Lease Contracts Under Chinese Civil Law

Lease contracts in China are governed by Book III (Contracts) of the Civil Code, which dedicates Articles 703-734 to leases (zulin hetong, 租赁合同). The Civil Code preserved the structure of the 1999 Contract Law’s lease provisions while introducing important innovations reflecting judicial practice and social policy objectives.

Scope and Definition

A lease contract is defined as a contract by which the lessor transfers the right to use the leased property to the lessee in return for rent (Article 703). The lease may apply to movable or immovable property, though the most significant provisions relate to real property leases. The Civil Code imposes a maximum lease term of 20 years (Article 705), with any term exceeding 20 years reduced to 20 years. This limitation is designed to prevent long-term alienation of property rights and to ensure periodic renegotiation of lease terms.

The lease term must be specified in the contract. If no term is specified or the term cannot be determined, the lease is treated as an indefinite term (bu dingqi zulin), which may be terminated by either party at any time upon reasonable notice (Article 730). This default rule encourages parties to specify lease terms while providing flexibility where terms are not agreed.

Rights and Duties

The lessor’s primary duties include: delivering the property in a condition suitable for the agreed use (Article 708); maintaining the property throughout the lease term (Article 712); and warranting that the property is free from defects and encumbrances affecting the lessee’s use (Article 708). The lessor is liable for failure to deliver, delivery of defective property, or failure to repair.

The lessee’s primary duties include: paying rent on time (Article 721); using the property in accordance with the agreed purpose (Article 709); taking reasonable care of the property (Article 714); and returning the property in its original condition upon termination, subject to normal wear and tear (Article 733). The lessee must notify the lessor of any need for repairs and allow the lessor access for maintenance.

Article 713 addresses the lessee’s right to conduct emergency repairs if the lessor fails to repair and the property requires immediate repair. Where the lessor fails to repair and this affects the lessee’s use, the lessee may reduce rent or extend the lease term. Where the property is unfit for use due to repair requirements, the lessee may terminate the lease.

Subleasing

Subleasing (zhuan zu) is permitted only with the lessor’s consent (Article 716). Where the lessee subleases without consent, the lessor may terminate the lease. Where the lessor consents to subleasing, the original lease continues in effect, and the sublessee assumes obligations toward the lessor as a guarantor for the lessee’s performance.

The Civil Code’s approach to subleasing balances the lessee’s commercial flexibility with the lessor’s interest in controlling who occupies the property. In commercial leases, subleasing rights are often negotiated as a key term. The original lessee remains liable to the lessor even after subleasing, creating continuing exposure for the original lessee.

Rent and Termination

Rent is payable at the time and place agreed, and in the currency agreed. Where the lease term is less than one year, rent is payable at the expiry of the term. Where the term exceeds one year, rent is payable annually. The lessor must provide receipts for rent payments.

The lessor may terminate the lease where the lessee fails to pay rent within a reasonable period after notice (Article 722); uses the property in a manner inconsistent with the agreed purpose; or causes damage to the property (Article 711). The lessee may terminate where the lessor fails to deliver the property; the property does not conform to the agreed use (Article 708); or the property is subject to claims by third parties (Article 723).

Priority of Renewal

Article 734 of the Civil Code grants the lessee a right of first refusal to renew the lease upon expiry on the same terms. Where the lessor intends to continue leasing the property, the lessee has priority to lease on the same conditions offered to third parties.

This provision has been particularly important in commercial leases, where lessees often invest significantly in premises and depend on continuity of location. Courts have held that the right of first refusal applies only where the lessor elects to continue leasing the property on the commercial market; it does not require the lessor to lease the property at all. The lessor must give the lessee reasonable notice of renewal terms and of any third-party offers.

Commercial vs Residential Leases

The Civil Code’s lease provisions apply to both commercial and residential leases, but important distinctions exist in practice. Residential leases are subject to additional protections under various regulations, including limits on rent increases during the lease term, protection against eviction during the lease period, and requirements for written leases with specified terms.

Commercial leases typically involve greater freedom of contract, with parties able to negotiate terms for rent adjustment, maintenance responsibilities, subleasing rights, and termination provisions. Commercial leases increasingly include provisions for rent adjustment based on CPI or market rates, provisions for early termination, and specific dispute resolution mechanisms.