Leasing Keywords
- Area Definition
- Lease Term
- Break Clause / Sales & Redevelopment Clause
- Sublet Right
- First Right of Refusal
- Rent
- Management Fee
- Government Rates & Rent
- Rent Free Period
- License Period
- Fit-Out Subsidies
- Stamp Duty & Legal Cost
- Security Deposit
- Insurance
- Decoration Deposit and Vetting Fee
- Guarantees
- Handover Condition & Reinstatement
- Car Parking
- Form of Tenancy Agreement
Area Definition
- Net Area:
The net area refers to the usable area within a property that is exclusive to the tenant or occupant. It represents the actual space available for tenant use and does not include common areas, such as corridors, stairwells, or shared facilities. Net area typically includes individual office spaces, meeting rooms, private restrooms, and any other areas that are designated for the exclusive use of the tenant. It is the area that the tenant pays for and occupies within the property. - Lettable Area:
The lettable area, also known as leasable area or rentable area, refers to the total area within a property that can be rented out to tenants. It includes both the net area and a proportionate share of the common areas. Common areas may include hallways, elevators, lobbies, staircases, shared restrooms, and other communal spaces that are used by multiple tenants within the property. The lettable area represents the total space that the landlord can offer to tenants for lease and is typically measured using standardized methods to ensure consistency and accuracy in rental calculations. - Gross Area:
The gross area represents the total floor area of a property, including all usable space, common areas, and service areas. It encompasses the net area, lettable area, and any other areas such as mechanical rooms, utility spaces, storage areas, and shared facilities within the building. Gross area includes all areas within the property’s footprint, providing an overall measure of the total size and extent of the property. It is often used for assessing building efficiency, construction costs, and compliance with building regulations.
Lease Term
In commercial leasing, the lease term refers to the length of time for which a tenant agrees to occupy and rent a commercial property from the landlord. It represents the duration of the contractual agreement between the tenant and the landlord, outlining the specific period during which the tenant has the right to use and occupy the leased premises.
Duration of Lease
In Hong Kong, the typical lease terms for office spaces range from 2 to 3 years. Some larger or more established businesses opting for even longer lease terms of 5 to 10 years.
Lease with Renewal Option
A lease with a renewal option, also known as a lease renewal clause, is a provision within a lease agreement that grants the tenant the right to extend or renew the lease for an additional period of time beyond the initial lease term. This option allows the tenant to continue occupying the premises and extends the contractual relationship between the tenant and the landlord. The specific terms and conditions of the lease renewal, such as the duration of the renewed term and any associated rent adjustments, are typically outlined within the lease agreement.
Rent Review
A rent review, also referred to as a rental adjustment or rent escalation clause, is a provision within a lease agreement that allows for the periodic adjustment of the rent amount during the lease term. Rent reviews are commonly included in commercial lease agreements to account for changes in market conditions, inflation, or other factors that may affect the rental value of the property. The rent review clause outlines the method or formula for determining the new rent amount and specifies the intervals at which the rent adjustments will occur. This could be annually, biennially, or at specific milestones during the lease term.
Break Clause / Sales & Redevelopment
Break Clause
A break clause, also known as a termination clause or early termination clause, is a provision within a lease agreement that allows either the tenant or the landlord to terminate the lease before the expiration of the fixed lease term. This clause provides flexibility and an opportunity to end the lease prematurely, subject to specific conditions and notice requirements as outlined in the lease agreement. Break clauses can be beneficial for tenants who may need to relocate or downsize their operations or for landlords who may require the premises for alternative purposes.
The conditions and requirements for exercising a break clause can vary, but they typically include factors such as providing advance notice within a specified timeframe, complying with specific conditions (e.g., rent arrears, repairs), and potentially paying a penalty or fulfilling other obligations outlined in the lease agreement. Break clauses are typically negotiated and agreed upon at the time of signing the lease.
Sales & Redevelopment:
Sales & redevelopment, sometimes referred to as redevelopment or redevelopment clause, is a provision within a lease agreement that allows the landlord to terminate the lease in the event of a proposed sale of the property or redevelopment plans. This clause gives the landlord the right to terminate the lease to facilitate the sale of the property to a new owner or to carry out substantial renovations or redevelopment of the property.
In such cases, the landlord may provide notice to the tenant about the intended sale or redevelopment plans, and the lease agreement will outline the specific terms and conditions related to the termination, including the notice period, compensation, and any relocation assistance provided to the tenant. The sales & redevelopment clause typically protects the landlord’s interests in repositioning or maximizing the value of the property.
It is very common that there is a six (6) months’ notice on the Hong Kong Commercial Lease.
Sublet Right
A sublet right, also known as a sublease right or subletting provision, is a clause within a lease agreement that grants the tenant the ability to sublet all or a portion of the leased premises to a third party. This provision allows the tenant to lease out the space they are renting to another individual or business, known as the subtenant, while still maintaining their primary lease agreement with the landlord.
First Right of Refusal
A “first right of refusal,” also known as a “right of first refusal” or “ROFR,” is a contractual provision that grants a specific party the opportunity to enter into a transaction or agreement before the property or opportunity is offered to others. In the context of commercial leasing, a first right of refusal typically refers to a clause that gives a tenant the option to lease additional space or purchase the property they are currently occupying if the landlord decides to sell or lease it to another party.
Rent
Face Rent:
Face rent, also known as base rent or contracted rent, refers to the fixed or base amount of rent agreed upon between the tenant and the landlord in a commercial lease agreement. It is the initial rent specified in the lease before any adjustments, such as rent escalations or turnover rent, are applied. Face rent is typically expressed as a fixed dollar amount per square foot or per month and forms the basis for calculating the tenant’s rental obligations.
Effective Rent:
Effective rent, also known as net effective rent, is the actual amount of rent paid by the tenant over the lease term after factoring in any concessions, incentives, or adjustments (such as Rent Free and License Free Period). It represents the average monthly or annual rent over the lease term, taking into account any rent-free periods, tenant improvement allowances, or other financial arrangements provided by the landlord.
Effective rent is calculated by dividing the total financial consideration (including any upfront incentives or concessions) over the lease term by the total number of months or years in the lease term. It provides a more accurate representation of the tenant’s ongoing financial commitment throughout the lease period and allows for better comparison between different lease offers or structures.
Turnover Rent:
Turnover rent, usually found in retail lease, also known as percentage rent or revenue-based rent, is a type of rent structure in commercial leases that is based on a percentage of the tenant’s sales or revenue rather than a fixed amount. In this arrangement, the tenant pays a portion of their sales or revenue as rent in addition to or instead of the face rent. Turnover rent allows the landlord to share in the tenant’s success and aligns the rent payments with the tenant’s business performance.
Management Fee
The management fee is a charge paid to a property management company or individual property manager for their services in overseeing and managing a property on behalf of the owner. The management fee is a recurring payment made on a monthly basis and is required to be paid in advance. The fee is subject to potential adjustments or revisions by the management company periodically. Typically, the management fee encompasses various expenses associated with maintaining and operating the common areas of the property, such as central air-conditioning charges and common area cleaning. These charges cover the upkeep and maintenance of shared spaces that benefit all tenants.
Government Rates & Rent
Government Rates
Government rates are a form of property tax levied by the Hong Kong government on all rateable properties in the city. The rates are calculated based 5% of the estimated rental value of the property, which is determined by the Rating and Valuation Department.
Government Rent
Government rent is a form of payment applicable to properties situated in specific areas of Hong Kong, including the New Territories and New Kowloon north of Boundary Street, as well as properties on Hong Kong Island or Kowloon that are held under a land lease granted or extended on or after 27 May 1985. While the government rent is imposed on property owners, it is commonly passed on to tenants in commercial lease agreements.
The assessment of government rent is based on 3% of the rateable value of a property. The rateable value is determined by the Rating and Valuation Department and represents an estimate of the property’s annual rental value. Any subsequent changes in the rateable value would result in corresponding adjustments to the government rent.
Rent Free Period
A rent-free period refers to a specified period during a lease agreement in which the tenant is not required to make rental payments to the landlord. It is a negotiated concession provided by the landlord to the tenant, typically as an incentive or compensation for various reasons.
Rent-free periods are often employed to incentivize tenants to lease a particular property or to support a tenant during the initial stages of occupancy. They can be used to attract new tenants, encourage lease renewals, facilitate tenant improvements, or provide financial relief during a business startup phase.
The duration of a rent-free period is agreed upon between the landlord and the tenant and is typically specified in the lease agreement. It can range from a few months up to a year, depending on the negotiations and the specific circumstances.
License Period
License Period typically refers to the duration during which a licensee is granted permission or a license to use a specific property or asset. It is the agreed-upon timeframe in which the licensee has the authorized right to occupy, utilize, or access the licensed property or asset.
The nature of License Period is similar to Rent Free Period where the Landlord can use the Licence Period to Utilize the lease negotiation.
Fit-Out Subsidies
Fit-Out Subsidies typically refer to financial incentives or allowances provided by landlords or other entities to assist tenants in covering the costs associated with the fit-out or customization of a leased space to meet their specific needs and requirements.
The availability and conditions of fit-out subsidies may vary depending on the landlord, property, and lease agreement. Typically, the subsidies are negotiated as part of the lease terms and may be contingent upon factors such as the length of the lease, the rental amount, or the tenant’s business type.
Stamp Duty & Legal Cost
Stamp Duty
Stamp Duty refers to a tax levied on certain documents, including lease agreements, to validate and enforce their legal status.
The current rates are as follows.
Not defined or uncertain: 0.25% of the yearly or average yearly rent
Not exceeding 1 year : 0.25% of the total rent payable
Exceeding 1 year but not exceeding 3 years :0.5% of the yearly or average yearly rent
Exceeding 3 years: 1% of the yearly or average yearly rent
Legal Cost
Legal Costs encompass the expenses incurred for legal services and professional advice related to the negotiation, preparation, and execution of the lease agreement.
In the context of commercial leases in Hong Kong, it is generally customary for each party, the landlord, and the tenant, to bear their own legal costs associated with preparing and reviewing the tenancy agreement. However, it is worth noting that in certain cases involving strata-title buildings or some developers may require the tenant to shoulder a portion, typically half, of the landlord’s legal costs, regardless of whether the tenant chooses to engage a separate firm of solicitors to represent them.
Security Deposit
Security Deposit refers to a sum of money paid by the tenant to the landlord as a form of financial security or guarantee for the performance of the lease obligations. The deposit serves to protect the landlord against any potential breach of the lease terms by the tenant.
Insurance
In most cases, landlords in commercial leasing agreements commonly require tenants to obtain property insurance with a specified coverage amount. This insurance is intended to protect against potential third-party liabilities that may arise due to events such as fire, flooding, or damage to items like curtain walls or glass. This requirement aims to ensure that the tenant has adequate protection against potential risks and liabilities associated with the leased premises.
Decoration Deposit and Vetting Fee
Decoration Deposit
A Decoration Deposit, also known as a Fit-Out Deposit or Renovation Deposit, is a sum of money paid by the tenant to the landlord as security for any potential damages or alterations that may occur during the process of decorating or customizing the leased premises. It serves as a form of financial protection for the landlord against any non-compliance with the agreed-upon decoration guidelines or potential restoration costs at the end of the lease term. The specific amount of the Decoration Deposit is typically agreed upon between the landlord and the tenant and is specified in the lease agreement. The decoration deposit is refundable upon the completion of renovation.
Vetting Fee
The Vetting Fee is a charge imposed by the landlord or their authorized agent for the review and approval of a tenant’s application for leasing a commercial property. This fee covers the administrative costs associated with assessing the tenant’s qualifications, conducting background checks, and verifying the tenant’s financial standing or business credibility. The Vetting Fee is usually a one-time payment and is non-refundable, regardless of the outcome of the application.
Decoration Insurance
During the renovation period, tenants may be obligated to obtain a specific amount of decoration insurance to safeguard against potential losses or damages that may occur during the decoration process of the leased premises. This insurance provides coverage for both injuries sustained by third parties and damages caused to others.
Guarantees
Personal Guarantee
A personal guarantee is a legal commitment made by an individual, often a business owner or an executive, to be personally liable for the debts or obligations of a company or another party. By signing a personal guarantee, the individual agrees to take personal responsibility for the financial obligations in the event that the company or party fails to fulfill its obligations. It provides an additional layer of security for lenders or creditors, offering them recourse to the personal assets of the guarantor if the primary debtor defaults. Personal guarantees are sometimes required by Tenant, particularly startups or company with very short history or weak financial capital.
Bank Guarantee
A bank guarantee is a type of financial instrument issued by a bank on behalf of the tenant to provide assurance and financial security to the landlord. It serves as a promise from the bank that the tenant’s obligations will be fulfilled, and if the tenant fails to fulfil those obligations, the bank will compensate the landlord up to the guaranteed amount.
Handover Condition & Reinstatement Condition
Handover condition
handover condition refers to the state or condition of the leased premises at the time of handover from the landlord to the tenant. It includes the physical condition of the space, as well as any specific requirements or provisions outlined in the lease agreement.
In the case leasing a single-title building, it is typical for the landlord to provide a handover condition that includes a screeded floor and a complete ceiling system consists of suspended ceilings, light boxes, a sprinkling system, and central air-conditioning ducting.
Fitted units are usually referred to “as is” condition with decoration was left by the previous tenant.
Reinstatement condition
Reinstatement condition refers to the requirements and obligations related to restoring the leased premises to its original condition at the end of the lease term or upon termination of the lease. It outlines the actions that the tenant must undertake to remove any alterations, modifications, or additions made during their occupancy and return the premises to a specified state.
Car Parking
Since parking availability is often limited in core business districts, large space occupiers may prioritize securing parking spaces to accommodate their employees and clients. By addressing parking needs through separate license agreements, both landlords and tenants can ensure that parking arrangements are properly documented and agreed upon, providing clarity and avoiding potential conflicts.
Form of Tenancy Agreement
In single-titled buildings, the tenancy agreement is usually drafted by the landlord or its solicitor, typically follows a standardized format with terms and conditions that are applied to all leases within the building. This standardized approach is necessary to provide consistent protection to the landlord, considering the various possibilities and the potential for difficult tenants.
On the other hand, for strata-titled buildings, the tenancy agreement is usually simpler in form. It may be prepared by the leasing agent, the landlord’s solicitor, or even purchased from a local bookstore. In Hong Kong, where the application of contract law is highly regarded, both landlords and tenants are well safeguarded by the relevant ordinances.
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