PRC Contract Law of 1999 has made it clear that, in case a tenant sublets the leased property without the prior consent of the landlord, the landlord may rescind the lease contract between him and the tenant. However, the Contract Law did not go further to provide the time limit of rescinding, and treatment of the relationship between the sub-tenant and the landlord.

Now the Interpretation sets out guidance to those questions.

 

(1)  Period of subleasing shall not be longer than that of the leasing contract. Article 15 of the Interpretation provides that, unless otherwise agreed by the landlord and the tenant, the excess period shall be invalid, provided that the subletting has been consented by the landlord.

 

(2)  Lessor shall have to terminate the leasing contract within six (6) months, where property is subleased. Article 16 of the Interpretation says that where the lessor does not put forward its objection within six (6) months after he knows or ought to know that the lessee has subleased the property, he will lose in court in requesting to rescind the lease contract or avoid the sublease contract on the ground that the tenant subleases property without his consent.  This is not good news for landlords.

 

(3)  Subtenant now has a right against the lessor terminating the lease contract.  It is provided in the Interpretation that, in case that the lessor asks to rescind a lease contract for the reason that the tenant has not paid rent in time, the subtenant can now step in and pay the owed rent and liquidated damages on behalf of the tenant in order to prevent the lessor from terminating the lease  contract, which termination will inevitably jeopardize the sublease contract. The court will support the subtenant in so doing unless the sublease contract is void at law.

 

 

The pre-emptive right to purchase the leased property by the tenant is granted by China Contract Law. Generally, the landlord shall notify the tenant of its sale of the leased property three (3) months in advance and otherwise, the tenant may have a good claim to nullify the sale contract between the landlord and the third party buyer.

 

However, the Interpretation seems to limit the pre-emptive right to purchase by the tenant:

 

(1)   Article 11 of the Interpretation provides that, the court shall uphold the claim by the tenant for damages against the lessor if the lessor sells the property without informing the tenant of the same in advance or otherwise infringes on the tenant’s priority right to purchase; the court shall not uphold the request made by the tenant to nullify the contract for sale of the property between the lessor and the third party.

 

(2)   Meanwhile, the Interpretation has further set forth four (4) situations where the tenant’s assertion of purchasing the property based on its pre-emptive right will not be upheld:

 

(a)  The co-owner exercise his or her priority right to purchase the property;

(b)  The lessor sells the property to his or her immediate relatives, such as spouse, parents, children etc.

(c)  The tenant fails to explicitly express its intention to buy the property within fifteen (15) days following the notice from the landlord; and

(d)  A bona fide third party has purchased the leased property and has effected the title transfer of the property.

 

Leasing, a plausibly easy matter, can lead to a lot of trouble if the contract is not well drafted. Foreign investors shall be more cautious and careful in investing in Chinese property market.

 

We are ready to provide our professional legal service to property owners not only in regard of entry into leasing contracts but also the administration of your lease contracts in connection with your properties in China, with a view to minimizing your exposure to legal and commercial risks.