| The creation of a domestic
tenancy may be oral or by way of a tenancy agreement or a
lease. Differences between a tenancy agreement and a lease
include duration and formality in execution. When the duration
of the tenancy is not more than three years, a tenancy agreement
is usually arranged. This will be in writing and involves
a simpler method of execution. The tenancy agreement may or
may not be registered. If the duration exceeds three years,
a lease is required in accordance with Section 4(1) of the
Conveyancing and Property Ordinance (Cap. 219). This has to
be created by deed and must follow the formal procedure for
a deed's execution. According to Section 3 of the Land
Registration Ordinance (Cap. 128), a lease has to be registered
at the Land Registry.
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1. |
Tenancy agreement |
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A tenancy not exceeding three years may be created by
way of a tenancy agreement between the landlord and the
tenant. If a party to the tenancy agreement is a limited
company incorporated under the Companies Ordinance (Cap.
32), an authorised person may sign on behalf of the company.
Generally, a director of the company has the power to
enter into an agreement which binds the company, including
a tenancy agreement. |
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2. |
Lease |
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Like all other kinds of agreement made by deed, the
execution of a lease comprises signature, sealing and
delivery by the parties thereto: |
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| a. |
Signature
If a party to a lease is an individual, the lease
can be signed either by the individual personally
or by his authorised agent. If a party is a limited
company, the manner of signing a lease will be
governed by its articles of association because
the company's common seal will have to be used.
The articles of association usually include one
article on the use of the company's common
seal, specifying who has authority to sign for
and on behalf of the company an instrument to
which the common seal is affixed. It is therefore
necessary to look at this article in order to
ascertain who has the authority to sign a lease
on behalf of the company. The articles of some
companies may specify the mode of execution, for
example, by the chairman of the board of directors
or by two directors. Other companies' articles
provide more flexibility, for example, such person
or persons as shall be authorised by the board
of directors.
There is a presumption under Section 20(1) of
the Conveyancing and Property Ordinance (Cap.
219) that a deed is presumed to have been duly
executed by a company if the deed bears the seal
of the company and is signed by any one of the
following three groups:
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| (i) |
Two directors; or |
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| (ii) |
One director and one secretary; or |
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| (iii) |
One director and one permanent officer. |
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| b. |
Sealing
If a party to a lease is an individual, sealing
is deemed to have been carried out on a document
if the document (i) describes itself as a deed;
or (ii) states that it has been sealed; or (iii)
bears any mark intended to be or to represent
a seal or the position of a seal. If a party is
a limited company, the common seal of the company
must be impressed adjacent to the signatures of
the person(s) signing the lease for and on behalf
of the company. |
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| c. |
Delivery
A deed is "delivered" when the person
granting the deed does or says something to indicate
that he intends the deed which he has executed
to be binding on him.
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3. |
Stamping |
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According to the Stamp Duty Ordinance (Cap. 117), stamp
duty is payable on a tenancy agreement or lease. A tenancy
agreement or lease which is not duly stamped cannot be
registered at the Land Registry. Nor will it be admitted
as evidence in court (including the Lands Tribunal) for
it to be enforceable against the parties thereto.
The amount of stamp duty payable depends on the current
rates of stamp duty, the term of the lease and the rent
payable by the tenant under the lease.
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Term |
Stamp duty |
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Not exceeding one year |
0.25% x monthly rental x number of months |
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Exceeding one year but not exceeding three years |
0.5% x average yearly rent |
| (c) |
Exceeding three years |
1% x average yearly rent |
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Example
A tenancy agreement covers a term of three years. If the
monthly rental for the first year is $10,000, the monthly
rental for the second year is $12,000 and the monthly
rental for the third year is $14,000, the average yearly
rent is calculated as follows: |
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($10,000 x 12) + ($12,000
x 12) + ($14,000 x 12) |
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= $144,000 |
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Since the tenancy is for a term not exceeding three
years, the amount of stamp duty payable will be calculated
by multiplying the average yearly rent by 0.5%. Since
a tenancy agreement is usually signed in duplicate, when
the stamp duty on a tenancy agreement has been paid, the
stamp duty payable on its counterpart will be $5. The
total amount of stamp duty payable is as follows: |
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| $144,000 x 0.5% + $5 = $725 |
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Generally speaking, the total stamp duty payable is
borne by the landlord and the tenant in equal shares.
In relation to the above example, each party should pay
$362.50.
Further, if a tenancy agreement stipulates that a tenant
is entitled to a rent-free period (a period usually
granted for the tenant to decorate the property), the
amount of average yearly rent will be reduced according
to the amount of rent not receivable for the rent-free
period, and the amount of stamp duty payable will be
reduced accordingly. |
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4. |
Registration |
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Pursuant to Section 3 of the Land Registration Ordinance
(Cap. 128), all leases have to be registered at the Land
Registry. In practice, the solicitors who prepare the
lease will submit the lease to the Land Registry for registration
within one month of its execution by the landlord and
tenant, in order to ensure that the priority of the lease
shall commence from the date of its execution. If a lease
is submitted for registration more than one month after
its execution, its priority will only commence from the
date of registration and not the date of its execution.
A tenancy agreement is also registrable at the Land Registry.
This is often done if the tenancy agreement contains a
clause giving the tenant the option to renew upon its
expiry. |
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5. |
Form CR 109 |
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If the property under the tenancy agreement or lease
is a domestic property, meaning that the property is primarily
used by the tenant as his dwelling, the landlord must
file Form CR 109 at the Rating and Valuation Department.
Form CR 109 has to be completed by the landlord or his
representative and contains information such as the names
of the parties to the tenancy agreement or lease, tenancy
term, monthly rental, the party who will bear and pay
the rates and the management fees. Form CR 109 has to
be submitted to the Rating and Valuation Department in
triplicate. Once endorsed by the Commissioner of Rating
and Valuation, one copy will be returned to the landlord
and another copy will be returned to the tenant.
Form CR 109 has to be filed at the Rating and Valuation
Department within one month of the execution of the
tenancy agreement or lease. If Form CR 109 is filed
after one month of the execution of the tenancy agreement
or lease, a penalty of $310 will have to be paid. Further,
failure to file Form CR 109 will render the landlord
unable to take legal action for recovery of the rent.
It is therefore of vital importance from the landlord's
perspective that Form CR 109 should be filed at the
Rating and Valuation Department. |
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6. |
Bank consent |
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Where a property is mortgaged to a bank or other financial
institution, the relevant mortgage deed or legal charge
will usually contain a covenant by the owner of the property
not to let the property or any part thereof. Hence, if
an owner lets a mortgaged property without the mortgagee's
prior consent, the owner will be in breach of the mortgage
deed or legal charge and the mortgagee may recover the
property from the owner.
Where bank consent has been obtained, a tenant should
inspect the same to see whether it is subject to any
conditions.
If the landlord does not agree to seek the bank's consent,
the tenant should understand the potential risks that
he/she may face. If the property is let without consent,
the mortgagee may take legal action against the landlord
to enforce the relevant provision in the mortgage deed
or legal charge to recover the property. Further, if
the mortgagee exercises its right of sale under the
mortgage deed or legal charge upon failure of the owner
to repay any instalment of the mortgage loan, it may
apply to the court for the eviction of the tenant and
the tenant will have to yield up vacant possession to
the mortgagee within a fairly short period of time if
the mortgagee has not consented to the letting.
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