2. I have let a residential property to a tenant and I recently found that the tenant is using the property as an office. Will this affect my interests or cause any liability to me as a landlord? If my tenant conducts criminal activities there, what further problems will I face?

2. I have let a residential property to a tenant and I recently found that the tenant is using the property as an office. Will this affect my interests or cause any liability to me as a landlord? If my tenant conducts criminal activities there, what further problems will I face?

A property that is used for a unauthorized purpose may create trouble and/or legal liability for its owner (the landlord) in the following ways.

Breach of Government Lease

All lands in Hong Kong (except the piece on which St. John's Cathedral is standing) are owned by the government, and landowners only lease their land. A typical owner of a flat in a building is therefore only a ‘tenant’ (of the Government) and co-owner of the shares in the land on which the building stands. When the government leases a piece of land to the "owner", a contract is signed. The contract, generally called a Government Lease, imposes various conditions on the "owners" and their successor in title. One commonly found condition is that the "owners" have to comply with the land use purpose specified in the Government Lease. If there is a breach of this condition, for example conducting business activities at a property designated for residential use, then the government is entitled to re-enter and take back the possession of the property as its own.

Although such a drastic measure is seldom used, in serious cases the Lands Department has no hesitation in re-entering properties where its occupants continued its breaches in blatant disregard of warnings given. The Government is entitled to exercise its powers under the Government Rights (Re-entry and Vesting Remedies) Ordinance (Cap. 126) by registering a memorial of an instrument of re-entry in the Lands Registry and upon such registration, the property is deemed to have been re-entered by the Government so that the owner will cease to become an owner of such land with immediate effect. In such event, under section 8 of the said ordinance, the former owner may only petition to the Chief Executive for the grant of relief (if a breach is admitted to have been committed) or apply to the Court of First Instance if disputes arose.

Breach of the Deed of Mutual Covenant

A deed of mutual covenant is a contract that is binding on all owners of a multi-unit or multi-storey building. It basically sets out the rules for the management of the building.

A standard deed of mutual covenant will state that a unit owner must comply with the terms of the relevant Government Lease and will use the property only for the authorised purpose(s). A unit owner will usually also be required to prevent the tenant or occupiers from breaching the relevant terms. Therefore, even though it may be the tenant who is in breach of the Government Lease and the deed of mutual covenant, the landlord can still be liable to legal action by the management company, the incorporated owners (if any) or the other unit owners of the building.

Liability to a third party

If a residential property is used for business purposes, then one can naturally expect that more visitors than originally anticipated will frequently enter into the vicinity of the property. The risks of such visitors suffering from accidents related to the property and thus claiming against the landlord will also increase.

A well-drafted tenancy document may contain a clause which specifies that the tenant shall indemnify the landlord from and against all claims and liabilities caused by the tenant’s acts or omissions. However, if the landlord does not have a well-drafted tenancy document, there may be a vacuum in the terms of liability to be borne by the landlord or tenant. In such circumstances, the landlord may be entangled in totally unanticipated litigation caused by unauthorized uses or accidents which occurs within the property by its occupants.

Criminal liability

If the tenant is merely using the property for purpose(s) other than that authorised, then the worst that the landlord will face is monetary loss and damages. However, if the landlord knows that the tenant is using the property for criminal activities, e.g. as a gambling place or a vice establishment, and does nothing about it, the landlord may face criminal liability.

Any illegal use of the property is also likely to trigger the enforcement of the Government Lease (by the Lands Department) or the Deed of Mutual Covenant (by other co-owners) as explained above against the owner directly.

As a tenancy document is likely to contain a clause that designates the use of the property, e.g. residential, retail, or industrial. The tenant's breach of this clause may give rise to the landlord's right of forfeiture. The landlord may also want to seek professional legal advice about the landlord's rights and liabilities, including a possible application for the grant of an injunctive relief. For instance, a tenant who uses a residential property as a “home office” may simply be using it as a business correspondence address with all transactions made on a computer. While it may be argued that the use of the property might have included business elements, there may not be any actual harm to the property or any actual negative effects to the landlord. In such circumstances, even though the tenant may be technically in breach of the term of the tenancy document, an injunction (whether temporary or permanent) might not lie as of right in favor of the landlord.