China: Commercial leases


Lease agreements

Types of leasing arrangements
Generally, the law recognises contractual agreements under which occupation and use of real property is let for a certain period of time. Written lease contracts are required if the intended lease term exceeds six months.

All residential, commercial and industrial letting are principally governed by the PRC Contract Law and the Administrative Measures for Commercial Real Estate Leasing. Local leasing policies and decrees may also apply.

Common terms in commercial leases
Unless provided by law, parties will be free to negotiate and agree on the terms of commercial leases. The lease agreement generally contains the following:

  • Details of the parties;
  • Location, area, structure, ancillary facilities, furniture and fixtures status of the property;
  • Rental, deposit and payment term;
  • Usage;
  • Lease term;
  • Repair and maintenance liabilities;
  • Payment of the property management fee and applicable utility fees;
  • Dispute settlement; and
  • Liabilities of breach.

In certain cities, a prescribed form lease must be adopted when submitting the lease for registration. However, the parties can amend its provisions.

Commercial leases typically last 3 to 5 years, while residential leases generally last 12 months with an option to renew. The lease term for all types of leases cannot exceed more than 20 years. Tenants are not guaranteed to Fa right of renewal at the end of the term unless otherwise provided in the lease, and any renewals cannot exceed 20 years from the date of renewal.

Managing leasing agreements

Security of Tenure
Tenants are not guaranteed to a right of renewal at the end of the term. However, fixed-term leases may be renewed automatically under the same terms if the lessee continues to occupy the property after the expiry of the lease and there is no objection from the lessor. Nevertheless, the renewed lease may still be terminated at any time if the lessor gives reasonable notice.

Recovering real estate from a lessee
The lessor may include a term in the lease contract penalising the late return of premises. Alternatively, if the lessee does not vacate the premises after termination of the lease or expiration of the lease term, the lessor can demand rent for the period in which the lessee remains in the premises.

Early termination
Many leases provide the lessor with a right to terminate and re-enter the premises in the event that the lessee breaches the lease agreement and fails to remedy a remediable breach within a stipulated notice period. Development clauses are also included in many leases, which give the lessor the right to redevelop the building.

Termination by third party
The government may expropriate land and pay compensation if it is in the public interest. Examples of public interest may include national defence and foreign affairs; construction of infrastructure and rebuilding of old urban areas under the Urban and Rural Planning law.

The lease typically provides for the above situations or is covered by the force majeure clause.

Security for protecting against failure by lessee to meet obligations
The lessor typically would do the following to protect against a failure by the lessee to meet its obligations:

  • Require the lessee to provide a security deposit consisting of certain months’ rent and/or certain months’ management fee; and
  • Require the lessee to provide a down payment of one months’ rent.

Transfer of lease
Unless otherwise provided by the lease, the lessee can only sublet or assign the lease to third parties with the lessor’s written consent.

Managing a leased real estate

Restrictions on use
Lessees are only entitled to use the premises for the purposes specified in the lease. If the lease does not provide for a specified purpose, the premises can only be used as designated by the government. Any deviation from the designated use will give the government a right of re-entry without compensation.

Alterations
Structural repairs which involve alteration of the building’s form and framework are usually not allowed.

The lessor’s consent should be sought when undertaking non-structural alterations. If such consent is not sought, the lessee must pay the full costs and reinstate the premises to their original condition, or compensate for damages, upon the expiration of the lease.

Rent

Rent variation
Rent payable remains the same during the term, but is typically subject to an annual increase, which is specified in the lease. For retail leases, it is common for the lessee to pay either the turnover rent or fixed rent, whichever is higher.

Costs for tenants other than rent

Costs payable by tenants at start of lease
The lessor will usually require the lessee to pay a rent security deposit, which is refundable unless the lessee breaches the lease. The lessor may also require deposits for utilities and/or management fees.

The lessee also needs to pay stamp duty and in most cases, lease recordal fee as applicable.

Maintenance and repairs
The maintenance and repair costs of the common areas are generally covered by the management charges. The burden to pay such management charges is open for negotiation between the parties.

The lessor shall perform the duty of maintaining and repairing the leased premises, unless the parties stipulate otherwise in the lease. If the lessor fails to do so, the lessee may maintain and repair the premises at the lessor’s expense. If the maintenance and repair of the leased premises affects the lessee’s use of the premises, the rent shall be reduced or the lease term extended accordingly.

Utilities and telecommunications
Such services are usually subscribed and paid by lessees directly to third-party suppliers. If separate metering is not possible for the leased premises, the landlord can arrange for the supply of utilities and apportion the charges to the respective lessee accordingly or cover such charges in the management fees payable by the lessee.

Insurance
The Contract Law does not set out who is responsible for insuring the premises. However, the lessor usually pays for the cost of insurance and the insurance policy is taken out under the lessor’s name.

Furthermore, leases typically contain clauses which:

  • Require the lessee to purchase insurance covering damages caused to the leased property or third parties because of the lessee’s activities on the leased premises; and
  • Require the lessee to purchase third-party and fire insurance to cover damages to common areas of the leased property and premises of other lessees (caused by the lessee’s fitting out of the leased premises during the rent-free fitting out period, if any).

Updated on 1 March 2019.

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