China Commercial Leases: Watching the Sausage Get Made

My law firm was called on to review a commercial lease for one of our regular clients. This client had been working with a local Chinese attorney on the lease but began to suspect this attorney had been “bought out” by the wealthy landlord, so they wanted us to “double-check to make sure everything was okay.”
The following is the email the lawyer on the matter wrote to our client, stripped of any identifiers:

I have reviewed the lease and my comments are as follows.

1. I assume this lease is not required for the formation of your Chinese WFOE? Is this correct. If it is part of the documentation required for the WFOE, then it may not be acceptable for two reasons. First, the landlord is not in the formal leasing business. Second, the lease will not be registered with the local real estate registry as is required by law.

2. You should check carefully to determine that the landlord has the right to lease the premises. I assume that the local attorney has done this.

3. The lease does not set out the the permitted uses for the premises. In that case, you are permitted to use the premises in any way consistent with the zoning. You should ensure that the zoning does in fact permit you to make use of the premises in the manner you are planning.

4. Note carefully Article 7 of the lease. The translation is NOT correct. What this says is that if you want a receipt for tax purposes (i.e. a fapiao), you must pay the tax imposed by the government on the amount of the income received by the landlord. That is, you will pay the landlord’s tax on the landlord’s behalf. This means the landlord 1) does not plan to register the lease as required and 2) the landlord does not plan to pay tax on the rental income. Both are common and both violate Chinese law. Since you will want a receipt (the fapiao), I recommend you face this issue directly. The lease should state that the landlord will provide you as the tenant with a tax receipt corresponding to each payment. Tenant will pay additional rent in an amount equal to the tax imposed on that payment. With respect to registration, note that the registration requirement protects you. For example, it 1) ensures that the local authorities agree that the landlord has the right to rent and 2) it provides notice to the world so that the landlord will not rent to someone else and 3) it provides notice to any buyer of the property that your lease is in effect and must be honored upon a purchase. For this reason, I would also revise the lease to require that the lease be registered. You should be aware that many landlords object to registering their leases. This is usually because they are evading taxes or there is a problem with the status of the property they do not want revealed to you. No matter what the reason, you as a tenant are much better off with a registered lease.

5. You should ensure that sufficient electricity will be provided. The local electricity utility needs to be contacted to ensure you will be able to obtain sufficient electricity at a price you can bear during the term of the lease. Some of the local utilities impose complex schemes for electricity usage and rationing and you need to be aware of how this will affect your operation. Since I do not know the use for this building, I do not know whether this will be a major issue for your company or not. For normal warehouse use, it probably is not an issue. But, if you will do any assembly or manufacturing, the issue could be significant.

6. It is usually best to state the condition in which the premises must be returned to the landlord in order to avoid disputes on the termination of the lease. Such disputes are extremely common in China.

Please contact me if you have any other questions on this matter.