Legal risks and strategies for ending a tenancy early

Early termination of a tenancy is now common due to the pandemic and economic downturn. Excluding force majeure or changed circumstances, what issues are of concern in the event of early surrender of a tenancy?

TIMELY SURRENDER

Regardless of the reason for ending the tenancy agreement early, the lessee is liable to return the leased property in time and the lessor should take back the property promptly after surrender, since the lessor bears part of the loss arising from leaving the property vacant.

If the lessee moves out without going through the handover procedure, different legal consequences may arise under specific circumstances, including:

• • If the lessee’s at fault, the lessee shall continue to pay for the property;
  • If the lessor’s at fault, the lessor has no right to claim the vacancy loss; and
  • If both are at fault for failing to hand over the property, the loss incurred in a reasonable period will be shared according to their liability.

According to judicial precedents, the lessor should send a letter urging the lessee to hand over the property within two to three months after knowing (or should know) the lessee has moved out, and sue the lessee in case of non-co-operation, to prevent greater vacancy loss.

If the lessor does not co-operate with the handover, the lessee may commission notarisation of the state of the property, and facilities and objects inside, when moving out, or move out in the presence of a third party such as the property manager or public security authority, with a video record.

CONTRACT BREACH

Disputes over early tenancy surrender focus on damages involved or claimed, including:

(1) Unpaid rent, property management fees, utilities and interest on overdue payments. The lessor may require the lessee to pay such charges overdue to the date of terminating the tenancy agreement.

(2) Occupancy fee. From termination of the agreement to actual repossession of the property, the lessor may require the lessee to pay the occupancy fee. If not agreed before, the agreed rental rate is generally used to calculate.

(3) Loss of vacant tenancy period. The lessee’s early surrender results in a reduction of the lessor’s expected revenue and possibility of the vacant property. After handover, the lessor can claim the vacancy loss from finding a new lessee. To facilitate amicable termination of a tenancy agreement with the lessor, the lessee is recommended to find a new lessee before the surrender.

(4) Clearance cost. If the lessee fails to clear the property, the lessor may bear the clearance cost. Generally speaking, the costs of demolition and removal of unattached decorations, facilities and equipment when repossessing are counted as the lessor’s loss, which the lessor can claim after calculating the specific amount, or third-party estimate.

(5) Rent loss during the rent-free period. Where the lessee causes termination of the agreement, the lessor generally claims compensation for loss during a rent-free period agreed in the agreement or in practice. However, absence of an explicit agreement will bring uncertainty to liability for the loss.

(6) Forfeiture of security deposit. The lessor generally collects the security deposit when entering into the contract and agrees it will be forfeited if the lessee surrenders tenancy early. If only security deposit forfeiture is agreed, the agreement will generally be supported; if both security deposit forfeiture and liquidated damages are agreed, the court usually determines total compensation based on actual loss.

(7) Liquidated damages. The amount of liquidated damages is determined in accordance with the principle that “the agreement shall prevail and, if there is no agreement, the actual loss shall prevail”. Courts usually determine the amount of compensation for each type of remedy based on the actual loss of the lessor, reasonableness, and parties’ liability for the loss.

FEASIBLE PATH

(1) Review the agreement for whether it stipulates termination conditions, as well as the timing, handling and legal consequences of early surrender of tenancy. The first step for a lessee wishing to end the tenancy early should be determining the contents of the tenancy agreement.

(2) Focus on negotiation in the absence of a clear agreement on circumstances of early surrender. Communicate and negotiate with the lessor on matters such as payment of unpaid fees and handover of the property after termination of the agreement. Courts are less likely to uphold a lessor’s claim to continue the tenancy agreement if the lessee decides to surrender.

(3) Serve notice to end tenancy. If the parties cannot agree on early surrender of the tenancy, the agreement’s performance may also cease. Whether a lessee surrendering early is entitled to unilateral release may be decided differently, depending on the grounds for termination and the court’s decision.

If the agreement’s purpose cannot be achieved due to serious quality problems in the leased property, or agreed conditions for termination are met, the lessee has the legal or agreed right to terminate the agreement. It is worth noting that the lessee can exert legal effect of this right by sending a notice of termination to the lessor via post, WeChat or SMS, keeping relevant evidence.

However, if the lessee’s early surrender is not agreed in the agreement and does not constitute a statutory cause of termination, judgments hold that the lessee has a unilateral right to terminate in the following circumstance:

According to the Civil Code, where the breaching party requests to terminate but the observing party requests to continue the agreement, to balance the interests of both parties the court allows termination when the breaching party’s financial and material resources required for continuation exceed benefits brought by performing the agreement to both parties, meaning there is no longer condition for continuation.

Article 48 of the Minutes of the National Conference on Civil and Commercial Judicial Work of the Courts also contains relevant provisions.

As can be seen from this judgment and relevant provisions, the breaching party may terminate the agreement in certain circumstances with liability for breach of contract.

Zhu Tao is a Partner, and Zhang Zhuo is an Associate at ETR Law Firm.