COMMERICAL LEASES

Managing leasing agreements


Security of tenure

Under the Landlord and Tenant (Consolidation) Ordinance (Chapter 7), lessees do not have a right to continue occupying the relevant real estate after the expiry of a commercial lease.

Recovering real estate from a lessee

If there is a time limit provided in the lease for notifying the tenant for recovery of the premises from a lessee upon the expiration of lease term, the lessor needs to give oral or written notice within this period of time. If there is no such time limit, the lessor should give notice within a reasonable time before the expiration of the lease.

Early termination by Landlord

Many leases include sale and redevelopment clauses which give the lessor a right to terminate the lease by giving a specified number of months' notice to terminate, if the lessor wants to sell or redevelop the building, or, when the lessor is a corporation, if there is a change in the controlling shareholder of the landlord (e.g., in the case of transfer of shares of the lessor). Typically, the lessor has to give at least six months' notice in writing to the lessee. The lease will terminate upon the expiry of the notice.

A lease can be terminated prior to the date originally agreed if the landlord exercises his right of forfeiture. The lessor 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 lessee fails to remedy a remediable breach and to make reasonable monetary compensation to the landlord's satisfaction within a reasonable time of service of the notice, the lessor can proceed to enforce the forfeiture.

The lessor can exercise the right of forfeiture either by physically re-entering the property, or by commencing legal proceedings for possession. If the lessor successfully obtains a judgment against the tenant, he/she will be able to apply to the Lands Tribunal or the appropriate Court for a Writ of Possession. Once the Writ of Possession is issued, the court bailiff will recover the possession of the property on the lessor's behalf.

Termination by third-party

Authorities may invoke the Lands Resumption Ordinance (Chapter 124) and/or the Mass Transit Railway (Land Resumption and Related Provisions) Ordinance (Chapter 276) to resume land, including leased property, compulsorily. If such Ordinances are invoked, compensation will be offered to the lessees according to the market value of their interest in the property.

For redevelopment purposes, one who meets both the applicable ownership threshold and other statutory requirements can apply to the Lands Tribunal under Land (Compulsory Sale for Redevelopment) Ordinance (Chapter 545) for compulsory sale of all the undivided shares in the lot. If the application is successful, the Lands Tribunal will make an order to sell the remaining undivided shares in the lot, and the lessee will be offered compensation by the Lands Tribunal.

With the granting of such order for sale, notwithstanding the terms of any lease or the provisions of the Landlord and Tenant (Consolidation) Ordinance (Chapter 7), all tenancies are terminated on the date when the purchaser of the lot becomes the owner; and the affected tenants are required to deliver up possession of those properties immediately upon the expiration of six months following the date above. It should be noted that if an order for sale is made, the Lands Tribunal may order compensation to be paid to a tenant (including any sub-tenant).

Security for protecting against failure by lessee to meet obligations

Parties enjoy the freedom of contract. The lessor may require a guarantee from the lessee's bank and/or a deposit as a security for the due performance and observance of the terms and covenants in the tenancy agreement. In addition, the lessor may require the lessee to purchase comprehensive insurance regarding third-party liability against any person or property in the premises.

Transfer of lease

The landlord does not usually allow the tenant to do any of the following:

  • Assign or sublet the lease;
  • Part with or share possession of the premises with others, including with companies in the same group; and
  • Change control of the tenant (if the tenant is a corporation).

A breach of any of the above will give the landlord a right of re-entry and the right 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 forfeit the deposit and claim against the guarantor (if any).

On the other hand, the landlord may expressly provide for the right to assign all the rights and obligations of the lease to a third party in the lease and require the tenant to enter into a novation agreement or deed to record such transfer.

If you have any questions or comments about this report, please get in touch.

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LEGAL AND REGULATORY