Law and regulation of rental agreements in China during Covid-19

Updated on 07.04.2020.

Safe as otherwise provided for in the relevant lease, the lessee is generally not entitled to rent deduction due to a decline of its turnover because of COVID-19, unless there are further circumstances such as applicable governmental measures, which could result into an event of force majeure (see question 3). 

There are administrative regulations applicable on both national and local levels encouraging but generally not forcing the (non-state-owned) lessors to reduce or exempt the rent especially for small- and medium-sized enterprises. However, the lessee is not entitled to a rent reduction in the case of any temporarily closing of the leased space at its own discretion, unless otherwise agreed in the lease.

In general, the closing of leased space following an order by the Government as a result of COVID-19 can be deemed as force majeure and the lessee could be eligible for rent reduction. According to Art. 117 Chinese Contract Law, force majeure refers to the objective circumstances that are unforeseeable, unavoidable and insurmountable. Where a contract cannot be performed, the liabilities shall be exempted (in part) considering the effects of the force majeure. However, based on the legal praxis in the PRC, the evaluation of the effects of force majeure are determined by the competent courts on a case by case basis.

The lessee is entitled to provide the lessor with different kinds of securities, including bank guarantee, but it is general practice to agree on a cash deposit as security. 

Generally, the contractual obligations of the lessee remain fully effective and enforceable during the COVID-19 epidemic, unless otherwise provided for in the relevant lease. The tenant can apply statutory rules on force majeure or the general doctrine of frustration. The lessee may be entitled to rescind the lease, if the purpose of the contract is rendered impossible to achieve due to force majeure. With respect to the doctrine of frustration, where any significant change of the objective circumstances have taken place after the formation of a lease which could not have been foreseen by the relevant parties at the time of entering into the contract (except for any force majeure events), rendering the continuance of the performance of the lease manifestly unfair or impossible to realise the objective of the contract, the Chinese People's Court shall confirm whether the lease shall be adjusted or rescinded in accordance with the principle of justice subject to the circumstances of the individual case.