MyLink Law Office

The lockdown in Shanghai since March 2022 has last for almost 2 months. During the lockdown, almost all companies in Shanghai are in the status of suspension in its operation. Many companies want to understand if they still need to pay the rental for the period of lockdown, and if any chance such rental can be reduced/exempted. In this regard, we would like to analyze some typical questions arising in accordance with the regulations promulgated by the Shanghai government and judicial bodies.

1. I heard that if the property our company has leased belongs to a state-owned company, we can enjoy rental exemption. Is this policy for all lessees?

No. In accordance with the Implementation Rules for Reducing and Exempting rental by Shanghai State-owned Enterprises for Small and Micro-Enterprises and Individual Business, the rental exemption is available for small and micro-enterprises and individual business. Small and micro-enterprises shall be defined according to the headcount and business revenue of the enterprise, and the criteria varies for different industries. For instance, in catering industry, any company with headcount less than 100 and business revenue less than 20 million RMB shall be deemed as small/micro-enterprise, and is eligible for rental exemption.

In addition, according to the latest notice by the Shanghai government, this policy also applies to private-run non-enterprise units who lease property belonging to state-owned enterprises and encounter business difficulty.

Therefore, for the lessee, the first step is to check if it is eligible for rental exemption.

2. Not sure if the property our company leases is the one belonging to state-owned company. How can we find out?

The first step is to find out who is the owner of the property. Sometimes, the landlord may not be the owner of the property, in particular in the event the property is subleased. If the landlord or the sub-lessor is a state-owned company while the owner of the property is not a state-owned company, then the rental exemption is not available.

If you have known the owner of the property, but not sure if it is a state-owned company, you can visit and search the website of Shanghai State-owned Assets Supervision and Administration Commission https://www.gzw.sh.gov.cn/shgzw_gqzc/index.html, or call the hotline 021-54186103 for checking.

3. I heard that 3 months rental exemption is available if the property is owned by a state-owned company, and additional 3 months rental exemption can be granted if the required conditions are met. Our company suffers big loss this year, and what documents are required if we want total 6 months rental exemption?

According to the latest notice by the Shanghai government, total 6 months rental exemption is available to small and micro-enterprises, individual business and private-run non-enterprises units who lease property belonging to state-owned companies. This notice simplifies the formality relating to application for rental exemption, and no proof material is required any more. However, if the term of lease in 2022 is less than 12 months, the rental exemption shall be granted on pro-rata basis.

4. If the property our company leases belongs to a non-state-owned company, can we ask for rental exemption?

If the property cannot be used as usual due to the impact of pandemic, the lessee can first of all negotiate with the landlord for rental reduction/exemption for the lockdown period, and if the negotiation is not successful, the lessee can file to the court or arbitration commission according to the lease contract and claim for rental reduction. Generally speaking, such claim can be reasonably supported.

In addition, if the lease contract is a long-term contract, the business of the lessee has been affected by the pandemic, which results in no revenue or material reduction of revenue, while payment of original agreed rental seems not fair to the lessee, the lessee is allowed to negotiate with the landlord for reduction of the rental. However, if the no agreement can be reached, the lessee is entitled to file to the court or arbitration commission according to the lease contract and ask for change to the rental rate. The claim for reduction of rental can be probably supported.

5. Our company leases apartment for the employee. Is there any chance to request for rental reduction/exemption for the period of lockdown?

If the apartment has been used by the employee during the period of lockdown, generally speaking the request for rental reduction/exemption is not feasible.

However, if the apartment cannot be used by the employee due to the lockdown, the company is entitled to rental reduction/exemption. If the lessor does not agree, the lessee can file to the court.

6. We are a small company and use shared office, and can we ask for rental reduction/exemption?

Sometimes the contract relating to shared office is a kind of service contract, instead of lease contract. Thus, even if the property belongs to a state-owned company, the rental exemption policy does not automatically apply.

However, as service provider of the shared office is not able to provide usual service during period of lockdown, you can request for reduction/exemption of service fee on the ground of no service is provided for the period of lockdown, which in our opinion is reasonable from the legal perspective.

7. Due to the impact of the pandemic, our company business is affected seriously, and we are not able to pay the rental in time. Now the landlord is asking for penalty for the late payment, and terminates the lease contract. Is the landlord entitled to do so?

Usually a lease contract may include penalty clauses relating to late payment of rental by the lessee, and grant the landlord right to terminate the contract unilaterally if the rental is not paid within certain period. However, if the landlord intends to ask for penalty or terminate the contract on the ground of late payment of rental by the lessee during the period of lockdown, such claim will not be supported by the court.

8. Our company business is affected too much by the pandemic and we are going to close the operation in Shanghai. Under such circumstances, can we terminate the lease contract with the landlord early?

Currently the law does not grant the lessee any right to terminate the lease contract unilaterally under the pandemic. Thus, the terms of the lease contract shall prevail in terms of early termination. In addition, the lessee can negotiate with the lessor how to terminate the lease contract early.

However, if the pandemic brings material impact to the business of the lessee, and it is unfair to the lessee to continue the lease contract with the original rental condition, and after negotiation with the lessor which is not successful, the lessee can file to the court or arbitration commission according to the lease contract and request for termination of the lease contract.

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.