Hong Kong Government Introduces Premium Free Building Covenant Extensions as Part of Anti-Epidemic Measures

Introduction

As part of the government's relief measures in response to the fifth wave of COVID-19 outbreak in Hong Kong, the Development Bureau announced on 14 March 2022 that extensions to the building covenant (BC) period for up to six months at nil premium will be granted.

On 18 March 2022, the Lands Department (LandsD) issued a Practice Note (LAO No.2/2022)¹ (2022 PN) to provide further operational details of such relief measure. This legal update summarizes the eligibility under the new measure and how the real estate industry may make use of the measure to plan for development progress.

What Developments are Eligible?

We summarize below the types of developments which are eligible for free BC extension:

Eligible

NOT Eligible

All types of developments with unfulfilled BC as at 14 March 2022, including cases with BC period already expired or not yet expired.

The 2022 PN specifically includes cases with BC period previously extended by LandsD and such extended BC period has already expired or not yet expired.

On types of development, the 2022 PN specifically covers:

Developments under the Buildings Ordinance (Application to the New Territories) Ordinance (Cap. 121).
Completion of building works for conversion of an entire existing industrial building as required under a special waiver.

Developments with:

Leases executed after 14 March 2022.
BC periods not imposed by LandsD (e.g., BC period imposed by the Lands Tribunal in an order for sale pursuant to the Land (Compulsory Sale for Redevelopment) Ordinance (Cap.545).
BC already fulfilled before 1 January 2022 but formality of BC extension previously applied has not yet been completed.

How to Benefit?

As opposed to the BC concession introduced by LandsD in 2020, no application is required from landowners this time around. Instead, LandsD will issue a letter offering BC extension for eligible cases:

	BC period not yet expired as at 14 March 2022	BC period already expired as at 14 March 2022
When will LandsD's letter be issued?	Within 3 calendar months before expiry date of the BC period	Not specified
How long to extend?	6 calendar months	6 calendar months
Extension from when?	Commencing on the expiry date of the BC period	Commencing later part of the expiry date of the BC period; and 1 January 2022
Premium for the 6-month extension	Nil
*Premium beyond* the 6-month extension**	May be subject to premium. Example in PN: Original BC expire date: 31 March 2022 Landowner applies for a 1-year extension (up to 31 March 2022) First 6-month extension (1 April 2022 to 30 September 2022): Premium Free. Remaining 6-month extension (1 October 2022 to 31 March 2023): if granted, still subject to premium under LACO Practice Note 2/2021².

Take Care of Your Construction Loans!

Separately, landowners who have taken out construction loans to finance development of buildings should also note that the BC extension does not necessarily entail a matching extension to the development completion deadline required under the relevant finance documents. Such deadline may be stated as a fixed date independent of the expiry date of the BC period.

In such case, if a delay in development completion is expected, while the new measure may address this from a government lease perspective, landowners are reminded to seek the financier’s consent for a corresponding extension of the development period or a waiver for a potential breach of the relevant development covenant under the finance documents.

Exclusion of BC Granted in Compulsory Sale Cases

The 2022 PN provides that the new measure does not apply to BC period which is not imposed by LandsD. On this, the 2022 PN specifically mentions that the BC imposed by the Lands Tribunal in compulsory sale applications made pursuant to the Land (Compulsory Sale for Redevelopment) Ordinance (Cap. 545) (LCSRO) is NOT eligible for the new measure. We consider that BC imposed under LCSRO should also be eligible:

According to s.9 of the LCSRO, each condition specified in Schedule 3 thereto is deemed to be a condition of the government lease of the lot the subject of an order for sale granted by the Lands Tribunal under the LCSRO.
The conditions in Schedule 3 to the LCSRO impose a BC period of up to six years, to be specified by the Lands Tribunal in the sale order, within which the redevelopment shall be completed, subject to extension as may be granted by the Lands Tribunal on application.
Given that, as a matter of law, the conditions under Schedule 3 to the LCSRO (being the building covenant), are "deemed to be" conditions of the government lease where the LandsD is entitled to take enforcement action against the landowner in case of breach, we consider that the new measure on BC extension should equally apply to government leases of the lots acquired through compulsory sale under the LCSRO.

Conclusion

Although no application is required for this round of free BC extension, it may be a bit "too late" if LandsD only issues its confirmation letter within three calendar months before expiration of the BC date pursuant to the PN. It is because landowners do require certainty at the early stage of the development to ensure that they are entitled to the free BC extension in order to plan ahead for their projects (e.g., construction progress, milestone dates for pre-sale consent, etc.).

We recommend that landowners of eligible developments take the initiative to seek early confirmation from LandsD to ensure they are eligible for the requisite BC extension. We also suggest the government (through LandsD) to issue a list of those government land grants and lease modification cases with BC date not yet expired as at 14 Mar 2022, so as to provide more certainty to the real estate industry.

We would also strongly suggest the government to expand the scope of application of the 2022 PN to lots acquired through compulsory sale under the LCSRO.

¹ LandsD Lands Administration Office Practice Note No. 2/2022 "Concession to Building Covenant Extensions" (18 March 2022).

² LandsD Lands Administration Office Practice Note No. 2/2021 "Streamlined Application Process for Extension of the Period in the Building Covenant for Over One Year and Other Matters Related to Building Covenants" (3 June 2021).