Moratorium on Rent Enforcement - How does it affect landlords?

On 23 February 2022, the Financial Secretary Mr. Paul Chan announced the rental enforcement moratorium for business tenants in the 2022-23 Budget (the “Budget”). The moratorium is intended to support small and medium-sized enterprises adversely affected by the fifth and by far the worst wave of the Covid pandemic in Hong Kong, but it has also attracted heated debate among local property owners. The Temporary Protection Measures for Business Tenants (COVID-19 Pandemic) Bill (the “Bill”) was gazetted on 18 March 2022 and the Government aims to have the Bill passed by the Legislative Council on 27 April 2022. It is important for owners of business premises to understand how the rental enforcement moratorium will work. In this article, we will provide a brief overview of the rental enforcement moratorium and some guidance to affected landlords on how they could protect their interests.

Overview of the rental enforcement moratorium

In short, the rental enforcement moratorium prohibits landlords from taking or continuing to take certain actions against their tenants during a “protection period” for failing to settle outstanding rent in respect of the period from 1 January 2022 to the end of the protection period. The Bill has clarified and limited the scope of such prohibition in the following ways:

• The rental enforcement moratorium only applies to leased premises that are used wholly or primarily as “specified premises”. Such specified premises include, amongst others, catering business premises, retail shops and premises that are required to suspend their business operations due to social distancing rules, such as fitness centres and beauty parlours, but supermarkets are expressly excluded.
  
  
• Landlords are prohibited from taking or continuing to take certain actions against their tenants, and these actions include, amongst others:
  
  
  • Suspending the provision of utility services or other services in relation to the leased premises;
    
    
  • Deducting from the rental deposit held by the landlord any arrears of rent due from the tenant payable from 1 January 2022 till the end of the protection period;
    
    
  • Terminating the tenancy;
    
    
  • Exercising a right of re-entry or forfeiture;
    
    
  • Bringing action in court (including tribunal) against the tenant; and
    
    
  • Presenting a winding-up petition or bankruptcy petition against the tenant.
    
    
• It should be noted that these actions are only prohibited where they are taken in respect of the tenant’s failure to pay rent which is due under the tenancy for the period from 1 January 2022 to the end of the protection period. The landlord is not barred from taking such actions if the tenant breached other terms of the tenancy agreement.
  
  
• The rental enforcement moratorium is a temporary measure. While it was initially proposed in the Budget that the rental enforcement moratorium would be valid for three months and could be extended for another three months if necessary, the option to extend has been removed from the Bill. In other words, the protection period will only last for three months from the commencement date of the legislation and will not be further extended.
  
  
• The Government has stressed that the moratorium is intended to be a deferral and does not waive the landlord’s right to receive rent or the tenant’s obligation to pay rent after the end of the protection period. The Bill sets out that unless the landlord gives an express waiver in writing, the landlord’s conduct while the moratorium applies will not be regarded as waiving his rights under the tenancy in respect of the tenant’s failure to pay rent.
  
  
• The rental enforcement moratorium will not apply to a tenancy if the tenancy is terminated on a ground other than the tenant’s failure to settle outstanding rent during the protection period. For example, if the tenancy expires or otherwise comes to an end without being renewed or the premises concerned cease to be wholly or primarily used as specified premises.

A landlord who takes, or continues to take, any prohibited action against its tenant will be liable to a fine equal to twice the amount of the rent claimed by the landlord to be in arrears and in any event not less than $50,000, unless the court decides otherwise.

Deferral payment of rates and Government rent

From the landlord’s perspective, the rental enforcement moratorium may cause financial difficulties. The Government will therefore offer a deferral of payment of rates and Government rent for affected premises and interest-free rental advancement to landlords whose livelihood is adversely affected by the implementation of the legislation. In addition to these measures, affected landlords may also consider taking advantage of the following means provided in the Bill to lessen the impact of the rental enforcement moratorium.

Moratorium on lenders

If a landlord has mortgaged the leased premises, the rental enforcement moratorium may affect the landlord’s ability to repay the instalments under the mortgage. To address this problem, a moratorium will also be imposed on lenders. The moratorium on lenders will bar lenders from taking or continuing to take certain actions against landlords for a default in the related secured loan repayment arising from tenants' failure to pay rent if such default takes place during the period the rental enforcement moratorium applies to the tenancy. The actions that the lender is prohibited to take or continue to take include, amongst others:

• Enforcing the security created on the subject premises;
  
  
• Suing for repayment of the amount in default;
  
  
• Entering into possession of the subject premises;
  
  
• Enforcing other collateral securities for the secured loan;
  
  
• Bringing action (including foreclosure action) in court (including tribunal) against the landlord; and
  
  
• Presenting a winding-up petition or bankruptcy petition against the landlord.

The moratorium on lenders only applies to landlords whose repayment ability is affected by the rental enforcement moratorium. A landlord will have to establish that the tenant’s failure to pay rent and the landlord’s inability to take actions against the tenant under the rental enforcement moratorium are the sole or a significant reason for the landlord’s default in paying the mortgage instalment. The factors that will be considered are the nature and magnitude of the tenant’s failure and the repayment default and the overall financial condition of the landlord. The moratorium on lenders will cease to apply if the lender enters into a written agreement with the landlord and makes concessions in respect of the repayment schedule or the amount of repayment.

The Government also assures that the Hong Kong Monetary Authority will be in close communication with the banks and will provide them with guidelines on exercising flexibility if the landlord’s repayment ability is affected by the rental enforcement moratorium.

Exemption for mutually agreeable rental arrangement

An objective of the rental enforcement moratorium is to give landlords and tenants an opportunity to work out a mutually agreeable rental arrangement through negotiation, therefore if the landlord and the tenant can agree on rental concessions, the rental enforcement moratorium will cease to apply. The Bill has not set out any threshold or guidance as to the extent of concession that the landlord has to make to benefit from this exemption, but the intention is that, if the landlord and the tenant could agree on an acceptable arrangement amongst themselves, then there will be no need for a rental enforcement moratorium between the parties.

For the exemption to apply, the agreement between the landlord and the tenant should satisfy the following requirements:

• The agreement should be in writing;
  
  
• Any concession agreed should be made in respect of the amount of rent or the time when any rent is payable; and
  
  
• The agreement should be entered into during the protection period.

The last requirement above may cause some concern as some landlords may have already agreed to offer their tenants rental concessions before the protection period starts. The Bill does not expressly provide for this, but the Government has indicated that for agreements that are entered into before the enactment of the legislation, the parties could reconfirm such agreement during the protection period, presumably in writing, to benefit from the exemption.

Our recommendations for Landlord

Landlords, especially those facing cash flow problems during the protection period, may want to negotiate more flexible rental arrangements with their tenants proactively so the tenancy would be exempted from the rental enforcement moratorium. If a landlord cannot reach an agreement with the tenant to benefit from the exemption and the tenant does take advantage of the rental enforcement moratorium to defer payment of rent, the landlord should nonetheless consider discussing with the tenant the arrangement for paying the outstanding rent after the three-month protection period is over. With the distribution of a new round of consumption voucher earlier this month and the easing of social distancing rules scheduled on 21 April 2022, there is hope that the retail market in Hong Kong will recover in the second quarter of the year and until then, it may be best for landlords and tenants to work through this difficult period together.