Introduction
The Temporary Protection Measures for Business Tenants (COVID-19 Pandemic) Ordinance (Cap. 644) (the Ordinance) came into effect on 1 May 2022.
Mayer Brown published a Legal Update on 3 May 2022 titled "Breathing Space" for Commercial Tenancies? What Hong Kong Landlords and Tenants Need to Know About COVID-19 Rental Moratorium. That Legal Update focuses on the implications of the Ordinance on landlords and tenants.
This Legal Update focuses on the implications of the Ordinance on lenders, including the authorized institutions (AIs) supervised by the Hong Kong Monetary Authority (HKMA).
When and How Is a Lender Caught by the Ordinance
In order to support the landlords that face cash-flow difficulties as a result of the rental enforcement moratorium imposed by the Ordinance on the landlords, the Ordinance correspondingly imposes a loan enforcement moratorium on the lenders to bar the lenders from taking action against the landlords for default in loan repayment.
A lender is required to comply with the Ordinance if all of the following facts and circumstances apply:
- the landlord has granted a tenancy to a tenant in relation to specified premises1 and the landlord is barred by the Ordinance from taking or continuing actions2 against the tenant for failure to pay rent during the relevant period specified in section 5(4) of the Ordinance (i.e. on and from 1 January 2022 up to the earlier of the end of 31 July 2022 or the day on which the rental enforcement moratorium ceases to apply in relation to the tenancy pursuant to section 5(9) of the Ordinance3) or specified in section 5(6) of the Ordinance (i.e. on and from the day on which the Ordinance becomes applicable to the tenancy and up to the earlier of the end of 31 July 2022 or the day on which the rental enforcement moratorium ceases to apply in relation to the tenancy pursuant to section 5(9) of the Ordinance)4;
- the lender has granted a loan to the landlord referred to in paragraph (1) above that is secured by a mortgage, charge or other type of security over the specified premises referred to in paragraph (1) above and/or the rent receivables; and
- the landlord defaults in repayment of the loan referred to in paragraph (2) above and the landlord can reasonably establish that, having regard to (i) the nature and magnitude of the tenant's failure to pay rent and the landlord's repayment default; and (ii) the overall financial condition of the landlord, the tenant's failure to pay rent together with the rental enforcement moratorium on the landlord is the sole reason or a significant reason for the landlord's inability to avoid default in repayment of the loan to the lender.
Loan Enforcement Moratorium on Lenders
If a lender is caught by the Ordinance, the lender is barred from taking or continuing certain actions5 against the landlord for default in loan repayment during a period that is co-terminus with the relevant period specified in section 5(4) or 5(6) of the Ordinance (affected period6). Further, any action taken by the landlord which is pending when the affected period begins must be stayed until the expiry of the affected period.
Section 7(6) of the Ordinance states that, for the avoidance of doubt, a lender is not barred from taking action against a landlord on a ground other than the repayment default.
Offence and Penalty
A lender who contravenes the loan enforcement moratorium commits an offence and is liable on conviction on indictment to a fine that is equal to twice the amount of the repayment default claimed by the lender and in any event not less than HK$50,000, unless the court considers that imposing a lower fine is just and equitable in the circumstances of the case.
Can a lender contract out of the Ordinance?
A lender can contract out of the Ordinance pursuant to section 4(2) of the Ordinance. According to section 4(2), the Ordinance ceases to apply to a loan once the lender and the landlord enters into a written agreement during the period from 1 May 2022 to the end of 31 July 2022 (protection period7) in respect of the loan whereby the lender and the landlord agree on any forbearance in respect of the repayment schedule or the amount of any repayment (written agreement).
If a lender wishes to contract out of the Ordinance, it has to enter into a written agreement with the landlord in accordance with section 4(2) during the protection period.
Given that (i) section 4(2) of the Ordinance specifically requires the written agreement to be entered into during the protection period; and (ii) contravention of the loan enforcement moratorium amounts to an offence, the prudent interpretation is that any forbearance agreement entered into by the lender and the landlord before 1 May 2022 is not a written agreement which enables the lender to contract out of the Ordinance.
Lenders that are AIs and the HKMA Circular Dated 29 April 20228
For lenders which are AIs, please note the HKMA's Circular dated 29 April 2022 which provides guidance to AIs on the Ordinance and the loan enforcement moratorium9. In summary:
- AIs should study the Ordinance carefully and be mindful of the applicable legal requirements when dealing with any affected landlords (which, where specified by the Ordinance, will include obligors, guarantors and other sureties).
- The HKMA expects and strongly encourages AIs to waive any penalties or late charges incurred by the landlords as a result of a failure of payment protected by the Ordinance.
- The HKMA also expects that, whilst interest may continue to be accrued on the unpaid principal amount, interest would not be accrued on unpaid interest.
- AIs should be prepared to extend the loan tenor correspondingly if they are so requested.
- AIs should refrain from any actions in respect of loan covenant breaches by landlords as a result of the rental enforcement moratorium.
- AIs should assist landlords in understanding the protection afforded by the Ordinance and the relief available under the Pre-approved Principal Payment Holiday Scheme (PPPHS).
- AIs should advise landlords whether the protection afforded by the Ordinance to the landlords will cease by participating in the PPPHS by virtue of section 4 of the Ordinance.
What Lenders Need to Do to Comply with the Ordinance
To ensure compliance with the Ordinance, lenders should review the relevant existing loans to identify any case which involves a loan to a landlord and specified premises which fall within the scope of the Ordinance. As regards any in-scope case, even if the lender had entered into a forbearance agreement with the landlord in respect of the loan before 1 May 2022, that forbearance agreement does not qualify as a written agreement under section 4(2) of the Ordinance for enabling the lender to contract out of the Ordinance in respect of that case. That being the case, the lender is required to comply with the loan enforcement moratorium or to sign a new forbearance agreement with the landlord to replace the existing forbearance agreement in order to rely on section 4(2) to contract out of the Ordinance.
Further, lenders will have to allocate the necessary manpower and resources and provide suitable staff training for handling the relevant cases having regard to their own operations and needs.
Link to the Ordinance:
Link to the Press Release:
Link to the HKMA Circular:
Link to the Rental Enforcement Moratorium Website:
Rental Enforcement Moratorium - Introduction (budget.gov.hk)
1 Part 2 of the Schedule to the Ordinance sets out the types of specified premises covered by the rental enforcement moratorium. These premises include most of the scheduled premises under the Prevention and Control of Disease (Requirements and Directions) (Business and Premises) Regulation (Cap. 599F) (save for cruise ships and supermarkets), food and catering business premises, retail shops (excluding supermarkets), education-related premises, and premises used for the business of travel agents, employment agencies and laundry trade, etc.
2 The actions that a landlord is prohibited from taking or continuing are specified in section 5(7) of the Ordinance.
3 Section 5(9) of the Ordinance provides that the rental enforcement moratorium ceases to apply in relation to a tenancy once (a) the tenancy is terminated on a ground other than the tenant's failure to pay rent that triggers the rental enforcement moratorium; (b) the tenancy expires or otherwise comes to an end, unless renewed immediately afterwards either automatically or in exercise of a right of renewal under the tenancy; or (c) the premises are no longer used wholly or primarily as specified premises under the tenancy, or the specified premises are removed from Part 2 of the Schedule to the Ordinance.
4 A landlord is barred from taking or continuing action against the tenant in respect of the tenant's failure to pay rent during the period specified in section 5(4) of the Ordinance (where the tenancy commences before 1 May 2022) or section 5(6) of the Ordinance (where the tenancy commences on or after 1 May 2022).
5 The actions that a lender is prohibited from taking or continuing are specified in section 7(5) of the Ordinance.
6 The period when the right of the lender to take or continue any action in relation to the secured loan is subject to the loan enforcement moratorium under section 7 of the Ordinance.
7 The protection period is the period from 1 May 2022 up to the expiry of the 3 months from 1 May 2022 (i.e. 1 August 2022).
