Types of leasing arrangements
The principal legislation which regulates leases of premises in Hong Kong, whether business or residential, is the Landlord and Tenant (Consolidation) Ordinance (Chapter 7).
Other relevant legislation can be found in the CPO and the Land Registration Ordinance (Chapter 128).
The law generally recognises contractual agreements (whether oral or written) under which occupation and use of real estate is let for a certain period of time.
There are two types of arrangements:
- A lease; and
- A tenancy agreement.
A lease for a term exceeding three years must be executed as a deed in order to create a legal estate in land. A tenancy agreement for a term not exceeding three years takes effect in possession and does not need to be in writing, although it is preferable.
Common terms in commercial leases
There are no prescribed form of commercial leases and parties are free to negotiate and agree on the terms of commercial leases. In practice, rent for commercial premises is usually divided into stages throughout the lease term whereby the rent payable would be a fixed rent which will be adjustable during the term of the lease such that the rent may increase by a certain percentage in stages, making reference to the turnover or the prevailing market rent, depending on the types of leases. There is, in general, no restrictions over the level of rent that
could be charged.
In terms of apportioning costs, the lessor is generally liable for structural repairs and the capital as well as non-recurring costs whereas the lessee is obliged to keep the property in good and tenantable condition, with fair wear and tear excepted, and shall bear the non-capital and recurring costs of the premises.
Length of lease
Most commercial leases for office use in Hong Kong are for a term of two or three years. Terms for office use over two or three years are negotiable depending on the parties' bargaining power and/or market conditions. Commercial leases for retail use may tend to be longer than office use.
While most commercial leases contain an option to renew prior to the expiry of the lease term, it is noteworthy that an option to renew has to be expressed and clearly delineated in leases for it to be effective as illustrated in the case of Tse Siu Hoi v Lee Dick Gold and Jewellery Limited LDPE 1132/2014. It is desirable to specify in clear terms how the option should be exercised, and how the new rental is to be determined.
An option to renew is a registrable interest in the Land Registry and therefore a lease containing an option to renew extending the lease term to over 3 years is often registered in the Land Registry to safeguard the interest of the lessee.
A party, or either party, may elect to terminate the commercial lease according to its terms and conditions. Usually, the landlord will reserve a right to terminate and re-enter the premises upon the lessee breaching a condition or a covenant and having failed to remedy such breach within a stipulated period of time.
It is noteworthy that an option to renew has to be expressed and clearly delineated in leases for it to be effective.
Regulation of lease
There are no specific regulations or laws which only apply to particular categories of real estate. All residential, commercial and industrial letting are principally governed by the Landlord and Tenant (Consolidation) Ordinance (Chapter 7), the CPO, the Land Registration Ordinance (Chapter 128) and for aspects regarding the obligations and liabilities of landlords and tenants as occupiers of the premises towards third party, the Occupiers' Liability Ordinance (Chapter 314).
Note that the Hotel and Guesthouse Accommodation Ordinance (Chapter 349) provides for the regulation, control and safety of the hotel.