Foreign chain stores and the leasing of premises

The Top 100 Chinese Chain Stores 2010 survey released by the China Chain Store & Franchise Association in March shows that the number of new shops opened by foreign-invested chain stores and their sales growth were higher than those of domestic Chinese chain stores in 2010. But what legal issues should foreign-invested chain stores consider when leasing commercial premises?

Clarify title

To avoid disputes and ensure that their business can run smoothly after a property is leased, foreign-invested chain stores should look for property with clear title. Property with a title certificate should be their preferred choice. Due to intense competition for quality premises, some have been leased without such a certificate – often before construction of the premises has been completed. However, a lease contract is invalid if a planning permit has not been obtained for a property under construction.

Foreign investment enterprises (FIEs) can lease temporary buildings which comply with building regulations, but the term of the lease must be within the usage period of a temporary building; any portion of the lease term exceeding the usage period will be void. Clearly, this would expose the business to risk. A people’s court will determine that a lease contract for commercial premises is valid only if a construction project permit has been obtained or the construction has been approved by the relevant authorities pursuant to the Supreme People’s Court Hearing of Disputes over Contracts for the Leasing of Urban Premises Judicial Interpretation and Application.

An FIE should carefully check the land certificate, construction land planning permit, construction project planning permit and construction project commencement permit (commonly known as the “four permits”) for property under construction to ensure each of the rights holders named on the four permits agree to rent out the property.

Understand permitted use

A business licence is unlikely to be obtained if the designated uses of the land or property concerned do not include that of a shop.

For example, if a building is for residential purposes only or for residential purposes on the upper floors and for commercial purposes on the ground floor, then it cannot be used as a food shop. Therefore, the nature of land stated on the land certificate and the purposes of a building described on the property title certificate must be checked thoroughly.

The Supreme People’s Court has stated in several cases that buildings erected on allocated land may be leased out for commercial purposes. However, whether buildings on allocated land may be leased out by administrative authorities, institutions or judicial authorities will depend on the circumstances of each case.

If a piece of rural collective land has been approved as construction land by a people’s government above the county level, and has passed project quality and fire inspections, then it can be leased and a lease contract will be valid.

Clarify subleasing relationships

Foreign-invested chain stores often lease shops not directly from the owner but from the principal tenants, subtenants or even the sub-subtenants. All tenants should provide their lease contracts or present documentation indicating their consent, to clarify that the sublease is permissible; that the term of the lease is within the lease terms of all the superior tenants; and that all the superior tenants consent to the sublease.

We have encountered numerous cases where a lessor is an affiliate of a property owner, and the lessor presents the lease contract entered into with the property owner and a power of attorney signed by the owner appointing the lessor to rent out the property.

In such circumstances, the lessor should make it clear that it has leased the property from the owner and then subleased it to a foreign-invested chain store, and not that the property owner appointed the lessor to rent out the property on its behalf.

If an owner appoints someone to rent out a property on its behalf, it must specify the term and scope of mandate for the lease, which should cover the signing of a lease contract, collection of rent, recovery of the property and all the rights and obligations under the lease contract.

Even if a subleasing relationship is clear and all the subleasing documents are available, a foreign-invested chain store will still risk having its contract invalidated as a result of the lease contract of a superior tenant being discharged. The foreign-invested chain store should therefore specify in its lease contract that if the contract cannot be performed due to a problem regarding the ownership or the right of rental of the leased property, the lessor is required to compensate the chain store for the resulting loss.

Some foreign-invested chain stores may take stronger action by requiring all the superior tenants to present written supporting documents giving consent to the subleasing, and to undertake that if the contract cannot be performed by the lessor, the previous tenants should step into the lessor’s shoes to fulfil the lease contract.

Check mortgage or repossession

Before signing a lease, a lessee should check with a real estate trading centre whether a leased property is mortgaged or has been repossessed. If it has, any lease may be terminated or rescinded if the mortgagee enforces its mortgage rights. To guard against this risk, the lessee may require the lessor to provide a third-party guarantee with joint and several liability.

Enquire about demolition

Foreign-invested chain stores usually desire a long lease term, during which things like recovery, demolition or removal of the leased property or municipal redevelopment or acquisition may happen, rendering the lease impossible to perform. Therefore, a lessee should first enquire at the relevant government departments whether these things are likely to happen during lease term and decide whether a mechanism should be included in the lease contract to allocate the cost associated with demolition and removal.

Hansen Zhao is a partner at Martin Hu & Partners (MHP Law Firm)