Rent for commercial properties in Hong Kong is very high.  In fact, it is one of the highest in the world.  It is also without doubt that most of the terms and conditions of tenancy agreements of commercial properties in Hong Kong tend to be complicated and technical and very much biased in favour of the landlord.  It is especially so when the landlord is the owner of the whole building, in which case the bargaining power of the tenant is very limited.  Hence, if the tenant overlooks certain terms, the result could be costly and disastrous.  In one case, it was provided in the tenancy agreement for a tenancy of 3 years that if the landlord decided to redevelop the building, the landlord was entitled to terminate the tenancy agreement by giving 3 months’ written notice to the tenant.  The tenant overlooked this clause and spent a substantial sum in decorating and renovating the property and after one year from the commencement of the tenancy, the landlord served a written notice on the tenant to terminate the tenancy agreement due to redevelopment of the building.  The tenant was obliged to deliver up possession of the property to the landlord without any compensation.

This article aims to provide some basic and practical tips to the tenants who have little or no experience in renting commercial properties in Hong Kong in order to minimize the risk of being caught by surprise of some unexpected terms in the tenancy agreements.

1.            Location of the property

Apart from the written description and address of the property stated in the tenancy agreement, a plan annexed to the tenancy agreement showing the property as indicated by colour is always helpful in identifying the exact location of the property.

2.            Outgoings of the property

The parties should set out in detail in the tenancy agreement which party is responsible for paying the outgoings of the property such as government rates, government rent, management fees and the deposits for the utilities such as electricity and water, air-conditioning charges and outgoings of a capital or non-recurring nature such as contributions towards fire safety improvement works at the property.  If the exact amounts of the above outgoings are known at the date of the tenancy agreement e.g. the monthly management fee and air-conditioning charges, the tenancy agreement usually states their amounts.  Landlords however, inevitably reserve the right to adjust the management fees and air-conditioning charges during the term of the tenancy.  Furthermore, the hours during which air-conditioning service will be provided to the property and the rate of charges for air-conditioning services provided outside these hours should also be specified in the tenancy agreement.

3.            Use

In almost all the tenancies of commercial properties in Hong Kong, the landlord will not give any warranty as to fitness of the property for the use intended by the tenant.  Moreover, the landlord will exclude all its liabilities arising from the fact that the property cannot be used for any particular purpose.  It is therefore important to the tenant to employ its own lawyers to check the occupation permit, government lease and deed of mutual covenant to ensure that its intended use of the property is legally permissible.

4.            Prohibition Against Assignment and Sub-letting

Tenancy agreements are usually personal in nature, i.e. the property can only be used and occupied by the tenant named in the tenancy agreement and no one else.  The tenant is prohibited from assigning its interest and rights under the tenancy agreement and sub-letting the property or any part thereof to third parties.  However, if the tenant belongs to a group of companies or there is a chance that the tenant will grant franchises to some third parties to carry on business at the property, the tenant may negotiate with the landlord to incorporate a provision into the tenancy agreement to allow the tenant’s associated companies or the tenant’s franchisees to use and occupy the property.

5.            Condition of the property

The landlord will deliver the property to the tenant either on an “as-is” condition or “bare shell” condition.  The tenancy agreement will usually provide that upon the termination of the tenancy, the landlord shall have the option to require the tenant to deliver up possession in a bare shell condition or “as is” condition with the tenant’s decorations and additions.  A tenant should therefore ascertain the decision of the landlord before the expiration of the tenancy in order to have sufficient time to reinstate the property to a bare shell condition if the landlord so elects.

6.            Insurance

In virtually all the tenancies for commercial properties in Hong Kong, the landlord will require the tenant to effect and maintain insurance cover in respect of third party liabilities and fire hazard etc..  The insurance shall be in an amount agreed by the parties after taking into account factors such as the intended use of the property, the area of the property etc.  Since in almost all the tenancies for commercial properties in Hong Kong, the landlord will exempt itself from liabilities for any loss or damage arising from the spread of fire, overflow or leakage of water etc., a tenant should effect and maintain sufficient insurance cover against such risks to protect its interests.  The results of failing to do so may be disastrous.  One of our clients rented a commercial property in Hong Kong.  During the term of the tenancy, a communal flush water pipe burst causing substantial damage to the decoration, furniture and goods of the tenant.  When the tenant tried to seek compensation from the management office and the landlord, the management office denied liability by claiming that the incident was an accident and there were no signs of any leakage/seepage detected by the management office prior to the accident.  On the other hand, the landlord denied responsibility by relying on the exemption clause in the tenancy agreement.  A tenant should therefore protect its loss and damage by taking out sufficient insurance coverage against such risks.

7.            Signage

In some cases, the landlord will grant a licence to the tenant to put up signage(s) on part of the external wall of the building.  Ownership of the external wall can be quite complicated and the tenant should check whether ownership of the external wall is vested in the landlord.  Details of the licence such as the term, the licence fee (if any), the location, size, design and insurance of the signage(s) should be set out clearly in the tenancy agreement.

8.            Security Deposit

Even though in most cases security deposit is paid by cash, some landlords are willing to accept bank guarantee as security deposit or partly by cash and partly by bank guarantee.  Where the amount of security deposit is substantial, the tenant should try to negotiate with the landlord to pay the security deposit by way of a bank guarantee.

It is provided in some tenancy agreements that in cases where the tenant is in breach of any of the terms and conditions of the tenancy agreement, the landlord will be entitled to terminate the tenancy and forfeit the security deposit in its entirety.  In other cases, it is provided that if the tenant is in breach of any of the terms and conditions of the tenancy agreement, the landlord will be entitled to deduct from the security deposit the amount of damage and loss suffered by the landlord due to the breach by the tenant.  Tenants should therefore watch out whether their tenancy agreements contain a forfeiture clause of the security deposit.

9.            Refund of Security Deposit

It is a usual term in the tenancy agreement that the landlord shall refund the security deposit to the tenant : (i) within 14 or 30 days after the expiration or sooner determination of the tenancy agreement and delivery of vacant possession to the landlord; or (ii) after settlement of the last outstanding claim by the landlord against the tenant whichever is the later.  A tenant should try to provide in the tenancy agreement that any claim by the landlord should be made within 7 or 14 days after vacant possession is delivered up.

10.         Transfer of Security Deposit

If during the term of the tenancy, the landlord sells the property to a new owner, the landlord will transfer the security deposit to the new owner.  The obligation to return the security deposit to the tenant is contractual.  In other words, the obligation to return the security deposit to the tenant is not automatically transferred to the new owner after a change of ownership of the property.  To protect its interest, the tenant should request the landlord to arrange a novation agreement to be signed by the landlord, the new owner and the tenant or a written undertaking from the new owner in favour of the tenant in which the new owner undertakes to hold and repay the security deposit to the tenant in accordance with the terms and conditions of the tenancy agreement.

11.         Mortgagee Consent

In case the property is subject to a mortgage/legal charge by the landlord in favour of a mortgagee bank, the tenant should require the landlord to obtain the written consent from the mortgagee for the creation of the tenancy before the commencement date of the tenancy.  If there is no mortgagee consent and an event of default in the mortgage/legal charge occurs, the mortgagee will be entitled to obtain possession of the property free from the rights of the tenant.  In other words, the tenant will be expelled from the property by the mortgagee without compensation for its loss or the return of the security deposit.

12.         Tenancies for more than 3 years should be by deed and registered at the Land Registry

Tenancy for more than 3 years should be by deed by virtue of the Conveyancing and Property Ordinance and registered at the Land Registry within one month after the time of execution by virtue of the Land Registration Ordinance, failing which the tenancy would be absolutely null and void against any subsequent bona fide purchaser or mortgagee for valuable consideration.

13.         Option to Renew

The tenant should ensure that the tenancy agreement sets out clearly during which period of time the tenant can serve notice to the landlord to exercise the option to renew.  It is very important that the tenant complies strictly with such provision because if the option is not exercised within the time specified, the tenant will be deemed to have waived its rights to renew the tenancy.  Moreover, the tenancy agreement should provide a detailed and precise mechanism to determine the rent for the new term.  It is usual to provide in commercial tenancies that if the parties cannot agree on the amount of the new rent, the new rent shall be determined by an independent surveyor to be nominated by the President of the Hong Kong Institute of Surveyors.  The tenancy agreement should specify who is responsible for the costs of the nomination and the surveyor.  Lastly, in order to further protect its interest, the tenant may try to negotiate with the landlord to cap the new rent at a certain level.

14.         Sale or Redevelopment Clause

It is quite common for some landlords who own a whole commercial building to provide in the tenancy agreement that in case the landlord decides to sell or redevelop the building, the landlord is entitled to terminate the tenancy by giving 6 or 3 months written notice to the tenant.  Tenants should watch out such provisions which are often found in tenancies offered at lower than market rent.  The inexperienced or unwary tenant may end up suffering heavy losses when the tenancy is terminated prematurely.

15.         Conclusion

The above is just a basic guideline for renting commercial properties in Hong Kong and is in no way meant to be exhaustive or a substitute for professional advice.  Tenants are highly recommended to instruct experienced property lawyers familiar with tenancy matters to act for them in preparing the tenancy agreements.