Lease contract disputes due to change of usage

Plant lease contracts have their peculiarities, to a certain extent. The contract term is generally long, and change of usage, or reconstruction, or even illegal construction, can always happen during the contract term. But most plant lease contracts are not as rigorous as, for example, contracts for the lease of offices and shopping malls, and there is no contractual agreement to be referred to for some of the disputes. This article will analyze disputes over plant lease contracts arising from the change of housing purposes, based on the author’s practical experience.

Company A leased 10 plant buildings with a gross floor area of 15,000 square metres to Company B for office and commercial purposes in 2005, with a lease term of 20 years and the rent to be paid in advance, quarterly. Company B renovated and decorated the plants (without relevant application and approval formalities) during the lease term, and demolished a part of the plants, and built some houses. Company B began to delay paying the rent from 2014. Company A repeatedly demanded payment but to no avail, so Company A notified Company B in writing to terminate the lease contract, and brought an action in court for Company B to pay the rent arrears and liquidated damages. Company B filed a counterclaim alleging that the contract was invalid, and requested Company A to compensate losses of renovation and reconstruction as well as anticipated profit.

The focus of this dispute is: (1) Does the contract become invalid due to the change of the purpose of the plant?; (2) Does Company A need to compensate for the renovation and reconstruction?; and (3) If the contract is null and void, does Company B have the right to claim the anticipated profit?

Kevin Shao is a senior partner at City Development Law Firm