How to Negotiate Favorable Lease Terms for Your China Business

A lease agreement, to some extent, is a “must-have” agreement for all companies. Whether the lease agreement is executed properly or not will have significant impact on a company’s operations. 

In our recent webinar, Senior Business Advisory Associate Mr. Richie He from our Guangzhou Office explained the major aspects companies should pay attention to when signing a lease agreement in China, and how they can mitigate risks and avoid traps. 

Here we have selected some typical questions asked by companies with brief answers. To watch the webinar, please click here.

Is it possible to change the rent due to changed circumstances? For example, what if the Lessee requests lower rent than the one agreed in the Lease agreement due to the outburst of Covid-19?

Firstly, there is no statutory requirement that the lessor/landlord should adjust the rent due to covid. During the initial outbreak, some local governments did promulgate notices that encouraged the lessor to lower the rate - but at best it was a suggestion, not mandated. Secondly, We are now in year three of the pandemic and its current impact on the company operation results mostly from occasional lockdowns, i.e. it normally doesn’t pose a constant threat. To recap, any adjustments to the rent will only be made via mutual agreement between both parties. At least for now we think that covid is not a strong reason for lessees to require a lower rate.

If your goal is to lower the rent cost, you could consider the following options:

• Reduce the size of leased premise by negotiating with the landlord, e.g. reduce the original two units you rented to one, and amend the lease accordingly.
• Relocate to smaller and cheaper sites.

Or in extreme occasions, if the company needs to shut down temporarily: the Implementing Rules for the Administrative Regulation of the People's Republic of China on the Registration of Market Entities（中华人民共和国市场主体登记管理条例实施细则）indicates that companies with operational difficulties can apply for a “state of business suspension”. Once approved, the company can retain a delivery address for legal documents only, and do not need to stay in a lease, or enter a new lease after terminating the current one, just to keep the registered address, thus saving the cost.

 Is it recommended to engage an agent to handle the lease agreement related issues?

Though it depends on the budget and usual practice of the company, for foreign invested companies, particularly those intending to rent a large office, it is beneficial to appoint a professional agent. A high-quality agent could save your communication cost, provide options for appropriate sites and good landlords, and help to mediate and bargain in a neutral manner.

How to prepare for negotiations with the landlord?

Negotiation is the art of compromise. The technique to do it, is to do it STEP BY STEP: list all the questions and all the requests you can possibly think of and go through them one by one.

To give you an example, after reviewing a lease, you may request a free exit - meaning that you can terminate the lease early without giving up the deposit.

What needs to be done for the landlord to deem this acceptable? One way to do it, is to propose a bunch of requests and blend the request for free exit within. For instance, you could ask for a 10% discount, an extension for the payment period, payment at sight of fapiao, exemption of water & electricity deposit, no hard requirement for restoration upon termination, etc. When the landlord faces so many requests at once, the request for a mere free exit might not seems over the line. 

How to legally terminate the contract if the landlord fails to fulfill his contractual obligations?

First, if it is stipulated in the lease that the tenant can unilaterally terminate the contract if the landlord does not perform its obligations, the tenant can unilaterally terminate the contract per such provision.

Second, if the lease agreement does not specifically stipulate in what situation the tenant may terminate the agreement, the tenant may still terminate the agreement PROVIDED the landlord fails to fulfill the core obligations of the agreement, also known as “material breach”, meaning that its failure will definitely cause the tenant to be unable to use the unit in a normal manner. In such cases, the tenant could initiate a negotiation with the landlord to reach a settlement. If no settlement is reached, the tenant may take legal action (e.g. arbitration or litigation) for a solution.