Key Legal Considerations for Hong Kong's Booming Mini-storage Business

Introduction

With Hong Kong’s dense population, dwindling living space, soaring residential and office costs and the expansion of online retailing, demand for mini-storage facilities is poised to increase drastically. According to a recent market study,¹ the Hong Kong self-storage market is expected to witness compound annual growth of 10 percent from 2021 to 2026. Concurrently, investment demand for Hong Kong industrial buildings also increases in light of the rising demand for storage space.² In Q2 2021, strata-titled industrial transactions volume (>HK$100 million) soared 280 percent quarter on quarter, with four en-bloc industrial assets sold in various districts.³

Despite bright prospects for the market, to avoid any pitfalls players in the mini-storage market should be mindful of relevant restrictions under Government Grants (Government Lease or Conditions), Occupation Permits, Deeds of Mutual Covenant (DMCs) and relevant building and fire safety regulations. This advisory addresses these key legal issues – and their practical implications to assist market players making their decisions.

User Restrictions

Completed developments are invariably subject to user restrictions. Such user restrictions may exist under Government Grants, Occupation Permits and/or DMCs.

Apart from possibly an "offensive trade clause", old Government Grants do not usually contain specific user restriction. For relatively modern ones, as landlord, the Hong Kong Government may impose certain restrictions under Government Grants. If a Government Grant specifies "industrial and/or godown use" or "godown use", the Government's position is that mini-storage use is not in breach of the Government Grant, even though goods stored in mini-storage facilities are usually personal or domestic items that are not stored in conventional godowns.⁴ However, where a Government Grant permits "industrial use" or "workshops" or "factories" only, the use of any part of the building erected on the land for mini-storage purpose is less straightforward. In this context, the expression "industrial use" generally signifies use for manufacturing purposes, but not storage.⁵

Where a Government Grant is in breach, the Lands Department of the Government (LandsD) may take lease enforcement action. Initially, this may take the form of issuing warning letters or orders, and registering the same against the property at the Land Registry.⁶ Re-entry is obviously the ultimate remedy.⁷

If a Government Grant specifies permitted use for "industrial use" only, and the owner intends to use the property for mini-storage purposes, the safest course is to apply for a waiver from the LandsD, which is temporary permission to relax restrictions under the Government Grant. Waiver fees assessed by the Government are payable during the waiver period. Waivers are normally granted for a term of one year – and thereafter quarterly – until terminated by either the Government or the registered owner, by giving three months' notice.⁸ Alternatively, the registered owner may apply for lease modification of the Government Grant upon payment of a land premium.⁹ While this presents a permanent solution for the life of the Government Grant, it is also a more costly option.

The Occupation Permit of a building issued under the Buildings Ordinance (Cap. 123) (Buildings Ordinance) also prescribes user restrictions for a building or different parts of a building. For instance, certain floors of an industrial building may only be permitted to be used as ‘factory’ or ‘workshop’. Market players should therefore consult their architects or other experts on whether the relevant areas or floors can be converted into "mini-storage facilities; that alterations and additions are required; and, more importantly, the procedure of giving notice to the Buildings Department concerning a material change in the use, as required under section 25(1) of the Buildings Ordinance. Under section 40(2) of the Buildings Ordinance, anyone who fails to give such notice commits an offence and is liable on conviction to a fine at level 6 (HK$100,000) and imprisonment of two years.

Finally, DMCs may also contain user restrictions. For example, where a DMC specifies that the property may only be used for industrial purpose, the use of mini-storage may contravene the DMC, exposing the registered owner and property itself to the possibility of enforcement action from either other owners, incorporated owners and/or the building manager.

Buildings Regulations

Even where an owner does not have user restriction problems as outlined above, building works may still be required to convert or fit out the property into a facility suitable for mini-storage purposes. Mini-storage facilities typically consist of cubicles, shelves or mini-units created by partitioning. Under section 14(1) of the Buildings Ordinance, no building works may commence without written Building Authority approval of (a) documents required to be submitted under the prescribed regulations, and (b) commencement of building works shown in the approved plan. Under section 16(1)(b) of the Buildings Ordinance, the Building Authority may refuse to approve any plans of building works submitted if the plans are not "endorsed with or accompanied by a certificate from the Director of Fire Services", certifying that fire service installations and equipment satisfy minimum requirements necessary for such a building in accordance with the relevant Code of Practice.¹⁰ This is particularly relevant to possible alteration and additional works required to convert property into a mini-storage facility.

An exception to section 14(1) of the Buildings Ordinance is if building works concerned are minor – in which case, commencement does not require approval or consent of the Building Authority,¹¹ and only certain documents need to be submitted within a time limit stipulated by the Building Authority before and/or after completion of the works.¹²

Contravention of section 14(1) of the Buildings Ordinance in respect of building works (other than minor works) is an offence, and anyone found guilty is liable on conviction to a fine of HK$400,000 and imprisonment for two years; and a fine of HK$20,000 for each day during which the offence has continued.¹³ Market players should therefore consult their architects or other experts on the categorisation of the building works involved and the relevant approval, document or plan submission process.

Building Works and Fire Safety Regulations

Following the unfortunate No. 4 alarm fire in 2016 involving a mini-storage facility on Ngau Tau Kok Road,¹⁴ the Director of Fire Services issued a fact sheet entitled "Potential Fire Hazards in Mini-Storages and Related Abatement Measure" (Fact Sheet).¹⁵ The Fact Sheet sets out five hazards commonly found in mini-storages (Common Hazards), including: (a) undesirable arrangement of storage cubicles; (b) obstruction/insufficient number of windows; (c) insufficient coverage of hose reel system; (d) insufficient exit signs and/or directional signs; and (e) undesirable types of locking device for escape doors.

Where fire hazards (including Common Hazards) exist, the Director of Fire Services may serve a fire hazard abatement notice (FHAN) to any owner, operator or user of a mini-storage facility by reason of whose act, default or sufferance the fire hazards arose or continues, requiring the person to abate the fire hazard within the period specified in the FHAN.¹⁶ Failure to comply with the FHAN requirement(s) within the specified period, or causing, permiting or suffering the fire hazard to recur at any time within 12 months after the date of service of the FHAN, is an offence, liable on conviction to a fine at level 6 (HK$100,000) and a further fine of HK$10,000 for each day during which the offence continues.¹⁷ Market players should therefore consult their architects or other professionals on whether the building works, layout and fire-fighting equipment of their mini-storage facilities comply with the technical requirements specified by the Fire Services Department, especially those stipulated in the Fact Sheet.

Conclusion

Operating and investing in Hong Kong’s mini-storage business may be lucrative. However, to avoid economic loss and even criminal liabilities, market players should be mindful of the potential legal pitfalls in store for them. In light of the complex legal and technical issues involved, market players should consider consulting lawyers and other technical experts in the process of developing their mini-storage business within industrial buildings.