The Action Plan, following the Several Policies and Measures to Fight the Pandemic and Support Businesses for Development, clarifies that “small and micro businesses and self-employed individuals” renting state-owned houses for production and operation are entitled to “a sixmonth house rent exemption in 2022” and that the exemption also applies to “private nonenterprise units” renting state-owned houses and having operational difficulties in order to drive Chinese central state-owned enterprises and other local state-owned enterprises based in Shanghai to reduce or exempt house rent for small and micro businesses and self-employed individuals, and restates that in case of sublease this policy does not apply. 

Owners or managers of non-state-owned houses such as commercial complexes, office buildings, specialized markets, industry parks, innovation bases, etc. are “encouraged” to give small and micro businesses and self-employed individuals which rent the houses for business operation a six-month rent exemption so that they can receive an allowance of 30% of the total exempted rent, but in no case over 3 million RMB. Where the chain businesses, branches or stores registered in Shanghai in the catering industry which are severely affected by the pandemic meet the condition of small and micro business and bear house rents can be seen as small and micro businesses and entitled to the house rent reduction and exemption. 

In the Action Plan only small and micro businesses and self-employed individuals renting stateowned houses are entitled to the rent reduction and exemption, not including large and medium sized businesses. 

According to the current classification criteria of the National Bureau of Statistics, the size of a business is decided on the basis of the number of staff, revenue, total assets, etc. Large and medium sized businesses achieve more revenues and have more assets, but also bear more costs, offer more job opportunities and pay more taxes so that their profit margin is not necessarily higher than that of small and micro businesses. As large and medium sized businesses are not included in the Action Plan, does this mean their rent cannot be reduced or exempted?

 The Action Plan also states the non-state-owned house rent reduction and exemption is “encouraged”, not “mandatory”. Government issued documents are not laws or regulations and cannot “force” private businesses to reduce or exempt the house rent. The allowance of 30% of the exempted rent given to the manager according to the action plan cannot cover all the rent, in which case the lessor will prefer the tenant to pay the full rent to maximize its benefits rather than receive the allowance. Some of our clients continued receiving rent payment notices from their landlords during the lockdown. 

Let’s look at the two issues from the legal aspect. 

Article 533 of Civil Code: 

After the establishment of a contract, in case of a material change in the basic conditions on which the contract is based that is unrelated to commercial risks and unpredictable upon the execution of the contract, if it is obviously unfair for either party to continue the performance of the contract, the adversely affected party may renegotiate with the other party; where no agreement can be reached within a reasonable period of time, the parties may request the people’s court or arbitration institution to amend or rescind the contract. 

Such a change is “change of circumstances” in civil law. The lockdown measures during the pandemic require residents “stay at home” and “keep still”, rendering businesses unable to use their leased houses for a long time, which is unrelated to commercial risks and unpredictable upon the establishment of the lease contract. It is obviously unfair for tenants to pay rents for the houses during the lockdown. Accordingly, in this case the tenant can request the court or arbitration institution to amend the contract if they cannot resolve the issue through consultation. 

The Answers to Questions on Law Application in COVID 19 Related Cases III 2022 issued by Shanghai High Court in early April provides that: 

If small and micro businesses, self-employed individuals and other small businesses renting stateowned houses for business operation have difficulty in doing business due to the pandemic or the prevention and control measures, their request that the lessor exempt the rent for a reasonable period of time according to relevant policies of Shanghai shall be supported.

 If it is obviously unfair for the tenant of a non-state-owned house for business operation that has no revenue or has significantly reduced revenue due to the pandemic or the prevention and control measures to continue paying the rent under the lease contract, and the tenant requests a rent reduction or exemption, extension of the lease period or delay of the rent payment, the parties are advised to resolve the issue through consultation with reference to the policies of Shanghai relating to rent reduction and exemption; if they cannot resolve the issue through consultation in the circumstances set out in Article 533 of Civil Code of the People’s Republic of China, the contract may be amended according to the principle of fairness on a case-by-case basis. The tenant’s request that the lessor reduce or exempt the rent for a period of time for the reason that the house cannot be normally used be due to the pandemic or the prevention and control measures may be accepted as the case may be. 

Subject to this article, the issue shall be addressed according to different influence on the business of the pandemic or the prevention and control measures:. 

Event I: If the tenant has no revenue or has significantly reduced revenue due to the pandemic or the prevention and control measures, the issue shall be resolved through consultation and if the issue cannot be resolved through consultation, the contract may be amended according to the principle of fairness under Article 533 “Change of Circumstances” of Civil Code.

 Event II: If the house cannot be normally used due to the pandemic or the prevention and control measures so that the tenant requests the lessor to reduce or exempt the rent for a period of time, the request may be accepted as the case may be. It is over two months since Pudong was locked down on 28th March and Puxi on 1st April. If the house cannot be used normally during this period of time due to the pandemic prevention and control measures, the tenant has the right to request the lessor reduce or exempt the rent. 

Actually, the Answers III 2022 does not mention how to deal with the request of large and medium sized businesses for reduction or exemption of the rent for state-owned houses. Subject to the fairness principle in Civil Code, different subjects shall be treated equally in civil activities. For this reason, in Event II the house may be state-owned. 

In the Six Typical Cases of Services Provided for Work and Production Resumption published by Shanghai High Court of in the morning of 30th May, the second one is a house lease contract case between a Zhang and a Rong, in which Zhang leased Rong’s store in March 2020 for business operation until 1st May this year. As the store could not be open since March 2022 due to the pandemic, Zhang decided to close down. Since the two parties could not reach an agreement, Zhang brought an action against Rong to the court in May, claiming that the deposit and the rent during the lockdown should be returned. Songjiang People’s Court held an online hearing and mediated in the dispute. In the end the defendant returned the deposit and the rent in court and the plaintiff withdrew the action. 

Songjiang People’s Court held that if the leased house could not be normally used due to the pandemic or the prevention and control measures, the tenant may claim a reduction or exemption of the rent, extension of the lease period or delay of the rent payment. In this case the plaintiff Zhang was a self-employed individual who was unable to normally use the leased house due to the pandemic and had great pressure and difficulties in doing business. The court adhered to the principles of sharing of risks and balance of interests, mediated in the dispute for social stability, attached equal importance to feelings and reasoning, took both sides’ interests into full consideration and guided both sides to empathize with each other. After the settlement of the case, the tenant was repaid certain amount of money and relieved from the financial pressure and the lessor was able to lease the house to other people with no dispute, avoiding further losses incurred by both sides and facilitating the complete resolution of the dispute. The pandemic has brought unprecedented difficulties to Shanghai. People in all industries are actively preparing for work and production resumption at present. After resumption, businesses will have more new problems. We believe our government will offer more preferential policies for businesses to recover and to revitalize the economy.