Can’t pay the rent? Hong Kong’s stricken SMEs get respite with measure to stop landlords chasing after arrears

Hong Kong’s struggling small and medium-sized enterprises (SMEs) have received a lifeline in the form of rental relief for up to six months and guaranteed loans of up to HK$9 million (US$1.15 million).

A government source said the unprecedented rental relief measure would not undermine the rights of private property owners, although an analyst said it gave small business owners more bargaining power in the midst of the city’s raging fifth wave of Covid-19 infections.

SMEs will also be entitled to bigger guaranteed loans and have longer to start repaying the principal sum.

The existing Special 100% Loan Guarantee Scheme will be extended by a year when it expires at the end of June. Eligible companies may borrow up to HK$9 million – up from HK$6 million – and repay only the interest but not the principal sum for 10 years, two years more than before.

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Financial Secretary Paul Chan Mo-po’s HK$170 billion (US$21.8 billion) budget on Wednesday delivered a list of measures to ease the financial burden on the 340,000 SMEs which account for 98 per cent of the city’s businesses.

He said the rental relief, being given for the first time ever, was meant to “provide enterprises in deep water with breathing space”.

“During this critical juncture of fighting the epidemic, we must take all necessary measures to preserve the vitality of the economy, in particular the survival of SMEs, and strive to safeguard jobs,” he said in the final budget address of his current term.

The new measure would require the Legislative Council to pass a law forbidding landlords from terminating the leases of, halting services for, or taking legal action against “tenants of specified sectors” that fail to pay their rent on time. These were mostly SMEs.

An estimated 130,000 shops would benefit, according to a source. Establishments hit by social-distancing curbs, such as restaurants and children’s playgroups would be included. Retail stores may be eligible too.

Speaking at a media session after his announcement, Chan said he hoped businesses and landlords could “overcome the tough times together”.

“Hong Kong is at a critical time,” he said. “By doing this, we hope tenants won’t be forced by landlords to cease their businesses by taking legal action. We hope landlords and tenants will sit down together to sail through the challenges.”

The source said the measure would be gazetted on Friday and the Financial Secretary’s Office and Department of Justice were working on amending the law.

Another source said the government hoped Legco could call a special meeting next month to pass the legislation so that the measure could take effect by April. It would be in force for three months for a start, and extended for three more months if necessary.

Once it took effect, property developers would not be allowed to chase after their tenants for rental arrears or take action against them.

A source said Chan had consulted the secretary of justice, who responded that there was “no problem” in allowing tenants to delay rental payments, and doing so would not violate the rights of private property owners protected under the Basic Law, the city’s mini-constitution.

“We are not trying to deprive owners’ rights, but we hope to assist some of these SMEs in these difficult times,” the source said. “Such a measure can help to stabilise the economy and rate of employment.”

Property owners would not be allowed to interfere with the tenants’ business operations, stop serving them or start bankruptcy proceedings against them.

Owners who fail to comply will face penalties equal to three months’ rent or a minimum fine of HK$50,000.

Chan said landlords did not need to worry if they could not afford property mortgage payments when the measure takes effect, adding that the Hong Kong Monetary Authority “has promised they can handle it in a flexible manner”.

A similar temporary law was introduced in Singapore in 2020 to benefit SMEs, though the city state’s government required businesses to show their drop in sales or inability to pay rent to qualify.

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Chan announced the measure a day after Chief Executive Carrie Lam Cheng Yuet-ngor extended social-distancing rules until mid to late April, which meant a wide range of businesses such as beauty salons, gyms, bars and karaoke rooms would remain shut.

The venue closures, in place since January 7, dealt a massive blow to SMEs that have effectively had no operational income for four months.

Professor Kevin Au Yuk-fai, director of the Centre for Entrepreneurship at Chinese University, said the “radical measure” to provide rental relief was well-received by SMEs dreading another two months of closures.

“Most of them are almost giving up, with rent as their main concern,” he said, adding that rent made up about 50 to 60 per cent of SMEs’ fixed costs.

He believed the rental relief scheme would give SME owners more bargaining power to negotiate with landlords. He said landlords might accept the delay in collecting rent, rather than leave the space vacant as it was difficult to secure long-term tenants at this time.

Au said SMEs also stood to benefit from the stimulus effect of another measure Chan announced, a fresh round of HK$10,000 electronic consumption vouchers for eligible residents to spend.