Commercial real estate in Hong Kong: overview
A Q&A guide to corporate real estate law in Hong Kong.
The Q&A gives a high level overview of the corporate real estate market; real estate investment structures, including REITs; title; tenure; sale of real estate; liability; due diligence; warranties; real estate tax; climate change targets; restrictions on foreign ownership; real estate finance; commercial leases; planning law and proposals for reform.
To compare answers across multiple jurisdictions, visit the Corporate Real Estate Country Q&A tool.
This Q&A is part of the global guide to corporate real estate law. For a full list of jurisdictional Q&As visit www.practicallaw.com/realestate-guide.
The corporate real estate market
In 2015, the volume of transactions in the commercial property market in Hong Kong was HK$93.3 billion, which was the highest level since 2012. However, eight months into 2016, rents of office spaces are nearing an inflection point as mainland demand declines. Office rent demand has weakened through the first half of 2016, yet with the current vacancy rates so low, the rent correction may not be as harsh as previous down cycles. The rents of prime offices in Hong Kong are still among the highest in the world, however. The rates of Government rent and Government rates remain unchanged (see Question 21 ( www.practicallaw.com/1-598-6545) ).
Significant deals in 2016 included the following:
Tuen Mun Town Lot No. 547 (Castle Peak Bay, Area 48, Tuen Mun, New Territories). Win Standard Enterprises Limited (parent company: Hong Kong Ferry (Holdings) Company Limited) (HK$2.7 billion).
Dah Sing Financial Centre (Gloucester Road, Wan Chai). China Everbright Limited (HK$10 billion).
Real estate investment
Investors can buy property through single asset companies (either incorporated in Hong Kong or offshore, or in structures involving both).
Advantages are that:
It is easy, fast and inexpensive to buy a shelf company.
There may be stamp duty savings if the property is already held in a corporate structure. This may be beneficial to both sellers (from a price perspective) and buyers (from a cost of entry perspective).
Depending on the structure used, it may provide anonymity.
Disadvantages are that:
The property company may be liable for profits tax for operating a business of buying and selling properties. Profits tax on corporations is currently 16.5%.
Property tax may be payable if the properties are rented. Property tax is currently 15%.
Stamp duty is assessed at ad valorem rates if the property being acquired by a company is not already held by a company (see Question 18). Ad valorem rates of stamp duty are higher than share transfer stamp duty.
Obligations under the Companies Ordinance (Cap. 622) must be complied with and the Contracts (Rights of Third Parties) Ordinance (Cap. 623) may give third parties rights under the Ordinance (see Question 43).
More extensive due diligence is required.
Investors can buy shares in a company that holds property or properties.
Advantages are that:
Stamp duty is payable at a lower rate on shares than it is on property (see Question 18).
There is the option to not buy all the shares in the company, which may be faster than buying the whole company.
Disadvantages are that:
Investors also buy all the liabilities of the company.
Obligations under the Companies Ordinance (Cap. 622) must be complied with.
More extensive due diligence is required if all the shares in the company are being bought.
Not all properties are owned in corporate structures, so the pool of available assets may be reduced.
Real Estate Investment Trust (REIT)
A REIT is a collective investment scheme which invests in real estate. Often a REIT will be specific to a different class of property such as office, industrial, hotels or shopping centres. From August 2014, REITs can invest up to 10% of the gross asset value of the REIT in property development projects.
REITs are not commonly used in Hong Kong. There are currently only 11 REITs listed in Hong Kong.
They are offered to the public, so property ownership through this structure is widely available.
Investors can invest in a wide range of properties.
Greater liquidity than traditional property ownership.
Managers manage properties for investors.
Investors obtain dividends of at least 90% of the audited annual net income after tax of the REITs.
Disadvantages are that:
Investors pay management charges and fees.
Units in REITs may be traded at a discount to their net asset value.
Real estate funds
Real estate funds can invest in a wider range of real estate (and sometimes other) assets than REITs.
Advantages are that:
Investors can invest in a wide range of properties.
Fund managers manage the fund for investors.
Disadvantages are that investors:
Must pay management charges and fees.
May have less control over underlying assets owned by the fund.
May not be able to cash out of the fund at a time of their choosing.
The main sources of financing real estate investments are:
Borrowing from banks.
There is no legislation in Hong Kong that actively encourages investments in real estate. However, there are a number of measures in place aimed at keeping the market from overheating and protecting the banking industry:
From 2010, the government introduced additional stamp duty imposts on foreign investors and on-sales occurring within three years of acquisition.
Since 2009 the Hong Kong Monetary Authority (HKMA) has introduced various rounds of macro-prudential counter-cyclical measures to strengthen risk management of banks in the property mortgage lending business. This is aimed at strengthening the resilience of the banking sector against a severe adjustment in property prices. This is achieved by restricting loan to value ratios on different types and values of properties.
Restrictions on foreign ownership or occupation
Title to real estate
The Conveyancing and Property Ordinance (Cap. 219) (CPO) defines land as including:
Land covered by water.
Any estate, right, interest or easement in or over any land.
The whole or part of an undivided share in land and any estate, right, interest or easement in or over the whole or part of an undivided share in land.
Things attached to land or permanently fastened to anything attached to land.
An owner of land also owns the airspace above the land and everything beneath the surface, subject to a few exceptions such as minerals or treasure trove.
Generally, land and buildings owned by the same entity are included in the same title. For what constitutes title in Hong Kong, see Question 6.
Title to real estate in Hong Kong is by a system of deeds registration (as opposed to title registration). This means that instruments affecting real estate are registered with the Land Registry. Together these instruments make up the title. There is no single document of title.
The Land Register is the public register of title. It shows the ownership particulars of each property and any encumbrances registered against the property such as legal charges, releases, agreements for sale and purchase, and court orders.
The Land Register is managed by the Land Registry. The Land Register can be accessed online at www2.iris.gov.hk/eservices/searchlandregister/search.jsp.
Electronic conveyancing is not available, although electronic lodgement of documents is currently being considered by the Land Registry.
The following documents are registered in the Land Registry:
Conveyances (deeds of assignment).
Agreements for sale and purchase.
Other instruments in writing.
If a document contains confidential information the parties may choose to register a memorandum of the document. The memorandum will include details of the matters that need to be registered to protect priority without disclosing the confidential information.
There is no state guarantee of title in Hong Kong. As only a system of deed registration operates in Hong Kong (see Question 6), the Land Register only registers deeds to protect priority and not to create title.
The Land Registry is not liable to pay compensation for errors it makes in relation to registration.
Title insurance is available in Hong Kong, although it is not widely used.
There is no privately owned freehold land in Hong Kong (with the exception of St. John's Cathedral). All land grants are made on a leasehold basis only.
The government grants either:
Licences to occupy land.
The "ownership" of leasehold land is governed by either:
A government lease.
A government grant, which contains conditions the satisfaction of which will result in a government lease being deemed to be issued (in practice, the government does not actually issue a physical lease document).
A government grant/lease is granted for the land on which a multi-storey building is erected. Separate government grants/leases are not granted for the ownership of each unit in a multi-storey building.
A deed of mutual covenant governs ownership of each unit in a multi-storey building, by:
Notionally dividing the land and building into a number of undivided shares.
Allocating a certain number of the undivided shares to each unit. The right to exclusive use and possession of a unit is attached to the shares. When a unit is sold it is effected by way of an assignment of all the rights attached to those undivided shares, for the residue of the term of the government grant/lease.
Sale of real estate
Preliminary agreements are not required but are commonly used in Hong Kong. They are also known as provisional agreements.
Most often preliminary agreements are prepared by the real estate agent.
The preliminary agreement usually constitutes a binding contract if both seller and buyer sign it and it contains the following essential elements:
It is common to include terms in relation to:
Timing for payment of the initial deposit (1%) and the main deposit (9%).
Timing for payment of the balance of the price.
The time for signing the formal agreement.
Payment of the costs, stamp duty and agent's commission.
Express provision for remedies in the event of default.
A right for the seller to withdraw from the sale by paying the buyer a liquidated sum.
The real estate agent is often a party to the preliminary agreement. This gives the real estate agent a direct contractual right under which it can recover its commission. In addition, unless expressly excluded the Contracts (Rights of Third Parties) Ordinance will apply (see Question 43).
Formal sale and purchase agreement (formal agreement)
The formal agreement is usually entered into within 14 days of the signing of the preliminary agreement. This provides stamp duty timing benefits.
If the parties cannot agree on the terms of the formal agreement and the preliminary agreement is binding the parties may decide not to enter into the formal agreement.
In addition to the provisions referred to in Question 10, the following provisions are usually included in a real estate contract:
Condition of property. Does the buyer take the property on an as-is basis or to some other standard?
Possession. Is vacant possession to be given on completion or is the property sold subject to tenancies?
Capacity of the seller. Does the seller assign as beneficial owner, trustee or mortgagee?
Apportionment of rents and outgoings. Rents and other outgoings are apportioned between the seller and buyer. Usually the seller pays up to and inclusive of the actual day of completion.
Easements, rights and liabilities. The seller usually warrants that the property is not adversely affected by encumbrances which the seller is aware of or could have ascertained on reasonable enquiry, other than:
those disclosed in the agreement; or
those which the buyer is aware of or could have ascertained on reasonable inspection of the property.
Requisitions. The buyer has a right to raise requisitions on title within a specified period.
Documents of title. The documents of title required for the purpose of giving title to the property will be delivered to the buyer.
Good title. The seller must give title and prove title to the property in accordance with section 13A and section 13 of the CPO.
the buyer defaults, the deposit will be forfeited and the seller can rescind the agreement and resell the property. Any deficiency arising from such resale and expenses relating to it will be paid by the buyer;
the seller defaults, the buyer can enforce specific performance of the agreement or claim for damages. The buyer may be able to recover any deficiency on buying another property and expenses relating to it from the seller.
Proper assurance. On completion, the seller must execute an assignment to the buyer.
Contracts (Rights of Third Parties) Ordinance. Consideration should be given to excluding the operation of the Contracts (Rights of Third Parties) Ordinance (see Question 43).
For a typical share sale agreement:
The above provisions apply, except there is no need for a proper assurance clause as there will be no separate assignment of the property.
Additional clauses dealing with the corporate aspects of the transaction are required.
Due diligence varies from property to property and is dictated by the needs and concerns of the buyer. At a minimum the following due diligence is undertaken for a straightforward property purchase:
Title. The buyer's solicitors will check the title documents of the property to ensure that the title is good (see Question 6).
Structures. The buyer's solicitors will check to see what approvals, if any, have been obtained to identify if building works have been authorised. Issues as to title may arise if there are unauthorised building works.
Depending on the nature of the purchase additional legal due diligence may be required in relation to the following:
Tenancies. Review of tenancy documents.
Other contracts. Review of service and maintenance contracts, management agreements such as hotel management agreements, and construction contracts.
Planning. Review of the government grant, the occupation certificate, and government zoning plans.
Litigation. To ensure that the property or the other parties are not involved in any litigation which may impact on a party's ability to perform.
Corporate. If the property is being acquired through a company structure, corporate due diligence is also required.
Third party consultants may be engaged to carry out the following due diligence:
Physical due diligence. To check that the actual property reflects the plans, and to identify any unauthorised building works or building defects.
Mechanical and engineering. To identify if the plant and equipment included in the sale exists and is operating properly.
There are no legal or legislative requirements for a seller to give a buyer any warranties.
A buyer will often require a seller to give it warranties in relation to the following matters:
That the seller has not received any notices adverse to the seller's interest in the property.
No third party has any right or interest whatsoever, whether legal or equitable, in the property.
The property is not adversely affected by any encumbrances of which the seller is aware or which the seller could have ascertained on reasonable inquiry; other than those:
disclosed in the agreement; or
which the buyer is aware of or could have ascertained on reasonable inspection of the property.
That the property is not subject to any litigation.
Other matters arising out of the due diligence enquiries.
Whether or not the seller gives the warranties will depend on the bargaining power of the parties and the commercial imperatives behind the deal.
Warranties can be limited by:
Disclosure of specific matters.
Unless otherwise contractually agreed, the seller has a duty to:
Prove title to the property (see Question 6).
Under the doctrine of caveat emptor, the seller has no duty to disclose any latent defects, that is, defects that are discoverable by inspection and ordinary enquiry due/diligence on the part of a buyer. However, the seller has an obligation to disclose any potential liability which a buyer, upon making usual enquiry may not be able to find out. The parties can agree otherwise.
The contract may be declared void by the court as a result of either:
Non-disclosure of latent defects in title known to the seller (or which should reasonably be known to him) which are not discoverable by inspection and ordinary enquiry/due diligence on the part of a buyer.
Competition Ordinance breaches under the Competition Ordinance (Cap. 619).
The Environmental Impact Assessment Ordinance (Cap.499) (EIAO) aims to protect the environment through planning controls. A person must not construct or operate a designated project without an environmental permit for the project (section 9(1), EIAO). A designated project includes certain residential developments and industrial estates.
In considering whether to issue a permit, the Director of Environmental Protection must consider various factors, including:
Attaining an acceptable environmental quality.
Whether the environmental impact caused by the designated project is or is likely to be prejudicial to the health or well-being of people, flora, fauna or ecosystems.
The permit may be subject to conditions. An appeal board hears appeals in relation to permits.
A property owner may incur potential criminal liability if the property owner:
Constructs a designated project without an environmental permit.
Is a person for whom the project is constructed under section 26(4) of the EIAO, unless the property owner proves that:
the project is constructed without the property owner's consent; and
the property owner exercises due diligence to prevent the breach.
In Hong Kong it is not common for buyers to obtain environmental surveys or environmental insurance unless either:
The value of the transaction is high.
The prior uses of the site suggest there could be issues (for example, industrial or a petrol station).
Environmental liability may be dealt with in sale and purchase agreements by either:
The seller providing warranties and indemnities.
Making completion conditional on the contamination being remediated to the buyer's satisfaction.
An owner or occupier may be liable for breaches occurring before their ownership or occupation if:
A prior owner erected unauthorised structures or converted common areas to its use and that use continues following completion. The current owner will be liable for the continuing breach.
There is an unsatisfied notice or order registered with the Land Registry which has priority to the buyer's interest.
There are outstanding management fees, government rent and government rates.
A buyer should make thorough enquiries on the target property.
A seller may retain liability for a breach of covenant after the seller has ceased to have any interest in the land if the breach is committed by the seller before disposal of the property and it is not a continuing breach.
Title is transferred on completion when all conditions for completion are satisfied, for example, payment of the balance of the purchase price, executing the assignment and, if appropriate, delivery of vacant possession.
Is a deed and must be executed as a deed (see Question 31).
Is subject to HK$100 stamp duty if the sale and purchase agreement has been stamped.
Must be registered within 30 days after the date of execution to protect the buyer's interest under the priority rules of registration.
If a mortgage is being discharged on completion, the discharge also needs to be registered within 30 days after the date of execution.
Registration occurs at the Land Registry.
Notarisation is not required if the documents are signed in Hong Kong.
Real estate tax
General. Under the Stamp Duties Ordinance (Cap.117) (SDO) the seller and the buyer are both liable for the payment of ad valorem duty (AVD). However, under the preliminary agreement the buyer usually agrees to pay the AVD.
For purchases on or after 23 February 2013, there are two scales:
Scale 1 applies to commercial and residential properties. The rate ranges from 1.5% to 8.5% of the purchase price or market value of the properties, whichever is higher.
Scale 2 applies to individuals purchasing residential properties and is beyond the scope of this article. Special rules apply.
If AVD is paid on the agreement, HK$100 stamp duty is payable on the assignment.
Exemptions. Intragroup transfers of property between associated companies may be exempt from AVD.
Part of the AVD may be refunded for the acquisition of non-residential properties for redevelopment purposes.
Hong Kong shares
General. Stamp duty is payable on each bought note and sold note for a transfer of shares in a Hong Kong company at the rate of 0.1% of the purchase price or the net asset value of the shares, whichever is higher.
HK$5 is also payable on the instrument of transfer.
Under the SDO the seller and the buyer are both liable for the payment of stamp duty. However, under the preliminary agreement the buyer usually agrees to pay the stamp duty.
Exemptions. Intragroup transfers of Hong Kong shares between associated companies may be exempt from stamp duty.
As stamp duty on share transfers is lower than stamp duty on property, many property transactions, especially those of significant value, are transacted at a corporate level.
There is no legislation in Hong Kong that treats transactions with property holding or land rich companies as property transactions for stamp duty purposes.
Owners and occupiers are responsible for paying government rates. If there is no agreement between the owners and occupiers, the occupiers are liable.
Government rates are charged at 5% of the rateable value of the property. The rateable value is the estimated annual rental value of a property at a designated valuation reference date, assuming that the property was then vacant and available to let.
There are very limited categories of properties that are exempt from paying government rates:
Social (cemeteries and crematoria).
Administrative (premises below a prescribed value).
Political (consulate and military properties).
Historical (certain village houses in the New Territories).
Owners are responsible for paying government rent. On all renewable Government leases government rent is charged yearly at 3% of the rateable value of the property.
There is no exemption from government rent for business premises.
Climate change issues
By 2020 Hong Kong aims to reduce carbon intensity to 50% to 60% of the level in 2005.
The Buildings Energy Efficiency Ordinance (Cap. 610) (BEEO) became effective on 21 September 2012.
The BEEO applies to:
Developers and building owners of a prescribed building, where consent to commence building works for superstructure construction was given after 21 September 2012.
Owners or occupiers of an existing prescribed building undertaking a major retrofit.
Prescribed buildings include commercial buildings, hotels and guesthouses, and common areas of a residential building.
Developers, owners or occupiers must ensure that the building services installation (air-conditioning, electrical, lift and escalator, and lighting installations) complies with the minimum energy efficiency standards set out in the Building Energy Code.
Further, owners of the following must carry out energy audits once every ten years:
Portions of a composite building that are used for commercial use.
Real estate finance
Secured lending involving real estate
Typical documentation and security interests are:
Legal charge over the real property.
Equitable mortgage over the real property (common for "off-the-plan" sales).
Debenture incorporating a fixed and floating charge over all assets of the borrower or the company holding the legal title of the property. These include assignment of leases, sale contracts, rental and sale proceeds, a charge over the rental account and any reserve account, and an assignment of insurances.
A mortgage over the shares of the borrower or the company holding the legal title to the property.
Most security documents must be filed with the Hong Kong Companies Registry within one month of execution.
If a charge is not registered with the Companies Registry within one month it is void against all creditors and any future liquidator. The money secured under the charge becomes immediately repayable at the lender's option.
An equitable mortgage and a legal charge should be registered at the Land Registry within one month of execution. If the mortgage/charge is not registered in time, it may lose its priority.
In Hong Kong stamp duty is not payable on loan agreements, mortgages or security documents unless either:
The mortgage is not made in favour of a recognised financial institution.
It is a legal mortgage of Hong Kong shares when stamp duty of HK$5 is payable on each instrument of transfer.
Consideration should also be given to excluding the operation of the Contracts Rights of Third Parties Ordinance from finance documents (see Question 43).
A person may be criminally liable if that person constructs or operates a designated project without an environmental permit (see Question 15).
Where a person convicted of an offence under the EIAO is a body corporate and it is proved that the offence was committed with the consent of, or was attributable to any neglect on the part of, a person concerned in the management of the body corporate, that person also commits the offence (section 29, EIAO). It is unlikely that a lender would be liable unless the lender exercises some management control over the borrower.
The lender may protect itself against potential environmental liability by:
Including warranties and indemnities in the security documentation.
Making an advance of the funds conditional on dealing with the liability to the lender's satisfaction.
Obliging the borrower to obtain environmental insurance to protect the borrower against particular environmental risks.
The main remedies for lenders in relation to a legal charge or equitable mortgage by deed are:
Receivership. 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.
Sale. 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. The title to the property can be assigned to a bona fide purchaser free of the mortgage. If the proceeds of sale are not sufficient to cover the debts owed, the borrower is still under an obligation to repay the deficit.
Possession. 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 have to apply to the court for a possession order.
If the property is subject to a tenancy and the tenancy is not granted in breach of the mortgage, the lender is subject to the tenancy and cannot take vacant possession of the land. However, the lender may take possession of the property by sending a letter to the tenant asking the tenant to pay rent to the lender.
Effect of insolvency
Secured creditors stand outside the insolvency proceedings to realise the security. However, if the property is not sufficient to meet the security, the secured creditors will have to compete with the unsecured creditors for the balance inside the insolvency proceedings.
There are a number of circumstances in which a charge may be set aside. This is outside the scope of this article.
Lenders may require:
Construction and principal contracts to be assigned to the lender, so that if the borrower defaults the lender can take over the projects.
A completion guarantee including a funding undertaking to ensure that the projects will be completed on time.
For a sale of uncompleted units requiring the consent of the Lands Department, the borrower, borrower's solicitors and the lender must sign a stakeholder agreement. The purchase money paid by the buyers of the units must be deposited into a designated stakeholder account.
Other real estate financing techniques
Real estate leases
Negotiation and execution of leases
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.
Companies. Under section 127 of the Companies Ordinance (Cap. 622), a company can execute a deed by:
Executing the deed in one of the following ways:
affixing its common seal in accordance with the articles of association of the company;
if the company has one director only, having the deed signed by the director on the company's behalf; or
if the company has two or more directors, having the deed signed on the company's behalf by the two directors or any two of the directors, or any of the directors and the company secretary.
Having the deed state that it is executed by the company as a deed.
Delivering it as a deed.
Delivery involves acts or words which show an intention to be legally bound. A document is presumed to be delivered as a deed if it is executed in accordance with section 127 of the Companies Ordinance, unless the contrary is proved.
Partnership. Deeds executed by a partnership must be signed, sealed and delivered by all of the partners.
The deed will be presumed to be sealed if the document does any of the following:
Describes itself as a deed.
States that it has been sealed.
Has a mark as a representation of a seal.
Individuals. Deeds executed by an individual must be signed, sealed and delivered.
Attestation/verification. Conveyancing documents are usually attested/verified by a solicitor acting for the party, although it is not legally required.
In Hong Kong rent is usually fixed for the whole term without any mid-term review. If an option term is granted rent is usually reviewed to market.
Stamp duty is payable on rent between 0.25% and 1% of the average annual rent. There is no value added tax (or equivalent) in Hong Kong.
A cash deposit is usually paid to secure performance of the lease by the tenant. The deposit is usually an amount equal to two to three months' rent and other money payable by the tenant under the lease. It is not generally held in a separate account by the landlord but mixed with other landlord funds. The deposit will be refunded to the tenant without interest within an agreed time period after the lease expires, usually 30 days.
Length of term and security of occupation
Most commercial leases in Hong Kong are for a term of three years. Terms in excess of three years are negotiable depending on the parties' bargaining power and/or market conditions.
While options to renew are negotiable most landlords do not grant options. 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.
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.
Change control of the tenant.
A breach of any of the above generally gives 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).
A tenancy has two aspects:
It is a contract.
It is also an interest in land.
Under privity of contract, the original contracting parties to the lease each remain liable for the performance of their obligations under the lease. Therefore, the landlord and the tenant remain liable to each other, even after the lease has been assigned by a party. The assignor is still primarily liable under the contract until the lease comes to an end. The Contracts (Rights of Third Parties) Ordinance changes the long established law of privity of contract and gives third parties rights to enforce benefits conferred on it. Consideration needs to be given to excluding the operation of the Contracts (Rights of Third Parties) Ordinance from leasing transactions (see Question 43).
Under privity of estate, covenants (obligations) which touch and concern land will bind third parties to the contract. For example, if the landlord sells the property to a buyer, the buyer becomes the landlord of the tenant. Accordingly, successors in title are only bound by covenants in the lease if they touch and concern the land. Examples of covenants which touch and concern land include, but are not limited to, repairing covenants, user covenants and the covenant to pay rent. Examples of covenants which do not touch and concern the land are the obligation to provide security deposits and to do works.
Repair and insurance
Repair and maintenance
The tenant is usually responsible for repairing and maintaining the premises in a good and tenantable condition.
The landlord is usually responsible for structural repairs. Items of a capital nature are often overlooked. It is sensible to specifically include them as part of the landlord's obligations.
The tenant generally effects insurance for public liability and tenant's fixtures and fittings and notes the landlord's interest on the policy.
The lease should oblige the landlord to insure the building, although many landlords are reluctant to include this obligation in the lease.
Ownership of alterations and additions to premises are a matter of negotiation. Most leases provide that the tenant is to remove the alterations and additions at the end of the term but give the landlord a right to notify the tenant that the landlord wants to keep the alterations and additions. This usually occurs for no monetary payment.
Landlord's remedies and termination
Remedies available to a landlord typically include:
Specific performance (specific performance of a positive obligation will not be ordered if damages for breach of covenant are adequate).
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 money 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.
The lease usually provides that insolvency of the tenant is one of the grounds for forfeiture. The landlord is not a secured creditor and has to claim the unpaid rent inside the insolvency proceedings. The landlord's priority ranks after the preferential creditors and floating charge holders. The claims of the landlord and other unsecured creditors rank equally.
It is common for leases to contain a provision stating that if either of the following occurs, the tenant's obligation to pay rent stops until the premises are again fit for occupation:
The premises are damaged or rendered unfit for use by an act of God.
The premises are affected by a demolition or closing order issued by a competent authority not due to the default of the tenant.
It is best to try and ensure that this right extends to all money payable under the lease, not just the rent.
If the premises are not made fit for occupation within the time specified either party generally has a right to terminate the lease. This time period is usually three or six months.
Planning and development controls
The Land Resumption Ordinance (Cap.124) (LRO) grants the government power to acquire land compulsorily, by resumption for public purposes such as the development of new towns or infrastructure.
Compensation is payable to the former owner and any person having an interest in the land immediately before reversion under an instrument registered in the Land Registry. Subject to other provisions in the LRO, the compensation payable will usually be the market value of the land (section 12(d), LRO).
The planning system in Hong Kong is regulated by legislation and subsidiary legislation, while the making and implementation of planning policy is subject to administrative discretion.
The relevant legislation includes the:
Town Planning Ordinance (Cap.131) (TPO) and the Town Planning Regulations.
Town Planning (Appeals) Regulations.
Town Planning (Taking Possession and Disposal of Property) Regulations.
Controls under the Buildings Ordinance (Cap. 123) issued by the Building Authority.
Controls included in the government leases/grants.
The TPO does not have specific protection for declared monuments or historic buildings. However, the planning policy is to protect these monuments or buildings. The Antiquities and Monuments Office must be consulted before any developments which may affect them or their immediate surroundings commence.
Statutory Outline Zoning Plans set out the designated uses of land. Some uses need permission of the Town Planning Board before building works can commence.
Building works must not commence without approval for the building plan and consent for the commencement of building works being obtained from the Building Authority (section 14, BO).
A new building must not be occupied (except by no more than two caretakers) unless an occupation permit or temporary occupation permit has been issued by the Building Authority (section 21(1), BO).
The Town Planning Board grants initial planning consents. A consent must be granted or refused within two months of receipt of the application, which may be subject to conditions.
Third party rights and appeals
The application for consent is available for public inspection until the Town Planning Board has considered the application. Any person can make comments to the Town Planning Board within the first three weeks. The Town Planning Board must consider the comments.
The applicant can within 21 days of receiving the decision of the Town Planning Board apply to the Town Planning Board for a review. The review must not be held more than three months after receipt of the application for review. The application for a review is available for public inspection until the decision has been reviewed by the Town Planning Board and any person can make a comment to the Town Planning Board within the first three weeks. The Town Planning Board must consider the comments. On review, the Town Planning Board may confirm or reverse the decision.
The applicant can appeal the review decision within 60 days of receiving the decision of the Town Planning Board to an Appeal Board, which may confirm, reverse or vary the decision.
The decisions of the Town Planning Board and Appeal Board can be challenged by judicial review.
In 1988, it was proposed that a system of registration of titles be introduced in Hong Kong, under which the registration of an appropriate transaction will establish title to land rather than by the execution of a deed.
The Land Titles Ordinance (LTO) was passed by the Legislative Council in 2004.
The LTO is not yet in force. In July 2016 the Lands Registry advised that "The Government has continued to liaise closely with the members of the Land Titles Ordinance Steering Committee to address their concern on the revised proposal of rectification and indemnity arrangements and various conversion options for handling indeterminate ownership cases under the Two-Stage Conversion Mechanism. A meeting with the Working Party on the Land Titles Ordinance of the Law Society was held in July 2016 for further discussion on the issues concerned. Subject to consensus from the stakeholders, a public engagement exercise on the proposed amendments to the Land Titles Ordinance will be launched in due course".
Rights of third parties
The Contracts (Rights of Third Parties) Ordinance (Cap.623) became effective on 1 January 2016 and applies to all contracts entered into on or after 1 January 2016, unless specifically excluded under the Contracts (Rights of Third Parties) Ordinance. Covenants relating to land are stated not to be included. However, the term is not clearly defined.
The Contracts (Rights of Third Parties) Ordinance provides a right for a third party to enforce a term of a contract if the contract expressly provides that a third party may do so, or the term purports to confer a benefit on a third party. The third party must be clearly identified in the contract by name or by class.
The Contracts (Rights of Third Parties) Ordinance could affect real estate transactions. For example:
A sub-purchaser may sue the head seller if a warranty or representation in relation to the property is incorrect.
Employees, agents or contractors of a seller/landlord who have the benefit of an indemnity clause may commence action directly against a purchaser/tenant instead of requiring the seller/landlord to commence action.
The original parties to a contract may exclude the operation of the Contracts (Rights of Third Parties) Ordinance from the contract. This is becoming the normal practice for real estate documents in Hong Kong.
The Competition Ordinance (Cap. 619) became effective on 14 December 2015. The Competition Ordinance applies to undertakings. An undertaking is defined in the Competition Ordinance as including any entity engaged in economic activity. The Competition sets out two rules: First Conduct Rule and Second Conduct Rule.
The First Conduct Rule provides that an undertaking must not make or give effect to an agreement, or engage in a concerted practice, if the object or the effect of the agreement is to prevent, restrict or distort competition in Hong Kong.
The Second Conduct Rule provides that an undertaking that has a substantial degree of market power in a market must not abuse that power by engaging in conduct that has as its object or effect the prevention, restriction or distortion of competition in Hong Kong.
The Competition Ordinance may affect real estate transactions. Whether it does will depend on the nature and conduct of the parties to the transaction. This is beyond the scope of this article.
Bilingual Laws Information System
Description. This website contains the English and Chinese versions of the legislation of Hong Kong. Both versions are binding. The Department of Justice of the Government of Hong Kong maintains and updates its content. The legislation is up-to-date except those provisions with a pencil mark.
Simon Reid-Kay, Principal
Simon Reid-Kay & Associates
- Scotland, Solicitor, 1984.
- Hong Kong, Solicitor, 1985.
- England and Wales, Solicitor, 1991.
Areas of practice. Real estate; real estate finance and M&A; construction.
- Chairman to the Appeal Tribunal Panel under section 45 of the Buildings Ordinance (Cap. 123).
- Member of the Solicitors Disciplinary Tribunal Panel.
- Examiner of the Law Society of Hong Kong Overseas Lawyers Qualification Examination.
Georgina Ward, Consultant
Simon Reid-Kay & Associates
- New South Wales, Australia, Solicitor, 1991.
- Hong Kong, Registered Foreign Lawyer, 2013.
- Hong Kong, Solicitor, 2015.
Areas of practice. Real estate; M&A; environmental; construction.
Michelle Chan, Solicitor
Simon Reid-Kay & Associates
Professional qualifications. Hong Kong, Solicitor, 2014.
Areas of practice. Real estate and real estate finance.
Languages. English, Cantonese.