Legal risks for foreign investors leasing privately owned property

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Within the large number of housing properties purchased by foreign investors in China, there are a significant amount being operated by leasing. As the Chinese government deploys macro-control on the real estate market, there are certain limitations restricting foreign investors on investing and operating housing properties. Some regional governmental departments only allow self-use of properties owned by foreign investors, and forbid the transfer and leasing of these properties. The following is a real case: Contract_with_gavel

Foreign company A signed a leasing contract with company B, agreeing that A shall lease its property in Beijing to B and B shall pay its rent accordingly. B moved in to the property after paying the bond and the first month’s rent. When B attempted to register its property as the business address for its subsidiary company, the government registry refused to process the application. According to the regulations of the Beijing municipal government, A had no right to lease its property, as it is a foreign company. A dispute occurred and, as negotiations failed, the case was ultimately referred to the Beijing Arbitration Commission (BAC). B requested the tribunal to terminate the contract, and A argued that it did not agree and that it was not stated in the contract that B was going to operate a business in the property. In addition to that, B did not mention it when signing the contract. A therefore did not agree to compensate B’s losses and raised a counter-claim for outstanding rent.

The tribunal found that the focus of the case is the question of which party should be responsible for not being able to register the property as a business and causing the non-fulfilment of the contract. According to the Notice on the Purchasing of Housing Properties by Foreign Organisations and Foreigners jointly issued by the Beijing Municipal Construction Commission and four departments, housing properties purchased by foreign organisations or foreigners can only be used by the purchaser, and cannot be transferred or leased. The tribunal found that due to the above regulation, objectively speaking, the property was functionally limited, and it is caused by the special identity of A.

under the circumstances, A did not disclose the nature of the property and hence B was not able to fulfil the purpose of entering the contract. A therefore has the responsibility of causing the dispute. Even if the contract did not state that A should assist or be responsible for B’s business permit, B using the property for business purposes should nevertheless be foreseeable to A. But as B did not make full inquiries into the property before entering into a contract, it should be partially responsible. The tribunal terminated the lease contract, but did not fully support A’s request of ordering B to make full rental payment.

The ruling of the tribunal shows that even if a lease contract does not state clearly the purpose of renting a property or promise to fulfil the purpose, it is still possible that foreign investors might be legally responsible if the purpose of the rental is defeated by laws or regulations on foreign-owned property. Therefore, when entering into a leasing contract, it is vital for foreign investors to take due care and fully investigate local laws, regulations and the purposes of the rental. It is also critical that the foreign investors disclose important limitations on the property.

On the other hand, the renter should inquire into the property to find potential flaws, limitations, the identity of the property’s owner, whether the property can fulfil the renter’s purposes, and local laws and regulations before entering into a leasing contract. It is important to seek legal advice when necessary.

For both foreign property owners and the companies that seek to rent these properties, it is advised that both parties should state clearly the purposes of the property and the obligations and responsibilities of the lender in the contract. It can significantly reduce the evidential burdens for both parties during a dispute. In addition to that, due to uncertain factors such as the local government regulations in the present case, it is beneficial that both parties should incorporate plans that could resolve instances of non-performance of contract due to law and regulation changes or third-party contract breaches, to turn uncertain risks into controllable and bearable risks.

The author, Zhang Jishuang, is case manager at the Beijing Arbitration Commission