01 October 2019

Key considerations for retailers regarding tenancy contracts


Polly Chu
Partner | Hong Kong

In Hong Kong, it is very common for retailers to rent a space for businesses. It is of paramount importance that these retailers have sufficient contractual protection and measures in place to minimise their losses if circumstances become difficult. There are a few essential points for tenants to consider when dealing with tenancy contracts to ensure satisfactory protection in the event of an unexpected situation.

Local commercial tenancy contracts state that retailers are not allowed to close their businesses for a consecutive number of days or for an entire festive season during their tenancy as this will affect the turnover income of property owners. If such terms are breached, landlords would be entitled to terminate the tenancy contract, given this is a serious contractual violation.

To protect the business, retailers can include excepted situations, exclusion of liability clauses (or more specifically, defined Force Majeure clauses to include situations which are beyond the control of the owner or retailers) in their contracts to ensure that unforeseeable situations, which caused the business to close, would not prematurely bring an end to or constitute defaults in their contracts.

Nevertheless, inclusion of such clauses does not guarantee absolute protection for retailers as the clauses have to be drafted clearly and in a reasonable manner. Whereas contractual parties are normally bound by the terms as stipulated in the contract, the unique nature of exclusionary clauses means that they are subject to strict statutory and common law scrutiny. As stated under the Control of Exemption Clauses Ordinance (“CECO”), all exclusionary clauses will have to be fair and reasonable, or they will be voided.

What amounts to “fair and reasonable” is highly dependent on the contextual environment of when the contract was formed, and, comparisons with case law, must be made to ensure the validity of such clauses. Moreover, even if the exclusionary clauses are valid under the CECO, this still does not automatically entitle retailers the right to seek reliance on it.

In Hong Kong, courts adopt the Contra Proferentum rule in interpreting exclusionary clauses, which means that any ambiguity within the exclusionary clauses will be construed against the party seeking protection. With such a restrictive approach, exclusionary clauses must be carefully worded to cover a sufficient scope of eventualities.

Retailers who have been ordered to close by their landlords may be deprived from future business opportunities. To prevent a loss of revenue under such circumstances, these retailers can negotiate terms when signing their tenancy agreements. By doing so, they would, at the very least, be entitled to monetary compensation from the shop owners, and may even be allowed to terminate the tenancy, if the relevant terms are appropriately drafted.

As with other common law regimes, Hong Kong courts will enable the affected party to terminate its contract if the breached term concerned is categorised as a “Condition”, or if the breach of such term would deprive the affected party from most of the benefits it had originally expected.

The right to terminate is important for retailers, particularly if their business operations are time-sensitive in nature. However, this legal protection is only afforded if the relevant terms are carefully drafted. Courts are generally reluctant to provide this drastic protective measure simply because the parties have branded a particular term as a “Condition”.

A clear intention to treat the term as such must be evinced through delicate contractual construction, or the retailers may suffer from irretrievable losses that cannot be fully compensated through monetary means.

With on-going uncertainties in the market, contractual protection has long been proven to be an adequate recourse for the commercial losses suffered as a result, and professionals should always be consulted if one is in doubt of the soundness and protectiveness of their contracts.

Polly Chu Partner | Hong Kong

Category: Article