Government’s Proposal to streamline Land Lease Extension in Hong Kong

After years of speculation and debate concerning the post-2047 land lease renewal process, the Development Bureau of the Hong Kong Government finally announced their plan to introduce a bill later this year to streamline the arrangement for land lease extension on 18 May 2023, reaffirming their power to grant leases beyond 2047.

 

A Peek at Hong Kong’s Unique Land Tenure System

• In Hong Kong, all land are owned by the PRC and managed by the Hong Kong Government¹ such that individuals and companies would only have a leasehold interest in the land.²
• Before 1997: The common leasehold periods granted prior to the handover were for 75, 99 or 999 years with or without a right of renewal.
• From 27 May 1985 to 30 June 1997: Under the terms of the Joint Declaration, the Government of the United Kingdom and the Government of the PRC agreed that:
  • All leases including those with rights of renewal extending beyond 1997 were allowed to continue.
  • All non-renewable leases (Non-renewable Leases) which expired before 30 June 1997³ could be extended until 30 June 2047 without additional premium subject to payment of an annual rent equivalent to 3% of the rateable value of the property at that date.⁴
  • New leases of land may be granted for terms expiring not later than 30 June 2047. They shall be granted at a premium and nominal rent until 30 June 1997, after which date no additional premium is required but an annual rent equivalent to 3% of the rateable value of the property at that date shall be charged.
• 1 July 1997: The Basic Law came into force and gave effect to the land polices enshrined in the Joint Declaration⁵ to ensure continuity of leases granted or renewed.
• 15 July 1997: The Executive Council endorsed the general land policy of Hong Kong. Amongst other things, the policy provided that:
  • Non-renewable Leases may, upon expiry, be extended at the sole discretion of the Government for 50 years without payment of any additional premium, but subject to an annual rent equivalent to 3% of the rateable value of the property.

Since then, the Lands Department (the LandsD) has dealt with extension of Non-renewable Leases, which are mainly for commercial, residential or industrial uses (General Purpose Leases) individually based on the aforementioned policy. The extension of these General Purpose Leases is the focus of this briefing note.

 

The Public’s Fear

As 2047 is approaching, there are public concerns on (i) whether the Hong Kong Government has constitutional authority to grant leases going beyond 2047, ii) post-2047 lease arrangement as property owners are concerned that their property title will be forfeited when the “one country, two systems” regime expires, (iii) how the Government would handle the 300,000 lots of General Purpose Leases which are all due to expire on 30 June 2047 and (iv) how likely would the existing General Purpose Leases be renewed without substantial changes if the Government has the constitutional authority to grant leases beyond 2047.

 

What is the Government’s Response?

• Former Secretary for Development, Mr Paul Chan has stressed in a public release in September 2016 that the HKSAR Government has constitutional authority to extend land leases beyond 2047 under Article 123 of the Basic Law.⁶
• Pokfulam Gardens has been cited as a notable example as the lease has been granted a 50-year extension until 2056.
• The Government has long indicated through the Hong Kong Monetary Authority that banks do not need to limit their mortgage policies to 30 June 2047, emphasizing that the Government has the right to renew leases beyond 2047.

Despite the Government’s effort to ease the public, uncertainties still exist as the Basic Law only provides that Hong Kong’s capitalist system and way of life would remain unchanged until 2047⁷, with no guarantee that the existing leasehold system and existing property rights will remain unchanged after 2047.

In light of the above, the proposed bill, which would be further explained below, provides a level of comfort that the Government has power to extend leases beyond 2047 as once the bill is enacted, General Purpose Leases would generally be automatically extended by law beyond 2047.

 

The Current Lease Renewal Process for General Purpose Leases

Without a statutory mechanism, the current lease renewal process would not be sufficient to handle the voluminous number of leases which would soon expire:

• The current lease execution process is complex and expensive as owners would have to submit renewal applications three years before their lease expires and each application is reviewed on a case-by-case basis by the LandsD.
• It is particularly challenging for lots involving multiple ownership as it may be difficult to reach all owners or obtain unanimous consent.
• In the lease renewal of Pokfulam Gardens, a residential estate with more than 1,100 flats whose lease expired in 2006, renewal negotiations started in 2004, but the long and burdensome lease negotiation process meant that owners suffered as the number of transactions, prices and mortgages applications had fluctuated over the two years prior to the extension of the lease.

 

The Proposed Bill

To overcome this, the proposed bill aims to establish a statutory mechanism to extend General Purpose Leases for 50 years without any additional premiums but with the annual rent of 3% of the property’s rateable value maintained. This statutory mechanism ensures that land lease extension can be conducted in an orderly and efficient manner:

1. Publication Format:
• The Government will use a “negative listing approach” and only publish non-extended leases in the gazette about three years before its expiry. If the leases are not published in the relevant gazette notice, they are automatically extended without requiring the owners to sign a new lease.
• Leases with repeated violations and serious offences will not be renewed, but owners may appeal the Government’s decision.
• The legislation will include an amendment mechanism allowing the Government to change its decision in not extending a lease after administrative review.
2. Additional Conditions:
• The liabilities and rights under the original lease will automatically be carried forward. The Government plans to preserve the conditions of the original land lease but will incorporate additional essential terms such as enforcement rights of the Government. Such clauses allow the Government to inspect lots for any non-compliance with lease conditions, allowing them to re-enter the lot if there are serious lease breaches.
3. Title and Encumbrances:
• An extended land lease will carry forward all interests, encumbrances, and rights from the original lease, eliminating the need for owners to prove title or address encumbrances.
4. Opt-out from Land Lease Extension by the Owners:
• Owners can opt-out from lease extensions under the new mechanism. But for multi-ownership leases, all lessees must act jointly.

 

What’s Next?

The legislative proposal is highly welcomed as it greatly reduces the costs in executing lease extension documents, alleviate public’s fear in relation to post-2047 land lease arrangements and most importantly, provides confidence to investors and stability to the property market.

However, given that details of the legislation would still need to be tabled and scrutinized, it is too early to comment on how such mechanism would work in practice. As the proposed legislation is still under consultation, we do not have details of the legislative timescale, but based on the Government’s announcement, the bill would first be gazetted before it is introduced into the Legislative Council for the three readings in the second half of this year. We look forward to the proposed legislation being introduced and will provide further updates when the Government publishes the draft legislation.

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¹ Article 7 of the Basic Law.
² With the exception of St John’s Cathedral, which is the only freehold land in Hong Kong.
³ Except for short-term tenancies, i.e. lease for a fixed term of not more than seven years and special purposes leases, i.e. leases that are granted on specific policy consideration for designated uses.
⁴ This provision was incorporated into Hong Kong law by the New Territories Leases (Extension) Ordinance (Cap. 150) enacted in 1988 such that all leases in the New Territories that expired before 30 June 1997 may also be extended for fifty years until 30 June 2047 without payment of any additional premium.
⁵ Article 120-123 of the Basic Law.
⁶ Article 123 of the Basic Law states that “Where leases of land without a right of renewal expire after the establishment of the Hong Kong Special Administrative Region, they shall be dealt with in accordance with laws and policies formulated by the Region on its own.”
⁷ Article 5 of the Basic Law.