BAC Newsletter Issue 28
BAC News
New Laws

Several Practical Issues Arising from the Termination of Housing Lease Contracts(Part One)
Zhang Jishuang1

A substantial proportion of disputes over housing lease contracts arises from the termination of contracts, among which the parties mainly argue about when the lessor shall be entitled to terminate a contract and how to exercise the termination right. This article presents the legal rules developed gradually by arbitral tribunals from individual cases based on case-handling experience, for purpose of providing useful guidance for the parties to protect their legal rights.

I. The Exercise of Stipulated Right of Termination

It is generally stipulated in a housing lease contract that when the lessee pays rent several days beyond the time limit, the lessor is entitled to terminate the contract. How shall the lessor exercise his/her right to terminate the contract when the lessor expects to reclaim the house and rent as the lessee fails to pay the overdue rent The lessor is advised to take the following two steps: 1. to send a notice of termination to the lessee ;, and 2. to petition an arbitration institution to confirm the termination of the contract and the payment of rent.

The parties, who may terminate the legal relationship by bilateral civil legal acts, are endowed with the right to terminate the contract at their discretion under some circumstances. Article 93 of the Contract Law of the People¡¯s Republic of China (hereinafter referred to as Contract Law) provides that , the party with the termination right may terminate the contract, while Article 96 provides that the contract is terminated when the termination notice has been served the other party. How shall a termination notice be served to ensure that the arbitration institution will confirm the service satisfies the condition for termination of the contract?
First, the observant party shall send a demand letter to the default party, indicating the positive attitude to avail itself of the claims. When the default party still fails to redress the breach and the conditions for termination agreed in the contract have been satisfied, the observant party shall send an official termination notice to the default party afterwards. There are cases in which the lessor avails itself of several rents failed to be paid on the part of the lessee on time during the performance of the contract and claims to terminate the contract thereby with a termination notice and relevant payment vouchers, on which condition, the demand of terminating the contract may not be supported as the lessor never raises an objection to the lessee on to the late rent payment. Demand is the element to result in the termination right on the condition that complete performance afterwards is still possible, while the contract may be terminated without demand on the condition that the performance afterwards is impossible. Article 94 of the Contract Law provides that the observant party may terminate the contract when the default party fails to perform its main obligations after receiving the demand of performance. Failure to perform other obligations may result in termination of the contract on condition that the failure of performance is fully proved to frustrate the purpose of the contract. The above provisions have defined the legal termination right, but where the arbitration tribunal determines whether the performance of the stipulated termination right is reasonable, it will also consider whether the purpose of laws has been satisfied. Therefore, the observant party is advised to send the demand letter to the default party on time. If the default party still fails to redress the breach within a reasonable time limit after receiving the demand, the observant party may send a termination letter.

The following details shall be paid attention to during the delivery of the demand or termination letter: 1. It shall be defined in the letter of the ¡°causes and results,¡±such as what fund the lessor demands, the consequences of continuous breach, and the legal validity of the letter(e.g. the termination letter can specify that in accordance with the contract, when you delay to pay rent for several days, the contract is terminated when the default party receives and signs this letter, and our party will take over the house within several days. The letter can also specify that the default partyhas to move out of the house within several days and the goods left arepresumed to be abandoned by the default party). 2. Because the arrival theory is adopted in declaration of intention in China, the termination letter has to be served to the default party to become effective. The serving method deserves much attention, such thatit can be served in person, urging the default party to sign and attach the date on the letter, or it can be served by EMS, better supplemented with notarization of the serving time, object and content of the mail to improve the effectiveness.

Where the notification is served and the lessee doesn¡¯t raise any objection within three months, the lessor may reclaim the house with self-reliant relief, make a notarization of the cleaning process of the goods left in the house and keep the goods of the lessee carefully in other places. Where losses are caused to the lessee thereby, the lessor may still need to make compensations for it even if the lessorowns the termination right, because although the contractual relationship is terminated, the lessor still bears the responsibility not to infringe upon the ownership of the lessee¡¯s goods.If the arbitration institution confirms that the lessor does not own the termination right afterwards, there is a risk on the part of the lessor to bear the liability for breach of contract to the lessee. In comparison to self-reliant relief, the lessor is more advised to petition the people¡¯s court or an arbitration institution to confirm the termination of contract and to claim the rent before the termination and the housing occupancy fee afterwards. To be sure, it is wise to send a termination notice to the lessee on time, which can be used as evidence and may be claimed to be calculated with the market price higher than that agreed in the contract.

The parties shall decide to put forward what kind of arbitration requests depending upon whether the contract has been terminated or not. Where the termination notice is assumed to have taken effect, the parties shall put forward action for confirmation to affirm the validity of termination; where the parties are not sure whether they own the termination right or the notice has reached the other party, they are advised to put forward action of formation with the arbitration tribunal to terminate the contract, or otherwise where the termination at the discretion of the parties is assumed to be invalid by the arbitration tribunal and the parties fail to petition the arbitration tribunal to terminate the contract, other requests relevant to the results of termination may not be supported. On the contrary, where the declaration of intention to terminate the contract on the part of the parties has taken effect and they have petitioned the arbitration tribunal to terminate the contract, the arbitration tribunal will confirm in the arbitration opinion the fact that the contract has terminated and meanwhile reject the arbitration request to terminate the contract.

Where the lessor has sent the termination notice to terminate the contract, and the lessor does not refund the rent occurred after the termination paid by the lessee, there are two different opinions on whether the original contract continues to take effect when the original contract doesn¡¯t expire. Where the lessor accepts the rent, it indicates that the parties have agreed to continue to exercise the contract and the parties shall continue to exercise the contract in accordance with the agreement of the original contract. As the contract has been terminated, where the lessee has paid new rent and the lessor has accepted it, a new factual contract has been entered into thereby. There are no agreements in the new contract on the price and duration, and the lessor is entitled to terminate the contract at any time. Therefore, the lessor is advised to send a letter to the lessee to claim that the fund paid by the lessee is housing occupancy fee and the original act to terminate the contract is still effective to maintain the validity of the termination.

(To be continued)

1. Author: Zhang Jishuang, Case-handling Secretary of Beijing Arbitration Commission. The cases adopted in the article are from those of BAC that have been processed by technology; the opinions of the article are based on personal case-handling experience, not indicating opinions of any other institutions and persons. I am particularly grateful to Director Jiang Qiuju, Director Chen Fuyong, Secretary Sun Jing and Secretary Chen Xi, for providing materials and opinions.

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