Office Lease Renewal?
MAY 2021 | LAST UPDATED
In many parts of the world, the end of an office lease does not normally mean that you have to move out of your existing premises, unless you want to, as the law or rights generally gives security of tenure to business tenants (there are exceptions). In Hong Kong, however, where option rights to renew are not standard (negotiations are required before an office lease is signed), large numbers of business occupiers are at risk of severe disruptions to their business operations. As the procedures can be complex, you need to take vital steps within prescribed time limits if you intend to renew your lease.
It is strongly advised to engage a specialist well in advance. Delay can be serious – you might not only lose your right to renew (if you hold an option to renew), but lose significant leverage to negotiate due to time constraints.
In this guide, understand the key fundamentals when undergoing a lease renewal, with a focus on the Hong Kong office market.
WHEN SHOULD I START THINKING ABOUT LEASE RENEWAL?
It is never too early to plan, but you should begin at least 10 months before your existing lease ends. As a general rule of thumb, time equals leverage and the more time you have on your hands for planning, the better position you and your business will be for negotiations.
WHAT ARE MY RIGHTS AS AN EXISTING TENANT?
In Hong Kong, an option to renew is only negotiable at the start of the lease. Many occupiers are without such a right in their Tenancy Agreement. Indeed, when signing a new lease, incorporating option rights to renew may also be subject to market conditions and landlords. Larger tenants can often secure an option to renew at expiry of the lease on original lease terms.
Where there is an option to renew, conditions such as serving of notice and method of assessment of the rental will be stated in the Tenancy Agreement. Typically, rent is determined by OMR at lease renewal. The chances are, if you are a small to mid-sized company in Hong Kong, you will not have an option to renew, so please read on.
WHEN MAY THE LANDLORD REFUSE TO GRANT A NEW LEASE?
In Hong Kong, generally landlords are willing to negotiate lease renewals upon expiry of a lease, regardless of whether there is or is not a option right to renew. Yet given the cost involved in fitting out a new office, the relocation planning process, and business disruption of relocating, business without the right to renew are at risk if early planning is not implemented.
The usual justifications for refusing a lease renewal are:
the tenant is not occupying the property for his or her business
the tenant does not follow the correct legal procedures
the tenant and landlord are unable to agree to new terms
the landlord wants the property for his or her own occupation, a new tenant or wishes to redevelop it, or perhaps the tenant has seriously breached the terms of the current lease
in other parts of the world, a court order was obtained at the start of the lease agreeing there would be no security of tenure.
WHAT ARE THE PROCEDURES TO SECURE A LEASE RENEWAL?
This is an area where mistakes or delay can be exceedingly costly. If you have an option to renew or security of tenure, and wish to protect it, there are certain formal notices that you must serve and respond to within stated time limits. In Hong Kong, where there is no security of tenure, the important point to grasp is that lease renewal involves a number of separate processes:
calculate the space needed for each area of your business
prepare a forecast of the way your space requirements are likely to change over the next three years
cost out the space requirements you have arrived at, look at the different ways you satisfy these requirements and test out the results against your business plans
comparing relocation options with a lease renewal
negotiation with your landlord to secure a lease renewal or lease restructure
HOW ARE THE TERMS OF THE NEW LEASE SETTLED?
Usually by negotiation between the landlord and tenant or their respective real estate advisors. SAVVI can advise you on your choices and the terms that you might realistically achieve for your existing lease, using market data and real-time market opportunities.
The rent will usually be agreed at the current open market level for properties of a similar type in your area. SAVVI will be able to advise on the likely level that can be agreed based on recent transactions or latest market sentiments.
As a general rule your landlord is not allowed to take into account any improvements to the property that you have carried out during the term of the lease or any extra value that might arise from your trading from the property.
WHAT HAPPENS IF THE LEASE RENEWAL IS NOT AGREED BEFORE THE OLD LEASE EXPIRES?
If your old lease is not protected by an Act (in other words, if you do not have security of tenure, as in the UK) or if you do not have an option to renew, then your landlord can require you to leave the property when the old lease expires, so it is vital to negotiate a new lease in good time.
In the UK, if you have security of tenure under the Act, you retain that security of tenure following the end of your lease. This remains the position and would only be lost if a court decides your landlord has grounds for regaining possession.
In Hong Kong, if the landlord requires you to leave and there is no opportunity to extend or renew your lease, the lease agreement generally requires tenants to restore the property to its original handover condition, before the expiration of the tenancy at the tenant’s own cost.
Reinstatement costs for Class A or Prime buildings normally range from HK$ 150–300 per sq ft Net.
Learn more about mitigating reinstatement cost here.
WHAT HAPPENS WHEN TERMS FOR THE NEW LEASE ARE AGREED?
Congratulations! The solicitors will draw up a new lease setting out all the details. Ask a professional to read through the lease to make sure it properly reflects the agreement. Read the lease yourself as well and ask your solicitor or real estate advisor to explain any terms you do not understand or are not happy with.
Do not sign before you fully understand and accept the terms.