[Covid-19] How do SMEs apply and negotiate for rent reduction?

The continuous epidemic has caused a large number of enterprises to stop production, followed by the rent cost, which has become a heavy burden on enterprises in this special period. In view of the most concerned problems of the enterprises, we refer to relevant policy documents and regulations to give suggestions on rent reduction and exemption of state-owned houses and non-state-owned houses from the practical operation level.

Compulsory rent reduction and exemption policy for the external lease of state-owned operating real estate

Applicable objects and standards:

Approval process: all state-owned enterprises form a model and form a list of final tenants - notify the lessee - the lessee submits application materials and applies for rent reduction - after the reduction is approved, go through the reduction procedures with the notice of rent reduction and the confirmation of the final lessee.

Application materials: application for rent reduction and exemption, identity certificate of the lessee's representative, business license, lease contract, certificate that the implementation of epidemic prevention requirements has a serious impact on business activities and other relevant materials.

Analysis on the legal ways of rent reduction and exemption of other operating houses except state-owned operating houses

At present, in the detailed rules on rent reduction issued by Shanghai, there are no relevant mandatory reduction measures for other non-state-owned operating leased properties. However, enterprises renting other non-state-owned operating leased real estate also have production and operation difficulties caused by the epidemic, and also hope to obtain relevant rent relief. In this regard, we have made the following brief analysis on how small and medium-sized enterprises obtain rent reduction and exemption and relevant laws and regulations for your reference.

1. Conditions agreed in the contract

If in the house lease contract, the lessee and the lessor have agreed that the rent can be reduced or exempted in case of epidemic situation, and similar terms such as "the rent during this period can be reduced or exempted in case of failure of normal operation due to accidents (such as infectious diseases such as Covid-19, municipal construction, natural disasters, wars, etc.), the lessee may request the lessor for rent reduction or exemption and shall be supported.

2. There is no agreement in the contract

From the perspective of laws and regulations, according to the interpretation of the series of questions and answers III (2022 Edition) of the Shanghai High Court on the application of law in cases involving the COVID-19 epidemic situation ("question and answer III"), if the leased non-state-owned house is used for operation and the house cannot be actually used or there is no operating income due to the epidemic control, it is obviously unfair to pay the rent according to the lease contract.

1) Both parties of the lease can negotiate rent reduction and exemption on their own;

2) If the self negotiation fails, and therefore brings a lawsuit to the court, the court generally guides both parties to negotiate first;

3) If the negotiation fails, the court reduce the rent for a certain period according to the force majeure provisions of “the civil code”, the principle of change of circumstances and the principle of fairness in combination with the actual situation of the case where the lessee is unable to actually use the house due to sealing and control. In general, the reduction period can be the rent during the actual sealing and shutdown.

Therefore, from the perspective of regulations, the lessee of non rent free lease can refer to the rent reduction policy of state-owned housing and negotiate with the lessor to reduce or extend the lease term or delay the payment of rent. If the negotiation fails, the people's court will reduce or reduce the rent according to the actual impact of the epidemic and its prevention and control measures on the performance of the lease contract in accordance with the principle of fairness.

In terms of legal practice, since the regulation level has recognized the reduction and exemption of rent in accordance with the provisions of force majeure, the principle of change of circumstances and the principle of fairness. According to the specific cases of different courts in Shanghai judicial practice, we found that the court mainly focused on the main purpose of the lease and the actual impact of the epidemic on the lessee's operation.

Case 1: in the case of the dispute over the housing lease contract between a dental clinic and company B in 2020, based on the fact that the main purpose of the prosecutor’s lease was to operate the dental clinic, and oral dental care was a high-risk industry during the COVID-19, the epidemic objectively did have a great impact on the prosecutor’s operation. Finally, the court decided to halve the monthly rent at its discretion.

Case 2: in the case of house lease contract dispute between company A and B Food Co., Ltd. in 2021. Based on the fact that the lease purpose of the house involved in the lawsuit was for office use, the COVID-19 did not prevent the lessee from using the house involved in the lawsuit. The product display, reception and tasting mentioned by the lessee shall be within the scope of business activities. The customer's failure to visit the house due to the COVID-19 is an operational risk. The lessee refused to pay the rent on this ground without any relevant basis.

Considering the delay in resumption of work after Shanghai launched the first level response to major public health emergencies on January 24, 2020, the court reduced the rent during this period (the total amount is equivalent to 0.16 months' rent).

It is understood that the judgment related to the epidemic situation in Shanghai in 2020 is basically based on the standard of supporting the rent reduction for about one month.

The epidemic in Shanghai has been sealed for more than one month, and some communities began to seal as early as March. The measures of sealing and controlling in Shanghai this time are also much stricter than the last time. The vast majority of people are isolated at home. Office buildings, factories, commercial and other operating houses are almost unusable, which will inevitably cause more substantial impairment to the revenue of various enterprises. In this context, we believe that the court may be more inclined to support the lessee's request for rent relief, and the court is likely to recognize the amount of relief higher than one month's rent.

In conclusion, small and medium-sized enterprises renting non-state-owned houses can take the following actions for rent reduction:

1)?????Negotiate with the lessor to reduce the rent, extend the lease term or delay the payment of rent;

2)?????If it is agreed through consultation, the supplementary agreement of the house lease contract shall be signed as soon as possible and confirmed in writing. The supplementary agreement shall clearly indicate the signing background of the supplementary agreement, the term and amount of rent reduction, and other contents of the change to the original house lease contract;

3)?????If the negotiation fails and the lawsuit is brought to the court, in arbitration or litigation, you can file a request for rent reduction to the court in accordance with the provisions of force majeure, the principle of change of circumstances and the principle of fairness in “the civil code”, and in combination with the actual negative impact of the epidemic on yourself and the performance of the house lease contract.

At the same time, we also paid close attention to the relief policy issued by Shanghai Lingang New District in early May. It includes the rent subsidy policy for non-state-owned housing rental enterprises:

Small, medium-sized and micro enterprises and individual businesses that rent non-state-owned houses for production and operation will be given a subsidy of 1 yuan/square meter/day for three months.

With the resumption of production and work in various districts, we believe that relevant supporting policies or guidance documents for non-state-owned housing will be issued in succession. We will continue to pay attention to them and share them with you in a timely manner.

Reference source: Shanghai Federation of industry and commerce, Dacheng Shanghai office, Shanghai Law Association

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Before setting up the firm, Bryan was holding senior positions in finance and tax department for many multinational corporations, such as Carrefour, Inbev and Metro. Later, he joined HMY Group as Vice President.

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