Tenants in Hong Kong advised to include a break option in agreements

Edina Wong is head of residential leasing at international property consultancy Savills Hong Kong. She discusses standard clauses in a tenancy agreement and the options a tenant has to terminate a lease early.

What are the common terms and conditions in a typical tenancy agreement?

In addition to the basics, such as property and landlord information and the monthly rent, a typical agreement specifies management fees and government rates, if payable by the tenant; security deposit, usually two month’s rent; rent-free period, if granted to the tenant; handover period; break clause; diplomatic clause; as well as if the tenant has an option to extend the lease. The tenant’s obligations, including general covenants, repair, maintenance and restrictions; as well as those of the landlord and exclusions of liability and indemnities from the tenant are clearly laid out in the agreement.

What is a standard tenancy agreement?

For housing estates or buildings owned by a single landlord, [such as] single ownership, it is typical for the landlord to use their own standard tenancy agreement, which applies to all rental properties under their management. The landlord usually accepts only minor changes to the terms and conditions. Individual landlords occasionally use the government-issued, pro forma tenancy agreement to cover only the very basic terms, which is not recommended for use.

How long is a typical lease for? Is it negotiable? What is the purpose of a break clause?

The general lease term in Hong Kong is two years, but is subject to negotiation. If the tenancy contains a “break clause”, two- or three-months’ written notice has to be served to the landlord to terminate the lease before it expires. A break clause allows the tenant to obtain early termination at a predetermined date by prior notice. The most common break clause for a two-year lease is 12 months, plus two months’ notice. Most break clauses are subject to negotiation. We strongly advise a tenant to include a break option.

What is the difference between a diplomatic and an unconditional break clause?

A diplomatic break clause is only exercisable when the tenant is leaving Hong Kong after not less than six months or leaving the company’s employment. An unconditional break clause is a straightforward break that can be exercised without reason.

Who is responsible for the reinstatement of the premises upon termination of the tenancy?

All tenancy agreements stipulate that when the tenant moves out of a property, it should be in the same condition as at the commencement of the tenancy. Fair wear and tear is accepted. At the initial handover, our tenancy management rep can help record and document all inventory, [such as] furniture and fittings provided by the landlord as well as any defects. At the end of the tenancy, all costs associated with any additional reinstatement work, necessary as a result of alterations made or caused by the tenant, will have to be rectified prior to handing the premises back to the landlord.

What if the tenant wants to vacate the premises during the “fixed contract period” before the break option is exercisable?

Tenants may try to negotiate with their landlords if they are unable to continue the tenancy during the fixed contract period. You may get help from the estate agent to help negotiate a mutually acceptable way of ending the tenancy. The landlord may agree to release the tenant from the contract if a replacement tenant is secured (by the agent) or if the tenant agrees to cover the costs of advertising the property and listing it with an agent. If no replacement tenant is found at the time you have to terminate the lease for personal reasons other than for the reason that the landlord is in breach of the agreement, you will be responsible for paying rent until the end of the fixed contract period (first 12 months) plus two months’ notice, or the landlord begins letting the property to a replacement tenant, who will sign a new lease instead of taking over the old lease from the outgoing tenant. While finding a replacement tenant is a good way to minimise costs, it is not always successful given the short time and it requires skill from the agent to attract one.