Legal Analysis upon the Reduction or Exemption of Rent during the Epidemic Situation

To deal with the domestic epidemic situation in China, local governments have issued a series of control measures such as the delay of work resumption, traffic control, close crowded places etc. Under the trend of strict control, most shopping malls have chosen to close. By January 29, 2020, some large-scale commercial real estate companies such Wanda, Baoli, Red Star Macalline, China Resources Land Limited have announced to reduce or exempt rent upon their subordinate commercial projects. Local governments have also issued policy documents to reduce or exempt part of the rent for eligible micro, small and medium-sized enterprises during the epidemic period.

Therefore, what is the legal basis for the reduction or exemption of rent? This article will answer this question on the following aspects: Force Majeure; Change of Circumstances and Rent Reduction under Different Types of Lease Contracts. We will also attach the latest policies in major cities such as Beijing and Shanghai in relation to rent reduction or exemption.

1. Legal Basis for Rent Reduction or Exemption during Epidemic Period

Generally speaking, there are two legal bases for claiming rent reductions and exemptions through litigation: one is claiming that the epidemic is a force majeure situation; the other is claiming that the epidemic constitutes a change of circumstances.

1. Force Majeure

• Does this epidemic situation belong to force majeure?

The government administrative behavior caused by this epidemic shall belong to “force majeure”.

According to the General Rules of Civil Law, force majeure refers to “any objective circumstance that is unforeseeable, unavoidable and insurmountable”. The outbreak of Covid-19 has directly led to administrative actions of the government departments such as the closure of cities, the implementation of traffic control and the extension of vacations. These administrative actions could not have been foreseen at all and are fully consistent with the three characteristics of force majeure, which are unpredictable, unavoidable and insurmountable. On February 10, 2020, the law working committee of the Standing Committee of the National People’s Congress stated that failure to perform the contract due to the epidemic was unforeseeable, unavoidable and insurmountable force majeure.

2)  What legal consequences will be caused by force majeure?

Generally speaking, according to Article 117 of Contract Law, “where a contract is not able to be performed due to force majeure, the liabilities shall be exempted in part or in whole in light of the effects of the force majeure, except as otherwise provided by law.” That is to say, during the epidemic period, if the lessee is completely unable to use the leased house due to the epidemic, the rent can be deduced or exempted.

For this reason, we have combined disputes related to the lease contract which occurred during the SARS period. Most of the cases support rent reduction, some support rent exemption, and some support that both parties shall reasonably share the loss of rent, some of which are exempted. The judgment point of view outlines: if the contract can be performed, it will be adjusted according to the Principle of Fairness; if it cannot be performed, liabilities will be exempted according to force majeure.

2.  Change of Circumstances

1)  Can the principle of change of circumstances be applied during this epidemic?

According to Article 26 of Interpretation II of the Contract Law, to apply the principle of change of circumstances, the following conditions shall be simultaneously met:

1. a) After the establishment of the contract, significant changes have taken place in the objective situation;
2. b) This kind of change is unforeseeable when the parties concluded the contract and does not belong to commercial risk;
3. c) It is obviously unfair or the purpose of the contract is unable to be achieved for one party in continuing to perform the contract.

If the contract can be continuously performed but will have a significant impact on the rights and interests of one party due to the epidemic, the principle of changed circumstances can be applied (Article 26 of the Interpretation of the Supreme Court on Certain Issues Concerning the Application of the PRC Contract Law (II) and Article 533 of the Civil Code (Draft)) to request reduction of rent. In judicial practice, the court has a greater discretion to determine the changed circumstances, which needs to be determined in combination with the impact of the epidemic on the actual operation.

2) What are the legal consequences of applying the principle of changed circumstances?

According to Article 26 of the Interpretation of the Supreme Court on Certain Issues Concerning the Application of the PRC Contract Law (II), “the principle of change of circumstances refers to where a party to a contract petitions the court to modify or terminate the contract on the grounds that the continuous performance of the same is obviously unfair to the party or the purpose of the contract will not be realized due to occurrence of any material change of circumstances that is unforeseeable, not caused by force majeure, and not a commercial risk after the conclusion of the contract, the court shall decide whether the contract shall be modified or terminated according to the Principle of Fairness on a case-by-case basis.”

If the government does not force the closure, but the operation is significantly affected by the epidemic, and the continued operation may cause the gathering of crowds, the spreading of the epidemic and obviously adverse effects to the lessee, such as in relation to hotels, bars etc., which may cause a sharp reduction in the number of customers and business difficulties due to the epidemic. In this scenario, if the lessee chooses not to continue to use the leased house, then the lessee can also request to reduce or exempt partial rent according to the change of circumstances.

1. Case study of rent reduction during the SARS period
2. Typical cases

• Rent reductions and exemptions based on force majeure

Article 117 of the Contract Law of the PRC stipulates, “where a contract is not able to be performed due to force majeure, the liabilities shall be exempted in part or in whole in light of the effects of the force majeure, except as otherwise provided by law. If the force majeure occurs after one party has delayed its performance, the liabilities of the party shall not be exempted.” In this case, the lessee operated a hotel, in April 2003, the hotel closed for five months to fight against the SARS virus. In May 2014, the hotel was closed for another five months due to the expansion and reconstruction of Yuhuang Road in front of the door. Those situations were unforeseen, unavoidable and insurmountable objective conditions at the time of concluding the contract, which belonged to force majeure. The lessee had no operating income during the period of force majeure, the rent for the 10 months was exempted from the operating income according to law, which was in total 11÷12×10≈91667 Yuan RMB. 【Case Number: （2018）Jin 04 Minzhong No.2272】

2)  Rent reductions and exemptions based on the principle of change of circumstances

According to the judgment, the “SARS” epidemic was an unpredictable disaster. The hotel rented by Li Peiyan, the lessee, was closed, resulting in objective economic losses, which was signed and confirmed by the members of the two committees of Xiguan neighborhood committee. The loss was beyond the scope of market risk and the principle of change of  circumstances applied in the original trial and was appropriate to reduce part of the rental fee, which was supported by law. 【Case Number：（2018）Lu 06 Minzhong No.268】

3)  Rent reductions and exemptions based on the Principle of Fairness

According to the judgment, based on the fact that the SARS epidemic happened in the spring and summer of 2003 in China, and the entertainment industry closed down in response to the requirements of the government to prevent and control SARS, the lessee claimed that the rent for those three months shall be exempted, which was supported by the court. Therefore, the rent for the three months shall be deducted from the rent owed by the lessee. 【Case Number：（2004）Hu’erzhong Minzhong No.354】

4)  Rent reductions and exemptions based on continuous performance

With respect to the amount of lease fees payable by the lessee, a dispute between the parties arose in relation to whether the rent can be exempted if the business was closed during the SARS period. According to the regulations of the local cultural authority, it was reasonable for the lessee to ask for rent exemption during the period of “SARS”. Considering that both parties fulfilled their obligations before and after the event and the lessor did not immediately ask for the rent during the period, the court of first instance found that it was reasonable to deem the lessor to agree to reduce the rent. 【Case Number：（2008）Shaozhong Minyizhong No.143】

5)  Rent reductions and exemptions based on the lessor’s approval

On May 28, 2003, the People’s Government of Xiamen formed meeting minutes on issues related to wildlife rescue. Influenced by “SARS”, the ticket revenue of Hai Cang Wildlife Park (The Lessee) decreased sharply, and the wildlife raised in the park faced a survival crisis due to hunger, which attracted great attention from the Xiamen municipal government. Hai Cang Management Committee (The Lessor) was requested to waive the admission of Xiamen Hai Cang Wildlife Park land rent for half a year from 1 April to 30 September 2003. Hai Cang Management Committee also sent representatives to attend the aforementioned meeting and the minutes formed by the meeting should therefore be consciously performed by the Hai Cang Management Committee.

2.  Legal analysis

The main legal basis for the disputes over lease contracts during the SARS period is the Supreme People’s Court issued on June 11, 2003, Article 3 (3) of the Notice on Doing Good Work in the Relevant Trial and Execution of the People’s Court during the Prevention and Treatment of SARS (法[2003]72号) (now invalid), ” As a result of the SARS epidemic, contract disputes that have a significant impact on the rights and interests of one party due to the performance of the original contract may be handled on the basis of the Principle of Fairness according to the specific situation. Disputes arising from the non-performance of the contract directly caused by the administrative measures taken by the government and relevant departments to prevent and control the SARS epidemic, or the non-performance of the contract parties caused by the influence of the SARS epidemic, shall be properly handled in accordance with the provisions of Article 117 and Article 118 of the Contract Law of the PRC.” Although the Notice is now invalid, its applicable principles are still worth studying in light of the current Covid-19 situation.

According to the above-mentioned typical disputes in regards to the performance of lease contracts during the SARS epidemic, the court’s judgments mainly focus on whether the SARS epidemic actually hinders the performance of the contract and whether the continuous performance is reasonable and fair, so as to realize the reasonable demands of the parties. Up until now, the scope and impact of this Covid-19 outbreak has exceeded that of SARS in 2003, and its impact on the performance of lease contracts is bound to be greater than that of SARS. In view of the issues surrounding rent reductions and exemptions under the Covid-19 epidemic, it shall be analyzed from the aspects of whether the epidemic constitutes force majeure or change of circumstances and whether the continuous performance is obviously unfair.

• Rent Reduction under Different Types of Lease Contracts

Firstly, the lessee shall judge the rent relief and liability exemption under different types of lease contracts according to the actual impact of the epidemic on the contract. Regardless of whether a partial or full exemption shall be granted, it shall not exceed the scope of the epidemic impact actually occurred. If it is not the epidemic that hindered the contract from being performed or destroying the purpose of the contract, it shall not be taken as the reason for the reduction or exemption. Therefore, we will discuss the following four situations for different types of lease contracts.

• Residential

Generally speaking, the amount of rent involved in a lease contract dispute for a residence is small. In practice, the rent reduction of such contracts is generally solved through negotiation between the lessee and the lessor.

The rent in this kind of contract is to acquire the rights of use and exploitation and the right of residence and dwelling within the property. Whether the rent can be reduced depends on the extent to which the residential function is affected by the epidemic. During the pneumonia epidemic, due to the national restrictions on transportation and premises, if some communities adopt closed-management in order to restrict the entry of non-local lessees, then the contractual purpose of the lease contract is unable to be achieved objectively, if the lessee is then still required to continue to pay the rent for this period, it will be deemed unfair. Therefore, the lessee can claim to reduce part of the rent as per the Principle of Fairness. If  the local government and the residential area do not prohibit the lessee from using the house, but only carry out necessary restrictions and inspections upon their access, which does not affect the realization of the residential function of the property, the lessee will have no right to claim for a rent reduction.

• Property for the Use of Office Buildings

For lease contracts upon the property for the use of offices, specifically for official areas, the lessee has the right to claim the corresponding rent reduction, as the case may be, from the lessor under the basis of “Force Majeure”.

Lessees as companies and enterprises, that rent plants, office buildings, towers and other places for official use are greatly affected by the epidemic. The government has successively issued documents to extend the Spring Festival holiday, delay the resumption of work, and is promoting home-based office work and other relevant measures, hindering business entities organizing their employees to work normally..

Taking Shanghai as an example, the Shanghai municipal government explicitly requires that all enterprises in the region shall return to work no earlier than 24:00 on February 9, 2020. When enterprises arrange to return to work, they need to apply to the related departments in order to be placed on record, additionally, non-local personnel returning to work from outside the region should serve a home-based quarantine of 14 days before returning to work. Therefore, even if the enterprise resumes operation, a number of employees may not be able to return to work in a timely fashion. Meanwhile, the management body of the leased property will also issue corresponding management documents to implement the conditions and time for the resumption of work, which will be generally later than the resumption time stipulated by the government. At this moment, due to the impact of the epidemic situation and the restrictions on the resumption of work by the government and the management entities, the enterprise will be unable to resume work normally, then the situation will generally be deemed as a Force Majeure event. The enterprise may, as per the local policies and under the Principle of Fairness and Reasonableness, claim for a reduction or exemption of the corresponding rent from the lessor. A reasonable scope of rent reduction shall be determined as per the relevant policies issued by the local government, the plants’ managements etc., or after full consultation.

• Property for the Use of Restaurants, Entertainment, Leisure Consumption and Other Business

For this kind of lease contract, the lessee can, under the Force Majeure basis, claim the corresponding rent reduction during the period of suspension of business from the lessor as the case may be. In legal practice, the Principle of Fairness can also be used as a supplementary means to reasonably determine the standard and scale of rent reduction as the case may be.

The negative impact of the pneumonia epidemic on the domestic physical economy is self-evident. In order to avoid the spread of the epidemic, local governments have taken measures to shut down or restrict the operation of restaurants, cinemas, bars and other densely populated places. Due to the above-mentioned measures, lessees are unable to actually carry out business activities, their income is basically equal to zero and they will also need to bear losses related to their raw materials and the procurement of products.

When the performance of the lease by both parties is hindered within a certain period due to the restrictions of the epidemic situation and administrative measures of the government, if the lessee’s purpose of renting and using the commercial site based on the lease contract is unable to be achieved in a phased manner, which constitutes a Force Majeure event, the lessee may claim to reduce the corresponding rent during the period of suspension.

• Property for the Use of Factories, Workshops and Other Areas of Production and Operation

For this kind of lease contract, unless otherwise agreed by the parties, the lessee can claim the corresponding rent reduction according to the arrangement of force majeure and regional policy documents.

In the case of factories, workshops and other areas of production and operation, the lease contract signed by the lessee and the lessor generally has a long term, and both parties establish a relatively stable basis for performance. Affected by the government’s measures such as extending holidays, delaying the resumption of work and restricting the flow of personnel, which hinder the enterprise from actually engaging in production and operation in the property for production and operation purposes, the lessee may under the basis of Force Majeure or contractual stipulations, claim for rent reduction during such period as stipulated in the contract. Alternatively, both parties may negotiate for adequate compensation by reducing the rent for the following period, extending the lease term appropriately or via other means.

• Attached：Rent Reduction Policies in Major Cities