Attention needed on 2047 land lease issue

The government has promised to study streamlined procedures to tackle the upcoming challenges of over 30,000 land leases that are going to expire by 2047.

October 07, 2020

The post-2047 land lease arrangements in Hong Kong have begun to elicit public unease since the last decade. 2047 may seem distant, but in fact the lease renewal issue is rather close at hand. As pointed out by the Secretary for Development, Michael Wong, in the Legislative Council last year, there are about 2,400 lots of current leases expiring on or before 29 June 2047, and the earliest one will expire in 2025. Owners should take care of the matter in advance to avoid any possible impairment on the marketability of their properties.

Land Policy and Lease Extension

Through the legislation of the New Territories Leases (Extension) Ordinance (Cap. 150) in 1988, over 30,000 leases of lots located in the New Territories and New Kowloon expiring before 30 June 1997 were automatically extended to expire on 30 June 2047. There are also some old leases for lots on Hong Kong Island and in Kowloon Peninsula which will expire before 2047 and contain no right of renewal.

According to the policy statement promulgated by the HKSAR Government in 1997, leases without a right of renewal may, upon expiry and at the sole discretion of the Government, be extended for a term of 50 years without payment of additional premium, but subject to an annual rent equivalent to 3% of the rateable value of the property.

Land owners are required to apply for "Conditions of Regrant" before the expiry of lease. The extended lease will usually follow the original conditions, where new clauses such as those on sustainable building design may also be added in view of the prevailing policies. In usual cases, the Lands Department (“LD”) will accept lease renewal applications from the owners three years before the expiry. For more complex cases or those involving a large number of owners, the LD may commence relevant work earlier.

According to the LD, the granting of a lease extension would be subject to examination whether there have been serious breaches on the original lease, and especially for leases granted out of policy considerations such as for promoting the development of a certain industry, whether such consideration is still valid. Despite this, there have been public controversies over how the Government exercises its “sole discretion”. So far most of the leases without a right of renewal have been successfully extended ever since the policy was put in place.

Execution of Lease Extension

For lots involving multiple ownership such as large estate development, it is often impossible to reach all the owners and have their unanimous consent on the arrangement for lease extension. Under the current practice, the Government will grant a new lease with a new lot number to the Financial Secretary Incorporated (“FSI”) after the expiry of the current lease. The FSI will then assign the undivided shares allocated to the individual premises to the registered owners concerned. Such arrangements could protect the interests of the majority of owners who have consented to the lease extension arrangement.

The lease renewal of Pokfulam Gardens, a residential estate containing more than 1,100 flats, more than a decade ago is a highly significant precedent. Valuable experience can be drawn from the case. Negotiations for renewal started in 2004, two years before the expiry of the original lease. Although the Government managed to grant a new lease before the expiry of the original one, the owners still suffered in the interim two years as the number of transactions, prices, and mortgage applications were severely affected before the lease extension was confirmed.

It can be expected that for buildings without owners committees or incorporated owners, the lease extension may prolong and cause more disruption.

Plan Ahead: 2025 and Beyond

The Government has gained some experience in the handling of lease extensions over the last two decades. It also promises to study streamlined procedures to tackle the upcoming challenges of over 30,000 land leases that are going to expire by 2047. Still no clear direction has been made known to the public on the prevalence of current polices. With the backdrop of the present tension worldwide and local economic, social and political situations, the certainty of how leases are to be extended is of paramount importance to providing confidence to investors and stability of the property market and ultimately the economy. It is high time the Government laid out clear guidelines and start the process of lease renewal to minimize negative impact to owners, investors and other stakeholders for the leases expiring from 2025 and beyond.

This article was originally published on the South China Morning Post on 7th October, 2020.

Dorothy Chow,Senior Director, Valuation and Advisory Services, Hong Kong
Dorothy Chow
Senior Director, Valuation and Advisory Services, Hong Kong