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Legal news, views and insight from LexisNexis Hong Kong

25 February 2020 | by LexisNexis Hong Kong

Introduction

Since early 2020, Hong Kong has been dealing with the outbreak of the Novel Coronavirus Pneumonia (COVID-19) in relation to its health & safety and business measures. Business disruptions have become the new normal for dealings in the commercial context. Meanwhile, the commercial leasing business has been suffering dramatical hits, and some landlords are now offering great rental deductions on existing retail leases. The key issue for businesses to consider is whether the application of force majeure clauses should apply for early/premature termination of commercial lease agreements in light of the current outbreak situation.

Most commercial leases in Hong Kong are rented for a fixed term of two or three years. As a matter of course, parties in negotiations are free to enter different lengths for leases, subject to their respective bargaining power. In certain cases, larger companies may better negotiate to enter leases for longer terms. Tenants may terminate a commercial lease early but should be mindful if this arises (if the option to terminate is allowed under a lease).

In contractual leases, the parties are bound by its terms, and it is usually not legally possible to end the lease before its expiration unless: (1) material terms have been breached, (2) there is a mutual agreement to do so, or (3) the happening of an unforeseen supervening event.

The Impact of the Novel Coronavirus Pneumonia (COVID-19) Outbreak

On 30 January 2020, the World Health Organisation (WHO) labelled the Novel Coronavirus Pneumonia outbreak a public health emergency, a matter which is of concern to the global context. As a consequence of the outbreak, it is anticipated that there will be an increasing significant practice for force majeure clauses to be included into commercial lease agreements.

Due to the outbreak of the COVID-19, both the tenants and landlords should adapt to any new changes regarding their rights and obligations under the commercial lease agreements.

  1. Force Majeure

    A contract may specify and excuse a party from performance due to a radical, unforeseeable intervening event that prevents a party from fulfilling a contract under the common law. A COVID-19 outbreak may amount to a radical, unforeseeable intervening event depending on the facts of each independent case and the drafting of its force majeure clause in the contract.

    The parties to a contract have the flexibility to determine the meaning of “force majeure” events. Despite there is no generally accepted definition for the term, usual examples of force majeure events would include war, strike, natural disasters or events of the such that are outside people’s control.

    A party relying on a force majeure clause should prove that:

    • he/she has been wholly or partially prevented or hindered from performing his/her contractual obligations as a result of the force majeure event; and
    • the affected party may be required to take reasonable steps to avoid or mitigate the consequences of the force majeure event.

    Therefore, contracting parties use force majeure clauses as a way of controlling what happens with regard to their contract and as a way of avoiding the common law doctrine of frustration.

  2. Frustration

With regards to contracts without a force majeure clause, it is possible to rely on the doctrine of frustration to set aside the contract entirely because it would be impossible to perform and/or its underlying purpose has radically changed due to the outbreak of Novel Coronavirus. A party must show that the virus situation frustrated the purpose of the contractual obligations for the agreement to end prematurely.

The legal threshold to determine frustration is high. The court interprets this threshold by assessing the doctrine of frustration on a case-by-case basis. For instance, a contract that has become harder or expensive to fulfill/perform is insufficient to give rise to frustration.

In Li Ching Wing v Xuan Yi Xiong [2004] 1 HKC 353, a tenant in a 2-years fixed-term tenancy claimed that the lease agreement was frustrated because the Department of Health evacuated the tenant out of the infected block in Amoy Gardens and isolated the area for 10 days through an isolation order because of the SARS outbreak. Subsequently, the tenant could return to the block post evacuation and isolation. The court rejected the claim for frustration as the isolation order which lasted for 10 days out of a 2 years’ lease was short and quite an insignificant period of time regarding the overall use of the premises for domestic purpose under the lease. Despite SARS was an unforeseeable supervening event, it did not significantly change the nature of the contractual rights and obligations that was set out under the contract.

Practical Tips

As it stands at present, it is likely that the Novel Coronavirus outbreak will amount to a force majeure event if the situation gets worse. Contractual lease agreements with such clauses in them should contain its scope, the prescribed form of notice and the applicable time limitations for the contract to be executed effectively. Parties entering into a new contract lease agreement should be meticulous and precise in drafting the relevant force majeure clause for conducting businesses under this outbreak. Further, other options are available if a tenant wishes to end the agreement earlier such as by way of a break clause, a sublet/assignment clause, a surrender agreement and/or securing a replacement tenant.

For more information, please see:

Lexis Advance® Hong Kong – The Annotated Ordinances of Hong Kong: Prevention and Control of Disease Ordinance (Cap 599); Occupational Safety and Health Ordinance (Cap 509); Public Health and Municipal Service Ordinance (Cap 132); Landlord and Tenant (Consolidation) Ordinance (Cap 7); Conveyancing and Property Ordinance (Cap 219)

Lexis Advance® Hong Kong – Halsbury’s Laws of Hong Kong: Contract; Health and Safety; Land; Landlord and Tenant

Hong Kong Conveyancing

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The Lexis Insights articles are provided for reference purposes only and are not intended, nor should they be used, as a substitute for professional advice or judgment or to provide legal advice with respect to specific circumstances. If you require any legal advice or other expert assistance, please consult a competent professional adviser.

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