Recently, China has witnessed the resurgence of covid-19 cases. In order to bring the outbreak under control, the government has adopted corresponding measures in different areas, for example, lockdown in Shanghai, and dine-in bans in some areas of Guangzhou. Consequently, the rental market has been hit severely. Despite the policies formulated by the government authorities to reduce the rent, we can still expect to see more of the rental contract disputes in the near future.

In fact, the rental disputes have been a heated issue since the beginning of the epidemic. Two years passed and many of the rental dispute cases filed then have already been tried with the final ruling issued. These effective rulings can provide a reference to the current disputes. The catering industry is one of the most affected industries. Our team has represented a foreign-invested catering enterprise for their rental disputes with the mall under the covid-19 situation and has received the judgment of the second instance recently, winning our case by recovering the security deposit and getting a rent reduction.

Facts

In September 2015, Company A and our client, Company B, signed a rental contract, whereby Company A rents a shop in the mall to Company B for operating a restaurant, with the lease term being from September 2015 to September 2020. Early 2020, the corona virus broke out and Guangdong province launched first-level response to major public health emergencies on January 23, 2020. Because of the epidemic situation Company B suffered a significant decrease in the restaurant operation revenue, and had to suspend operation several times. Company B submitted to Company A “Application for Rent Reduction” and “Application for Delaying Rent Payment” several times but Company A insisted that Company B pay the overdue rent of March to May, 2020. On May 9, 2020, Company A issued “Warning of Suspension of Property Management Service” to Company B and then issued “Notice of Termination” to Company B on May 11, 2020. Company B was forced to leave on May 25, 2020. Company A filed a lawsuit with the court in March, 2021, requesting Company B to pay the rent of March to May, 2020 and the liquidated damages for late payment.

Our representation

After reading the case materials, we noticed that the key factor in this case is the impact of the covid-19 situation, due to which Company B has suffered a lot. According to the principle of fairness, the risk of the covid-19 situation should be jointly borne by the landlord and tenant. Therefore, Company A has no right to terminate the contract nor confiscate the security deposit paid by Company B or request Company B to bear the liabilities for breaching the contract. Meanwhile, under such epidemic situation, policies have been made to encourage rent reduction by private enterprises. Company A should take such rent reduction policies into consideration and reduce the rent accordingly. Based on such analysis, our answer to the civil complaint mainly includes the following points: 1. Company A has no right to terminate the rental contract; 2. requesting Company A to reduce the rent; 3. sparing Company B from the liabilities for breaching the contract; 4. requesting Company A to return the security deposit as a counterclaim.

Ruling

The court of first instance ruled in September 2021 that considering the covid-19 situation, in light of the principle of fairness, the rent of March and April shall be halved and the rent of May shall be paid as per the original contract, that the liquidated damages claimed by Company A for late payment shall be denied, and that Company A shall return the security deposit to Company B. Company A lodged an appeal to such ruling. In March, 2022, the court of second instance affirmed the ruling of the trial court.

Issues

1.Whether the revenue decrease caused by the epidemic control measures counts as a normal business risk?

2.Whether the landlord has the right to terminate the rental contract and request the tenant to bear the liabilities for breaching the contract under the circumstance where the tenant fails to pay the rent on time because of the epidemic control measures?

Holding

1.This is not a normal business risk but a major change unpredictable at the time of signing the contract.

2.The landlord does not have such right.

Rationale

The shop concerned was rent to Company B for the purpose of operating a restaurant. Under the impact of the covid-19 epidemic, Guangdong province launched first-level response to major public health emergencies, where the enterprises were supposed to delay the time of resuming work after the spring festival and people were supposed to stay at home as much as possible to avoid spread of the virus. These measures have led to a significant decrease of consumers in the restaurants, causing loss of the revenues and liquidity difficulties. This is a major change that the landlord and the tenant cannot foresee at the time of signing the rental contract and should not be deemed as a normal business risk. Under such circumstance, it will be unfair for the tenant to continue to pay the rent at the rate stipulated in the contract. However, at the same time, the outbreak of the epidemic does not directly make the purpose of the rental contract unachievable. Both parties may continue to perform this contract by reducing the rent or extending the lease term through negotiations based on mutual understanding, fairness and equal value exchange, and make joint efforts to bear the risks and overcome the difficulties. Neither party shall have the right to terminate the contract on the grounds of the outbreak of the epidemic. According to Article 5 of the Guiding Opinions of the Supreme People’s Court on Several Issues Concerning the Proper Trial of Civil Cases Involving the Covid-19 Epidemic in Accordance with Law (II), where the tenant rents the premises for business operation and due to the epidemic or its control measures the tenant faces serious liquidity difficulties and a significant decrease of operation revenues, if the landlord requests that the rental contract be terminated and the tenant bear the liabilities for breaching the contract on the grounds that the tenant fails to pay the rent on time as agreed, the court will not support such claims.

Suggestions

Based on our recent case and other information collected during our legal researches for the case, we offer the following suggestions for your reference from the perspective of experienced Chinese lawyers.

1.For tenants who suffer losses from suspending operation attributed to the epidemic or its control measures and want to delay rent payment or reduce the rent, our suggestion is that they should propose applications for late payment or rent reduction. Such applications and other evidence, if any, should be mailed to the address of the landlord specified in the rental contract or the registered address of the landlord, with the name of the document recorded in the waybill. In case that mailing is not available, they should at least notify the landlord in writing by Wechat or otherwise. For more information about delivering, please refer to VI. Practical tips for delivering the lawyer’s letter in Lawyer’s Letter: Resolving Your Dispute in China.

The tenant should keep the relevant evidence, which will be an important factor in deciding whether the tenant’s delay in paying the rent is reasonable. In the case we represented above, the other party denied that Company B had submitted any application for delaying rent payment. We, however, sorted out all the relevant evidence and formed a chain of evidence, winning the court’s support of our claim.

2.For landlords who don’t receive the rent paid by the tenant on time due to the epidemic or its control measures and cannot terminate the contract unilaterally and immediately, our suggestion is that they negotiate with the tenant about reducing the rent and request the tenant to continue performance of the contract based on the reduced rent. Where a written agreement is reached on the reduction of the rent, if the tenant still fails to pay the rent on time, the landlord may hold the tenant liable for breaching the contract in terms of late payment of the rent subject to the rental contract.

3.The length of the overlapping period of the overdue rent and the epidemic outbreak correlates with the possibility of the court supporting the claims of the tenant. In other words, if the time period of the overdue payment is within the time period of the epidemic, the court is more likely to support the claims of the tenant and vice versa.

Please note that the ruling may vary according to the evidence of each case. Our suggestions above are given only as a reference in general. If you are involved in any rental dispute case under the covid-19 situation, please feel free to contact us via administrator@legalandwise.com.

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