OFFICE LEASING GUIDE HONG KONG

Major developers

Such as Hongkong Land, Swire, Cheung Kong, Sino and Henderson have the most market shares. They usually own building complexes, including retail and commercial projects, while property management and leasing are all undertaken by their own companies.

Single owner

A single property usually held by a single private investor, institution or large organization. Landlords often hire third-party property management and leasing teams to handle day-to-day affairs.

Strata titled landlords

Buildings are owned by different owners. The rights and responsibilities of property owners and overall property management are mentioned in the deed of mutual covenant. The common areas of the property, including the exterior of the building, are also usually managed by a third-party management company. The quality of these buildings is usually not as decent as buildings belonging to single owners and major developers, and tenants are not as flexible as those in single-ownership buildings when they need to expand.

Lease term and lease renewal

Leases in Hong Kong are usually 3 years and at least two years (the rent cannot be increased during the lease period), and larger tenants usually have greater bargaining power, sometimes as long as 6 to 9 years, but usually there is a rent review after 3 years at the open market rent, depending on the lease, it is also possible to have an independent expert/surveyor or an arbitrator to decide the rent. In terms of lease renewal, the lease is usually renewed for 2-3 years.

Rent free period

The length of the rent-free period offered by the landlord depends on the size of the office and market conditions and is usually one to three months. The occupancy rate of the building and covenant strength might affect it as well.

Rent

Pay in advance on a monthly basis and refer to the owner's defined area (in Hong Kong, usually 1. Gross Area 2. Lettable Area or 3. Net Area) in Hong Kong dollars per square foot per month.

Area Definition

Tenants should be aware of the differences in the area of ​​office units so that they can make a proper comparative analysis. The following are the most common ones (taking office buildings in Hong Kong Island as an example:

Net Area

The efficiency is 100%. In Hong Kong Island, Hongkong Land is one of the main representatives to calculate the area and rent by Net Area

Lettable Area

The efficiency is usually 75 to 90%. On Hong Kong Island, Hysan, Swire and some newer commercial buildings use Lettable Area to calculate the area and rent.

Gross Area

The efficiency is usually 60 to 73%. Most other commercial buildings in Hong Kong Islands use Gross Area to calculate the area and rent.

Option to renew

It can be affected by market conditions and landlords, however, larger tenants usually have the option to renew in the terms of the agreement, the landlord cannot refuse to renew the lease in this case, and the rent is determined by the market rate.

Expansion right

The right to expand means that if the tenant expands their space within the landlord’s portfolio, he can give up the existing lease and then sign a new lease

Right of first refusal

When a new unit is available for rent in the building where the tenant is located, the owner needs to notify the tenant in writing, and the tenant has the priority to choose the unit, and usually has 1 day to a month to make a decision.

Sublet

It is usually not allowed, and the tenant who is about to leave needs to have approval from the landlord, and should pay the agency fee, legal fee and stamp duty payable by the landlord. Larger tenants are usually more likely to obtain sublease rights than smaller tenants, but the maximum area for sublease is usually stipulated in the lease agreement, which is about 20-30% of the floor area.

Termination right

Most leases do not allow it, but the lessee can terminate the lease early in one of two ways:

1. After negotiation, both parties agree to return the lease with payment

2. By introducing a new tenant and the landlord agrees to terminate the lease.

Sale & Redevelopment Clause

Many leases include a sell and redevelopment clause, which gives the owner the right to terminate the lease with advance notice if the owner wants to sell or rebuild the building. Usually the landlord must give the tenant at least six months' written notice. The lease will terminate upon expiry of the notice period.

Naming right

Depends on the leased area and is subject to the circumstances of the landlord and tenant.

Renovation subsidy

This is generally not mentioned in the lease, but it can be included in the rider in some cases.

Management Fees

Pay in advance on a monthly basis and refer to the owner's defined area (in Hong Kong, usually 1. Gross Area 2. Lettable Area or 3. Net Area) in Hong Kong dollars per square foot per month. It usually includes air conditioning, security, elevator maintenance and common area cleaning. Typical management fees for Grade A offices range from HK$6 to HK$15 per sq. ft. per month.

Deposit and Guarantee

The tenant must pay a deposit usually equivalent to three months' rent, management fees and government rates when signing the formal tenancy agreement. For newly formed companies (tenants), this payment may be as much as six months or more to reduce the risk to the landlord. The security deposit is held by the landlord for the duration of the lease and is refundable after the lease term if the tenant complies with all conditions of the agreement (such as paying rent and bills on time).

Government rates and rent

Payable quarterly in advance at 5% and 3% of the rateable value of the property respectively. Government rent is usually borne by landlords, but some smaller landlords will pass this cost on to tenants.

Stamp duty

Landlords and tenants generally share equally the one-off cost of stamp duty at prevailing rates, as well as other incidental costs involved in preparing and executing lease documents. In the case of abandonment or subletting, the leaving tenant pays the fee.

Since early 2014, the following stamp duty rates apply and are payable when you sign the lease:

Lease term 1 year or less - 0.25% of average annual rent

Lease period 1-3 years - 0.5% of the average annual rent

Lease term over 3 years - 1% of average annual rent

Utilities

Tenant pays directly. Electricity bills are usually metered, and office tenants are typically charged by HK$1-1.2 per sq. ft. per month.

Water bills are paid according to the water meter. In some cases, water bills are billed to property owners and then passed on to tenants through fixed permit fees or management fees.

Insurance

Tenants need to purchase adequate insurance to protect themselves against third party liability (including fire and water damage).

Car Park

The average rent is HK$3,000-6,800 per month. The terms and conditions are usually contained in a separate agreement, and the lease term may be shorter than an office lease. Parking spaces can be fixed or floating, covered or outside, and are available 24 hours a day, 7 days a week, or Monday to Friday, 8am to 6pm. Office tenants over approximately 10,000 square feet are usually allocated two parking spaces.

Renovation

The decoration cost can usually be quoted and evaluated based on the usable area of ​​the office space. The decoration cost of Grade A or relatively high-quality buildings is usually HK$600-1.200 per square foot, including construction, furniture, electrical and design fees, etc.

The scope shown below includes design and construction costs, excluding IT and server equipment.

HK$400-600 per square foot

Basic specifications suitable for trading companies.

HKD600- 800 per foot

It is suitable for some companies that have a few quality requirements.

HKD800- 1,200 per foot

Suitable for professional services such as finance, legal and accounting.

Above HKD1,200 per square foot

Suitable for very high-end investment banks and technology companies such as Facebook and Google.

Reinstatement

Lease agreements generally require the lessee to be responsible for restoring the office unit to its original delivery condition before the lease expires.

The restoration cost of Grade A office buildings is usually HK$150-450 per square foot.

Vetting Fee

A charge for plan approval, as well as an administrative fee for the construction work.

Legal Fee

Each party will bear its own legal costs in any documentation required in the negotiation and execution of the lease. Landlords often have lease agreements that specify standards, but they are often reluctant to accept major changes.

Agency Fees

New lease

If the landlord comes to an agreement with the new tenant, the landlord will pay the agent an agency fee, which is usually one month's rent (depending on market conditions). This will not affect the tenant's rent as this cost is included in the landlord's annual promotional budget.

Lease Renewal

Tenants pay the broker who represents them. Usually a flat fee or a percentage of the rent saved over the new lease term based on the landlord's asking price.

Sublet

The sub-owner will usually provide 1.5-2 months commission (depending on the content of the lease and market conditions) to find the new tenant, and if the sub-owner's agent finds a new tenant by himself, the broker will keep the full fee. If the sub-owner's agent works with a third-party agent to find a new tenant, the two agents will usually split the fee.

Sale & Purchase

Typically buyers pay their broker 1% of the property price and sellers pay their broker 1% of the property price. Fees are negotiable based on market conditions and total transaction value.