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Landlords’ hands tied over SME tenants

By Fiona Chan

Hong Kong, 2 March 2022: In an unprecedented move, the government is introducing emergency legislation to prohibit landlords from taking action against certain types of businesses which have fallen behind with their rent. Financial Secretary Paul Chan made the surprise announcement in his budget speech on 23 February as he emphasised the urgent need to address Hong Kong’s worsening Covid-19 situation.

The new law will forbid landlords from terminating the leases of, halting services for, or taking legal action against certain tenants – mainly small to medium-sized enterprises (SMEs) – for failing to pay rent on time. The measure will be in effect for three months, starting from January, and could be extended for another quarter if needed. Because of a sunset clause, the law will cease to have effect after six months. (See note at end of article.)

The Financial Secretary took the surprise step “taking into consideration that rental payment constitutes a major part of the operating expenses of enterprises”. He added that “many SMEs currently face huge challenges amidst the adverse business environment”. More than 19 sectors, including catering and retail, which have been hit hard by the fifth wave of coronavirus infections are expected to benefit. The penalty for breaching the law will be three times the rent owed, or a minimum fine of HK$50,000. The measure is expected to benefit more than 130,000 commercial tenants.

Other relief measures for businesses include:

  • Reducing profits tax for the year of assessment 2021-22 by 100%, subject to a ceiling of HK$10,000.
  • Providing rates concessions for non-domestic properties for four quarters of 2022-23, subject to a ceiling of HK$5,000 per quarter in the first two quarters and HK$2,000 per quarter in the remaining two quarters for each rateable property.
  • Waiving business registration fees for 2022-23
  • Continuing to waive 75% of water and sewage charges for non-domestic households until 30 November, subject to a monthly ceiling of HK$20,000 and HK$12,500 respectively.
  • Extending the waivers/concessions of the existing 34 groups of government fees and charges for 12 months starting from October.
  • Continuing to grant the 75% rental or fee concession to eligible tenants of government premises and eligible short-term tenancies and waivers under the Lands Department for six months until 30 September.

Chan has also offered relief to residential renters. He is providing a tax deduction for domestic rental expenses starting from the year of assessment 2022-23 so as to ease the burden of renting a private property on taxpayers liable to salaries tax and tax under personal assessment who are not owners of domestic properties, subject to a deduction ceiling of HK$100,000 for a year of assessment.

For property purchasers, the government-backed Hong Kong Mortgage Corporation will raise the ceiling on first-home mortgages. Buyers will be allowed to borrow 90% of a property’s value if the home is worth not more than HK$10 million, up from the existing HK$8 million or less. For non-first-time buyers seeking to borrow 80%, the property should be worth not more than HK$12 million, up from HK$10 million.

Looking further ahead, the Financial Secretary plans to revise the property tax system for the first time since 1995. Starting from 2023-24, owners of residential properties will be limited to applying for tax rebates on just one self-occupied property, rather than multiple ones. This is expected to save the government around HK$3.1 billion on rate concessions.

Further, a system will be introduced by 2024-25 under which tax rates will increase along with properties’ rateable value – calculated as 5% of a home’s annual rental value. Properties with a rateable value of less than HK$550,000 will be taxed at the current rate of 5% of that value. This will rise to 8% for the next HK$250,000 and to 12% for any amount over HK$800,000.

While the budget has been broadly welcomed for providing pandemic relief for Hong Kong’s struggling business community, it is the move to prevent landlords acting against SMEs which has proved the major talking point. A number of SME owners are unimpressed, pointing out that they still have to pay the rent at some stage, while landlords are worried about defaulting on mortgage payments to banks, although Chan has said the Hong Kong Monetary Authority will instruct banks to be flexible on this issue.

In the days since his speech, the Financial Secretary has robustly defended his strategy. Responding to complaints from landlords that some business tenants have been lagging behind with their rent for months, he has pointed out they can still try to recover any rent owed since last year. “Our preliminary idea is to draw a line on January 1, when the Covid outbreak began. The amount of outstanding rent before, meanwhile, can be handled according to the contract,” he said.

But the impending law change – while only a temporary measure – is noteworthy, nonetheless. It has been tried elsewhere, such as in Singapore in 2020, but it is unprecedented in Hong Kong that laws are implemented to prohibit landlords from enforcing their rights against tenants who have failed to pay rent in breach of contractual obligations.

Note: On 7 March, the Financial Secretary watered down his original proposal, removing the option of extending the “protection period” by a further three months. Hence, the measure will only be in effect for three months, starting from January.

As a Partner in BC&C, Fiona Chan specialises in dispute resolution and is experienced in a wide range of civil litigation. Her core practice areas include conveyancing and property, Will drafting, estate administration and probate matters, while she is an appointed member of the Panel Solicitors for the Official Administrator. She can be contacted at fionachan@boasecohencollins.com.

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