"Breathing Space" for Commercial Tenancies? What Hong Kong Landlords and Tenants Need to Know About COVID-19 Rental Moratorium

Introduction 

Hong Kong’s Legislative Council passed the Temporary Protection Measures for Business Tenants (COVID-19 Pandemic) Ordinance (Cap.644) (the Ordinance) on 28 April 2022, with the stated aim to create a "breathing space" for tenants of certain sectors affected by the fifth wave of COVID-19 outbreak. 

With a three-month "protection period", the Ordinance took effect on 1 May 2022.¹  

During this protection period, a landlord of a tenancy for specified premises is barred from taking (or continuing to take) certain actions against its tenant, in respect of the tenant's failure to pay rent from 1 January 2022 to the expiry of the protection period².

In short, except as otherwise specified in the Ordinance, a landlord of a tenancy for specified premises cannot take any of the actions prohibited under the Ordinance against a tenant who fails to pay rent for the period between 1 January and 31 July 2022. 

What Landlords and Tenants Need to Know About the Law?

We set out below a number of key takeaways in the form of Q&A to facilitate landlords and tenants to get familiar with the new law. 

Q1: Are your premises "wholly or primarily" used as "specified premises"?

• The moratorium applies to a tenancy for premises used wholly or primarily as specified premises in the beginning of the protection period (i.e., 1 May 2022)³. 
• Specified premises are listed in Part 2 of the Schedule (as may be amended from time to time) which include scheduled premises under the Prevention and Control of Disease (Requirements and Directions) (Business and Premises) Regulation, Cap.599F. Examples include retail shops, restaurants, fitness centres, beauty parlours and karaoke establishments.
• There is no elaboration in the Ordinance on whether premises are "wholly or primarily" used as specified premises. We consider that it is a question of fact and degree having regard to all relevant circumstances (e.g., actual use, size, scale, etc.) to determine whether your premises are "wholly or primarily" used as specified premises. 

Q2: What actions a landlord is barred to take (or continue to take) during the protection period?

• Landlords are barred from taking (or continuing to take) certain actions⁴ during the protection period in respect of the tenant's failure to pay rent in the protection period.
• Those actions may be categorised as follows:-
  
  

  Recovering money	Actions adversely affect tenant’s enjoyment	Legal actions against tenants*
  Deducting from deposits any amount of rent which the tenant fails to pay Demanding tenants* to make good any shortfall in the deposit (if deposit is already deducted before the beginning of the protection period) Recovering interest or surcharge on the outstanding rent	Suspending utility services or other services Terminating the tenancy Exercising a right of re-entry or forfeiture	Bringing an action in a court/ tribunal Commencing arbitral proceedings, presenting bankruptcy petition or winding-up petition Commencing or levying an execution, distress or other legal proceedings against the tenant's property  Appointment of receiver or manager over tenant's property

       
• It is important to note that, if the landlord has already taken any of the above prohibited actions before commencement of the Ordinance (i.e., before 1 May 2022), the landlord will need to put on hold such action against the tenant during the protection period. 

Q3: Apart from tenants, are landlords also barred from taking those prohibited actions against other related parties? 

• YES. For those prohibited actions marked asterisk (*) above, no such action shall be taken against the tenant, as well as its guarantor or surety who incurs liability to the landlord under any document on the tenant's failure to pay rent.
• For example, if a director or shareholder of a tenant (being a company) or a bank executes a guarantee (e.g., personal/ bank guarantee) in favour of the landlord to secure the tenant's obligations under the tenancy for specified premises, the landlord is barred from taking (or continuing to take) those prohibited actions against such guarantor by reason of the tenant's failure to pay rent during the protection period.

Q4: Can landlords still take prohibited actions on grounds other than failure to pay rent?

• YES. Landlords can still take any of those actions on a ground other than the tenant’s failure to pay rent. For example, a landlord may still exercise its right of forfeiture in case the tenant assigns/ sub-lets/ shares the premises if this is in breach of the tenancy.
• Further, a landlord may take the above actions after expiration of the protection period (i.e., on or after 1 August 2022)⁵.
• It is important to note that such moratorium is not regarded as any waiver of the landlord's right in respect of the tenant's failure to pay rent. If the landlord's right to take any of the prohibited actions is to be exercised within a period, then such period will be extended after the protection period⁶ by a period of the same length as the period during which the landlord is barred from taking (or continuing to take) such actions.

Q5: Can landlords and tenants negotiate separate arrangement to avoid application of the moratorium?

• YES. An important feature of the Ordinance is that, in case a landlord and a tenant reach agreement providing for forbearance during the protection period, the moratorium ceases to apply to the relevant tenancy.
• Such forbearance could be in respect of the rent amount or the time when rent is payable.
• It is important to note that such agreement must be in writing (preferably duly signed or acknowledged by both landlords and tenants).
• For example, if, during the protection period, the parties sign a written agreement under which the tenant is allowed to pay a lesser rent and/or to pay rent at a later time, and the tenant subsequently fails to pay rent in accordance with such written agreement, the landlord can take any of the prohibited actions during the protection period.

Q6: Apart from expiration of the protection period, is there any other circumstances which the moratorium would cease to apply?

YES. Other circumstances in which the moratorium ceases to apply include the following during the protection period:-

• A tenancy is terminated on a ground other than the tenant’s failure to pay rent.
• A tenancy naturally expires or otherwise comes to an end without a renewal.
• The premises are no longer used wholly or primarily as specified premises.

Q7: Are landlords entitled to enjoy corresponding relief against possible actions by their lenders?

• YES. Similar to the moratorium imposed on landlords, the Ordinance imposes corresponding moratorium to bar lenders of landlords from taking (or continuing to take) similar actions in respect of the landlord’s failure to repay loans secured by any premises.
• Such moratorium is subject to a condition: it is reasonably established that the tenant’s failure to pay rent and the landlord’s rights to take action in respect of such failure being barred are the sole or significant reason for the inability to avoid the repayment default.
• Lenders' prohibited actions include enforcing the relevant security, suing for repayment, entering into possession and commencing legal or arbitral proceedings.⁷

Q8: What are the legal consequences of contravention of the new law?

• A landlord or a lender who takes (or continues to take) any of the prohibited actions in contravention of the Ordinance during the protection period commits a criminal offence.
• Offending landlord will be liable to a fine being twice the amount of the rent claimed and in any event not less than HK$50,000.⁸
• Offending lender will be liable to a fine being twice the amount of the repayment default claimed and in any event not less than HK$50,000.⁹

Conclusion and Practical Tips

To avoid legal liabilities, landlords should check whether their tenancies and leases fall within the scrutiny of the Ordinance. If so, they should make sure that none of the actions prohibited under the Ordinance are taken against tenants over the protection period (that is, up to 31 July 2022 unless otherwise specified in the Ordinance).

Landlords should consider putting in place relevant arrangements and training to their staff, agents or representatives who deal with tenants, to ensure they do not fall foul of the provisions of the Ordinance.

Landlords may also explore the possibility of working out mutually agreeable rental arrangements with their tenants (on reduction of rent and/or extension of repayment period). If such written agreement can be reached, the moratorium will cease to apply.

If a tenant is in breach of other terms of the tenancy agreement (other than default in rental payment) during the protection period, the landlord is still entitled to take enforcement action against such defaulting tenant specifically for such breach.

---

¹ By Gazette Notice No. G.N. (E.) 481 of 2022 published on 1 May 2022.

² Or when the moratorium ceases to apply under circumstances set out in section 5(9) of the Ordinance (e.g., tenancy expires or premises are no longer used wholly or primarily as specified premises), whichever is the earlier.

³ If the tenancy commences during the protection period, on the commencement date of the tenancy.

⁴ Full list of the prohibited actions are set out in clause 5(7) of the Ordinance.

⁵ Or when the moratorium ceases to apply under circumstances set out in section 5(9) of the Ordinance (e.g., tenancy expires or premises are no longer used wholly or primarily as specified premises), whichever is the earlier.

⁶ Or when the moratorium ceases to apply under circumstances set out in section 5(9) of the Ordinance (e.g., tenancy expires or premises are no longer used wholly or primarily as specified premises), whichever is the earlier.

⁷ Full list of the prohibited actions are set out in clause 7(5) of the Ordinance.

⁸ Unless the court determines a lower fine as being just and equitable in the circumstances.

⁹ Unless the court determines a lower fine as being just and equitable in the circumstances.