Hong Kong:
Hong Kong Government Introduces Premium Free Building Covenant Extensions As Part Of Anti-Epidemic Measures
28 March 2022
Mayer Brown
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Introduction
As part of the government’s relief measures in response to
the fifth wave of COVID-19 outbreak in Hong Kong, the Development
Bureau announced on 14 March 2022 that extensions to the building
covenant (BC) period for up to six months at nil premium
will be granted.
On 18 March 2022, the Lands Department (LandsD) issued a
Practice Note (LAO No.2/2022)1 (2022 PN) to provide
further operational details of such relief measure. This legal
update summarizes the eligibility under the new measure and how the
real estate industry may make use of the measure to plan for
development progress.
What Developments are Eligible?
We summarize below the types of developments which are eligible
for free BC extension:
Eligible
NOT
Eligible
All types of developments with
unfulfilled BC as at 14 March
2022, including cases with BC period already expired or
not yet expired.
The 2022 PN specifically includes cases with BC period
previously extended by LandsD and such extended
BC period has already expired or not yet expired.
On types of development, the 2022 PN specifically covers:
- Developments under the Buildings Ordinance (Application to the
New Territories) Ordinance (Cap. 121). - Completion of building works for conversion of an entire
existing industrial building as required under a special
waiver.
Developments with:
- Leases executed after 14 March 2022.
- BC periods not imposed by LandsD (e.g., BC
period imposed by the Lands Tribunal in an order for sale pursuant
to the Land (Compulsory Sale for Redevelopment) Ordinance
(Cap.545). - BC already fulfilled before 1 January 2022 but
formality of BC extension previously applied has not yet been
completed.
How to Benefit?
As opposed to the BC concession introduced by LandsD in 2020,
no application is required from landowners this
time around. Instead, LandsD will issue a letter offering BC
extension for eligible cases:
BC period not yet
expired
as at 14 March 2022
BC period already
expired
as at 14 March 2022
When
will LandsD’s letter be issued?
Within 3
calendar months before expiry date of the BC
period
Not
specified
How long
to extend?
6 calendar
months
6 calendar
months
Extension from when?
Commencing on
the expiry date of the BC period
Commencing later part of the
- expiry date of the BC period; and
- 1 January 2022
Premium
for the 6-month extension
Nil
Premium
beyond the 6-month extension
May be subject to premium. Example in PN:
- Original BC expire date: 31 March 2022
- Landowner applies for a 1-year extension (up
to 31 March 2022) - First 6-month extension (1 April 2022 to 30 September 2022):
Premium Free. - Remaining 6-month extension (1 October 2022 to 31 March 2023):
if granted, still subject to premium under LACO Practice Note
2/20212.
Take Care of Your Construction Loans!
Separately, landowners who have taken out construction loans to
finance development of buildings should also note that the BC
extension does not necessarily entail a matching
extension to the development completion deadline required under the
relevant finance documents. Such deadline may be stated as a fixed
date independent of the expiry date of the BC period.
In such case, if a delay in development completion is expected,
while the new measure may address this from a government lease
perspective, landowners are reminded to seek the financier’s
consent for a corresponding extension of the development period or
a waiver for a potential breach of the relevant development
covenant under the finance documents.
Exclusion of BC Granted in Compulsory Sale Cases
The 2022 PN provides that the new measure does
not apply to BC period which is
not imposed by LandsD. On this, the 2022 PN
specifically mentions that the BC imposed by the Lands Tribunal in
compulsory sale applications made pursuant to the Land (Compulsory
Sale for Redevelopment) Ordinance (Cap. 545) (LCSRO) is
NOT eligible for the new measure. We consider that
BC imposed under LCSRO should also be eligible:
- According to s.9 of the LCSRO, each condition specified in
Schedule 3 thereto is deemed to be a condition of
the government lease of the lot the subject of an order for sale
granted by the Lands Tribunal under the LCSRO. - The conditions in Schedule 3 to the LCSRO impose a BC period of
up to six years, to be specified by the Lands Tribunal in the sale
order, within which the redevelopment shall be completed, subject
to extension as may be granted by the Lands Tribunal on
application. - Given that, as a matter of law, the conditions under Schedule 3
to the LCSRO (being the building covenant), are
“deemed to be” conditions of the
government lease where the LandsD is entitled to take enforcement
action against the landowner in case of breach, we consider that
the new measure on BC extension should equally apply to government
leases of the lots acquired through compulsory sale under the
LCSRO.
Conclusion
Although no application is required for this round of free BC
extension, it may be a bit “too late” if LandsD only
issues its confirmation letter within three calendar months before
expiration of the BC date pursuant to the PN. It is because
landowners do require certainty at the early stage of the
development to ensure that they are entitled to the free BC
extension in order to plan ahead for their projects (e.g.,
construction progress, milestone dates for pre-sale consent,
etc.).
We recommend that landowners of eligible developments take the
initiative to seek early confirmation from LandsD to ensure they
are eligible for the requisite BC extension. We also suggest the
government (through LandsD) to issue a list of those government
land grants and lease modification cases with BC date not yet
expired as at 14 Mar 2022, so as to provide more certainty to the
real estate industry.
We would also strongly suggest the government to expand the
scope of application of the 2022 PN to lots acquired through
compulsory sale under the LCSRO.
Footnotes
1. LandsD Lands Administration Office
Practice Note No. 2/2022 “Concession to Building Covenant
Extensions” (18 March 2022).
2. LandsD Lands Administration Office
Practice Note No. 2/2021 “Streamlined Application Process for Extension of
the Period in the Building Covenant for Over One Year and Other
Matters Related to Building Covenants” (3 June
2021).
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