On April 10th, 2022, The Shanghai High People's Court revised and completed the Series of Questions and Answers on the Application of Law in Cases Involving the COVID-19 Epidemic Situation (2022 Edition), in which question 2 clearly stated that "the epidemic situation and the epidemic prevention and control measures are generally force majeure stipulated by law, and the epidemic situation or the epidemic prevention and control measures make it impossible to achieve the purpose of the contract/the contract cannot be performed, and the parties can claim to terminate the contract/exempt from liability or partially exempt from liability according to the relevant provisions".

So is the force majeure under the COVID-19 an exemption gold medal?

Currently, Shanghai has entered a gradual state of deregulation, and it is believed that a comprehensive deregulation will eventually come. During the period of deregulation, the suspension of the city has made the leasing industry even worse. With the recovery of the pace of life, the breach of leasing contracts is likely to become a type of high-frequency disputes. Both the lessor and the lessee can take precautions and be prepared to deal with disputes over breach of contract. This article intends to provide legal advice to both parties to a lease contract that may face disputes over breach of contract based on judicial decisions since 2020, in order to make a modest contribution.

1、 Judicial adjudication of lease contract disputes under the influence of the COVID-19

"Both parties to the lease have losses, and the lessor shall provide a reasonable and appropriate rent reduction for the damaged lessee.".

Reference case: (2021) Hu 02 Min Zhong 8754 Shanghai A Business Consulting Co., Ltd. and Shanghai B Culture and Art Development Co., Ltd. dispute over the housing lease contract

The court held that the focus of controversy in this case is whether Company A should receive a 3-month rent reduction from Company B. The epidemic belongs to force majeure, and the lessor of a house should provide certain rent relief for the lessee who has suffered losses. However, the rent relief does not necessarily mean that it is all relief. After the outbreak of the epidemic, the lessee and the lessor also have losses, and the rent relief should be reasonable and appropriate, and treated differently according to different situations.

"During the epidemic period, if normal business activities cannot be carried out and the purpose of the contract cannot be achieved, force majeure cancellation shall apply, and both parties shall not be held responsible.".

Reference case: (2022) Hu 02 Min Zhong No. 881 Kang and Shanghai A Development Co., Ltd. dispute over housing lease contract

The court held that during the performance of the contract, it coincided with the COVID-19. In view of the fact that Company A rented the contested house for the establishment of offline children's education and training institutions, in response to the national call to fight against the epidemic, Company A could not carry out normal business activities during the epidemic, and the purpose of the contract could not be achieved. Therefore, it is not inappropriate for the lease contract involved to be terminated due to force majeure, and neither party to the contract shall bear the responsibility for breach of contract.

It is unfair to request the termination of the contract under the pretext of the epidemic and to transfer all operational risks to the lessor.

Reference Case: (2022) Hu 02 Min Zhong 238 Shanghai A Advertising Co., Ltd. and Shanghai B Investment Co., Ltd. Lease Contract Dispute

The court held that the sudden COVID-19 epidemic did have a negative impact on all aspects of society. In view of the fact that on May 9, 2020, the Shanghai Municipal Government had adjusted the emergency response level of major public health emergencies to Level III response, the time when Company A proposed to terminate the contract and pay rent overdue occurred in December 2020, and the business type involved in the dispute in this case was outdoor advertising, Despite the fact that Company B granted Company A a free extension of the lease term for one month, Company A still claimed exemption from liability for breach of contract on the grounds that its next home was affected by the epidemic and terminated its contract in advance, transferring all operational risks to Company B, which lacked legal basis and was unfair, making it difficult for the court to support.

4. If the contract is terminated due to late payment of rent after there are no obstacles to the performance of the contract, the party shall bear the responsibility for breach of contract on its own.

Reference case: (2021) Hu 02 Min Zhong No. 12051 Li and Shanghai A Enterprise Management Co., Ltd. dispute over the housing lease contract
The court held that although the performance of the contract involved in the case was affected by the COVID-19 epidemic, the epidemic was not the root cause of the failure to perform the contract. On March 24, 2020, the response level for major public health emergencies in Shanghai was adjusted from Level 1 to Level 2. Although the fitness industry has been affected to some extent, those eligible for resumption of work and production can operate normally. According to the facts ascertained by the court, there were no obstacles to the performance of the contract in March 2020. Therefore, the contract was terminated due to the appellant's late payment of rent, and the appellant should bear the responsibility for breach of contract. The court of first instance has adjusted the penalty for breach of contract based on comprehensive consideration of contract performance, and this court agrees.

It can be seen that force majeure under the COVID-19 is not a gold medal for exemption. Due to different types of lease contracts, signing purposes, and the development of the epidemic itself, the degree of impact of the epidemic on contracts will vary greatly. Therefore, when contracts fall into the risk of failure or delay in performance, corresponding measures should be taken according to different situations to reduce the risk of liability for breach of contract. When applicable, it cannot be generalized.

2、 Under the COVID-19, how to reduce the default risk of lease contract performance?

Refer to judicial cases and the Series of Questions and Answers on the Application of Law in Cases Involving the COVID-19 (2022 Edition) It can be seen that the COVID-19 objectively did have a certain impact on the business behavior of various business entities, including both the lessor and the lessee suffered losses. Therefore, the judiciary advocates that the lessee and the lessee should negotiate and deal with the rent and breach of contract during the period affected by the epidemic based on the principle of mutual understanding and risk sharing, support the lessee to ask the lessor to reduce or exempt the rent, but at the same time protect the rights and interests of the lessor.

Based on practical experience, share some practical points on how to deal with the breach of contract between both parties to the lease contract, with a view to helping both parties understand each other and overcome difficulties.

"When the lessee truly suffers losses due to the epidemic, it can negotiate with the lessor to reduce the rent during the period affected by the epidemic, extend the lease term, or extend the payment of rent. However, the rent reduction or exemption is not entirely exempt, and the period is more limited to the period affected by the epidemic.".

In addition to the claim for rent reduction, if the lessee requests to reduce the subsequent rent standards, extend the rent-free period, etc., in the event that the lessor disagrees, both parties shall continue to perform in accordance with the original contract.

"Payment of rent and other expenses on time and in full is the main obligation of the lessee under the contract. If the lessee intentionally fails to pay rent without being affected by the epidemic and using the epidemic as an excuse, there is a risk of breach of contract.".

"If the lessee fails to pay the rent in a timely manner due to the impact of the epidemic, such as difficulty in capital turnover and significant reduction in operating income, the lessor shall grant a certain grace period, and directly request the termination of the lease contract on the grounds that the lessee has not paid the rent within the agreed time limit, and the lessee shall bear the responsibility for breach of contract, which shall not be supported;"; If measures such as power failure and door locking are taken directly, the lessee will objectively be unable to occupy and use the disputed house normally, and the resulting losses shall be borne by the lessor itself.

Currently, Shanghai is experiencing an unprecedented test, during which more diverse leasing disputes may arise. Friendly negotiation, mutual understanding and accommodation, sharing risks, balancing interests, and fairness and justice will become the key words to resolve these disputes. We hope that all of us in this situation can establish the concept of helping each other through difficulties and rationally treat default situations based on our own circumstances.