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A case for security of tenure for business tenants

Business tenants, particularly those in the commercial and retail sectors, are vulnerable to the demands of landlords and there is a strong argument for legislation to counter this trend, writes Boase Cohen & Collins Consultant Charles Cook.

Hong Kong, 5 September 2016: In recent (post World War Two) history, tenants of residential premises in Hong Kong enjoyed a substantial measure of security of tenure. If they complied with certain fairly complex formalities as to service of notices, tenants were entitled to a new tenancy on expiry of their existing one unless the landlord could establish one of a few specific grounds to terminate the tenancy. Such grounds included non-payment of rent; the landlord wished to rebuild the premises; or the landlord wished to occupy the premises himself.

These provisions were very technical and, as such, regularly criticised by the long standing Presiding Officer of the Lands Tribunal (“the LT”) at the time. Nevertheless, tenants who were properly informed or represented did make use of them and were entitled to new tenancies at the prevailing market rental, to be determined by the LT if not agreed. The LT would determine the rent based on evidence, often from professional valuers, as to the applicable rental for the premises.

At the same time, there was a very limited type of security of tenure for business tenants but that simply provided that the tenancy would continue until the expiry of six months’ notice by the landlord to terminate it. Such notice could be given six months before the end of the contractual term and did not give the tenant any right to a new tenancy.

Both of the above protections for tenants were abolished by the Landlord and Tenant Ordinance (Consolidation) (Amendment) Ordinance in 2004. The landlord and tenant relationship since then has been governed by what is written in the lease or tenancy agreement (“the Agreement”) itself without any overriding statutory protection. Therefore if the Agreement provides that a tenancy expires on a certain date, as is usual, the tenant must leave the premises unless he reaches a new agreement with the landlord who can name his price, whether reasonable or related to the current market or not.

The old residential provisions were based on Part II of the English Landlord and Tenant Act 1954 which in fact governs commercial and not residential tenancies. Hence the fairly complicated procedures as the English Act provisions were founded on the assumption that commercial landlords and tenants would be fully aware of their rights and/or would obtain sufficient legal advice.

This was not really suitable for residential tenancies in Hong Kong where tenants, and very often landlords, were unrepresented (at least at the early and often critical stages of the procedure).

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Restaurants and bars are routinely forced to close when landlords raise the rent on expiry of the Agreement. 

The abolition of the residential protection was advocated by the government as a measure to free up the secondary residential property market but was seen by many at the time as being indicative of the government’s relationship with Hong Kong property developers.

Nevertheless, whatever one’s views may be in that regard, there is arguably an even stronger case for security of tenure, similar to the previous residential protections, to be given to business tenants, particularly commercial and retail businesses. Many will have seen new restaurants open and be forced to close on expiry of their Agreements due to landlords refusing to renew their tenancies but instead renting out to the highest bidder, possibly a high end fashion accessories store. The existence of the restaurants in question could well have contributed to an increase in overall rental values in the vicinity. Tenants, particularly in the case of restaurants and bars, routinely spend large amounts of money on fitting out their premises. They then lose the value of that by being forced to move out at the end of their tenancies.

In the case of tenants with a high degree of bargaining power, this issue can be mitigated by the inclusion in the Agreement of an option in the tenant’s favour to renew the tenancy at the end of its term (again at the market rent according to a formula as set out in the Agreement). This, we would suggest, is what tenants should seek to do at the outset so as not to lose a large part of the investment they have put into fitting out their premises. This, however, of course depends upon the landlord’s agreement to such a provision which is often not forthcoming.

To remedy this situation, there is a strong case to introduce security of tenure provisions for business tenants.