II. How should the parties handle the signed Tenancy Agreement/Lease?
A tenancy document is usually executed in counterparts, both of which are forwarded to the Stamp Office of the Inland Revenue Department for stamping within 30 days after the date of execution.
If the tenancy document is a Lease, then it should also be registered at the Land Registry within 30 days of the date of execution, otherwise it will lose priority under the Land Registration Ordinance (Cap.128 of the Laws of Hong Kong).
The landlord of a domestic property should also submit a Notice of New Letting or Renewal Agreement (Form CR109) to the Commissioner of Rating and Valuation for endorsement within 1 month of the execution of the tenancy document. A landlord is not entitled to maintain a legal action to recover rent under a tenancy document (in case the tenant fails to pay rent) if the Commissioner does not endorse the Form CR109. However, a landlord who does not submit the form within the one month period may later do so after paying a fee of $310.
1. How is stamp duty calculated on a tenancy document?
Stamp duty is a tax on certain written documents that evidence transactions. Parties to a tenancy document are liable to pay stamp duty on the document according to Schedule 1 of the Stamp Duty Ordinance ( Cap. 117 of the Laws of Hong Kong). The rate of stamp duty varies with the term/period of the tenancy. The current rates are as follows.
Term of the tenancy
Rate of stamp duty
Not defined or uncertain
0.25% of the yearly or average yearly rent
Not exceeding 1 year
0.25% of the total rent payable
Exceeding 1 year but not exceeding 3 years
0.5% of the yearly or average yearly rent
Exceeding 3 years
1% of the yearly or average yearly rent
$5 is also be payable for the stamping of each counterpart of the tenancy document.
A licence does not transfer any interest in land and is not liable for stamp duty. However, if there is any doubt as to whether a tenancy document is liable for stamp duty, then it is good practice to seek adjudication from the Stamp Office. The current adjudication fee is $50.
No law specifies whether the landlord or the tenant should pay the stamp duty. Therefore, the parties to a Tenancy Agreement can freely agree between themselves on their respective shares of stamp duty. In most cases, the parties will pay the stamp duty in equal shares.
There is a two month rent-free period in a tenancy with a term of three years and a rent of $10,000 per month. How can the stamp duty be calculated for this Tenancy Agreement?
The stamp duty chargeable on a tenancy document and its counterpart is based on the rent payable or the yearly or average yearly rent. A rent-free period will therefore diminish the base on which stamp duty is calculated. The following examples will serve to illustrate how a rent-free period affects the stamp duty payable.
A property is let for $10,000 per month and the term of the tenancy is 3 years without a rent-free period . The stamp duty payable is:
($10,000.00 x 36)/3 x 0.5% + $5 = $605
A property is let for $10,000 per month and the term of the tenancy is 3 years with a rent-free period of 2 months . The stamp duty payable is:
($10,000 x (36 – 2))/3 x 0.5% + $5 = $572
2. What are the consequences of failing to stamp a tenancy document?
An obvious consequence is that the landlord and the tenant will be liable to civil proceedings by the Collector of Stamp Duty of the Inland Revenue Department .
Moreover, a tenancy document must be stamped before it can be lodged with the Lands Registry for registration.
A more important consequence is that the Court may not accept an unstamped tenancy document as evidence in civil proceedings. In other words, a party will have difficulties in enforcing the tenancy document against the other party (who has breached the Tenancy Agreement or Lease) in Court.
3. Some tenancy documents must be registered with the Land Registry but some do not. Why?
The major purpose of registering documents at the Lands Registry is to notify the public of all documents affecting lands in Hong Kong and to set up a priority system regarding documents affecting a particular property. Once a document is registered, the public is deemed to have notice of its existence and its content. The date of registration also affects the priority of a party’s rights in a particular property. A tenancy document, being an instrument affecting land, is of course registrable at the Lands Registry.
The laws that govern the registration of documents at the Lands Registry are contained primarily in the Land Registration Ordinance ( Cap.128 of the Laws of Hong Kong). Strictly speaking, the Land Registration Ordinance does not contain any provision that compels the registration of documents. It only spells out the consequences of non-registration. Therefore, the question should be: why is it that some tenancy documents should be registered with the Lands Registry?
Lease and Tenancy Agreement
Although a tenancy document is registrable with the Lands Registry, Section 3(2) of the Land Registration Ordinance provides that the principles of notice and priority do not apply to “bona fide leases at rack rent for any term not exceeding 3 years”.
Therefore, a document that creates a tenancy for a term of more than 3 years (i.e. a Lease) should be registered, otherwise it is prone to be defeated by successors in title of the landlord and will lose its priority against other registered documents that affect the same property.
In contrast, a document that creates a tenancy for a term of 3 years or less (i.e. a Tenancy Agreement) does not gain or lose anything by registration.
However, if a Tenancy Agreement contains an option to renew the existing tenancy, it should be registered even though the term of the tenancy does not exceed 3 years. An option to renew confers on the tenant a right to continue to rent the property after the expiry of the current term, i.e. to renew the existing tenancy. As this option to renew represents a legal interest in land and affects the principles of notice and priority, the relevant Tenancy Agreement should be registered.
To play it safe, parties to a Tenancy Agreement should check with either the Land Registry or legal professionals to ascertain the necessity of registration.