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.

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

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