New Initiative Launched To Expedite Lease Modifications - Involving Industrial Buildings

April 2021

A pilot scheme (the "Scheme") for charging land premium at standard rates on lease modifications for redevelopment of industrial buildings ("IBs") was launched on 15 March 2021. Practice Note Issue No.1/2021 was published by the Lands Department to provide guidance on the Scheme. The Scheme provides an alternative mechanism for the assessment of premium payable on lease modification.

The Government has implemented various schemes with a view to unleashing the development potential of IBs. One of the major hurdles to the schemes is the amount of premium payable on lease modification. Currently, the premium is predominantly determined through negotiation between the Lands Department and the owner applicants on a case-by-case basis. This negotiation mechanism can be a long and painful process. It is not surprising for negotiation to take years to conclude and many owner applicants might drop out. A pilot scheme for arbitration on land premium was introduced in 2014 and has now been extended to run till 2022. In light of the risk of an unfavorable arbitral award, it is understandable that many owner applicants would like to stick with the conventional negotiation mechanism.

Under the Scheme, the premium payable on lease modification will be computed by a simple and one-size-fit-all formula. Standard rates have been set for each of the five (5) geographical locations and will be adopted throughout the initial period of the Scheme. The variables include maximum total gross floor area after the application, gross floor area before the application and geographical location (which in turn determines the applicable standard rates). According to the Lands Department, premium offer in straightforward cases will be issued to the owner applicants within five (5) weeks from the date of receipt of the acceptance of the provisional basic terms offer. It is expected that, with a higher degree of certainty in terms of premium payable and the expeditious procedures, the Scheme would stipulate transformation of IBs into uses which are more compatible with the current needs of society.

The Scheme does not apply to all IBs. Only modifications to government leases of industrial and/or godown lots for the purpose of redevelopment of pre-1987 IBs for commercial and/or residential uses are qualified for the Scheme. Special factories and those IBs which completed wholesale conversion pursuant to previous IBs revitalization schemes are excluded from the Scheme.

The Scheme will run for an initial period of two years and will expire on 14 March 2023. During the two-year period, qualified owner applicants may opt to partake in the Scheme on or before the acceptance of provisional basic terms offer. It should be noted that any option made will be irreversible and there is no appeal mechanism. Even though owner applicants may withdraw the application at a later stage and start an application afresh, all fees paid will be forfeited absolutely.

The precise location of the IBs will no doubt affect the redevelopment potential of the IBs. But this has not been reflected adequately in the broad-brush approach for the standard rates under the Scheme. Moreover, the Lands Department retain absolute discretion whether to process the lease modification pursuant to the Scheme or not. The same issue faced with the conventional negotiation mechanism remains. It is possible that the premium computed based on the standard rates is higher than the premium assessed by the Government. As such, owner applicants may feel aggrieved as the Lands Department may only accept application under the Scheme for cases where the premium assessed based on the standard rate is clearly higher than that of the market value.

It remains to be seen whether the Scheme will be extended or modified. Any effort aiming at greater flexibility and certainty in lease modifications should be welcomed. It is desirous for owner applicants or investors to work out a more accurate budget and timetable for redevelopment.