What is a Commercial Lease and How to Negotiate one?

Businesses require commercial property to generate profit through the sale of goods or services. To rent such property, businesses must sign a commercial lease agreement, a legally binding contract between the company (the tenant) and the commercial landlord. Unlike residential leases, commercial leases involve unique considerations, making it essential to negotiate terms carefully to avoid unfavorable conditions and ensure the agreement reflects the landlord and tenant’s intentions.

This guide covers everything you need to know about commercial leasing in Hong Kong.

How Does a Commercial Lease Differ from a Residential Lease?

Commercial and residential leases are governed by different rules. Residential leases typically offer greater tenant protections, such as safeguards for security deposits and privacy rights, because residential tenants rarely negotiate terms extensively. In contrast, commercial leases require thorough negotiations, resulting in fewer protections but greater flexibility to tailor the lease to the specific needs of the commercial space (e.g., office or retail).

Commercial leases are more complex due to legal terminology. A customizable commercial lease template is available here.

Relevant Hong Kong Laws

The primary legislation governing leases in Hong Kong is the Landlord and Tenant (Consolidation) Ordinance (Cap. 7), which outlines the rights and obligations of landlords and tenants, with Part V addressing non-domestic tenancies.

The Land Registration Ordinance (Cap. 128) allows registration of deeds affecting immovable property. Tenancy agreements exceeding three years must be registered with the Land Registry to maintain priority over subsequent registered documents.

Lease arrangements include:

• Lease: For terms exceeding three years, requiring a deed to create a legal estate in land.
• Tenancy Agreement: For terms of three years or less, which may be oral but is recommended in writing to avoid disputes.

Lease terms are freely negotiable, as no legislation mandates specific conditions.

What Are the Essential Elements of a Commercial Lease?

Negotiating a commercial lease requires attention to elements beyond those of a standard contract. Below are the key components.

The Parties

The lease must clearly identify the landlord and tenant using their legal names. Complex company structures (e.g., subsidiaries vs. parent companies) necessitate due diligence to confirm identities and understand liability limitations.

The Subject

This clause specifies the property’s location, typically by address. The property must be suitable for its intended use (e.g., commercial activities may be prohibited in residential zones). In Hong Kong, verify zoning with the Town Planning Board. The lease should clarify whether the property is for domestic or non-domestic use, as misuse (e.g., using a residential property commercially) breaches the contract. Permitted use can be confirmed via a Certificate of Primary User from the Rating and Valuation Department, Occupation Permits, or Approved Building Plans from the Buildings Department.

The lease should also define what constitutes the property (e.g., whether air-conditioners are included), as some facilities may be essential but not legally part of the property.

Rent

This clause outlines rent payment terms, typically due monthly for the lease duration, adjusted to market rates to account for volatility.

Duration

Commercial leases, often exceeding three years, require a specified commencement date to be valid, reflecting businesses’ need for long-term stability.

Deposit

A security deposit, typically two to three months’ rent, is payable upon signing. It is refundable at lease expiry, minus deductions for tenant defaults. Deposit terms are negotiable.

Rates

Rates, a tax on property occupation, are charged quarterly based on the property’s rateable value. Unless agreed otherwise, the tenant is liable for rates.

What Else Should You Negotiate For?

Beyond core requirements, negotiate the following terms to align the lease with your needs.

Sale and Redevelopment Clause

Hong Kong leases often include a Sale and Redevelopment clause, allowing landlords to terminate the lease with notice (typically six months) if they sell, redevelop, or renovate the property. Tenants may negotiate to exclude or limit this clause.

Repairing Obligation

Clarify repair responsibilities to avoid conflicts. Typically, landlords handle external and structural repairs, while tenants manage internal, non-structural repairs. Tenants should inspect the property before signing and report existing damages. Under the Occupiers Liability Ordinance, tenants, as occupiers, owe a duty of care to visitors (e.g., guests, delivery personnel) and may need comprehensive third-party liability insurance.

Rent-Free Period

Landlords may offer a rent-free period at the lease’s start for fitting out the premises. Specify who pays management fees, rates, and other expenses during this period.

Rent Review Clause

A rent review clause allows rent adjustments at specified intervals or upon lease renewal to reflect market rates. Reviews can be upwards (rent stays the same or increases) or upwards-downwards (rent adjusts up or down). Tenants should understand the review mechanism and its potential impact, ideally consulting commercial property lawyers.

Termination Clause

This clause outlines conditions for early lease termination, including notice periods to allow time for finding replacements. Termination may occur due to a material breach (e.g., illegal activities by the tenant), with “material” defined case-by-case or specified in the lease. Landlords may terminate for property damage or other reasons, typically with notice and compensation to the tenant.

Facilities of the Property

Tenants may require specific facilities (e.g., kitchen ventilators for restaurants, security systems for jewelry stores, or air-conditioners for ballrooms). Negotiate these needs before signing, as they may not be guaranteed. If facilities are unavailable, negotiate modifications, consulting surveyors and lawyers to understand limits.

The Nature of the Business

Landlords may restrict tenant businesses to align with the property’s purpose (e.g., an IT mall may exclude clothing stores). A tenant exclusive clause can limit the tenant’s use, especially for multi-purpose businesses (e.g., a gym selling food).

Legal Requirements to Execute a Lease

Execution formalities depend on the parties’ capacity:

1. Individual, Sole Proprietorship, or Partnership: Affix a red seal next to the signature(s).
2. Limited Company: Affix the company’s common seal, comply with articles of association, and provide a board resolution authorizing execution.
3. Sole Proprietorship, Partnership, or Limited Company: Affix a chop or rubber stamp next to the signature(s).

Learn more about execution in What is the Difference Between Tenancy Agreement and Lease Agreement?.

Stamp Duty on Commercial Property Leases in Hong Kong

Per Schedule 1 of the Stamp Duty Ordinance (Cap. 117), leases incur stamp duty based on the lease term (e.g., 1% of yearly rent for terms exceeding three years). Deposits are excluded from stamp duty calculations. Parties typically split stamp duty equally, but this is negotiable. The lease must be stamped within 30 days of execution, regardless of the commencement date. Non-payment results in penalties, court inadmissibility, and rejection by the Land Registry.

Lease Registration

The Land Registration Ordinance (Cap. 128) mandates registration of leases exceeding three years with the Land Registry. Leases of three years or less are exempt unless they include a renewal option, which must be registered for priority. Registration ensures:

1. Priority over later-registered documents
2. Public notice of the lease, protecting tenant interests
3. Binding new purchasers or mortgagees, preventing tenant eviction

Registration does not validate an otherwise invalid document. Leases must be registered within 30 days of execution. For details, see the Guide to Registration of Documents.

Summary

Commercial leases require extensive negotiations to protect both landlord and tenant interests. All oral agreements must be documented in writing. Given the complexity, consult a real estate lawyer experienced in commercial leases and conduct research to understand your options.

Please note that this is a general summary of the position under the Laws of Hong Kong SAR and does not constitute legal advice.

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