Arbitrating commercial tenancy contract disputes

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Arbitrating commercial tenancy contract disputes
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The pandemic’s impact on local economies has provoked a significant increase in disputes arising from commercial tenancy contracts since 2020, disrupting an expansion of shopping centres in most first and second-tier cities that has surpassed some developed economies in recent years.

Considering that commercial real estate still carries the important function of promoting commercial and economic development, effective prevention of risks arising from commercial tenancy contracts – with proper resolution of related disputes – is crucial for safeguarding economic operation and promoting commercial development.

This article summarises the practice of the Shanghai International Arbitration Centre (SHIAC) in handling relevant disputes, although this should not be deemed as any legal opinion of the SHIAC or its arbitration in particular cases.

AN OVERVIEW

The SHIAC accepted 221 cases involving commercial tenancy contracts from 2019 to 2021. The pandemic’s impact was immediate in 2020, with a 60% rise in cases compared to 2019. The trend was especially noteworthy from April 2020, mainly due to a large number of tenants unable to pay their rents.

From the perspective of parties involved, disputes between corporate entities accounted for 84.3% of cases, which is also more in line with the general characteristics of commercial tenancy disputes. The remaining 15.7% of disputes were between natural persons and corporate entities – mainly between individual operators and large supermarkets or small and medium-sized shopping malls regarding the lease of retail stores.

Among all of these, lessors accounted for 65.8% of claimants and tenants accounted for 34.2%, indicating that twice as many claimants were lessors and most disputes were caused by tenant breach of contract.

In terms of the amount in dispute, the number concerning less than RMB1 million (USD157,000) accounted for about 20%, mostly between natural persons and legal persons, while 70% were between RMB1 million and RMB50 million – mainly related to leasing of commercial office buildings or stores in large shopping malls. About 10% with a disputed amount of more than RMB50 million mainly arose from leasing of entire commercial buildings with large shopping malls or supermarkets, with annual rents in the tens or even hundreds of millions of renminbi.

In terms of the types of disputes, the most frequent breach of contract by the tenant was non-payment of rents and other fees, followed by failure to perform specific contractual obligations. For example, some shopping malls would contractually agree on the opening date and length of the tenant’s opening in order to ensure the overall opening rate, and there was no intention to continue to perform the contract due to changes in business strategies and other reasons.

The most common breach of contract by lessors was that leased property did not meet standards agreed in the contract, or the specific purpose of the tenant. For example, the property had not obtained a fire permit, or was not designed and constructed in accordance with the tenant’s requirements. Following that was the lessor’s failure to properly perform property management services, resulting in losses to the tenant. For example, accidents such as burst water pipes and fires during the lease period resulted in losses to the tenant.

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Xu Zhihe is deputy director of the department of research and information at SHIAC

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