sale is made, the Lands Tribunal may order compensation to be paid to a tenant (including any sub-tenant).
Security for protecting against failure by lessee to meet obligations
Parties enjoy the freedom of contract. The lessor may require a guarantee from the lessee’s bank and/or a deposit. In addition, the lessor may require the lessee to purchase comprehensive insurance regarding third-party liability against any person or property in the premises.
Transfer of lease
The landlord does not usually allow the tenant to do any of the following:
- Assign or sublet the lease;
- Part with or share possession of the premises with others, including with companies in the same group; and
- Change control of the tenant.
A breach of any of the above will give the landlord a right of re-entry and the ability to forfeit the lease. It is possible to negotiate changes to these provisions. If the landlord claims damages against the tenant for the breach and the tenant defaults, the landlord may claim against the guarantor (if any).
Managing a leased real estate
Restrictions on use
Lessees must abide by the user restrictions under the Government lease and any subsequent lease modifications. They are also restricted by the Occupation Permit for the building and the Deed of Mutual Covenant. Lessees must also abide by the laws and regulations relating to the permitted use of the premises, such as those in the Town Planning Ordinance and Outline Zoning Plans.
Leases typically limit the extent of or prohibit alterations or improvements of property. Structural repairs that involve alteration of the building’s form and framework are usually not allowed. The lessor’s consent should be sought when undertaking non-structural alterations.
In the majority of cases, leases set out a fixed amount of rent payable, or a mechanism to calculate the rent payable, for the entire duration of the lease term.
Taxes for rental
Stamp duty is payable on the tenancy agreement or lease. The amount depends on the level of rent and the term of the lease. Typically, both the lessor and lessee share the stamp duty payable equally.