Real estate finance law in Hong Kong

Yes. Security can be granted to a foreign lender.

Yes. Lenders can take a mortgage over land and buildings on the land.

There is no distinction in law: the definition of ‘land’ includes all fixtures attached to it. Accordingly, all buildings (unless they are movable) by definition constitute ‘land’ and are subject to the same mortgage as the plot of land on which they are situated.

Mortgage certificates for a certain value are not issued in Hong Kong.

Yes. Second ranking security can be taken. The registration is effected the same way as for  the first-ranking security. A priority deed that varies the provisions of the Land Registration Ordinance and affects land interest may be registered (although the Land Registry has absolute discretion to allow the registration of a priority deed).

It is rare for transactions to happen without lender’s consent because:

• the Land Register will reveal the lender’s mortgage
• no bona fide purchaser would want to buy a property without good title
• the original title deeds are usually deposited with the lender pending discharge of the mortgage (and purchasers will want to review those title deeds as part of the property transaction process).

If the mortgage documents do not contain transfer restrictions, and if the new transferee does complete the transaction without the lender’s consent, the new transferee will not obtain good title and its rights will rank subordinated to the lender.

Among unsecured creditors, there are certain categories of preferred creditors listed under section 265 of the Cap. 32 Companies (Winding Up and Miscellaneous Provisions) Ordinance.

Yes.

Yes. A lender can take security over rent by way of first fixed charge or security assignment. However, a mortgage over land gives the lender the ability to sell the land with all rents receivable.

Yes. Such security can be taken by way of first fixed charge or security assignment. However, the creation of a fixed security (charge or assignment) requires the lender to exercise control over the charged accounts, i.e. to restrict the chargor’s rights to withdraw funds. This is often not practicable in the case of operational accounts. These are therefore left to be freely operated by the chargor until the bank decides to enforce its security. Still, such accounts are subject to a floating charge which ranks behind fixed charges and preferred creditors.

Hong Kong has a partial land registration system. The records in the Hong Kong Land Registry are not conclusive proof of title. Original title deeds and documents relating to property in Hong Kong must be inspected to verify good title. All mortgages over land must be registered within 1 month by submitting the mortgage instrument to the Land Registry, which then records the details of the mortgage against the title of the mortgaged property.

In addition, if the security is created by a Hong Kong company or by an overseas company that has registered a place of business in Hong Kong, the mortgage should also be registered at the Hong Kong Companies Registry within 1 month after the date of the mortgage’s creation.

Failure to register at the Hong Kong Companies Registry within the specified time limit will render the security conferred by the mortgage void against the liquidator and any creditor of the company.

Failure to register at the Hong Kong Land Registry means a third-party purchaser in good faith may acquire the land free of the mortgage.

The security document should be expressed in writing as being executed as a deed, sealed and signed before a solicitor or legal executive as witness.

When an overseas entity is the seller, the overseas entity will need to satisfy the buyer that it has corporate capacity, and has duly authorised and executed the documents in accordance with its foreign laws. This may create additional costs because foreign lawyers need to be appointed.

Any documents executed outside Hong Kong may also need to be notarised and apostilled.

Yes.

In bilateral transactions, no new security needs to be signed if the new and the previous lenders assign the mortgage as between themselves. However, the lenders commonly require the chargers to confirm that the change to the lenders has no effect on the existing security. In syndicated transactions using a Security Trustee, the security is held automatically for the lenders from time to time.

Control over changes in the tenants depends on the contractual terms of the lease.

A holder of a mortgage of real estate may (if the terms of the mortgage allow):

• exercise its power of sale, or
• appoint a receiver.

The remedy of foreclosure is little used, and is discussed in more detail below.

Yes. Such choice will be recognised and upheld by the Hong Kong court if:

• it was freely made in good faith by the parties and not for the purpose of avoiding the mandatory law of another jurisdiction
• there are no reasons for avoiding that choice on the grounds of public policy.

Yes, although this depends on any relevant treaties.

Security can be enforced directly without recourse to the courts and generally this is done privately. The most common out-of-court enforcement methods used in practice are appointing a receiver over specific assets (referred to as a “fixed charge receiver”), preferably pursuant to an express power to appoint which is typically contained in security documents. Security document(s) typically set out extensive powers for fixed charge receivers, usually including an express power to manage and sell the secured assets for application against outstanding obligations of the chargor(s).

Alternatively, a creditor could exercise a power of sale directly (preferably pursuant to an express power of sale contained in the security document(s)).

This depends on the enforcement action taken by the lender. If the lender takes possession of the property, then it will be responsible for maintenance and insurance and, generally, is at greater risk of incurring liability itself. The lender can avoid this by appointing a receiver instead.

Foreclosure is available in Hong Kong and requires a court order, which results in the lender becoming an absolute owner of the charged property. There is no requirement to sell by public auction.

The Hong Kong legal regime is generally favourable towards lenders; the rules relating to floating and fixed charges, legal and equitable mortgages and registration requirements are quite intricate at times and have to be understood in detail to appreciate and preserve the quality of the security taken in each particular situation. 

Assuming real estate is held in a locally-incorporated single purpose vehicle to provide an alternative to enforcement of the mortgage over real estate:

Yes.

Yes. Share charges (see below) usually rank in order of creation (provided they are properly registered).

• a share charge must be registered with the Registrar of Companies at Companies Registry within 1 month from the date of creation of the share charge. A Form NM1 (Statement of Particulars of Charge) is submitted, together with a certified copy of charge instrument and a prescribed fee
• the articles of association may need to be amended to permit a transfer of shares on enforcement of the security
• a power of attorney is required from the owner of the shares in favour of the lender (usually included in the share charge itself)
• the lender should obtain a blank stock transfer form, signed by the owner of the shares
• the lender should take custody of the share certificate(s).

The consequences of non-registration include invalidity against liquidators and a loss of priority against other creditors of the borrower who subsequently register a charge against those assets.

To provide valid security, a share charge must be in writing and executed as a deed. Pursuant to section 128 of the Companies Ordinance (Cap.622) (“CO”), deeds in Hong Kong are executed in accordance with section 127 of the CO, having it expressed to be executed by that Hong Kong company as a deed, and delivering it as a deed. Section 127(2) of the CO provides that a company may execute a deed under its common seal, which is affixed in accordance with the provisions of its articles of association. Section 127(3) also permits a deed to be executed by a company by one director and the company secretary, or by two directors.  

The cost of registering a share charge with the Registrar of Companies at Companies Registry is HKD 340 (Form NM1).

No. There are usually two ways in which security is taken over shares in Hong Kong:

• legal mortgage – this involves transferring the shares into the name of the lender and issuing a new share certificate to the lender. The lender becomes the owner of the shares and this is recorded in the Register of Members of the company. In the event of a default, the lender may sell the shares. When the loan is repaid, the shares are retransferred back to the borrower or shareholder
• equitable mortgage or fixed charge (these are virtually indistinguishable) – unlike a legal mortgage, this security does not involve the transfer of ownership in the shares to the lender. The charge “encumbers” the shares by attaching the lender’s power to sell the shares. The lender takes custody of the share certificate(s), together with blank stock transfer form(s) (the transferee’s name is blank) executed by the owner of the shares. If there is a default, the lender may enter its name into the stock transfer form, or that of a purchaser.

It is usually the case that an equitable mortgage over shares (or fixed charge) is taken. There is more administration involved in taking a legal mortgage and this would expose the lender to possible liabilities and/or obligations as owner of the shares.

On enforcement, the shares can be sold to a third party (the powers of sale are usually included in the share charge). It is worth noting that fewer buyers may be willing to buy a private company than the real estate itself due to other potential liabilities related to the company.

Yes. Security can be enforced directly without recourse to the courts or any requirement to have a public auction. A receiver may be appointed under the terms of the share charge to exercise the powers of sale, or the lender may sell the shares itself without appointing a receiver.

Shareholder loans rank pari passu with other unsecured creditors, unless shareholder creditors have entered into a subordination agreement or intercreditor agreement to subordinate their shareholder loans. In order to be able to sell the shares without retaining the residual liability for shareholders’ loans, it is necessary to be able to sell the shares free of such debt. This can be achieved if there are provisions for the debt to be written off as part of the enforcement, or if the lender takes security to be taken over the loans from the shareholders.

Legal issues that would be likely to impact upon the valuation and the security of income from an investment perspective.

There is no minimum/maximum length for an occupational lease of commercial property. Very long leases, i.e. 10 years, are uncommon in Hong Kong and terms are usually much shorter for office leases, around 2-3 years, with or without an option to renew for another 2-3 years.

The lease length is commercially agreed between the parties.

Parties can freely negotiate and agree between themselves on the termination and renewal of a lease created after 9 July 2004.

Only leases created for domestic properties before 9 July 2004, as well as those created with sub-divided flats after 22 January 2022, are subject to regulatory controls, i.e. Landlord and Tenant (Consolidation) Ordinance (Cap. 7).

No, but leases often include a contractual right for the tenant to break the lease early.

No. If the landlord wishes to end the lease early where there is no tenant breach, it requires a contractual right to do so.  

Rent is typically paid either quarterly or monthly in advance, but can be in arrears and depends on what is commercially agreed between the parties.

To be determined commercially between the parties.

As agreed between the parties, but typically based on market rent.

No, save for the sub-divided flats. Part IVA of the Landlord and Tenant (Consolidation) Ordinance (Cap.7) has implemented tenancy control on sub-divided flats.

This depends on what is agreed between the parties and the extent of the premises demised (let) to the tenant. If the internal premises only are demised, the tenant is responsible for the internal premises and the landlord would usually retain the obligations for maintenance, decoration and repair of external areas and common parts, and may recharge any costs incurred to the tenants in the building through a service charge. Where the tenant takes a lease of the whole property (internal and external), it would be usual for the tenant to be responsible for all internal and external repairs, decoration and maintenance.

See above.

See above.

This is subject to the contractual agreement between the landlord and tenant.

There is currently no VAT in Hong Kong.

This is subject to contractual agreement between the landlord and tenant. For commercial properties, government rates are usually paid by the tenant. For domestic properties, these are usually paid by the landlord. It is worth noting that even if the tenant is responsible for paying the rates, and fails to do so, the landlord is still ultimately responsible for paying these (and any late payment penalties).

Dependent on what is commercially agreed between the parties, the tenant will usually pay all other outgoings (e.g. utilities) for its premises.

This is subject to contractual agreement between the landlord and tenant. For commercial properties, management costs are usually paid by the tenant. For domestic properties, these are usually paid by the landlord (i.e. included in the rent). It is worth noting that even if the tenant is responsible for paying the management costs, and fails to do so, the landlord is still ultimately responsible for paying these (and any late payment penalties).

Yes.

There is no general legal requirement for being an expert witness, although from a credibility perspective, a RICS or equivalent appraisal would be a sensible precaution. The requirements as to any appraisal will depend on what is prescribed by the relevant documentation, e.g. definition and requirements of a ‘Valuation’ in a contract.

It is possible, although not customarily required for standard property transactions.

Yes. A lender may assume the liability attaching to a borrower, depending on the liabilities of the borrower. For example, where there are past breaches, the borrower or its purchaser may have agreed to indemnify a previous owner against all environmental liabilities and a lender, when enforcing its security, may assume this liability. Where there are present breaches of environmental law, it is assumed that any owner, including a mortgagee which is in possession of the land, would be liable.