Introduction
With general purpose leases of about 2,400 lots expiring from June 2025 to 29 June 2047and about 300,000 lots expiring concurrently on 30 June 20471 the Hong Kong SAR Government (Government) is actively considering solutions to streamline and resolve issues arising from the current lease renewal process.
The Lands Department has now introduced a legislative proposal to streamline the arrangement for extension of land leases not containing a right of renewal (Legislative Proposal)2, which was discussed by the Legislative Council on 23 May 2023.
This Legal Update discusses current government policy for lease extension, analysing salient features of the Legislative Proposal and putting forward issues about the Legislative Proposal which should be further clarified and improved.
Current Policy
Constitutional Power of the Government
(1) In respect of land in Hong Kong, Article 7 of the Basic Law stipulates that the Government "shall be responsible for their management, use and development and for their lease or grant to … legal persons … for use or development."; and (2) Article 123 stipulates that leases without a right of renewal after establishment of the Hong Kong Special Administrative Region (i.e. 1 July 1997) will be dealt with "in accordance with laws and policies formulated by the Hong Kong Special Administrative Region on its own."
Current Land Grant Policy
As of 15 July 1997, the Executive Council of Hong Kong has adopted various policies governing land leases. In short, the current land grant policy (Current Policy) is as follows:
(1) new leases of land shall be granted for a term of 50 years from the date of grant3 at premium and subject to payment from the date of grant of an annual rent equivalent to 3% of the rateable value of the property at that date, adjusted in step with any changes in rateable value thereafter;4
(2) non-renewable leases5 may upon expiry be extended at the sole discretion of the Government for a term of 50 years without payment of an additional premium but an annual rent equivalent to 3% of the rateable value of the property will be charged; and
(3) in exercising the Government's sole discretion, most land leases for general commercial/residential/industrial use will be extended unless there are public interest considerations for not extending a particular lease.
Current Procedure
The current procedure operates in the following manner:
- The Lands Department will offer proposed conditions of the new lease to the owner(s) for acceptance, and subsequently execute the new land lease with the owner(s).
- Prior to execution of the new land lease, the owner(s) would have to produce proof of title for the Lands Department's verification that he / she is the true owner. This involves the Lands Department reviewing and approving title deeds of the property presented by the owner(s).
- Furthermore, where a lot involving multiple ownership (i.e. existing real estate developments) has expired, the Government will grant a new lease with a new lot number to the Financial Secretary Incorporated (FSI) upon expiry of the previous lease. FSI will assign the undivided shares allocated to every individual premises to the registered owners accordingly.6
- In offering proposed conditions for the new land lease, the
Lands Department will retain key conditions of the original land
lease and incorporate modernised standard conditions found in newly
granted land leases.
(the steps (1) to (4) above are collectively known as the Current Procedure)
More importantly, the Lands Department will generally only accept lease renewal applications from owners not more than three years prior to expiry of the land lease.
Analysis
Cumbersome Process
One can observe that the Current Procedure is relatively cumbersome, albeit providing flexibility for the new lease to incorporate modernised lease conditions in line with market practice.7 In particular, the FSI arrangement mentioned above for multi-ownership cases normally involves a long drawn out process for years.8
Certainty - Sole Discretion of the Government
Another concern is granting a new government lease is completely discretionary and dependent on the Government's policy without clear guidance on how such renewal (or non-renewal) decisions are being made.
Three-year Time Restraint
The Government's practice is normally to entertain an application for lease renewal not more than three years before the expiry of the lease.
This time frame is perhaps unrealistic in terms of investment in real estate projects, which are based on a much longer term timeframe.
Further, as explained above, the cumbersome process and short time frame prescribed (not more than three years) may result in significant administrative hurdles for both the Lands Department and lessees.
From the Lands Department's perspective, not only is it required to execute a new land lease every time, but it also needs to review and approve title of all the owner(s) and propose new conditions to the new lease, which are subject to acceptance by all the owner(s).9
The Legislative Proposal
The Legislative Proposal will put into law the lease extension procedure and aim to automate the process of lease renewal and reduce the volume of administrative hurdles in the Current Procedure as set out above.
Note that the Legislative Proposal will be applicable to all non-renewable general purpose leases, excluding short term tenancies and special purpose leases.10
The salient features are as follows:
- The Government will declare and effect the extension of land leases through publishing gazette notices under the proposed legislation without requiring the owner(s) to execute a new land lease. The Government plans to publish the gazette notice about three years before expiry of each batch of leases, declaring whether such land lease will be extended or not. Only land leases which will not be extended shall be published (i.e. through the method of a negative list).
- The lease will be similarly extended for 50 years without payment of premium but subject to an annual rent equivalent to 3% of the rateable value, similar to the Current Policy.
- Key conditions under the existing lease, such as user and development parameters, will be retained by the Lands Department. Additional clauses will also be incorporated to strengthen lease enforcement. Examples include enforcement rights, maintenance and the use of land.
- All existing interests, encumbrances and rights under the original lease will carry forward.
- Owners may opt out from the lease extension and likewise, the Government may also amend a decision of non-extension of lease. The proposed legislation will provide an option for owner(s) to opt out if they do not wish for the lease to be extended. For non-extension of lease, there will be an amendment mechanism allowing The Government to change the non-extension decision to extending the same after administrative review.
Analysis
Streamlined Procedure
The Legislative Proposal aims to streamline the procedure and improve certainty of granting an extension of land lease. Hopefully, the new mechanism will also increase investor confidence in the Hong Kong property market.
We hope that special purpose leases, which are currently excluded from the scope of the Legislative Proposal, can also benefit under the same streamlined procedures. This is particularly important as special purpose leases may involve substantial investment from owner(s).
We also hope that the Government will clarify how the streamlined procedures work and take effect, including the format and content of the gazette notice.
Three-year Notice Period
In the Legislative Proposal, owners would only know whether their leases are renewed about three years prior to lease expiry.11 This is an improvement from the Current Process (under which applications for renewal only start to be entertained and considered by the Lands Department within three years of expiry).
However, from an investment perspective, three years is actually an unrealistically short time frame. It is hoped that when the draft legislation is published, the time frame can be further (substantially) extended.
"Negative Listing" Criteria
The criteria for determining which land leases will be subject to negative listing was only briefly explained by the Development Bureau during the meeting of the Panel on Development on 23 May 2023.
The Development Bureau stipulated that this would be subject to public interest, highlighting examples of those subject to the negative list, such as persistent breaches of conditions of lease and large scale unauthorised building works.
However, it is still unclear how exactly "public interest" will be interpreted.
The notion of "public interest" seems to align with the Current Policy, in that the Government is given wide discretion to decide which land leases will be extended, without a clear decision making mechanism being set out.
We hope that before the Legislative Proposal is introduced into the law, there will be further elaboration on specific factors the Government will take into account in determining whether a land lease will be renewed.
Amendment Mechanism
The Legislative Proposal briefly describes an amendment mechanism available to the Government to remove certain land leases from the negative list. Again, hopefully more clarity on how amendment decisions to the negative list are made can be provided as the Legislative Proposal develops.
Appeal of "Negative Listing" Decision
In the meeting of the Panel on Development on 23 May 2023, the Development Bureau mentioned that there will be an appeal procedure for land leases listed in the negative list.12
But whether that will be introduced into law is still subject to future discussion. We hope the Development Bureau can further clarify how the appeal procedure (if introduced) will work and the timeframe for such appeal.
No Additional Premium
It is important for investors and owners to note that, as with the Current Policy, the Legislative Proposal will not involve payment of additional premium with renewal of Government Leases. This is obviously welcome by owners.
Additional Clauses
The Legislative Proposal stipulates that additional clauses to strengthen the Government's enforcement rights will be introduced, such as the right to enter and inspect the lot for any non-compliance with conditions of the lease. We hope that the Government can further clarify the scope of such power, with a degree of precision, as the mechanism for renewal under the Legislative Proposal does not actively involve engagement with existing owners.
Conclusion
The Legislative Proposal is in its preliminary stages and subject to further development.
We strongly welcome the introduction of the Legislative Proposal as it simplifies and streamlines the procedure for lease extensions.
It is hoped that it helps reduce the administrative work that has to be completed by both the Government and lessees, and also increases transparency of the process of granting lease extensions.
With automatic renewal of lease extensions, a substantial step is taken to enhance the degree of certainty to the Hong Kong property market, bearing in mind that large number of properties will benefit under the Legislative Proposal. We eagerly await the draft legislation.
Footnotes
1. LC Paper NO. CB(1)506/2023(04)
2. Extension of leases with a right of renewal is already dealt with by existing statutes.
3 .Note that this excludes new special purpose leases for recreational purposes and petrol filing stations, new special purpose leases covered by franchises and operating licenses and short term tenancies.
4. The policy for charging an annual rent equivalent to three percent of rateable value of the property for leases approved for extension, since July 1997, was a continuation of the relevant arrangement under the Sino-British Joint Declaration which came into force in 1985 for maintaining consistency of policy.
5. Non-renewable leases mean leases that contain no right of renewal. However, the above policy excludes short term tenancies and special purpose leases.
6. This arrangement is to ensure that even if the individual owners do not agree with or cannot execute the extension arrangement, the interests of other owners will not be affected.
7. The Government of the Hong Kong Special Administrative Region, Press Release: Extension of Land Leases (15 June 2022).
8. Statement by the Secretary for Development published on 29 March 2017 accessible at https://www.info.gov.hk/gia/general/201703/29/P2017032900267.htm and 28 April 2021, accessible at https://www.info.gov.hk/gia/general/202104/28/P2021042800320.htm.
9. The Government of the Hong Kong Special Administrative Region, LCQ20: Extension of Land Leases (15 June 2022).
10. LC Paper NO. CB(1)506/2023(04)
11. 政府拟简化地契续期-议员指三年通知期太短, In Media HK (24 May 2023).
12. 政府拟简化地契续期-议员指三年通知期太短, In Media HK (24 May 2023).
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