The Hong Kong legal system is based on the English common law system. HK land law is comprises of, primarily, a few key statutes but also a body of case law.
Key legislation governing specific areas of real estate include the Conveyancing and Property Ordinance (CPO), Land Registration Ordinance (LRO), Buildings Ordinance, Landlord and Tenant (Consolidation) Ordinance, Stamp Duties Ordinance (SDO), Land (Compulsory Sale for Redevelopment) Ordinance and Residential Properties (First-Hand Sales) Ordinance (RP(FHS)O).
Hong Kong's property market has been weighed down throughout 2019 by continued economic and local political issues. The US-China trade war impacted sentiment at the start of 2019. Citywide demonstrations have led to a further economic slowdown, compounded by the dramatic impact of COVID-19. Office rentals are softening, retail leasing more so and the hotels and tourism sector facing dire straits. Residential sales and leasing markets are also softening.
Nevertheless, HK saw completion of some significant transactions such as the sale in March 2019 by Link REIT for just over USD1.5 billion of 12 shopping centres and over 4,700 parking spaces. SHKP also purchased land to develop over three million square feet of commercial space in West Kowloon at a much lower than expected price of USD5.4 billion.
Transactions involving blockchain are starting to emerge with Centaline Property Agency starting a blockchain platform in March 2019 for secondary market transactions. This is not expected to disrupt the market in the short term, but greater shifts can be expected in the longer term.
Land reform is exceptionally slow. The Land Title Ordinance (LTO) was gazetted on 7 July 2004 but has still not been implemented. This new piece of legislation aims to replace and simplify the deeds registration system.
The Government’s 2019 policy address proposed plans to redevelop about 700 hectares of unused private land for public housing in the New Territories. The Chief Executive also announced a series of measures to acquire land from private landlords and to relax mortgage requirements for first-time buyers.
All land here is leasehold with the exception of St John’s Cathedral being the only site of freehold land. Leasehold interests are granted by way of government lease or conditions of grant.
There is no system of title registration. This may change when and if the LTO is implemented. Instead, under the LRO, Hong Kong currently adopts a system of deeds registration.
To effect a transfer of title, the transaction must be completed in accordance with prescribed rules, duly stamped with the Stamp Office and properly registered with the Land Registry within stipulated time frames. Registration is by way of deeds. The relevant requirements are set out in the CPO and LRO.
The SDO outlines different types of stamp duty payable and various tax treatments which apply depending on the party and property involved.
There are otherwise no special laws applicable to transfer of specific types of real estate.
A lawful and proper transfer of title to real estate is effected by a deed which shall be stamped and registered within 30 days after the execution date. Common exceptions include licences and short-term leases of no more than three years. Registration itself does not prove ownership but will impact an Owner’s priority of interest.
Title is shown on the Land Register via a system of registered deeds evidencing ownership particulars and registered encumbrances.
Title insurance is not commonly used in Hong Kong. However, it is increasingly being used by some private equity type investors.
A seller is typically obliged to prove a good title to the property in accordance with Section 13 of the CPO.
Due diligence on title is an integral part of a property transaction, which requires the seller to produce the original title documents for the buyer’s inspection. A land search with the Land Registry also reveals registered encumbrances, eg, legal charges, building orders or court orders.
Due diligence may also be needed on zoning plans, existing tenancies and contracts such as service, construction and building management contracts. If the proposed transaction involves buying a company which holds the target property, corporate due diligence will also be needed on the target company(ies).
Physical due diligence is also advisable to ensure that the building plans are complied with and there are no unauthorised building works or material building defects.
Requisitions on title will be raised by the buyer’s lawyers. The seller is obliged to answer such requisitions to the buyer’s lawyers’ satisfaction to prove good title. Refusal to do so may enable the buyer to refuse to proceed with the transaction (unless the requisitions were raised out of time).
A seller is not obliged by law to provide mandatory warranties in a sale of real estate.
However, in most cases parties may agree to incorporate by reference Part A of the Second Schedule of the CPO’s covenants and conditions into a sale and purchase agreement. Seller’s representations are typically provided in relation to:
A buyer will often require a seller to give warranties in relation to:
The specific warranties a seller may give depends on the type of property, market condition and bargaining power of the parties. A buyer’s remedies against seller for misrepresentation can be found in either statute or common law. The Misrepresentation Ordinance provides statutory protection to a buyer in respect of a seller’s misrepresentation. If the court finds the seller liable for misrepresentation, it may annul the contract and order a retransfer back to seller, and repayment to buyer of the purchase money with interest from the date of payment.
A buyer may also be entitled to the costs, charges and expenses incidental to the transfer. Instead of reversing the transfer, a buyer may be awarded damages. In a sale of newly developed residential property, a purchaser may also find relief under the RP(FHS)O.
Apart from legislation already covered in this article there are no special laws of particular relevance to investors other than the SDO which imposes additional stamp duty on foreign, non-permanent resident investors and on sales occurring within three years of an acquisition. There are also guidelines on how much an investor can borrow which are regulated by the Hong Kong Monetary Authority (HKMA).
The owner/occupier of land will need to comply with various environmental laws and regulations, including the Air Pollution Control Ordinance, Noise Control Ordinance, Waste Disposal Ordinance, Water Pollution Control Ordinance and the Environmental Impact Assessment Ordinance. Where a local authority has stepped in to remedy a breach, it may register a charge against the property to recover any costs that need to be reimbursed.
Normally, in a sale and purchase transaction, the seller does not retain liability for environmental damage after an asset sale. However, the parties are free to allocate these risks by agreement. In practice, liability for environmental damage is usually assumed by the buyer. Proving that the environmental liability arose before the transfer of an asset can be difficult, hence, the buyer may wish to obtain a contractual indemnity from the seller to safeguard its position, especially where the piece of property or land is for some environmentally-unfriendly use (eg, an industrial site).
In a share sale, the environmental liability remains with the company being transferred.
Statutory Outline Zoning Plans set out the designated uses of land. Under the Town Planning Ordinance (TPO), if an owner wishes to use land for a use other than as permitted in the Statutory Outline Zoning Plans, approval must be obtained from the Town Planning Board (TPB).
An occupation permit sets out the permitted user of that building and certifies that such newly constructed building is fit for occupation.
Local authorities may also require the developer to enter into a development agreement with certain obligations, such as making a payment or carrying out public works in order to obtain planning permission.
Government can acquire private land for public projects under the Lands Resumption Ordinance. Examples of such projects include the construction of a public road, a public housing development, an urban renewal project, a mass transit railway or a drainage project. Other resumption procedures will be instituted under laws such as the Roads (Works, Use and Compensation) Ordinance, the Land Drainage Ordinance, the Urban Renewal Authority Ordinance and the Mass Transit Railway (Land Resumption and Related Provisions) Ordinance.
The Government may commence statutory eviction proceedings by serving a clearance notice. It is not obliged to rehouse affected owners as long as compensation has been awarded.
For compulsory acquisitions made by the Government, the affected owners can challenge it by way of judicial review on limited grounds: illegality, procedural impropriety and irrationality.
Where an entity has acquired more than 90% of the undivided shares in a lot, that entity may apply to the Lands Tribunal to acquire the remaining units under the Land Compulsory Sale for Redevelopment Ordinance. This percentage may be reduced to 80% for:
If a redevelopment is justified having regard to the age or state of repair of the building and the owners can prove that they have conducted all reasonable steps to acquire all of the undivided shares through negotiation on fair and reasonable terms, such an order will be made. Failing agreement, the Court can intervene to impose a fair and reasonable amount.
Three different types of stamp duty may be payable on a transfer of property under the SDO: ad valorem duly (AVD), buyer’s stamp duty (BSD) and special stamp duty (SSD). Although the SDO outlines which parties are liable to pay, this can be varied by agreement between buyer and seller. As mentioned in 2.2 Laws Applicable to Transfer of Title, the applicable rate of stamp duty depends on the property type and the parties involved. BSD and SSD only applies to residential property.
AVD is usually paid by the buyer. Since 5 November 2016, a 15% flat rate of the purchase price is payable for residential property transactions. Lower rates, from HKD100 to 4.25% depending on the property value, are available if the buyer is a Hong Kong Permanent Resident (HKPR) not acting on behalf of anyone and does not own any other residential property in HK at the time. Lower rates also apply when a buyer changes their only residential property in Hong Kong. For non-residential properties, rates are 1.5%-8.5% depending on the property value. Amongst other exemptions, no AVD is payable if the property passed under a will.
The buyer must also pay BSD at a 15% flat rate of the purchase price or market value (whichever is higher), unless the buyer is a HKPR.
SSD is also payable on disposal of residential property acquired on or after 27 October 2012 and which is resold within 36 months. The rate (10%-20%) payable depends on the acquisition date and how long the property has been held.
Stamp Duty Relief, Alternative Payments and Property Tax
Stamp Duty relief is available under s.45 of the SDO on the transfer of property between associated companies. This relief will be withdrawn if the companies involved cease to be associated companies within two years from the transfer date.
Stamp duty is also payable on the transfer of shares in a Hong Kong property-owning at the rate of 0.2% of the purchase price or net asset value of the shares (whichever is the higher). Contractually, the buyer usually agrees to pay this amount.
Landlords pay property tax at 15% of the net assessable value on the rent.
There are no specific restrictions on foreign ownership or occupation of land (including shares in companies holding properties). See 2.10 Taxes Applicable to a Transaction.
The main sources of financing real estate investments are borrowing loans from banks and financial institutions or raising equity or a hybrid of both. There are no restrictions on borrowing loans from foreign banks.
The most common forms of security are:
There are no restrictions on granting security to foreign lenders, or making loan repayments to a foreign lender under a security document or loan agreement. There are no exchange controls.
Stamp duty is not payable on loan agreements, mortgages or security documents unless either:
Where the borrower is a body corporate incorporated in Hong Kong, or a foreign company registered in Hong Kong, security documents should be filed with the Companies Registry within one month from execution (registration fee: HKD340).
An equitable mortgage and a legal charge should also be registered at the Land Registry within one month from execution otherwise it may lose its priority.
There is no specific tax or fee payable for enforcement in general. However, the party who intends to enforce a default security document may need to institute court proceedings.
Before a corporate entity can give valid security over its real estate assets, it must observe and comply with Hong Kong laws including the Companies Ordinance (CO) in relation to financial assistance and corporate benefit.
Under the CO, it is not lawful for a company formed and registered in Hong Kong, or for its subsidiaries, to provide financial assistance for the purchase of shares in that company. Exceptions apply, however, where its directors are able to make a solvency statement and comply with certain specified statutory procedures.
Directors must comply with common law rules and the CO. A director must only act in a way that the director considers, in good faith, is most likely to promote the success of the company for the benefit of its members as a whole. If directors are in breach of such duties, guarantees and security may be unenforceable. This is especially relevant when assessing corporate benefit in relation to up-stream or cross-stream guarantees or security. Challenges from shareholders can be mitigated by obtaining shareholder resolutions to support such guarantees or security.
A corporate entity must also comply with other rules regarding maintenance of capital, restrictions on transactions between a company and connected parties and provisions relating to transactions which may be set aside if they occur within certain periods before the company commences any insolvency process.
The owner must also check the land grant to see if any restrictions on alienation prevent the grant of any security interests.
Depending on the security, enforcement rights should be set out in the security documents. When a borrower defaults, the lender can usually invoke relevant provisions by way of appointment of a receiver, foreclosure or taking possession of the applicable assets in accordance with Order 88 of the Rules of the High Court.
Section 50 of the CPO implies, in all legal charges or equitable mortgages by deed, a power for the lender to appoint a receiver of the real estate and the income derived from it when the money becomes due. Appointments of a receiver in respect of land must be registered with the Land Registry and the Companies Registry.
The CPO implies, in all legal charges or equitable mortgages by deed, a power of sale subject to the provisions of the CPO, unless it has been varied or excluded. In the event of a mortgage default, the title to the property can be assigned by the mortgagee to a bona fide purchaser free of the mortgage. If the proceeds of sale are insufficient to cover the debts owed, the borrower is still required to repay the deficit.
The receiver will take physical possession of the property so that vacant possession can be delivered to the buyer if the property is sold. If the borrower refuses to deliver vacant possession to the receiver, the receiver will need to apply to the court for a possession order. Exercising the power of possession should be notified to the Companies Registry.
If the property is subject to a tenancy granted with lender’s consent under the mortgage, the lender’s right is subject to the tenant’s rights under that tenancy and cannot take the property free from that tenancy. However, the lender may send a letter to the tenant asking it to pay rent directly to the lender.
Under the LRO, loan documents affecting land must be registered within the prescribed timeframe to preserve priority. This can be varied by contractual subordination whereby senior and junior creditors agree that the junior creditor will not exercise its rights until the senior creditor has been fully repaid. This is effected by a deed of subordination or an inter-creditor deed.
Another common technique is structural subordination where a loan is granted to a company which is a holding company of another asset-owning company. A creditor of the holding company can only recover from the assets of the holding company rather than the subsidiary. A company's assets are treated individually rather than as a group. Accordingly, a creditor of an asset-owning subsidiary will, as a practical matter, "rank" higher.
Under environmental legislation (see 2.7 Soil Pollution or Environmental Contamination), a holder of security over land is not liable for environmental damage provided it does not take possession of the land and does not cause, or knowingly permit, damage to the environment.
However, if the security is enforced, caution must be exercised as owners can be liable for environmental damage on or coming from the land, even if it did not cause such damage. A lender should not go into possession of land without carefully assessing the implications of potential environmental liabilities. The lender may protect itself against such liability by:
Security interests created by a borrower in favour of a lender may become invalid or subject to a liquidator’s challenge if they were granted within certain risk periods known as “hardening periods” of six, 12 or 24 months on or before a winding up or, insolvency of the security grantor.
Security may be voidable in certain circumstances including where it constitutes an unfair preference under Section 266 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (C(WUMP)O) incorporating Section 50 of the Bankruptcy Ordinance in corporate insolvencies, or a transaction at an undervalue under Section 265D of the C(WUMP)O.
Generally, to set aside a security, a court order is required and the security must have been created within the relevant hardening period.
A floating charge granted by a company within 12 months of commencement of a winding-up is invalid under Section 267 of the C(WUMP)O unless it is proved that the company was solvent immediately after creation of the charge or except with respect to the amount of any cash paid to the company in consideration for the charge.
Hong Kong's equivalent of LIBOR is Hong Kong Interbank Offered Rate (HIBOR). The responsible transition committee – Treasury Markets Association’s Market Practices Committee has consulted industry stakeholders relating to the alternative reference rate for HIBOR. The HKMA is considering the adoption of the Hong Kong dollar overnight index average, Honia, as a possible alternative. Honia is based on actual transaction data and is similar to the alternative reference rates for USD and GBP. However, the timeframe to discontinue HIBOR in Hong Kong is not clear.
Whichever alternative reference rate is chosen, LIBOR can’t simply be “swapped out” with that replacement in existing contracts - at least not without appropriate adjustments. Lenders are encouraged to consider including “fallback" clauses in all new contracts to outline how differences between new alternative reference rates and LIBOR will be calculated.
LIBOR’s expiry could also pose challenges for how lenders communicate rate changes because lenders will need to estimate interest rates for borrowers using a prior compounding period.
A combination of statutes and policies governs strategic planning and zoning, including the Town Planning Ordinance (TPO) and its derivative regulations. There are also Governmental controls: development strategies at the territorial level and statutory and departmental plans at the district or local level. Such development plans are framed by the Hong Kong Planning Standards and Guidelines, relevant development related policies and principles and community views.
The TPO also allows certain statutory bodies to take action against unauthorised land uses and regulates land use.
Building covenant and design, disposition and height requirements are usually contained under the land grant.
Along with plans for land use, the BO and derivative regulations contain requirements regarding a new building's technical design. The Buildings Department also issues practice notes and guidelines.
Objectives and standards for urban design are also included in the Urban Design Guidelines. Before construction, all plans must be submitted to the Building Authority for approval. Other than these controls, developers have significant freedom of design.
Buildings in the New Territories are regulated by the Buildings Ordinance (Application to the New Territories) Ordinance. More stringent statutory specifications are imposed on Small Houses which must be built in accordance with Government’s Small House Policy.
The TPO regulates the development and designated use of individual parcels of land which are overseen by the Planning Department, Development Bureau and District Planning Offices.
Each land lease contains terms and conditions on how the land and buildings should be used. Lands Department will regulate and enforce any breaches.
Usually, the Lands Department will first issue a warning letter to the owner requiring rectification of the breach by a deadline. The Lands Department may also register its letter at the Land Registry as an encumbrance. If the breach is serious, such that the breach will pose a serious threat to public safety or public interest or is adversely against government policy, it may proceed with re-entry of the land.
If unauthorised building works have been carried out in breach of any relevant provisions under the BO, the Buildings Department can order such works to be removed. The owner will have to bear such removal costs and criminal liabilities, eg, fine and/or imprisonment.
All intended use of the land must align with the use permitted under the land grant. Certain uses require TPB permission before building works can commence.
A change of permitted use may require separate TPB permission:
All applications must be submitted to TPB together with supporting documents which are made available for public inspection.
The TPB makes the final decision. A Section 16 Application may be approved with or without conditions, or refused by the TPB. A Section 12A Application may be accepted in whole or in part or refused by the TPB.
Once a Section 16 permission is granted, amendments to such permission are provided under Section 16A of TPO.
Usually, the Director of Planning will consider a Section 16A Application. If it is considered unacceptable by any governmental departments, it may also be submitted to the TPB for consideration.
Either the TPB or the Director of Planning can refuse or approve the Section16A Application with or without conditions attached. If permission is refused, a review and an appeal can be requested.
Third parties have the right to participate and object to a proposal during the application stage. The TPB should consider comments fairly. If a review on such decision is sought, third parties may also object during the review stage as all submitted documents will be made public. Although third parties cannot appeal against the grant of planning permission, it can always challenge a decision by way of judicial review in the High Court.
The right of review and appeal against a relevant authority’s decision to refuse permission for development or the carrying on of a designated use are only available under Section 16 and Section 16A Applications. Within 21 days of being notified of the decision, the applicant can request a review. The appeal will be decided by the Appeal Board.
An appeal can be made by the applicant within 60 days of being notified of the appeal decision. Although the appeal decision is final, judicial review proceedings may be brought if it can be shown that the decision may have been made unlawfully, unreasonably or with procedural impropriety.
There is no statutory right of review or appeal for Section 12A Application.
Developers may need to enter into agreements with utility suppliers such as electricity, gas, and water supply agreements and agreements with the Drainage Services Department.
The Lands Department will take appropriate enforcement action for breaches of the land use provisions in the land grant.
Under the TPO, the Planning Department is given enforcement powers against unauthorised developments. Enforcement and prosecution actions can also be undertaken by the Central Enforcement and Prosecution Section of the Planning Department.
If a designated use is found to be non-compliant, the developer would be fined and may be required to reinstate the land. If the developer ignores the non-compliance enforcement, the Director of Planning of the Planning Department can enter the land and take whatever steps necessary to ensure that the unauthorised development or use is removed or discontinued. The Director of Planning can also take steps such as removal, disposal, detain and possession of property on the land.
The Buildings Department can order the removal of unauthorised building works. The owner of the development will have to bear such removal costs and criminal liabilities, eg, a fine and/or imprisonment.
Corporate vehicles available to investors in real estate include:
Investors may also invest indirectly in real estate investment trusts (REITs) or private equity type funds.
The following types of companies can be formed under the CO:
The articles of association of a private company usually limit its number of members to 50. Private companies are restricted from raising public funds.
The most common vehicle for real estate investors will be private companies limited by shares.
Branches of a Foreign Corporation
A company incorporated outside HK may conduct business and hold real estate in HK by establishing and registering a “place of business” here as a “non-Hong Kong registered company”. It must also obtain a business registration certificate from the Inland Revenue Department within one month of establishment.
The relationship between partners is usually set out in a partnership agreement, typically covering matters such as capital contributions, drawings, partners' duties and powers (and any restrictions on such powers) and procedural matters relating to meetings and voting rights, etc.
Partnerships do not have separate legal identities. To avoid unlimited liability for all partners involved, a partnership may be structured as a limited partnership with at least one general partner and the rest as limited partners. A limited partnership must be registered at the Companies Registry.
A trust is usually constituted by payment to the trustee of an amount which the trustee agrees to hold on trust, together with any other money or property transferred to it. The trustees are the legal owners of the trust property and hold any capital sum and income derived on trust for the beneficiaries. This is usually governed by the trust deed, which defines the relationship between the trustee and the beneficiaries and any trustee duties and powers of investment.
There is no minimum capital requirement for companies, branches, partnerships or trusts.
Corporate governance requirements for a company are primarily set out in its constitutional documents, typically the articles of association. These articles set out the internal regulations for the management of a company and may provide information about the appointment and powers of directors, shareholders' rights and procedures in general meetings.
A private company in Hong Kong requires at least:
Each Hong Kong company must have a registered office here to which all official communications and notices, including service of process, may be addressed.
Companies must also hold an AGM within nine months (for a private company or a company limited by guarantee) or six months (for an unlisted public company) after the end of their accounting reference period.
If listed on the Hong Kong Stock Exchange (HKSE), the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited (Listing Rules). The Corporate Governance Code and Corporate Governance Report will also apply.
Branches of a Foreign Corporation
A non-Hong Kong company establishing a place of business in Hong Kong will need to appoint an authorised representative and have a registered place of business in Hong Kong. If the non-Hong Kong company ceases to have a place of business here, the company must appoint another authorised person.
Partnerships are governed by the partnership agreement and the Partnership Ordinance. For limited partnerships, the Limited Partnerships Ordinance must be considered.
Governance requirements for trusts are determined by the trust deed. Additional regulations apply to unit trusts subject to authorisation from the Securities and Futures Commission of Hong Kong (SFC).
If the trustee is a company or is listed on the HKSE, additional requirements will also apply.
Hong Kong companies must file an annual return with the Companies Registry within 42 days after the anniversary of the date of its incorporation and, thereafter, 42 days after the return date (if the financial year of a public company begins on or after 3 March 2014). The return date is six months (for a public company) or nine months (for a company limited by guarantee) after the end of the company’s accounting reference period.
Filing fees are minimal.
Private companies are required to prepare audited accounts but not to submit them to the Companies Registry. Public companies must submit their accounts with their annual return. A dormant company is exempted from preparing audited financial statements.
A valid business registration certificate is also required which costs HKD3950 for a three-year period.
Branches of Foreign Corporations
Non-Hong Kong companies must:
Limited partnerships must file changes to their registered particulars with the Companies Registry within seven days. Additional costs will be payable for changes in sums contributed by any (new) limited partner.
Managing a trust involves annual administration costs, payable to the management company depending on the type of trust. Unit trusts (including those authorised by the SFC) are subject to an annual fee payable to the SFC.
In the case of unit trusts, annual management fees and any performance related fees may also need to be paid to the management company.
A lease and a licence are the two main types of arrangements to document use and occupation of real estate.
A lease grants the lessee the right of exclusive possession of the property for an agreed period. A lease provides the lessee with contractual rights and a proprietary interest in the property, which can be transferred to a third party, subject to any specific restrictions set out under the lease.
A licence grants permission to occupy the property but not a proprietary interest in land or an exclusive right to possess the property. Moreover, the period of occupation under the licence does not have to be fixed. A licence is not generally transferable to a third party nor is it binding on the Licensor’s successor in title. In granting a licence, owners need to ensure they are not inadvertently granting a lease.
The courts will look at the substance of the agreement and not whether the document is called a lease or a licence.
Government may also put vacant land to temporary uses by granting short term tenancies to applicants based on support from the relevant Policy Bureau on policy grounds. For land already subject to leases granted by Government, the Lands Department may also grant waivers to waive certain specific conditions under a lease.
There are two different types of commercial leases:
Rents and lease terms are currently not regulated. Given current adverse market conditions, there is a growing call for more tenant favourable regulations. This situation may change in due course.
There are no prescribed forms of commercial leases. Parties are free to negotiate and agree their own terms.
Unless specified in the land grant, there is no minimum or maximum term for a commercial lease. A three-year term with an option to renew is common for office leases. Long leases (such as ten years) are possible but uncommon.
Terms for retail leases are comparatively longer and usually tend to be between three to five years also with an option to renew.
Generally, the lessor is responsible for structural repairs. The lessee is obliged to keep the property in good and tenantable condition.
Rent is typically paid monthly and on a fixed basis. Retail leases often contain a variable part linked to a percentage of turnover. A rent review half way through a term is also quite commonly agreed sometimes with “floors” and “caps” on how high or low an adjustment can be made.
The rent review process is typically set out in the lease and the amounts determined by negotiation between the parties by making reference to the prevailing market rent or turnover.
Currently, there is no VAT or GST regime in Hong Kong.
A rental deposit is usually payable by a tenant on commencement of a lease. The common market rate is usually between three to six months of rent.
Once the lease is executed, the lessee has to pay the registration fee of the lease (if applicable) and a half share of the stamp duty. Typically, the lessee will also pay the cost of fitting-out, management fees and utility deposits.
It is common to see landlords in-charge of structural maintenance and repairs of communal areas. This is subject to negotiation as to which party pays for the management fees. Tenants are typically only responsible for maintenance and repair costs for areas they occupy exclusively.
Depending on the tenancy agreement, the landlord will subscribe for most utility services directly with third-party suppliers. Tenants may also pay an apportioned cost to the landlord where such services are provided on a centralised basis. Air-conditioning charges, for example, are often included within management fees.
There is no statutory obligation on either party to insure a leased property in the event of damage or destruction. However, when the landlord is also an owner of the building’s common areas (in most cases the Incorporated Owners), there will be a statutory obligation to purchase third-party insurance over such areas.
If the landlord obtains a mortgage, it is common for banks to contractually require the landlord to insure the real estate up to a certain amount. When the insurance is taken out by the landlord, the cost will usually be passed on to the tenant indirectly through management fees or factored into the rent.
In normal leases, the landlord and tenant are contractually bound to take out certain insurances. Liability for any damage or loss of profit suffered by the tenant as a result of any smoke, fire, water damage or fitting out/works being carried out is usually not covered. The tenant should ideally ensure that it has insurance to cover any loss suffered by the tenant itself and by third parties caused by such risks.
Leases typically impose contractual obligations on the tenants to comply with the land grant, deed of mutual covenant, occupation permit of the building and local laws and regulations. The tenancy agreement will specify the permitted use of the leased premises.
Tenancy agreements typically limit the extent of or prohibit alterations or improvements of property. Structural repairs by tenants that involve alteration of the building’s form and framework are usually not allowed. The landlord’s consent should be obtained if structural works are envisaged.
Alteration will require tenants to submit plans to the landlords for approval and also obtain consents from the relevant government departments. Subject to the tenancy agreement, a tenant will have to bear all related building (and subsequent removal) costs and expenses.
Residential, commercial and industrial lettings are principally governed by the Landlord and Tenant (Consolidation) Ordinance, the LRO and the Occupiers’ Liability Ordinance. There are no specific regulations or laws which only apply to particular categories of real estate save for hotels and guesthouses which are subject to the Hotel and Guesthouse Accommodation Ordinance. Of course, general licences are required for the operation of certain types of premises such as hotels, restaurants, clubs, bars, massage parlours and other places of entertainment.
Leases will usually provide that insolvency of the tenant is a ground for forfeiture.
Any unpaid rent can only be claimed as part of the tenant’s insolvency proceedings since the landlord is not a secured creditor and will rank low in priority. Any security deposit paid by the tenant will likely be used to offset the landlord’s loss and damage suffered.
A landlord may require a guarantee from the tenant’s bank and/or a deposit to protect against a failure by the tenant to meet its obligations under the tenancy agreement. This may be in the form of cash, bank guarantee or both.
Under the LT(C)O, lessees do not have a right to continue to occupy the relevant real estate after the expiry of a commercial lease. A tenant is recommended to negotiate with the landlord well before the expiry of the lease if it wishes to extend the lease term.
Usually, the landlord does not allow the tenant to assign or sublet the lease; part with or share possession of the premises with others; or be subject to any change of control. It is often possible to negotiate group sharing provisions so that tenants can share premises with specified group companies.
Many leases include “sale and redevelopment” clauses which provide the landlord a right to terminate the lease early if the landlord wants to sell or redevelop the building on giving prior written notice (usually six months). The lease will terminate upon expiry of that notice often without compensation to the tenant.
The landlord can also exercise the right of forfeiture either by physically re-entering the property or by commencing legal proceedings for possession. The landlord can enforce forfeiture where a tenant fails to remedy a remediable breach under the lease and make reasonable monetary compensation to the landlord’s satisfaction within a reasonable time.
If the landlord successfully obtains judgment against the tenant, it can apply to the Lands Tribunal or appropriate court for a writ of possession. Once issued, the court bailiff will recover possession of the property on the landlord’s behalf.
Leases of three years or less do not need to be registered in order to have priority over later interests and to bind purchasers of the landlord’s interest. However, if such a lease contains an option to renew, this option should be registered with the Land Registry to have that priority. This is often neglected and is a common way for such options to be rendered unenforceable in the event of a sale of the building.
A lease of more than three years needs to be registered in order to have priority and bind third parties.
The cost of registration is usually shared between landlord and tenant with the landlord’s solicitor taking responsibility for such registration.
A tenant may be forced to leave before the date originally agreed if the landlord exercises the right of forfeiture. Unless the forfeiture arises because of non-payment of rent or insolvency, the landlord must comply with the notice provisions of Section 58 of the CPO. If the tenant breached the tenancy agreement, (eg, for not paying rent on time), landlords may apply to the Lands Tribunal for a repossession order to recover the premises. This may take a few months to obtain.
A lease may be terminated if authorities invoke the Lands Resumption Ordinance or any other applicable ordinances such as the Mass Transit Railway (Land Resumption and Related Provisions) Ordinance to resume land compulsorily. If invoked, compensation will be offered to the lessee according to the market value of their interest in the property and statutory compensation provisions.
Lump sum or fixed price construction contracts are common where the price for construction work is expressed as a fixed amount. The amount would be determined by the schedule of rates which sets out unit prices of relevant materials and labour.
Alternatively, measurement contracts are used where the type and quantities of works are not clearly defined at the time of tender. The total price would be calculated on completion of the project based on the unit rates set out in the schedule of rates.
Under a traditional model, design consultants are engaged prior to the tendering for contractors. Detailed project design is then made available before contractors are invited to tender. The design consultants would bear responsibility for the design. The contractor would bear responsibility for the construction.
A design-and-build model is becoming more common where a design-builder is engaged to design and construct the project.
The common devices used to manage construction risk include indemnities, warranties and limitation of liability.
Indemnities are used as promises by the contractor (or sometimes the architect) to reimburse owner for losses suffered in respect of particular types of risks.
Warranties are assurances given by the contractor in respect of certain matters in the construction contract. For example, that all works have been carried out with reasonable care and skill.
Limitation of liability is typically arranged contractually by setting a cap on liability. While an express cap for liability is not always available, liquidated damages provisions for late completion are often adopted and stipulate the daily payable amount for delay to project completion.
Liability can also be limited by exclusion of liability. Generally, contractors are unable to limit liability for indirect and consequential losses.
A major risk in construction is delay. This risk is usually managed by liquidated and ascertained damages. These are typically pre-determined figures based on a genuine calculation of the likely loss in the event of delay, and are distinguished from penalties. This mechanism protects both the contractor and the owner, as the anticipated amount payable to the owner is clearly set out in advance.
In addition, contractual mechanisms to permit extensions of time are usually adopted subject to relevant contractual provisions. Notices given by the contractor would typically include:
After consideration, the contractor administrator would make a decision regarding the application. Usually, extensions of time would be granted if the delay has been caused by events outside the contractor’s control, eg, inclement weather or delay caused by the owner. The contractor would also typically be required to mitigate the loss.
To manage the risk of contractor non-performance, it is common for an owner to require additional forms of security for breach, namely:
Escrow accounts: between a third-party escrow agent on behalf of either owner or contractor would release payment to the other party when certain conditions are met (eg, completion).
A contractor has no statutory right to a lien in the event of non-payment but may exercise the common law right to a lien on any materials brought on to the site prior to installation.
A contractor can however submit claims for non-payment to courts/arbitral tribunals in accordance with the contractual dispute resolution clause. A successful claim will usually entitle the contractor to damages of a compensatory nature.
Prior to the commencement of any construction work, approval must be sought from the Buildings Authority. The Buildings Department adopts a centralised processing system to work with all interested government departments to raise disapproval items.
Throughout construction, the BA may require further approvals and inspections by other relevant authorities.
An occupation permit issued by the BA must be obtained before occupation. The issuance of such a permit may be subject to inspections and approvals by other relevant government departments (eg, the Fire Services Department).
Following occupation, the project shall be used for its intended purpose only.
There is no VAT, GST or equivalent tax in Hong Kong. Stamp duty is payable (see 2.10 Taxes Applicable to a Transaction).
As outlined in 2.10 Taxes Applicable to a Transaction, parties may be exempted from payment or partial payment of stamp duty in very limited circumstances under the SDO. Different levels of concessions to applicable stamp duty rates are available subject to meeting requirements of the relevant exemption.
The same rate applies for occupation of business and non-business premises. No special tax applies for business premises.
Government rates of 5% of the rateable value of the property are payable by the tenant unless otherwise agreed with the landlord. However, these can be offset against property tax payable. Only very limited exemptions apply to certain categories of properties, such as cemeteries, consulates and some historical properties.
The owner is responsible for payment of Government rent charged yearly at 3% of the property’s rateable value.
There is no income tax withholding for foreign investors. There are generally no restrictions on foreign investors owning real estate in Hong Kong.
The landlord is responsible to pay property tax on rental income. The applicable rates depend on whether the owner is an individual or a corporation.
There is no capital gains tax in Hong Kong. Profits are likely to be subject to profits tax at a rate of 16.5%, but may be exempted if the property was disposed of as a capital asset. If applicable, property tax payable can be offset against the profits tax amount to be paid.
Tax benefits include depreciation and deductions which can be claimed for repair and maintenance (excluding furnishings). There is a 20% statutory allowance for any such expenses and is deductable before property tax is charged.
Taxpayers are entitled to claim limited deductions for home loan interest payments from salaries tax payable in relation to their own residential property.