Did you know that a simple right-of-way agreement or a covenant restricting property use could have significant stamp duty implications in Hong Kong? While most property owners focus on the main purchase transaction, ancillary property rights like easements and covenants often fly under the radar—until they become critical in disputes or future sales. Understanding how these rights are taxed and registered can save you from costly legal complications and ensure your property interests are properly protected.

Understanding Ancillary Property Rights in Hong Kong

In Hong Kong’s dynamic property market, while outright ownership and leasehold interests dominate discussions, ancillary property rights play a crucial role in determining how land can be used and enjoyed. These rights don’t grant possession but can significantly impact property value, functionality, and future development potential. Whether you’re a property owner, developer, or investor, understanding easements and covenants is essential for comprehensive property management.

What Are Easements?

An easement is a non-exclusive proprietary right that allows you to use another person’s land in a specific way for the benefit of your own property. This legal right can be created through express grant, implication, or statute, and it “runs with the land”—meaning it binds future owners, not just the original parties.

Common examples of easements include:

• Right of way: Access over neighboring property for vehicles or pedestrians
• Parking rights: Permission to park vehicles on adjoining land
• Utility easements: Rights for water supply, drainage, or sewerage pipes
• Light and air rights: Protection of access to natural light and ventilation
• Support rights: Rights to structural support from adjacent buildings

What Are Covenants?

Covenants are binding promises or obligations that affect how land can be used. In Hong Kong property transactions, covenants come in several forms, each with different legal implications and stamp duty considerations.

• Restrictive Covenants: Negative obligations that prevent certain land uses (e.g., prohibiting commercial activities in residential zones)
• Positive Covenants: Obligations requiring specific actions (e.g., maintaining boundary walls or contributing to maintenance costs)
• Government Lease Covenants: Conditions imposed by the Hong Kong Government controlling land development, use, and modifications
• Deeds of Mutual Covenant: In multi-story buildings, these documents govern rights and obligations among unit owners, including access to common areas like corridors, staircases, and facilities

Stamp Duty Treatment for Easements and Covenants

The Stamp Duty Framework

The Stamp Duty Ordinance (Cap. 117) governs all stamp duty matters in Hong Kong. Under Section 4, instruments listed in the First Schedule are chargeable with stamp duty. The key distinction for ancillary property rights is whether they’re created as part of a conveyance on sale (attracting ad valorem stamp duty) or through separate instruments (typically attracting fixed duty).

Current Stamp Duty Rates (2024-2025)

Following the Stamp Duty (Amendment) Ordinance 2024, Hong Kong’s property stamp duty regime underwent significant simplification. Here are the key changes effective from February 28, 2024:

Stamp Duty Scenarios for Easements and Covenants

Land Registry Registration Requirements

Hong Kong operates under the Land Registration Ordinance (Cap. 128), which provides for registration of instruments (deeds) affecting land rather than registration of title. This is fundamentally different from a Torrens title registration system used in some other jurisdictions.

Critical Registration Rules

• Deeds Registration System: The Land Registry maintains records of instruments affecting land, but registration doesn’t guarantee title validity
• Priority Protection: Registration establishes priority among competing interests
• One-Month Rule: If registered within one month of execution, priority dates from execution date
• After One Month: If registered after one month, priority dates from registration date
• No Title Guarantee: The government doesn’t warrant title quality or validity

Registration Process for Easements and Covenants

1. Step 1: Execution: Execute the deed creating the easement or covenant in proper legal form, complying with Conveyancing and Property Ordinance (Cap. 219) requirements
2. Step 2: Stamping: Submit the instrument to the Stamp Office within 30 days of execution (unstamped instruments cannot be registered)
3. Step 3: Memorial Preparation: Prepare a memorial in prescribed form summarizing the instrument and affected property
4. Step 4: Submission: Submit the stamped instrument and memorial to the Land Registry with applicable fees (HK$210 to HK$2,000 depending on document type)
5. Step 5: Registration: The Land Registry updates the land register, making the instrument part of the public record searchable by third parties

Why Registration is Essential (Even If Not Mandatory)

While registration isn’t legally mandatory in Hong Kong, failing to register easements and covenants exposes you to significant risks:

• Priority Loss: Unregistered interests may be defeated by subsequently registered interests
• No Public Notice: Potential purchasers may not discover unregistered rights during due diligence
• Enforcement Issues: Unregistered interests may not bind bona fide purchasers without notice
• Evidence Problems: Unstamped instruments cannot be used as evidence in court
• Succession Uncertainty: Unregistered rights may not properly “run with the land” to future owners

Practical Considerations for Property Owners

Due Diligence Checklist

When dealing with property transactions involving easements or covenants, comprehensive due diligence is non-negotiable:

• Land Registry Search: Conduct thorough searches to identify all registered easements and covenants
• Document Review: Examine government lease conditions, Deeds of Mutual Covenant, and all relevant instruments
• Physical Verification: Inspect the property to verify actual use matches registered rights (e.g., visible rights of way, drainage systems)
• Compliance Check: Ensure existing property use complies with all restrictive covenants and lease conditions
• Stamp Duty Verification: Confirm all relevant instruments have been properly stamped

Common Pitfalls to Avoid

• Inadequate Stamping: The Stamp Office may challenge understated consideration and impose penalties
• Late Registration: Delaying beyond one month affects priority date, potentially allowing intervening interests to take precedence
• Government Lease Conflicts: Private easements/covenants must not conflict with government lease conditions
• Implied vs Express Rights: While some easements arise by implication or necessity, express grants provide greater certainty and enforceability
• Multi-Story Building Complexities: Deeds of Mutual Covenant in developments create complex webs of rights and obligations

Special Situations: Multi-Story Buildings

In Hong Kong’s prevalent multi-story developments, Deeds of Mutual Covenant create unique stamp duty and registration considerations:

• Rights to common areas (corridors, staircases, lifts, facilities) are typically incorporated in the first assignment from developer to initial purchaser
• These rights automatically bind subsequent purchasers through the chain of assignments
• Sub-Deeds of Mutual Covenant may supplement original documents in phased developments
• Rights remain enforceable under the Building Management Ordinance even if not expressly stated

When to Seek Professional Advice

Given the complexity of stamp duty law and land registration requirements, professional advice is strongly recommended in these situations:

• Creating new easements or covenants affecting valuable property
• Uncertainty about whether an instrument constitutes a “conveyance on sale”
• Complex consideration structures potentially subject to Stamp Office challenge
• Dealing with implied easements or rights of necessity
• Modifying or releasing existing easements or covenants
• Questions about priority among competing interests
• Multi-story building transactions involving Deeds of Mutual Covenant

Navigating Hong Kong’s stamp duty and registration requirements for easements and covenants requires careful attention to detail and timely action. With the 2024 reforms simplifying the stamp duty landscape but maintaining complex registration rules, property owners and professionals must stay informed about current requirements. Whether you’re granting a right-of-way, imposing a restrictive covenant, or dealing with multi-story building rights, proper stamping and registration protect your interests and ensure enforceability. When in doubt, consult qualified legal and tax professionals to navigate these complex areas effectively.