Impact of national security clause on property developers, owners and tenants in Hong Kong

Recently, new provisions have been inserted by the Lands Department in their land sale tenders and short-term tenancies. This article will briefly outline these new provisions and discuss the potential impacts this will have on property developers, owners and tenants.

Background

The Hong Kong national security law was passed on 30 June 2020 with the purpose of safeguarding national security and preventing, suppressing and imposing punishment for the offences of succession, subversion, organisation and perpetration of terrorist activities, and collusion with a foreign country or with external elements to endanger national security in relation to the Hong Kong Special Administrative Region of the People's Republic of China ("HKSAR").  

To ensure compliance with the national security law by suppliers and service providers, the HKSAR Government updated its Stores and Procurement Regulation (the "Regulation") in August 2022 to insert such national security provisions in all tenders it issued. The Regulation applies to all procurement tenders for goods and services supplied to the HKSAR Government, and took effect in November 2022. 

The insertion was designed to underline that the national security requirements are one of the criteria, along with price and specification, in the Government procurement process.  

Land sale tender

The newly inserted provision states that the HKSAR Government reserves the right to disqualify a tenderer on the following grounds: namely, that the tenderer or its parent company or his principal has engaged, is engaging, or is reasonably believed to have engaged or be engaging in any acts or activities that are likely to cause or constitute the occurrence of offences, endangering nations security. Alternatively, if the disqualification is necessary in the interest of national security, or is necessary to protect the public interest of Hong Kong, public morals, public order or public safety. There are concerns that this provision may affect the desire of developers or investors, in particular those from overseas, to join the land bidding. It is believed that this provision might not have an impact on a developer’s desire to participate in land tenders as most land developers or investors primarily consider factors such as development costs, future revenue and income, strategic expansion of their portfolio, risk, funding, technical difficulties and ongoing management etc. before joining the land bidding. In fact, the first land sale project in the Kai Tak area, which included the national security clauses, attracted six bidders, and the site was successfully sold at the end of 2022.

Short-term tenancy

The national security clause is now part of the short-term tenancy when leasing government properties. The clause states that it shall be lawful for the HKSAR Government as the landlord re-enters the premises and determines the tenancy without any refund or compensation after any of the following event occurs: 

• the tenant has engaged or is engaging in acts or activities that are likely to constitute or cause the occurrence of offences endangering national security or which would otherwise be contrary to the interest of national security; 
• the continued occupation and use of the premises by the tenant or the continued performance of the tenancy is contrary to the interest of national security law; or 
• the HKSAR Government reasonably believes that any of the event mentioned above is about to occur.     

The newly inserted provision should not have an impact on a tenant's desire to lease the government properties. Most tenants will consider the permitted usage, their needs, rental cost and revenue when making their decision.

Illegal purpose clause 

A typical tenancy agreement normally contains a covenant that the tenant shall not use, or suffer or permit the use of, the premises or any part thereof for an immoral or illegal purpose, with a condition for forfeiture and termination in case of breach. There are concerns whether such an illegal purpose clause is sufficient to cover acts or activities endangering national security and to protect the right of landlords under a typical tenancy agreement. 

In normal circumstances, when a landlord exercises his right of forfeiture under the illegal purpose clause, he may find it hard to prove that the tenant has used, suffered, or permitted the use of the premises for an illegal purpose. A criminal conviction of a tenant may well be useful evidence that the tenant is in default of the illegal purpose clause, but it is only available after the conclusion of a criminal trial, which always takes time. The landlord is thus required to find other evidence to prove the breach to trigger his rights under the tenancy agreement. If the illegal purpose involves a violation of national security law, it is harder for a landlord to prove the illegal purpose.  

Even if evidence is found, Section 58 of the Conveyancing and Property Ordinance (Cap 219 of the law of HKSAR) provides that a landlord cannot enforce a forfeiture of a tenancy agreement for breach of covenant unless (1) he serves upon the tenant a notice, which must require the tenant to remedy the breach, if it is capable of remedy, and (2) the tenant fails within a reasonable time thereafter to remedy the breach, if it is capable of remedy.  

If the illegal purpose involves a violation of national security law, the landlord may face a dilemma: 

• On the one hand, it is difficult for a landlord to determine whether such breach is remediable. The question whether a breach of covenant is capable or incapable of remedy is always a question of fact in each case and it is not possible to lay down or suggest certain categories of breach which are incapable of remedy, especially for a breach of national security law.   
• On the other hand, even if the breach is capable of remedy, the landlord may prefer to terminate the tenancy because the breach has a lasting effect on the reputation and value of the premises. The landlord might be involved in investigation by police or governing body regarding the occurrence, awareness or involvement of such breach.

It is thus advisable for landlords to consider inserting a national security clause under their tenancy agreement in addition to the existing illegal purpose clause.  

Insertion of national security clause 

A well-drafted national security clause can assist the landlord in exercising his right of forfeiture in the following ways:

• To particularly and expressly prescribe that any act or activity endangering national security or likely to endanger national security shall trigger the landlord's right of forfeiture and put an end to the tenancy agreement; 
• To clearly define the scope of acts or activities which will trigger the forfeiture; and
• To prescribe that the determination of the landlord shall be final and conclusive when deciding whether the breach is capable of remedy or not.

It is worth noting that, up to now, there is no case law in Hong Kong to determine whether breach of a national security covenant is remediable or not. Landlords who wish to terminate the tenancy on such ground, legal advice is recommended.    

Should you have any enquiry, our team of real estate lawyers is ready to share more information on this topic.