SUNeVision files judicial review against HKSTPC alleging subletting of data centers in TKO

SUNeVision has filed a judicial review against HKSTPC (image: georgeclerk/iStockPhoto)

SUNeVision, an IT company and the technology arm of Sun Hung Kai Properties, has filed a judicial review against the Hong Kong Science and Technology Parks Corporation (HKSTPC) alleging that the HKSTPC did not enforce restrictions in leases against subletting data centers in the Tseung Kwan O Industrial Estate (TKOIE).

In the SUNeVision notice of application for judicial review (HCAL 1890/2018) on 10 September 2018, the company seeks relief from the High Court against HKSTPC’s decision for “not to take immediate steps to rectify the failure or refusal to take reasonable steps to enforce restrictions in leases against subletting, parting with possession and/or sharing of occupation in the TKOIE.”

SUNeVision and HKSTPC provided their responses to Computerworld Hong Kong in the statements below.

“In view of the ongoing legal proceedings, it is not appropriate for SUNeVision to comment on the case,” said SUNeVision in the statement. “SUNeVision has always been supportive of technology and innovation in Hong Kong, and appreciated what the Hong Kong Science and Technology Parks Corporation had done to promote the industry. We believe the SAR Government should allocate more land and resources to support the further development of the data center industry.”

“As we have said over the past few years, SUNeVision is strongly against any suspected practice of breaches of subletting among some data center operators in industrial estates, causing great confusion and unfairness in the market,” the SUNeVision statement said.

“As there may be potential legal proceedings, we will not be able to comment or provide further information,” said the HKSTPC in the statement.

Lease restrictions & legitimate expectation
Currently, the HKSTPC has three industrial estates granted by the HKSAR government—located in Tseung Kwan O, Tai Po, and Yuen Long. The HKSTPC leases individual sections in the industrial estates to data center operators at substantially lower-than-market prices.

According to the SUNeVision judicial review notice, “HKSTPC’s standard lease for individual sections in the Industrial Estates contains the Restrictions Against Parting with Possession and the Restrictions Against Licensing and Sharing of Occupation (the Lease Restrictions)”. Grantees who are data center operators should retain an “exclusive possession” of the leased premises. They are “not allowed to sublet or part with possession of the leased premises or to license or allow third parties to occupy part of the premises.”

Furthermore, the admission policy for data center operators stated that “the provision of managed services shall be the dominant element of operation in the premises, and the grantees should be the ones who undertake the provision of managed services in the premises.”

SUNeVision has a “Legitimate Expectation” in which the HKSTPC will enforce the Lease Restrictions and will prohibit grantees from the following acts:

  • Sublet buildings, floors or caged spaces in the leased premises to third parties
  • Let third parties have control on who can access the leased premises including by implementing their own security measures
  • Let third parties station their staff or have office space or set up office in the leased premises
  • Let third parties provide managed services

Suspected breaches
As stated in the judicial review notice, “HKSTPC appeared not to be enforcing the Lease Restrictions.”

SUNeVision suspected the breaches or potential breaches by three grantees in the TKOIE—NTT Com Asia, Global Switch, and HKCOLO. According to the judicial review notice, NTT sublet part of its leased premises to an international cloud computing enterprise and a financial institution. Global Switch secured China Telecom Global as an anchor tenant for its facility through China-based data center company Daily-Tech Beijing Co. HKCOLO sublet its premises to IBM, a public authority, and a financial institution.

The customers of the grantees placed their equipment and stationed their staff to work in the leased premises, have access control of designated areas and have the right to exclude the grantees’ staff from entering into designated areas. In view of such arrangements between customers and grantees, SUNeVision said in the judicial review notice that the grantees “would not be retaining exclusive possession of their leased premises,” whereas their customers “would be having the right to exclusive possession over at least a part of the leased premises.”

SUNeVision made various enquiries to the HKSTPC from November 2012 to April 2018, requesting the latter to investigate the suspected breaches and take necessary actions such as conducting unscheduled inspections on the premises or requesting the grantees to sign a letter of compliance with the Lease Restrictions.

HKSTPC’s letter to SUNeVision
In the HKSTPC’s letter to SUNeVision in May this year, the HKSTPC said there was no breach of the Lease Restrictions.

The HKSTPC stated in the letter that it’s a “trade practice” for some customers to “place their equipment in the data center to make themselves avail of the services provided by the data center operators.” Those customers “do not have exclusive possession of the space in the data center where their equipment is placed.”

The HKSTPC also mentioned in the letter that there is no breach of the Lease Restrictions as long as “the data center operator provided services in addition to the provision of space to customers such as the provision of cooling.” Exclusive possession is retained as long as “the data center operator had retained the right to relocate customer’s servers to different areas.”

As said in the judicial review notice, SUNeVision considered that the letter “did not respond to the concerns” on the suspected breaches and “refused to accede to the demands” of SUNeVision. SUNeVision stated in the judicial review notice that “HKSTPC had been acting in breach of HKSTPC’s public law duties” and SUNeVision’s “Legitimate Expectation.”

Increased plot ratio to a grantee
In the judicial review notice, SUNeVision also seeks a relief about “a declaration that the grant of the increased plot ratio to Global Switch for the site at the TKOIE would be unlawful.”

Global Switch, a grantee in the TKOIE, has entered into negotiations with the HKSTPC for an increased plot ratio for its site. It appears that “HKSTPC may have already decided to grant the increased plot ratio to Global Switch,” according to SUNeVision in the judicial review.

This has raised concerns within the data center industry. The Datacenter Association of Hong Kong wrote a letter to the Director of Lands in early September, expressing its concern and asking for clarification.

“Unfairness” & “distorted competition”
In the judicial review notice, SUNeVision said that HKSTPC’s failure to enforce the Lease Restrictions had led to “substantive unfairness” to SUNeVision and “severely distorted competition” in the industry. As stated by SUNeVision in the judicial review notice, SUNeVision failed in the application for a leasing site in TKOIE at a subsidized rate in 2012. It acquired a land in TKO in 2013 at the full market price of HK$428 million for constructing a data center.

“In continuously condoning and in continuously failing to rectify the breach of the Lease Restrictions by Grantees, HKSTPC has nurtured the restricted business of subletting inside TKOIE, rather than the highly skilled businesses undertaken by data center operators which are MSPs,” said SUNeVision in the judicial review notice.