Rent Enforcement Moratorium – Hong Kong Landlords and Tenants to “Work This Out Together”?

The Financial Secretary of Hong Kong, Paul Chan, announced his 2022-2023 budget (the "Budget") on 23 February 2022 with an immense focus on initiatives relieving peoples’ hardship amid the latest rampant pandemic wave sweeping Hong Kong. From a real estate perspective, apart from rates and utility concessions welcomed by domestic and non-domestic property owners, the proposed “rent enforcement moratorium” raised many eyebrows and has triggered much debate.

According to the Budget, landlords of premises leased to tenants of specific sectors will be prohibited from “terminating tenancies” or “taking legal action” against those tenants for failing to pay rents. It proposed rent relief valid for three months and, if necessary, a one-off extension for the same duration, with the legislation automatically lapsing after six months.

Explaining his reasoning, the Financial Secretary noted that many small and medium enterprises (SMEs) were struggling to survive the pandemic and had been unable to sustain rent payment, which accounts for a major part of their operating expenses. Therefore, he expected that this policy could offer some “breathing space” to SMEs.

The coverage of those “specified sectors” – or how to precisely define ‘SME tenants’ – has not been explicitly stated in the Budget. The Financial Secretary subsequently elaborated in his blog on 27 February 2022 that certain specific industries hard hit by the COVID wave would include the 17 scheduled premises under the Anti-epidemic Fund, and beleaguered sectors such as retail outlets, interest-class operators and tutorial schools. However, financial or professional services sectors are unlikely to benefit. Also, how the rent suspension mechanism is expected to be carried out still remains unknown. 

That being said, the Financial Secretary has made it clear that similar rent enforcement moratoria were also introduced in other jurisdictions such as the United States, the UK, Australia and Singapore. 

Pending further announcement by the government on the details of implementation, it is worthwhile to take reference from the counterpart legislation implemented in Singapore two years ago. There may be a few takeaways the government may consider when preparing the relevant bill for LegCo’s consideration.

What Did Singapore Do?

Hong Kong’s rental enforcement moratorium initiative aims to precisely protect tenants who have not been able to pay rent due to COVID-19. As such, a mechanism clearly defining those who are “in need” should be adopted. 

To seek relief under Singapore’s legislation In Singapore through the COVID-19 (Temporary Measures) Act of 2020 (COVID Act), if a tenant is unable to pay rent, the relevant tenant shall issue a notice to the landlord as well as other relevant parties (such as guarantors or sureties) (if any) confirming that it is unable to pay rent due to COVID-19.

Upon service of such notice to the landlord and relevant parties, the landlord may not take any action to foreclose the lease, claim outstanding rents or evict the tenant for non-payment of rent during the period the legislation specifies. In this regard, the government may also consider whether supporting documentation is necessary, such as a certified copy of the tenant’s cashflow statement (in case of an entity) showing such inability to pay rent is necessary. However, such requirement may create difficulty for those specified tenants. 

Moreover, it is also important to note that in commercial leases it is common to have a guarantor (usually an individual or entity with financial substance) guaranteeing the tenant’s obligations. The Financial Secretary’s current proposal does not mention whether the proposed arrangement will offer corresponding protection to guarantors or sureties.

It is inevitable that disputes will arise – however precise and clear the legislation or designed mechanism. Under Singapore’s COVID Act, an assessor panel is established to handle any disputes between the landlord and tenant on suspensions of obligations under the specified commercial leases and/or the notification of relief. These disputes can be referred to assessor(s) appointed by the Minister for Law of Singapore, and the determination by the assessor(s) shall be final and binding. 

Moreover, in September 2020, the Singapore government further amended the COVID Act to expand the powers of assessors to determine whether an application for rental relief is acceptable – or should be rejected – on specified grounds and disputes between the parties on the amount of rental waiver. 

The Hong Kong government should consider adopting a similar approach, with carefully-designed scope of powers of the assessors (or similar roles) to handle potential disputes, as it is the government’s intention to prevent landlords from “taking legal action” in court during the specified period. 

What’s in It for Landlords?

It is not the government’s intention to leave the affected landlords out in the cold.

• Unlike Singapore and the UK, only a limited moratorium on rent enforcement, confined to commercial leases of specified sectors, will be introduced. 
• Landlords who are affected by the moratorium will be permitted to defer payment of rates. 
• For those affected landlords whose ability to repay loans is affected by the drop in their rental income, it is expected that the Hong Kong Monetary Authority will introduce guidelines to the banks to “exercise flexibility” in establishing corresponding repayment moratoria. 

For the sake of completeness, the Financial Secretary also indicated that loans or subsidies would be offered to any elderly landlord whose living depends on rental income from a single commercial lease that is affected

Clearly, the rent enforcement moratorium is not equivalent to a rental waiver. Tenants of those specified sectors are still obliged to pay rent and perform other relevant obligations under the leases after the specified period in the legislation lapses. Whether such policy can help secure survival of the hard-hit SMEs in the long run remains to be seen. 

Yet, we do notice that market players have been reacting strongly in response to the proposed Budget legislation. Some potentially affected landlords may even take advantage of the time gap pending legislation to take immediate legal action for rent recovery. 

Key concerns from the landlords’ perspective include without limitation the following: 

• How to define the rent relief's scope of application will be a tough challenge for the government. An overly complex regime may be counterproductive to the purpose of this initiative.
• It appears that the proposed regime contemplates the affected landlords as being major corporate property owners with vast financial resources. However, there are many other affected landlords who have been under the pressure of rental reduction for many months.
• As compared with the depletion of rental income, the deferral of rates payment may only offer the affected landlords limited comfort.
• Within the spectrum of the specified sectors, not all of the relevant tenants are affected by the pandemic to the same extent. A blanket approach for all specified sectors may not be fair. Would the government consider having a turnover rent regime for a short period as an alternative?
• One issue that cannot be resolved is where a tenant repudiates the tenancy after the expiry of the moratorium period. Practically-speaking, at the expiry of the moratorium, it is likely that the security offered by the rental deposit would have been used up, leaving the landlord in a net loss position. In view of this, some landlords have suggested that there should be some financial backing by the government in case tenants default after the moratorium. 

What’s Next?

In light of such market sentiment, the government would need to consult with different stakeholders further before proposing any legislation on the proposed rent relief. Such bill has to be endorsed by the Chief Executive-in-Council before going to the Legislative Council for enactment. 

Stay tuned for further government updates on this initiative.