Overview of retail lease agreements in China

Leases in China are mainly regulated by:

• The Civil Code of the People’s Republic of China, effective since 1 January 2021 (the PRC Civil Code).
• The Law of the People’s Republic of China on the Administration of Urban Real Estate, last amended in 2009 (the PRC Urban Real Estate Law).
• The Interpretation on Several Issues Concerning Specific Application of Law in the Trial of Cases on Disputes over Lease Contracts of Urban Houses by the Supreme People’s Court, last amended in 2020 (the Lease Contract Interpretation).

Depending on the location of the leased property, the retail lease agreement may in addition be subject to certain local regulations.

There is no statutory minimum duration. The maximum duration is twenty (20) years. In case of expiration of the lease term, the lease agreement may be renewed upon agreement, but the renewed lease term shall not exceed 20 years as of the date of renewal.

Where a lease term is over six (6) months, the lease agreement shall be made in written form. If the parties do not conclude an agreement in written form, the lease shall be deemed as a lease with an indefinite term.

If the parties do not agree on a lease term and the lease term cannot be otherwise determined according to supplementary agreements, other contractual terms or business practice, the lease term shall be deemed indefinite.

According to the PRC Civil Code and the Lease Contract Interpretation, the landlord is entitled to terminate the lease agreement early:

• Where the tenant fails to use the leased property in the prescribed methods or in light of the nature thereof, thus causing losses to the leased property (if the tenant  changes the main body and load-bearing structure of the building or extends the building without authorization, and fails to restore the building to the original status within a reasonable time period required by the landlord, the landlord may terminate the lease agreement and claim loss compensation); or
• Where the tenant sublets the leased property without the consent of the landlord; or
• Where the tenant fails to pay or delays the payment of the rent without justified reasons. In this case, the landlord may require the tenant to pay the rent within a reasonable time limit. If the tenant fails to pay the rent within the time limit, the landlord may terminate the contract.

If the parties do not agree on a lease term and the lease term cannot be otherwise determined according to supplementary agreements, other contractual terms or business practice, the lease term shall be deemed indefinite and either party may terminate the lease agreement at any time but shall notify the other party reasonably in advance. 

In addition, as a general rule, a retail lease agreement can be terminated by either party at any time if a Force Majeure event occurs or the other party fails to fulfil its obligations, rendering it impossible to realize the objectives of the agreement. Also, a retail lease agreement may be terminated for reasons which the parties have defined in the underlying lease agreement or by mutual agreement between the parties.

According to the PRC Civil Code and the Lease Contract Interpretation, the tenant is entitled to terminate the lease agreement early:

• If, due to causes which are not attributable to the tenant, part or all of the leased property is damaged, or lost. In this case the tenant may request a reduction of the rent or not to pay the rent. If the damage to or loss of part or all of the leased property makes it impossible to realize the purpose of the contract, the tenant may terminate the contract; or
• Where the leased property endangers the safety or health of the tenant; even if the tenant knows the leased property does not comply with quality requirements when concluding the contract, the tenant may terminate the contract at any time; or
• If the leased property is unusable due to seizure by authorities, dispute over the ownership of the leased property or violation of mandatory use conditions stipulated by law.

If the lease term is deemed indefinite due to lack of an agreement or business practice, either party may terminate the lease agreement at any time but shall notify the other party reasonably in advance. 

In addition, as a general rule, a retail lease agreement can be terminated by either party at any time if a Force Majeure event occurs or the other party fails to fulfil its obligations, rendering it impossible to realize the objectives of the agreement. Also, a retail legal agreement may be terminated for reasons which the parties have defined in the underlying lease agreement or by mutual agreement between the parties.

There is no statutory automatic right of renewal. Subject to agreement the right of renewal is defined in the retail lease agreement. If the tenant continues to use the leased property after the expiration of the lease term and the landlord does not raise any objection, the agreement is deemed to be extended for an indefinite term.

There is no eviction indemnity payable by the landlord upon the expiration of the lease term unless otherwise agreed in the retail lease agreement.

In principle, the rent agreed in the relevant retail lease agreement is fixed unless otherwise agreed by the parties. However, according to the PRC Civil Code, under any of the following circumstances, it is possible to revise the rent:

• Where repairs to the leased property affect the tenant’s ability to use the leased property, rent shall be correspondingly reduced or the lease period shall be correspondingly extended.
• Where a third party claims rights, making it impossible for the tenant to use or obtain proceeds from the leased property, the tenant may request a reduction of the rent or not to pay the rent.
• If, due to causes which are not attributable to the tenant, part or all of the leased property is damaged or lost, the tenant may request a reduction of the rent or not to pay the rent.

Some lease contracts also contain clauses which allow the landlord to increase the rental on a yearly basis up to a certain percentage.

The landlord is obliged to provide the premises in a condition suitable for the usual and/or agreed use. The tenant may, with the consent of the landlord, make improvements to, or affix attachments to the leased property. Where the tenant makes improvements to, or affixes attachments to the leased property without obtaining the consent of the landlord, the landlord may demand that the leased property be restored to its original condition, or may demand compensation for any losses sustained. If the tenant makes fitting-out works with the consent of the landlord, when the lease term expires or the contract terminates, unless otherwise stipulated by the parties, the fitting-out works that have not formed attachment may be dismantled by the tenant; if damages have been caused to the leased property due to dismantlement, the tenant shall restore the leased property to its original state. If the fitting-out works have formed a fixed attachment to the premises, and the parties have not agreed on how to proceed with them at termination,, the tenant will in principle be entitled to claim the remaining value of the fitting-out works unless the lease contract is terminated due to the tenant’s breach of contract.

In practice, it is common in China that premises are provided by the landlord without fit-out and lease agreements usually provide for a fitting-out period during which no rent is charged by the landlord.

The tenant is required to return the premises to the landlord according to the agreed status or the status after use taking ordinary wear  and tear according to the nature of the premises into account.

The tenant is entitled to sublease the premises or transfer the lease only with the landlord’s consent. Where the tenant subleases the leased property, the lease agreement between the landlord and the tenant shall continue to be in effect, and if the sub-tenant causes damage to the leased property, the tenant shall provide compensation for the losses sustained. Where the tenant sublets the leased property without the consent of the landlord, the landlord is entitled to terminate the lease agreement.

If the landlord knows or ought to have known about the sublease but has not raised an objection within 6 months, the landlord shall be deemed to have agreed to the sublease.

Any change in the ownership of the leased property during the period of the lease shall have no effect on the validity of the lease agreement.

If the landlord intends to sell the leased premises, the landlord shall notify the tenant within a reasonable time limit prior to the sale and the tenant shall, in principle, have  the pre-emption right under the same conditions. The tenant shall be deemed to have waived such right if it has not explicitly declared to purchase the premises within 15 days after being notified by the landlord. It is common to exclude such  pre-emption rights in the lease agreement.

If the landlord sells the leased property without notifying the tenant within a reasonable period or in other circumstances that infringe upon the pre-emptive right of the tenant, where the tenant requests the invalidation of the sales contract of such property concluded by the landlord and the third-party buyer, the people’s court shall not uphold such request (unless there is any other reason to invalidate the contract, such as malicious conspiracy between the landlord and the buyer damaging the interests of the tenant). However, the tenant in such case is entitled to claim loss compensation by the landlord.

There are no mandatory provisions regarding the form    and/or duration of a rental guarantee. In practice, the tenant usually provides a deposit to the landlord in the amount of 2 or 3 monthly rentals which shall be returned, normally without any interest, upon the expiration of the lease term deducting reasonable payables to the landlord.

The landlord shall be obliged to maintain and repair the leased property (other than the fit-out done by the tenant) except as otherwise agreed by the parties, or unless the need for maintenance and repair is caused by a fault of the tenant.

Where the landlord fails to perform the obligations of maintenance and repair of the leased property, the tenant may conduct the maintenance and repair, and the expenses thereof shall be borne by the landlord. Where the maintenance and repair affects the use of the leased property by the tenant, the rent shall be reduced or the lease term shall be extended correspondingly.

Generally, lease of immovable properties (e.g. real estate) is subject to VAT at 9% in China. However, for lease of real estate acquired via direct purchase, donation, shareholder investment, etc. before 1 May 2016, a simplified VAT method at the rate of 5% can be selected. For real estate acquired via direct purchase, donation, shareholder investment, etc. after 1 May 2016, the general VAT method at the rate of 9% shall be adopted.

In China, the parties to the lease shall go through tenancy registration formalities with the competent real estate authorities. The registration is not a condition precedent for the validity of the lease contract. However, f registered lease contracts  prevail over that of non-registered ones. In some regions local legislators have issued local regulations on lease agreements. Thus, when concluding lease contracts, the parties should always check whether there are specific local regulations.