This country-specific Q&A provides an overview to technology laws and regulations that may occur in Hong Kong.
It will cover real estate law as well as the author’s view on planned future reforms of the commercial real estate regime.
This Q&A is part of the global guide to Real Estate. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/real-estate
All land in Hong Kong (with the exception of St. John's Cathedral, the only freehold property in Hong Kong) is leasehold property. The government leases the land for a term of years with covenants and conditions imposed on the grantee. Previously, the government as lessor would issue a Government Lease to the purchaser (usually a developer) (as the lessee). The current practice now is that the government usually executes Conditions of Sale, Grant, Re-grant or Extensions depending on the purpose of grant. Once the conditions stipulated therein are complied, the Conditions of Sale or Grant will convert into a form of legal ownership to the purchaser. Before 1997, the lease terms were in general 75 and 99 years renewable for a further 75 years or 99 years. Some lease terms were even 999 years. After 1997, new lease terms were in general 50 years from the date of grant. Government rent is payable on land and the sum is equivalent to 3% of the rateable value of the property on the land leased. Given Hong Kong's limited supply of land, real estate is usually developed in form of multi-storey buildings, whether for residential, commercial, industrial or other purposes. Under this system, the entire land and building is notionally divided into a number of undivided shares which are allocated to different premises. Owners buying commercial real estate will therefore own a number of undivided shares in the land together with the exclusive right to occupy the premises and their interests will usually be governed by a Deed of Mutual Covenant.
How is ownership of real estate proved?
Hong Kong operates a deeds registration system for recording transactions in land and property, rather than a title registration system. Ownership of real estate can be registered on a publicly accessible register maintained by the Land Registry. However, registration is not a definitive proof of ownership. Registration in Hong Kong confers only priority on the rights in registered documents. As the records kept are public information, notice is deemed to be given to any party acquiring an interest in the real estate. Registrable documents include deeds, conveyances and other instruments in writing and judgments. Registrable but unregistered documents will be void against any future bona fide purchaser for value or any other deed which is thereafter registered.
Currently, unless otherwise agreed by the vendor and purchaser, proof of title is shown by a vendor showing to a purchaser the Government Lease relating to that land and, (i) where the grant of Government Lease was less than 15 years from the date of the instant disposition, then all title deeds (e.g. assignment, mortgage, charge) and all documents referred to in such title deeds within this period, or (ii) where the grant of Government Lease was more than 15 years from the date of the instant disposition, then only all such title deeds and all documents referred to in such title deeds within this 15 year period. Upon completion, all the originals of these documents which are required for proving good title and relate exclusively to the property and certified copies of all other title deeds in the possession of the vendor shall upon the purchaser's request be delivered to the purchaser. In addition, the vendor's solicitor has a duty to answer requisitions raised by the purchaser satisfactorily.
Are there any restrictions on who can own real estate?
Generally there are no legal restrictions as to who can own Hong Kong property.
What types of proprietary interests in real estate can be created?
Apart from leasehold interests, other types of proprietary interests include easements, leases (for a term more than 3 years), tenancies (for a term less than 3 years), mortgages and beneficial interests under a trust.
Is ownership of real estate and the buildings on it separate?
Ownership of a building is not separate from the ownership of land. Owning a unit in a multi-storey building in Hong Kong means that the owner owns a portion of the undivided shares in the land such that the owner and the other co-owners of the same building hold the Government lease of the land on which the building has been constructed. Such undivided shares will be expressed to be attached to the right of exclusive use and possession of a relevant premises in the building. Likewise, full ownership of a building will mean the owner owns all of the undivided shares in the parcel of land on which the building is erected.
What are common ownership structures for ownership of commercial real estate?
Investment holding companies are commonly used to hold and dispose of commercial real estate in Hong Kong. A share transfer of the relevant company will in effect transfer the target real estate. The stamp duty applicable would therefore be the stamp duty on the sale and purchase of shares, which is equivalent to 0.2% of the higher of the consideration and the fair market value of the shares being transferred.
What is the usual legal due diligence process that is undertaken when acquiring commercial real estate?
The following is a summary of the legal due diligence process that is undertaken when acquiring commercial real estate in Hong Kong:
- The purchaser's solicitors will normally conduct legal due diligence (rather than by a counsel or a notary).
- The purchaser's solicitors will carry out a land search at the Land Registry and obtain copies of the title deeds for inspection. Searches at the Land Registry cost HK$10 per lot searched and results can be obtained instantly. They will then usually request the vendor's solicitors to deliver the title deeds (usually original copies) for inspection under an undertaking to return those title deeds upon demand and to keep them in safe custody. The purchaser's solicitors will cross check those title deeds against those registered in the Land Registry.
- The purchaser's solicitors would also request additional information to be provided by the vendor's solicitors e.g. whether there are any unregistrable documents such as tenancy agreements or trust arrangements.
- If there are any defects in the title, such as missing documents, unregistered documents or suspected unauthorized building works or other encumbrances, the purchaser's solicitors may raise requisitions. The vendor's solicitors will need to respond to, or help rectify those deficiencies in order to prove good title. If requisitions are unsatisfactorily answered or the defect(s) on title is/are not remedied, the purchaser will usually have reserved a right to annul the transaction in the sale and purchase agreement.
- The purchaser's solicitors may also engage a surveyor to inspect the physical condition of the property, identify whether there are any unauthorized building works, ensure that all of the fixtures and equipment expressed to be sold are in fact existing and functional, and also obtain an opinion on the price of the property.
- The purchaser's solicitors may also write to the management company of the property to check for any outstanding management fees or breach of terms of the deed of mutual covenants or management agreement by the vendor.
- The purchaser's solicitors may also write to relevant Government authority for any outstanding payment of Government rent and rates payable by the vendor.
- The purchaser may inspect the property to see whether the property is subject to unregistrable interests such as any tenants, licensees or occupiers occupying in or the property and/or to check the physical condition of the property and the fixtures, fittings and furniture.
- If the property transaction is to be effected via a share sale, then corporate due diligence may be also necessary.
- There is no market standard form of reporting or standard form of enquiries raised by purchasers.
- Vendors will also customarily be asked to represent and warrant in relation to the legal title and conditions of the property.
What legal issues (if any) cannot be covered by usual legal due diligence?
Legal due diligence may not make apparent all unauthorized building works, which may render the title not being good and marketable.
It is also important to pay attention to unregistrable interests such as tenancies, uncrystallised floating charges and other interests arising from resulting or constructive trusts that may not be found from the land search record obtained from the Land Registry and which might not have been disclosed by the vendor.
What is the usual process for transfer of commercial real estate?
After preliminary negotiations occur and both parties settle on a price, a "provisional agreement", which is legally binding on the purchaser and vendor, is drafted and entered into. It must be complied with and, if not replaced within the stipulated time by a formal sale and purchase agreement, may be relied on to govern the rest of the transaction or to sue for compensation for breach of contract. An initial deposit is usually paid on signing.
Such a provisional agreement usually contains the following terms:
- address of the premises;
- price of the premises;
- details of the parties ;
- amount of the initial deposit (industry practice being 1 to 3 percent) to be paid on the signing of the provision agreement;
- amount of the further deposit (industry practice being 10 percent inclusive of the initial deposit) to be paid on the signing of the formal sale and purchase agreement);
- when the formal sale and purchase agreement is to be signed;
- the completion date (on which the vendor disposes of the property to the purchaser);
- stipulating that the balance price is to be paid by the purchaser of the aforementioned completion date;
- the apportionment of legal expenses and stamp duty between the party;
- the amount of commission payable to the estate agent by the purchaser and/or vendor;
- liability for breach of agreement; and
- an escape clause providing for a date before which either party may withdraw from the transaction.
The purchaser's solicitors will then draft a formal sale and purchase agreement base on the results of the due diligence exercise. Once both parties agree to the form and content, it will be executed and registered at the Land Registry.
On the date of completion, the purchaser hands over the balance of the purchase price in exchange for a duly executed document of transfer (otherwise known as deed of assignment). All other title deeds and means of access (e.g. keys) are delivered to the purchaser, unless the property is bought via a mortgage in which case the title deeds will be furnished to the purchaser's mortgagee. The assignment will also be stamped and registered at the Land Registry.
There is no prescribed form of transfer in Hong Kong. The typical legal document involves a provisional sale and purchase agreement, a formal sale and purchase agreement and a deed of assignment which must all be in writing, duly signed and attested, stamped and registered at the Land Registry.
Is it common for commercial real estate transfers to be effected by way of share transfer as well as asset transfer?
Transfers are commonly effected by way of share transfer as well as asset transfer in Hong Kong. Share transfer is becoming more and more common, as the the stamp duty payable on the sale and purchase of shares, is currently equivalent to 0.2% of the higher of the consideration and the fair market value of the shares being transferred.
On the sale of interests in land does the benefit of any occupational leases and income automatically transfer?
If the property transaction is effected by a share transfer and not an asset transfer, there is no change of registered owner holding the property and the benefit of any occupational leases and income remain the same.
If the property is sold as an asset transfer subject to a lease, the sale and purchase agreement normally will specify that the purchaser will assume all the rights, obligations and liabilities under the subsisting lease. Novation agreement should also be entered into to replace the purchaser as the new lessor who shall continue to receive the rental income after completion of the purchase of the property.
What common rights, interests and burdens can be created or attach over real estate and how are these protected?
Property interests include:
- Regular leaseholds;
- Legal charge over land i.e. mortgage interest;
- Equitable interest in the form of being the beneficiary of a trust, whether such a trust was intentionally created by a settlor, or arises by operation of the law in the form of a resulting or constructive trust; and
These rights are created by registering the relevant instruments at the Land Registry. Such registration operates as deemed notice to any third party. Unregistrable interests (i.e. interests that are simply not capable of being registered), such as trusts that arise by operation of the law or leases for a term of less than 3 years, are protected by common law rules.
Are split of legal and beneficial ownership of real estate (ie Trust structures) recognised?
Split legal and beneficial ownership of real estate (i.e. trust structures) are recognised in Hong Kong. Parties to a declaration of trust may file such declaration at the Land Registry.
What are the main taxes associated with commercial real estate ownership and transfer of commercial real estate?
The current tax imposed on the transfer of commercial real estate ranges from 1.5% to 8.5% of the purchase price or market value of the property, whichever is higher, if the sale is effected as an asset transfer. HK$100 is also payable on the assignment of the property. If the property is sold via a share transfer, then the current stamp duty payable on each bought and sold note will be 0.1% of the higher of the purchase price or the net asset value of the shares. HK$5 is also payable on the instrument of transfer. In comparison, residential properties in Hong Kong are further subject to a buyer stamp duty of 15% on the stated consideration or market value of the property (whichever is higher) payable by the purchaser and a special stamp duty jointly payable by the seller and purchaser at a rate ranging from 5% to 15% of the stated consideration or market value of the property.
In Hong Kong, property ownership is subject to the payment of government rent, rates and property tax which, as of November 2017, is determined at 3%, 5% and 15% of the rateable value of the property (determined as the rental income (and any other consideration) which is generated by the property), respectively.
What are common terms of commercial leases and are there regulatory controls on the terms of leases?
There are no prescribed form of commercial leases and parties will be free to negotiate and agree on the terms of commercial leases. In practice, rent for commercial premises are usually divided into stages throughout the lease term whereby the rent payable would be a fixed rent which will be adjustable such that the rent may increase by a certain percentage in stages making reference to the turnover or the prevailing market rent, depending on the types of leases. There is, in general, no restrictions over the level of rent that could be charged.
Commercial leases usually contain an option to renew prior to the expiry of the initial lease term. Either party may elect to terminate the commercial lease according to its terms and conditions. Usually, the landlord will reserve a right to terminate and re-enter the premises upon the lessee breaching a condition or a covenant and having failed to remedy such breach within a stipulated notice period. Anti-alienation provisions prohibiting any assignment or subletting of the premises are also usually found in commercial leases.
In terms of apportioning costs, the lessor is generally liable for structural repairs whereas the lessee is obliged to keep the property in good and tenantable condition.
How are use, planning and zoning restrictions on real estate regulated?
Government leases contain conditions stipulating permitted uses of the land. Construction on the lot of land will also require a developer to seek an Occupation Permit, which will contain conditions restricting the authorized use of the building. If a new owner or developer wishes to change the authorized use of the building, he or she may apply to the Lands Department for approval. Moreover, developers may also need to obtain approvals from the Town Planning Board if the land lot is not initially zoned and intended for commercial purposes.
Who can be liable for environmental contamination on real estate?
In Hong Kong, the enforcement of environmental laws is mainly carried out by the Environmental Protection Department which covers air pollution, water pollution, waste disposal, noise, hazardous chemicals control areas, to name a few. Given Hong Kong's uniqueness in having multi-story buildings, the incorporated owners of a building will usually be liable for environmental contamination as each owner holds undivided shares in the land and building. Each owner may be required to contribute to any penalty imposed according to their respective shareholding in the land and building.
Is expropriation of real estate possible?
The Urban Renewal Authority has the power to apply for a compulsory sale of property to the government for urban renewal purposes. Affected owners will be entitled to a compensation equivalent to the market value assessed as at the date of reversion of ownership back to the government of the expropriated properties. An order for resumption is made only if there is a "public purpose" to do so which is decided by the Chief Executive in Council at its sole discretion.
Expropriation may also occur if a person or group of persons who, together, owning no less than 90% of the undivided shares in a given lot of land, make an application to the Lands Tribunal for an order to sell all 100% of the undivided shares in the lot for government redevelopment on the condition that (i) the disrepair of the building is apparent and (ii) the majority owner(s) having made reasonable efforts to purchase the undivided shares of the minority owner(s).
Is it possible to create mortgages over real estate and how are these protected and enforced?
It is possible to create mortgages over real estate. Such mortgages would usually be registered at the Land Registry and the Companies Registry and notice will be deemed to be given to any third party acquiring an interest in the real estate.
Mortgages usually contain a provision to the effect that the mortgagee shall have a right to take actual possession of the property and sell it to satisfy part or whole of the outstanding mortgage in case of an event of default, such as the failure to repay.
Are there material costs associated with the creation of mortgages over real estate?
The registration fee of a mortgage interest is HK$230 if the interest being registered is valued at HK$750,000 or less, or HK$450 if the value exceeds HK$750,000. Mortgages must also be registered at the Companies Registry at a fee of HK$340. No stamp duty or other taxes is payable on mortgage creation or mortgage documents. No notarization fees are required as no notary public needs to ratify the mortgage.
Is it possible to create a trust structure for mortgage security over real estate?
Security over land can be created in favour of a security trustee who will hold the mortgage in trust for a syndicate of lenders appointed under the financing documents of such syndicated loan transactions.
What is the main legislation relating to commercial real estate ownership?
The Conveyancing and Property Ordinance (Cap. 219) which regulates the ownership, proof of title, transfer, and mortgaging of properties in Hong Kong is the main legislation. Apart from the above, other governing legislation include (i) the Land Registration Ordinance (Cap. 128) which regulates the documents registration system in Hong Kong; (ii) the Landlord and Tenant (Consolidation) Ordinance (Cap. 7) which regulates the relationship between lessors and lessees; and (iii) the Government Leases Ordinance (Cap. 40) which regulates the regime of leasing land from the Hong Kong government.