Rent control bill aims to bury abusive ‘coffin home’ landlords

from Hong Kong Business (April - June 2022)

HK CEOs’ confidence in economic growth wanes

LEGAL BRIEFING Rent control bill aims to bury abusive ‘coffin home’ landlords

A ban on rent hikes in the first 2 years and caps on increases in subsequent years has landlords worried.

It has been over two decades since rent controls have been implemented in Hong Kong, a city that has usually been laissez-faire with price controls; which is why for low-income families dwelling in subdivided units (SDUs) who have been grappling with high rents, plans under the Landlord and Tenant (Consolidation) (Amendment) Ordinance 2021 to prohibit any increase in the rent for the first term of tenancy, which is equivalent to two years, should be welcomed.

On renewal, which is another two years, landlords of the so-called “cage houses” or “coffin homes” may only increase rent up to a 10% cap, but they may be restricted to an even lower rent rise.

The rent hike for the second term tenancy is determined by the percentage change of the citywide rental index published by the Rating and Valuation Department, which means that landlords cannot always increase the second term rent by 10%.

“If the percentage change of the relevant rental index published by the Rating and Valuation Department is lower than 10 percent, the landlord can only increase the rent to such percentage at most. If such percentage is negative, then the rent must be reduced at least by such percentage,” Lilian Chiang, a senior partner at Deacons, explained to Hong Kong Business.

In general, what the bill aims to do is safeguard tenants’ security of tenure and protect them from arbitrary rent increases. Some legal experts have cast doubts on whether the bill will actually work as intended.

Chiang expressed doubt as to whether the bill can effectively protect tenants because it does not regulate initial rent fees. “Since there is no restriction on the starting rent fee of the first-term tenancy… the landlords may charge a higher starting rent to offset the cap on increase of rent fee,” she said.

This view was shared by Janice Yau Garton, a partner at Stephenson Harwood LLP, who told Hong Kong Business that “without regulation on initial rents and rents of future renewals after the protected 2+2-year terms, the problem of excessive rental hikes does not go away permanently.”

A loss for landlords?

Since the measure was only implemented on 22 January, Garton said tenancy agreements entered before its implementation could have high rent, unfair terms and/ or a longer rental term, circumventing the purpose of the amendment ordinance.

Another provision of the bill that would push landlords to greatly increase rent fees for existing and new tenancies alike is the forbiddance of overcharging tenants for utility bills, Doreen Kong, a partner at ReedSmith LLP, told Hong Kong Business.

Under the bill, “if the utilities of the SDUs are not separately billed, the landlords can only seek reimbursement from the tenants if copies of bills and accounts showing how the amounts are apportioned to different parts are provided to the tenants, and the aggregate of the apportioned amounts do not exceed the billed amounts,” Chiang also explained.

If landlords will not impose increased initial rents, they will likely put the quality of their substandard flats at stake to counteract the rental hike cap, reducing the cost of repair and maintenance during the first two terms when they need to shoulder it, Chiang said.

One of the biggest disadvantages that the bill brings upon landlords is their inability to terminate a regulated tenancy to sell their property with vacant possession, Garton said.

Such tenancy restrictions impair a landlord’s “property rights through restricting their rights to the use and disposal of property guaranteed by Articles 6 and 105 of the Basic Law,” Kong further explained.

“It remains doubtful whether an appropriate balance has really been struck between the protection of tenants and interests of the landlords,” Kong added.

A band-aid solution

Looking at the bill’s effect on a larger scale, particularly on Hong Kong’s housing crisis, Kong said the measure is at most a “band-aid on a bullet wound.”

Kong added that there’s a need for a “comprehensive and integrated plan on tackling housing problems.”

Garton agreed, saying that HK needs longer-term housing policies like building transitional housing, increasing housing supply in a faster and more efficient manner, and tighter regulations overbuilding and fire safety since its housing problem is a multi-layered issue that cannot be solved overnight.

“The rental control policy is a short-term, perhaps temporary, measure that does not resolve underlying issues in the Hong Kong market,” Garton said.

On renewal, landlords of so-called “cage houses” or “coffin homes” may only increase rent up to a 10% cap