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Several Practical Issues Arising from the Termination of Housing Lease Contracts(Part Two)
Zhang Jishuang1
A substantial proportion of disputes over house lease contracts arise from the termination of contracts, among which the parties mainly argue that when the lessor shall be entitled to terminate a contract and how to exercise the termination right. I present the legal rules developed gradually by arbitral tribunals from individual cases in the article based on case-handling experience, for purpose of providing useful guidance for the parties to protect their rights with laws.
(Continued from the previous text)
II. Demurrer to hinder the realization of the right of termination
Where the lessor claims to terminate the contract for the lessee’s failure to pay rent on time, the lessee generally argues that he/she doesn’t breach the contract viciously with due payment of rent but that the lessor fails to perform the obligations, such as not providing the house in lease fit for the purpose of the contract. The lessee refuses to pay the rent for the reason that the lessor’s default has caused losses to the lessee. Whether the kind of demurrer will hinder the realization of the lessor’s right of termination
The lessee’s demurrer may be divided into two levels: first, in order to reduce the payment, the lessee claims that the lessor fails to provide the house fit for the purpose of the contract; second, in order to commute the rent with the losses, the lessee claims that the default of the lessor has caused losses to the lessee. I will analyze whether the two kinds of demurrer would be tenable with individual cases below.
Case 1: Where the lessor failed to pay the property management cost on time, the property management company has cut off the electricity of the house rented by the lessee for 3 days，that the lessee refused to pay the rent of that month, so the lessor raised an arbitration claim that the lease contract shall be terminated for the reason that the lessee was in arrear with the rent.
According to the contract, the arbitration tribunal held the opinion which was the lessor’s obligation to maintain the operation of public utilities and provide public service .Whether the property management company to cut the power off was legal or not, the lessor was in default for not providing the proper house in accordance with the contract. So that the lessee was entitled to refuse to pay the rent during the outage. However, the lessee was in default for the arrear of rent beyond the period of outage and the lessor was entitled to terminate the contract.
Case 2: The parties had entered into the house lease contract and a supplementary agreement, in accordance with which, the lessor (hereinafter referred to applicant ) leased the house to the lessee(hereinafter referred to respondent) and assisted the respondent to transfer the ownership of the business license with the house as the domicile to the respondent. The applicant filed an arbitration as the respondent was in arrear with rent to claim for the termination of the contract and the payment of rent. The respondent said that the applicant, fully aware that the house in lease would be used for a beauty service institution, still failed to transfer the ownership of the business license to the respondent in accordance with the agreement. The respondent wasn’t able to start business without the business license and the approval of relevant administrative department, frustrating the purpose of the contract. In accordance with Article 216 of the Contract Law, the lessor shall deliver the lease item to the lessee in accordance with the contract and shall, during the lease term, keep the lease item fit for the prescribed purpose. Where the applicant failed to keep the lease item fit for the prescribed purpose, the respondent was entitled to refuse to pay rent.
The arbitration tribunal held the opinion that whether the applicant was in default shall be based on the agreement of the contract. It was only agreed in the contract and the supplementary agreement that the applicant assumed the obligation to assist the transfer procedure of the business license other than full obligation to handle the license; second, although the applicant was fully aware of that the respondent had rent the house for the purpose of setting up a beauty company when concluding the contract, the applicant shall not be responsible for the successful opening of the respondent. What the respondent asserted as “commercial” purpose was overly broad . The definition of commercial purpose was different from the definition of commercial purpose with specific form. Where the respondent was in demand that the house shall realize specific commercial form and purpose, it shall be clearly prescribed in the contract, or otherwise the respondent was short of basis to propose the default of the applicant. Besides, the applicant and the respondent were aware of the nature, purpose and service condition of the house in lease when entering into the contract, which never changed during the performance of the contract. Therefore, the demurrer of the respondent wasn’t tenable and the applicant was entitled to terminate the contract.
Case 3: The applicant leased the house to the respondent for working, while the respondent didn’t pay rent so the applicant filed an arbitration to terminate the contract. The respondent stated that where the respondent applied for business license with the house as a domicile, the respondent was refused to manage the business license with the respondent’s subject identity in accordance with relevant policies, which frustrated the purpose of the contract so that the applicant wasn’t entitled to claim for rent from the respondent. The applicant stated that it wasn’t promised by the applicant or agreed in the contract or proposed by the applicant that the house in lease shall be used for business registration.
The arbitration tribunal held the opinion that the applicant was fully aware of the restrictions for managing business license when entering into the contract and the house was of specific nature different form general commercial houses, while the applicant didn’t perform the notice obligation to the respondent, who encountered great restrictions to use the house. The respondent was of certain fault for not performing the duty of prudence and care when entering into the contract. However, the applicant’s notice obligation was more important by comparison, so the applicant shall assume major responsibilities for the contract subject’s failure to realize the purpose of the respondent. The respondent shall pay half of the rent and the contract shall be terminated.
It was proposed in the above cases by the lessee that where the lessor was in default for not providing proper houses fit for the purpose of the contract, the lessee was entitled to refuse to pay rent. It was the lessor’s main payment obligation in Case 1 to supply power and the lessee was entitled to deduct rent within corresponding range; it was the lessor’s subordinate payment obligation in Case 2 to assist the transfer of business license, while the obligation to transfer the ownership of the business license and keep the house in lease for regular operation proposed by the lessee wasn’t agreed in the contract. The lessor had performed the obligation to assist the transfer and the lessee was fully aware of the nature, purpose and service conditions of the house in lease when entering into the contract, so the lessee wasn’t entitled to refuse to pay rent; it wasn’t agreed in the contract in Case 3 that the lessor shall ensure the lease item proper for business license, while the lessor shall assume the notice obligation on the condition that the lease item was of special use restrictions frustrating the purpose of the contract.
In conclusion, when to determine whether the demurrer for the lessee to refuse to pay the rent is tenable, whether the parties have clearly agreed on the state and function of the subject matter, the purpose of the contract and the responsibilities borne by the lessor shall be first considered. Where the parties fail to reach an agreement and there is defect with the lease item, the degree of the fault borne by the party to frustrate the purpose of the other party shall be considered. Where the lease item fails to fit for the purpose of the contract due to the lessor, the lessee is entitled to claim the lessor to assume the liability to reduce the rent for breach of contract in accordance with Article 111 of the Contract Law. Where the lessee fails to clearly avail itself of the liability of reducing payment through arbitration, the arbitration tribunal may apply voluntarily. The lessor’s claim to terminate the contract for the lessee’s failure to pay rent may not be supported.
Whether the lessor’s claim to terminate the contract will be supported where the lessee refuses to pay the rent as the lessor’s default has caused losses? Where the losses the lessor shall compensate for the lessee and the rent the lessee shall pay to the lessor are two different debts, which only can be offset on condition that the parties have reached an agreement. Where the lessor claims for the payment of rent, the lessee shall not raise the losses as demurrer but shall independently raise an arbitration claim. Where the lessee fails to prove that the failure to pay rent was due to negotiation on the compensation for losses, the arbitration tribunal may support the lessor’s claim to terminate the contract. Therefore, where the lessor’s default has caused losses to the lessee, the lessee shall keep the evidence of the losses and relevant evidence that the applicant agrees to negotiate on the losses if he intends to offset the losses with rent, or otherwise the lessee may encounter the risk that the contract will be terminated for his/her failure to pay the rent.
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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