Property Rates and Leasehold vs. Freehold Properties in Hong Kong

A comprehensive guide to understanding Hong Kong’s unique land tenure system and property taxation

1. Understanding Hong Kong’s Land Tenure System

1.1 Government Land Ownership

Since the handover in 1997, all land in Hong Kong is owned by the People’s Republic of China, with the Government of the Hong Kong Special Administrative Region (HKSAR) responsible for its management, use, and development. This is enshrined in Article 7 of the Basic Law, which states that land and natural resources within the HKSAR shall be State property.

Under this system, the Chief Executive, acting on behalf of the HKSAR Government, has the power to lease and grant state land to the public for ownership for a limited period of time. This is legally defined as “leasehold” land, meaning property owners hold their land under a lease from the government rather than owning it outright.

1.2 The Sole Freehold Exception: St. John’s Cathedral

It’s worth noting that the University of Hong Kong also once held freehold land, but surrendered it in the 1920s in exchange for a 999-year lease. Today, St. John’s Cathedral stands alone as the only true freehold property in all of Hong Kong.

2. Types of Leases and Their Terms

2.1 Historical Lease Terms

In the early days of Hong Kong’s development, land leases were granted for various terms:

• 75-year leases: Common for urban development
• 99-year leases: Standard for many properties, particularly in the New Territories
• 999-year leases: Rare, quasi-perpetual leases (essentially equivalent to freehold)

For the New Territories and New Kowloon, leases were typically sold for the residue of a 99-year term less three days from July 1, 1898, reflecting the date of the Convention for the Extension of Hong Kong Territory.

2.2 Modern Lease Terms (Post-1985)

The Sino-British Joint Declaration, signed in 1984 and entered into force on May 27, 1985, fundamentally changed Hong Kong’s land policy. From this date onwards, new land leases have been granted under the following terms:

• Term: 50 years from the date of grant
• Premium: Paid upfront at market value
• Annual government rent: 3% of the rateable value, adjusted annually

2.3 Timeline of Hong Kong Land Tenure

3. The 2047 Lease Expiry and Renewal Mechanism

3.1 The Challenge

On June 30, 2047, approximately 300,000 land lots will see their leases expire simultaneously. This represents a significant portion of Hong Kong’s developed land, affecting residential, commercial, and industrial properties across the territory. The New Territories Leases (Extension) Ordinance of 1988 had extended many pre-1997 New Territories leases to this date without requiring additional premium payments.

3.2 The Legislative Solution

In July 2024, the Hong Kong government enacted the Extension of Government Leases Ordinance, establishing a standing statutory mechanism for lease renewals. This landmark legislation provides certainty to property owners and investors by creating an automatic renewal process.

3.3 Constitutional Authority

The HKSAR Government’s authority to extend leases beyond 2047 is grounded in the Basic Law:

Article 7: “The land and natural resources within the Hong Kong Special Administrative Region shall be State property. The Government of the Hong Kong Special Administrative Region shall be responsible for their management, use and development…”

Article 123: “Where leases of land without a right of renewal expire after the establishment of the Hong Kong Special Administrative Region, they shall be dealt with in accordance with laws and policies formulated by the Region on its own.”

4. Property Rates in Hong Kong

4.1 What Are Property Rates?

Property rates are an indirect tax levied on all properties in Hong Kong under the Rating Ordinance (Cap. 116). The revenue collected forms part of the Government’s general revenue and is used to fund public services. Rates are administered and collected by the Rating and Valuation Department (RVD).

4.2 How Rates Are Calculated

Property rates are calculated as a percentage of the rateable value of a property. The rateable value is defined as:

The rates percentage charges for 2025-26 are:

• Non-domestic properties: 5% of rateable value
• Domestic properties (RV ≤ HK$550,000): 5% of rateable value
• Domestic properties (RV > HK$550,000): Progressive rates scale applies

4.3 Annual Revaluation

Rateable values are reviewed annually during the general revaluation to reflect changes in market rental values. For the 2025-26 valuation list, the designated valuation reference date is October 1, 2024, with rateable values taking effect from April 1, 2025.

4.4 Rates and Lease Length: No Direct Correlation

Important principle: The Rating Ordinance (Cap. 116) does not distinguish between properties based on their remaining lease term. Rates are calculated uniformly at 5% of rateable value for qualifying properties, regardless of whether a lease has 10 years or 50 years remaining.

However, the market rental value (which determines rateable value) may be affected by lease length. Properties with shorter remaining lease terms may command lower rents in the open market, which would then be reflected in a lower rateable value assessment. But this is an indirect market effect, not a statutory adjustment based on lease length.

5. Government Rent

5.1 What Is Government Rent?

Government rent (formerly Crown rent) is paid by property owners to the Government in return for the right to hold and occupy leased land for the term specified in the lease document. Unlike property rates, which are a general tax, government rent is a specific obligation arising from the lease agreement between the leaseholder and the government.

5.2 Calculation of Government Rent

For properties subject to variable government rent, the amount is calculated as:

Like property rates, government rent is adjusted automatically in step with any changes in the rateable value during annual revaluations.

5.3 Types of Government Rent

Not all properties are subject to the same government rent regime. The type of government rent payable depends on when and where the lease was granted:

5.4 The Significance of May 27, 1985

The date May 27, 1985 marks when the Sino-British Joint Declaration entered into force. This agreement fundamentally changed Hong Kong’s land policy:

• Before May 27, 1985: Leases on Hong Kong Island and in Kowloon had fixed Crown rent amounts specified in the lease documents
• After May 27, 1985: All new leases require payment of government rent equal to 3% of rateable value, adjustable annually
• Between 1985-1997: New leases granted for 50 years with premium plus 3% government rent, in accordance with Annex III of the Joint Declaration

6. Comprehensive Comparison: Lease Types and Rate Implications

7. Practical Examples and Case Studies

Example 1: Modern Residential Property (Post-1985 Lease)

Example 2: New Territories Property (Extended to 2047)

Example 3: Old Schedule Lease (Pre-1985)

Example 4: Commercial Property (Post-1985)

8. Important Distinctions and Misconceptions

8.1 Rates vs. Government Rent

8.2 Lease Renewal vs. Lease Modification

These are distinct processes with different financial implications:

• Lease Renewal: Extending the term of an expiring lease. May require land premium payment (except for 2047 automatic extensions). Does not affect property rates calculation, though the renewal cost is separate.
• Lease Modification: Changing lease conditions (e.g., permitted use, plot ratio, building restrictions). Typically requires substantial land premium based on the enhancement in land value. Also separate from ongoing rates obligations.

8.3 Common Misconceptions

9. What Happens Upon Lease Expiry?

9.1 Legal Position

Legally, when a land lease expires, the land and any buildings or improvements on it revert to the government without compensation. This principle is fundamental to the leasehold system – the “owner” has only been holding a time-limited right to use the land, not perpetual ownership.

9.2 Practice and Policy

In reality, actual reversion of developed property is extremely rare in Hong Kong. The government has consistently adopted policies that allow for lease renewal:

• Economic considerations: Mass property reversion would devastate the economy and property market
• Social stability: Millions of residents would face displacement
• Legal frameworks: The Extension of Government Leases Ordinance (2024) provides statutory renewal mechanisms
• Political commitments: Government has repeatedly assured property owners of renewal opportunities

9.3 Renewal Application Process (For Non-2047 Leases)

For properties not covered by the automatic 2047 extension mechanism, owners should:

1. Apply early: Submit renewal application to Lands Department well before expiry
2. Property valuation: Government will assess current land value
3. Premium negotiation: Land premium typically required based on property value enhancement
4. New rent terms: Usually converted to 3% variable government rent
5. Execution: Sign new lease documents and pay agreed premium

10. Key Takeaways for Property Owners

11. Official Resources and Further Information

Conclusion

Hong Kong’s leasehold land system is unique and complex, reflecting its historical development from British Crown Colony to Special Administrative Region of China. While the government technically owns all land (except St. John’s Cathedral), the practical reality is that property owners hold secure, long-term rights that can be renewed and extended.

The property rates system operates uniformly across all leasehold properties at 5% of rateable value, regardless of remaining lease term. Government rent adds an additional 3% for most modern leases, or a fixed historical amount for older leases. Together, these charges represent the ongoing cost of holding leasehold property in Hong Kong.

The recent enactment of the Extension of Government Leases Ordinance in 2024 has provided crucial certainty for the hundreds of thousands of properties with leases expiring in 2047, guaranteeing automatic 50-year extensions without land premium. This development demonstrates the government’s commitment to maintaining stability in the property market and protecting the rights of leaseholders.

For property owners and prospective buyers, understanding these systems is essential for making informed decisions and planning for long-term property ownership in Hong Kong.