Operating Guesthouses
Introduction
It has been discussed for some years that the ever growing number of tourists had caused immense pressure on the vacancy of hotels and guesthouses. Some viewed that the number of hotel / guesthouse rooms available for tourists is far from catching up with the growth rate of tourist, resulting in rocketing room rent.
Mr TSANG Tak-sing, Secretary for Home Affairs, has recently in his blog (http://www.hab.gov.hk/tc/about_us/from_the_desk_of_secretary_for_home_affairs/shaArticles260.htm) shared the view that guesthouse operating in residential buildings not only is a good solution to the demand for tourist accommodations, but also provides a relatively cheaper alternative for tourists. Having said that, there are several points to note in selecting the location for operating a guesthouse.
Licensing Requirement for Hotels / Guesthouses
Licensing of hotels and guesthouses is governed by the Hotel and Guesthouse Accommodation Ordinance (Cap.349) (the “Ordinance”), which authorizes the Hotel and Guesthouse Accommodation Authority (the “Authority”) to decide on licensing matters and licensing criteria of hotel and guesthouses.
Pursuant to the “A Layman’s Guide to License Application under the Hotel & Guesthouse Accommodation Ordinance” (the “Layman’s Guide”) published by the Office of the Licensing Authority of the Home Affairs Department, in considering whether to grant a hotel or guesthouse license, the Authority would take into account, among other things, the following factors:
1. Fire safety issues;
2. Due compliance of requirements under “Minor Work Control System”;
3. Lighting and ventilation requirements;
4. Hygienic requirements.
It is notable that the Layman’s Guide expressly stated that in dealing with applications for licenses, the Authority would not consider factors like whether such use of the property is permissible under the Government Lease and/or any covenants under the deed of mutual covenant (“DMC”), and hence applicants should be aware that should there be any breach of the abovementioned covenants, they may be held responsible for any potential legal liabilities thereof. The grant of a licence under the Ordinance will not be a defence to such liabilities.
Possible Restrictions under Government Lease and/or DMC
The first thing that an applicant for guesthouse license should be aware of is the terms and conditions under the Government Lease and the DMC, both of which usually contain restrictions on what uses are permitted for the property in concern.
One must be very careful in reading the terms and conditions under the Government Lease and DMC. For a property to be used as a guesthouse, the property must be permissible for residential use. However, knowing that residential use is permitted is not the end of the story, because case law already made it clear that operating a guesthouse contravenes the covenant under the DMC which permits the flat to be used only for “private residential purpose” (Incorporated Owners of Hamilton Mansion v Yu Kiem Chiu & Ors [1998] 1 HKC 112).
Possible Restrictions under Tenancy Agreements
If the property intended for running the guesthouse is a leased property, one must also be aware of the possible restrictions under the tenancy agreement (if any). In a recent case of Mutualbest Limited v Ngai Wah Kit LDPD 1548/2013, Deputy Judge Kot sitting in the Lands Tribunal ruled that, in using a residential property under lease as a guesthouse, the defendant was in breach of several terms under the tenancy agreement.
The first term that the tenant has breached was the clause restricting the user of the property. The tenancy agreement in Mutualbest stipulated that the property in concern shall not be used for any purposes other than for residential purposes, to which the Lands Tribunal held that the running of a guesthouse involved the leasing out of rooms for value and is “apparently for a commercial purpose and can hardly be qualified as a residential use”. Deputy Judge Kot further commented that, although it was suggested in the Layman’s Guide that in picking the premises to run a guesthouse that premises must be one which is for domestic or residential use, that does not mean that the use of the premises to run a guesthouse amounts to a residential use!
Further, the tenant in Mutualbest also breached the covenant disallowing any assignment, transfer, sublet with the possession of the property. The Lands Tribunal held that leasing out rooms to guests is clearly in breach of such term. Although the landlord in Mutualbest eventually failed to evict the tenant due to other technical reasons (please refer to our Newsletter issued in January 2014 for more details), it is nevertheless a warning signal to tenants to look for possible restrictions under tenancy agreements.
Conclusion
Breaching terms and conditions under the Government Lease, DMC or tenancy agreement may attract a range of consequences, ranging from minor monetary damages to forfeiture of the Government Lease. Given the complexity of these documents, it is always advisable to seek proper legal advice before picking a location to run a guesthouse.
For enquiries, please contact our Property Department:
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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.
