TYGlobe

Case Introduction: In September 2020, Lessor Company A leased its street-front commercial premises to Lessee Company B. The two parties entered into a Housing Lease Contract, which stipulated the liability for breach of contract to be borne by Company B in case of overdue rent payment. Subsequently, as the epidemic caused heavy operational losses to the commercial premises, Company B was unable to pay the rent. Taking the epidemic factor into consideration, Company A agreed that Company B could temporarily defer the rent payment. However, after the end of the epidemic, Company B claimed that there were management defects on the part of Company A and still failed to pay the rent. After the original lease contract expired, the two parties did not formally terminate the lease relationship, and Company B continued to use the commercial premises owned by Company A, thus forming a non-fixed-term lease contract relationship between the two parties. Nevertheless, Company B still refused to pay the rent at this point. Accordingly, Company A issued a notice of contract termination to Company B on the grounds of Company B's breach of contract, and a litigation arose therefrom.

The court finally ruled that Company B shall pay the rent. However, with respect to the liability for breach of contract arising from the termination of the contract, the court held that "Company A exercised its right of termination during the term of the non-fixed-term lease contract, and Company B is not in breach of contract for the termination of the contract. Accordingly, the court rules that Company B shall not bear the liability for breach of contract". Although the court ruled that Company B shall not bear the liability for breach of contract, it failed to clarify whether the breach clauses of the original lease contract can continue to apply during the term of the non-fixed-term lease contract. Therefore, the author conducted research on this issue, and found that there are substantial disputes over the determination of this issue in judicial practice, and judgments rendered by courts across China also hold different stances. The author hereby compiles the research findings into this article for your discussion and reference.

View 1: During the term of a non-fixed-term lease contract, the breach clauses of the original lease contract shall continue to apply. This view is upheld by the people's courts of Beijing, Guangdong and other regions.

The legal basis for this viewpoint is as follows: Article 734 of the Civil Code of the People's Republic of China: Where the lessee continues to use the leased property after the expiration of the lease term, and the lessor does not raise any objection thereto, the original lease contract shall remain valid, except that the lease term shall be an indefinite term.

Case 1: Dispute over House Lease Contract between Huafang Company and Huameiren Company [Case No. (2023) Jing 02 Min Zhong No. 5047]

The court of first instance held that in this case, the lease contract signed between Huafang Company and Huameiren Company expired on December 31, 2020, and the two parties did not sign a new written lease contract thereafter. After the expiration, Huameiren Company continued to use the leased premises and paid rent, while Huafang Company raised no objection thereto. Therefore, the relevant clauses of the original contract remain valid for both parties, but the lease term is converted to an indefinite term, and either party may terminate the contract at any time by notifying the other party within a reasonable period in advance. Pursuant to Clause 14.4 of the original contract, upon termination of the contract, Huameiren Company shall vacate and return the leased premises to Huafang Company; if it fails to move out within the time limit, it shall pay double the rent to Huafang Company on a daily basis. In the present case, Huameiren Company did not move out of the property involved after the expiration of the contract term, and continued to possess and use the leased premises after the termination of the contract. Accordingly, the court upholds all claims of Huafang Company requiring Huameiren Company to pay the overdue occupancy fee and the liquidated damages for overdue vacation of the leased premises.

The Court of Second Instance holds that: The judgment of first instance, which orders Huameiren Company to pay the fee for possession and use of the house and liquidated damages to Huafang Company with reference to the clauses on breach of contract stipulated in the House Lease Contract signed by both parties, is not improper. This Court hereby affirms the aforesaid judgment.

Case 2: Dispute over House Lease Contract between Liwan School Education Co., Ltd. and Lijia Property Management Co., Ltd. 【(2021) Yue 01 Min Zhong No. 23571】

The court of first instance holds that: With respect to liquidated damages, prior to the rescission of the contract, an unfixed-term lease relationship was formed between Liwan School Education Co., Ltd. and Lijia Property Management Co., Ltd. Except for the unfixed lease term, other rights and obligations of both parties under the aforesaid unfixed-term lease relationship shall still be performed in accordance with the provisions of the original *Guangzhou Municipal House Lease Contract*. At present, Lijia Property Management Co., Ltd. fails to pay the possession and use fee on time on a monthly basis as agreed in the contract, which constitutes a breach of contract. The claim of Liwan School Education Co., Ltd. that Lijia Property Management Co., Ltd. shall pay liquidated damages respectively on a monthly basis is legitimate and reasonable, and shall be upheld. However, the rate of 1% per day is excessively high, and is adjusted on a discretionary basis as follows: the rate applicable to the period before August 19, 2019 shall be the benchmark lending rate of the People's Bank of China for the corresponding period; the rate applicable to the period starting from August 20, 2019 shall be the Loan Prime Rate (LPR) published by the National Interbank Funding Center, and the total amount of the aforesaid liquidated damages shall be capped at the principal amount.

The court of second instance holds that: With respect to liquidated damages, Lijia Property Management Co., Ltd. failed to pay the rent for the current month by the 10th day of each month as agreed in the contract between the two parties, which constitutes a breach of contract and has caused losses to Liwan School Education Co., Ltd. arising from fund occupation. Therefore, Lijia Property Management Co., Ltd. shall pay liquidated damages to Liwan School Education Co., Ltd. However, the agreed standard of liquidated damages between the two parties is excessively high. The adjustment made by the court of first instance on the standard of liquidated damages is not improper, and this Court upholds such adjustment. Nevertheless, the court of first instance improperly determined the calculation period of the liquidated damages, and this Court hereby corrects such determination. The appeal claim of Lijia Property Management Co., Ltd. for exemption from paying liquidated damages lacks legal basis, and this Court does not support such claim.

Viewpoint 2: During the term of a non-fixed-term lease contract, the default clauses under the original lease contract shall not continue to apply. This viewpoint is upheld by courts in Shanghai, Anhui and other regions.

The main grounds for this view are as follows: First, liability for breach of contract is a form of strict liability, which shall be explicitly agreed upon by both parties. Second, the liability for breach of contract stipulated in the original contract is formulated for the specific lease term thereof. Upon expiration of the original lease term, the parties have separately formed a non-fixed-term lease relationship. The starting point for calculating the liability for breach of contract is linked to the agreement on the time of payment, while the agreement on the time of payment is ambiguous. Therefore, the liability for breach of contract under the original contract shall not continue to apply.

Case 1: Dispute over Housing Lease Contract between Shanghai A Co., Ltd. and B 【(2013) Hu Yi Zhong Min Er (Min) Zhong Zi No. 972】

The Court holds that: Pursuant to the law, liability for breach of contract is an explicit and special type of strict liability, referring to the civil liability that a party shall bear to the other party where, as agreed by the parties to the contract, such party fails to perform its contractual obligations or the performance thereof is not in conformity with the contractual stipulations. Accordingly, where the parties do not stipulate breach clauses in the contract, no liability for breach of contract shall arise. The non-fixed-term lease contract converted from the original lease contract upon expiration is a new contract, hence the breach clauses under the original lease contract shall not apply to the non-fixed-term lease contract. Therefore, B's claim for late payment penalty based on the stipulations of the original lease contract is contrary to the law, and the court of first instance cannot uphold such claim.

Case 2: Dispute over a House Lease Contract between Wang Guotai and Fei Yuhuan [(2020) Hu 0107 Min Chu No. 4301]

The Court holds that: With respect to the plaintiff's claim that the deposit shall be used to offset the liquidated damages, given that the liability for breach of contract stipulated in the lease contract between the two parties only applies to the circumstance of early termination of the contract within the agreed lease term, while the two parties formed a non-fixed-term lease relationship after the expiration of the contract term in this case, the aforementioned breach of contract clause shall no longer apply.

Case III: Case of Dispute over House Lease Contract between Zheng Moumou and Li Moumou [Case No.: (2018) Wan 1323 Min Chu No. 1698]

The Court holds that: After the House Lease Contract signed by the plaintiff and the defendant expired on February 22, 2014, the two parties did not conclude a new contract, thus forming a non-fixed-term lease relationship. As the two parties had no explicit agreement on liquidated damages, the liquidated damages clause under the original lease contract shall not continue to apply. In addition, the liquidated damages clause agreed in the original lease contract was formulated specifically for the contract with the fixed lease term at that time, and shall not apply to the non-fixed-term lease contract formed after the expiration of the original lease contract. Accordingly, the Court does not uphold the plaintiff's claim for liquidated damages.

In a non-fixed-term tenancy relationship, the term of use cannot be ascertained in the absence of relevant stipulations. Furthermore, after the formation of the non-fixed-term tenancy relationship and before the plaintiff issued the notice to terminate the tenancy relationship, the two parties failed to reach a consensus on the specific term of the rent payment cycle. Therefore, this Court holds that the clauses concerning rent payment methods under the Lease Contract shall be deemed as ambiguously stipulated with respect to the non-fixed-term tenancy relationship between the parties. Pursuant to the provisions of the laws of China, the non-fixed-term tenancy term between the parties in this case is less than one year, hence the defendant shall pay the rent upon expiration of the tenancy term. The plaintiff claims that the defendant shall pay the penalty for overdue payment covering the period from April 2015 to December 2015. However, the defendant was not obligated to pay rent during the aforesaid period. Accordingly, this Court holds that the defendant is not liable for paying the claimed penalty for overdue payment.

Conclusion: There is no unified adjudication standard in judicial practice on whether the breach clauses of the original lease contract continue to apply during the term of a non-fixed-term lease contract, nor are further interpretative provisions on this issue stipulated by law. In the process of handling specific cases or conducting leasing activities, reference shall be made to the existing adjudication approaches of courts in various regions.

Lawyer's Advice:

1. In a housing lease relationship, both the lessor and the lessee shall take the initiative to require the conclusion of a written *Housing Lease Contract*, which explicitly stipulates such contents as rent, lease term, liability for breach of contract, etc. Upon expiration of the contract, the two parties shall also confirm in writing whether to renew the contract and the conditions for renewal, otherwise both parties may bear the adverse consequences arising from the failure to conclude a written contract.

2. Upon expiration of the lease term, if the lessee does not intend to renew the lease, it shall notify the lessor in writing without fail and vacate the leased premises within the time limit stipulated in the contract. Otherwise, even if no business operation or residence is conducted therein, the continued occupation of the premises may be deemed by the people's court as continuation of the leasehold, which constitutes a non-fixed-term lease contract, and may further give rise to payment obligations of rent, liquidated damages and other expenses.

3. Where the lessor discovers that the lessee has no intention to renew the lease, or the lessee fails to explicitly indicate whether to renew the lease through passive means, the lessor shall timely confirm the termination of the lease contract with the lessee, take back the leased premises, or demand the lessee to renew the lease contract. Otherwise, during the period when the lessor has possession of the leased premises but does not actually use the same, it may be deemed that the lessor fails to take timely measures leading to the expansion of losses, and such part of losses shall be borne by the lessor.