When entering into a commercial lease, there are initial costs that you, as the tenant, must pay when signing a lease. Additionally there are on-going costs a tenant must pay when they are leasing the property, and it will depend on the terms of the lease.
Initial costs
- Security deposits
The tenant needs to pay a security deposit equivalent to 1 to 3 months of the rent to the landlord at the time of signing the tenancy agreement. This deposit is refundable upon expiry of the lease, however the landlord is entitled from the contract to deduct from the deposit the amount of rent and fees in arrears.
- Stamp duty
In case of lease, both the tenant and the landlord generally share the stamp duty payable to the Government. Usually it is 1% of the yearly or average yearly rent, and you can calculate the amount of the stamp duty by utilising the “Stamp Duty Computation” website provided by the Inland Revenue Department.
- Registration Fee
A lease should be registered with the Land Registry within 30 days of its execution, otherwise it will lose its priority against other registered documents that affect the same property. In such an event, the existing tenant may become evicted.
The lease agreement should specify whether the landlord or tenant pays the registration fee.
- Legal fees
If you have hired a lawyer to draft/review the Lease agreement, you will need to pay them.
- Agency commissions
Agents may charge both landlords and tenants if the leasing premises had been facilitated by an estate agent.
On-going costs
- Rent
A tenant must pay their landlord rent as specified in the lease deed.
- Property Tax
The landlord usually pays the property tax annually. The standard tax rate for Hong Kong is 15%, and the assessable value of the property is based on the rent paid.
However if the landlord is a limited company carrying on a business in Hong Kong, it is likely they will be exempt from paying Property tax. The company can apply for an exemption of Property Tax because the income (e.g. rental income) will be assessed under Profits Tax instead.
- Rates and Government rent
Depending on the lease, either the occupier or owner of the property has to pay rates. In the absence of any agreement to the contrary, it is assumed that the occupier or tenant will pay rates.
Rates are charged at a percentage of the rateable value. The rate percentage charge is currently at 5%. The rateable value is the estimated annual rental value of a property at a designated valuation reference date, assuming that the property was then vacant and to let. To find the rateable value of the property, you should utilise the “Enquiry on Rates and/or Government Rent Account” service on the Rating and Valuation Department website.
- Insurance
The tenancy agreement usually includes provisions for insurance liabilities. Generally, landlords are not responsible for insuring the building or to reinstate in case of damage or destruction. The Owner’s Corporation of a building will usually. However, the landlords will usually require the tenants to purchase additional coverage and more comprehensive insurance regarding third-party liability against any person or property in the premises.
- Service charges
Service charges cover items such as central air conditioning supply, building management, cleaning and the upkeep of common areas and are calculated on the area of the premises to be rented. The charges are quoted on a per square foot per month basis and are non-negotiable. Charges may be revised from time to time.
- Maintenance and repairs
This will largely depend on the lease and how it allocated the maintenance and repair obligations. Usually, the tenant may need to pay to keep the interior of the rental property in good condition. The landlord will usually share the costs of maintenance and repair of common areas and facilities of the building with all other owners of the building.
Key Takeaways
- There are many costs associated with leasing a property and you must review your lease agreement to understand the costs you are responsible for.
Bibliography
- Estates Agents Authority, “Notes on Signing A Tenancy Agreement”: https://www.eaa.org.hk/consumers/doc/tenancy.pdf
- Rating and Valuation Department “Rates”: https://www.rvd.gov.hk/en/public_services/rates.html