How to seek rental reduction/exemption under the COVID-19 situation
Author: Erex Chen, Doris Zhang
Due to COVID-19, the production and operation of most companies are affected. Some of them have to suspended business operation. On the other hand, the costs such as rental and salary for the employees remain. Under such circumstances, the pressure for survival increases rapidly.
The operation suspension leads to the result that the leased property by the company cannot be utilized as usual. So is it possible the company, as the lessee, may request for exemption/reduction of rental so that to reduce its business costs? Is there any policy made by the government in this regard?
SEMs who lease state-owned commercial properties are eligible for rental exemption
Due to COVID-19, local government at provincial levels has issued policies on rental exemption for small and medium-sized enterprises (“SMEs”) who leased stated-owned commercial properties. For instance, according to Several Policies and Measures for Fully Controlling the Epidemic Situation and Supporting the Smooth and Healthy Development of Enterprises in Shanghai issued by Shanghai government on February 7, 2020, SMEs that lease stated-owned commercial properties in Shanghai (including development zones and industrial parks, entrepreneurial bases, and science-tech business incubators) will be exempted with rental payment for February and March of 2020.
Based on above policy, the conditions for enjoying the rental exemption in Shanghai include:
（1）The leased property shall be a state-owned commercial property. Usually it can be confirmed if the property is registered under the name of a state-owned company. If you are not sure of the identity of the landlord (namely, whether it is a state-owned company or not), you may search through the website www.gzw.sh.gov.cn.
In addition, if the property owned by the state-owned company is leased by a SME though a second landlord, the SME as the lessee is still able to enjoy the rental exemption from the second landlord instead of directly from the landlord.
（2）The lessee that may request for rental exemption shall be a SME. So, how to define a SME? According to Provisions on Classification Standard for Small and Medium-sized Enterprises jointly issued by the Ministry of Industry and Information Technology and other departments, here are some examples to identify a SME:
- Heavy industry: staff headcount＜1000, or business revenue＜CNY 400 million;
- Wholesale trade industry: staff headcount＜200, or business revenue＜CNY 400 million;
- Retail industry: staff headcount＜300, or business revenue＜CNY 200 million;
- Restaurant and catering industry: staff headcount＜300, or business revenue ＜CNY 100 million;
- Software and IT industry: staff headcount＜300, or business revenue ＜CNY 100 million;
（3）So far the rental for February and March of 2020 can be exempted.
Is it possible for the company that leases a non-stated-owned property to request for rental reduction?
Obviously, currently most companies whose leased properties are not qualified to enjoy rental exemption. However, due to the COVID-19, indeed many companies are not able to make use of the leased properties properly, or the business relating to the leased property is affected seriously. Then, are they still able to ask for rental reduction? In this aspect, we would like to analyze in different scenarios:
（1）The leased property/business relating to the leased property is ordered to shut down by the government due to the impact of COVID-19.
For instance, according to the government policy in Hubei province, except for enterprises essential to national economy and people’s livelihood, all enterprises in Wuhan city are not allowed to resume work before 24:00PM March 20th. This restriction covers entertainment venues, training institutions, restaurants, etc.
Thus, if the leased property cannot be used due to above restriction, we think the lessee is entitled to request for reduction of the rental on the ground of Force Majeure event.
（2）The business in relation to the leased property is affected due to the decrease of customer flow as result of COVID-19
Businesses like hotels, bars, restaurants, shopping malls, training institutions, etc. heavily reply on customer flow. If the business revenue decreases due to the COVID-19, the lessee is also allowed to request for reasonable decrease to rental in the principle of fairness/change of objective circumstances.
（3）Rental reduction for other commercial properties
For other properties, such as office buildings and warehouses, usually as the use of the property is not affected, so it is difficult to request for rental reduction in such case.
Any chance to request for rental reduction in relation to residential property leased by a company?
Sometimes, a company may provide its employee the leased residential property as part of employee benefit. If such property cannot be used as usual, can the company request for rental reduction? In this case, we would like to analyze this in different scenarios:
（1）Property which is leased in the name of the employee
In such case, the employee concludes the lease agreement in his own name, and the company reimburses the rental for the employee against the invoice of the rental.
Let’s assume that the employee is not able to use the property due to the COVID-19. For instance, the employee is not able to return to the place where the leased property is located due to the travelling restriction, and therefore is not able to use the property as usual, we think the employee can request for rental reduction on the ground of Force Majeure event.
（2）Property which is leased in the name of the company
In such case the company concludes the lease agreement in its name and allows the designated employ to use it. So if the employee is not able to use the property due to the COVID-19, can the company request for rental reduction? We think the answer can be found in the following situations:
Let’s assume that in the signed lease agreement, there is a clause which specifies the name of the employee who shall be the actual user of the property, then if such employee is not able to return and use the property, we think the company is entitled to request for rental reduction on the ground of Force Majeure event. However, if no name of employee as the actual user of the property is specified in the lease agreement, it could be difficult to request for rental reduction on the ground of Force Majeure event even if the actual user is affected by the COVID-19, as the landlord may argue any other employee of the company is allowed to use it.
This article is published solely for the interest of friends and clients and should not be relied upon as the legal advice of any kind from us. Should you have any questions about this article, please contact the partner of Mylink Law Office.
Erex Chen, Managing Partner
Doris Zhang, Attorney-at-law