What Hong Kong’s Real Estate Policy Responses after WW2 Could Indicate for the Sector Around the World after the COVID-19 Pandemic

George Tinson, had a beautiful house on Hong Kong Island called Postbridge at the top of Repulse Bay Road, located near Wong Nai Chung Gap with lovely views overlooking Repulse Bay. This befitted his status as the senior partner of Johnson Stokes & Master (the firm that now practices in Hong Kong as “Mayer Brown”). Tinson, however, was concerned. He had a great deal to be concerned about. It was 18 December 1941 and the Japanese army had landed on the Island.

The previous decade had been a poor one for business because of, first, the Great Depression and then Japanese encroachments into Mainland China. The previous senior partner of the firm, Daniel Lewis, had retired to France in 1935 and had been unable to sell his house on the Peak, despite offering it for only HK$25,000. By early 1941 it was unsaleable.

Things turned out worse for Tinson. Wong Nai Chung Gap, where his house, Postbridge lay, was a strategic point in the middle of Hong Kong Island and the Japanese Army moved to capture it on the night of 18 December. A British Army unit was occupying Postbridge as part of their defensive line and Tinson, a first World War veteran, stayed in his home to fight alongside them. In the early hours of 19 December the house was destroyed and sadly Tinson was among the fatalities. Six days later, on Christmas Day 1941, Hong Kong surrendered, the Japanese administering it until August 1945.

The law firm was effectively shut down for the entire period. The Caucasian lawyers were all interned in a prison camp and the Japanese Army occupied the firm’s premises in the HSBC building, one of the few office buildings in Hong Kong that was air conditioned at the time, so the local staff were unable to carry on the business. The staff were not paid any wages during the occupation – despite an unsuccessful attempt led by one of the firm’s Hong Kong Chinese lawyers to break into the office to find the cash to pay them in December 1941. Nor was any rent paid to the landlord (HSBC). And yet the law firm and its landlord both survived and thrived through to the present day. How?

After 1945 the re-building of the law firm’s business was very slow. However, from our archives, there is no discussion of paying back rent to HSBC or back pay to staff for the years when the business shut down. There are likely two reasons for this:

1. The British Military Administration’s (BMA) policy response once it assumed control of Hong Kong in September 1945, many of whose policies were continued once civilian government was re-established in late 1946; and
2. Of narrower application, the use of the common law doctrine of frustration which would have cancelled the rental obligations under lease.

The BMA Moratorium

The BMA proclaimed a moratorium, during which creditors had “no rights, remedies or powers” in law against their debtors solely by result of non-payment. There were exceptions to this:

• Small debts (below HK$100 – about two weeks’ wages for a junior lawyer in 1941) could still be recovered.
• Wages and salaries, and all payments for labour or professional services still had to be paid (obviously lawyers were helping the BMA drafting the wording!).
• Debts due to Government still had to be paid.
• Finally, in respect of tenancy agreements, up to one year’s rent, was also due.

Despite rent being limited to one year’s payments, (the occupation was nearly four years), the BMA set up a Tenancy Tribunal to manage the many disputes that arose and to institute rent controls. A landlord could only receive “standard rent”, i.e. not in excess of the last payment in respect of the same premises for a similar period prior to the Japanese Occupation, unless otherwise ordered by the Tenancy Tribunal.

Doctrine of Frustration

In the case of Johnson Stokes & Master’s lease of a floor in the HSBC Building, the doctrine of frustration would have applied because the Japanese Army directly occupied the premises which defeated the entire point of tenancy. As a result, no rent would have been payable during the period of the occupation.

Policy Response to COVID-19

Governments around the world have taken a far more robust fiscal policy approach to the COVID-19 outbreak compared to the BMA’s response in 1945. In the real estate context, we have seen various types of measures introduced in one jurisdiction that, or variants of them, have been implemented swiftly elsewhere. This list, while not exhaustive, indicates the type of policy response that may follow in many jurisdictions, if not already. Three categories of measures have either happened already or which one can reasonably expect to happen: (a) direct liquidity support for tenants (particularly SMEs) from governments, (b) laws that reduce or postpone rental payments (and mortgage payments) and (c) moratoriums on evictions for non-payment of rent or mortgages.

Liquidity Support

There has been an avalanche of direct liquidity support measures around the world (a policy response that was simply not possible in the immediate aftermath of WW2). For example, in Hong Kong, the government announced on 8 April 2020 it would subsidise the payment of wages up to certain limits, following a surge of similar measures elsewhere.

Reduction/Postponement of Rent

The Hong Kong Government has not taken any steps here other than to encourage major landlords to be sympathetic to tenants. By contrast, the Singapore Government has reduced property taxes for non-residential properties and required landlords to pass the full amount of this reduction to the tenants as a rebate, which in most cases is estimated to be equivalent to one month’s rent.

There are no signs yet of the rent controls of the type imposed by the BMA after WW2 and we do not expect this precedent to be followed. Rent reductions, however, maybe indirectly achieved via the moratoriums on eviction discussed below.

Moratoriums on evictions/terminations for non-payment of rent or mortgage payments

Again, the Hong Kong Government has not introduced any specific new rules similar to the BMA’s moratorium. However Singapore and the UK (among others) have introduced measures to help commercial tenants and borrowers.

In Singapore, both tenancies and loans secured on commercial property cannot be terminated for failure to make payments. In the UK, commercial tenants are protected from eviction for non-payment of rent until the end of June 2020 and a number of banks have voluntarily introduced mortgage holiday schemes. Such measures obviously empower tenants to default on rent and use it as a negotiating chip for rental reductions, thus indirectly forcing rent down.

The Future

As many jurisdictions are facing the same set of economic problems and simultaneous demand and supply shocks, we expect best practices to emerge which will be widely adopted to share the burden in such a way that keeps the overall economy intact as much as possible.

You can expect the types of measures mentioned above to be considered wherever your real estate (whether owned or occupied) is located. These measures are likely to tip the negotiating balance towards occupiers as landlords or lenders have less power to evict them and press for immediate payment. We are also seeing the emergence of “blend and extend” type arrangements where landlords agree a lower rent now in exchange for an extension of the term of the lease to maintain occupancy levels during this economic shock period.