Q&A:Leases and the Lease Priority Right

Jingyun Wang

Jingyun Wang is legal consultant and assists clients with all corporate secretary matters. Specifically, she provides support with the implementation and deployment of China subsidiaries of European companies and the follow up of formalities and coordination, both in China and Hong Kong.

What is the lease priority right?

The lease priority right refers to the fact that a lessee shall have the priority right to rent the premises they are already renting under the same conditions when the previous lease agreement arrives its term. The lease priority right may be agreed by mutual consent in an agreement, but the new PRC Civil Code also provides such priority right in Article 734.

According to subsequent judicial interpretation issued by Supreme Court, if the lease agreement arrives its term after the effective date of Civil Code (1st January 2021), the lessee is also entitled to claim for a lease priority right even if it is not provided for in the original agreement.

Who can benefit from the lease priority right?

This concept is limited to a housing lease agreement between equal civil parties. The housing lease agreements in low-rental or welfare with administration are excluded. The lessee or sub-lessee of a housing lease agreement might benefit from such right. However in those circumstances, the sub-lessee can only claim its right against its sub-lessor, since those rights are exclusively transferable between parties to the lease agreement. Along those lines, the lease priority right cannot be transferred or inherited.

Under what circumstances can I exercise the right?

  • A valid housing lease agreement arrives at its term;

If the lease agreement becomes invalid, revoked or is terminated early, the lessee will lose the priority right.

  • the Lessor is willing to rent the house to a third party;

If the Lessor decides to take back the house for personal use, the lessee will not have this priority right. If the lessor gives or intends to transfer use of the house to their relatives, it would still be deemed as personal use. In the context of business, this excludes a parent company/subsidiary relationship.

  • the Lessee proposes the same conditions comparing with a third party.

The lessee may propose the same conditions to a third party who eventually intends to rent the house. The same conditions include not only the rental price but also other conditions (lease term, payment method, area of premises, etc.)

Enforcement of the Right

Essentially, the relief for lease priority right violations are based on contractual liability. The lessee can claim damages for their actual losses. However, it is important to note that a court still cannot unilaterally cancel a lease agreement between the lessor and a third party.

How to better protect the lease priority right of lessee?

The lessor is obliged to inform the lessee if it intends to enter another lease agreement with a third party. However, in the practice, many lessees are not even aware of the concept of priority rights due to the absence of notice. In order to better protect the lessee, they should insist on clauses in their agreements related to notice period, notice method, and notice content. If you need any help with lease agreements, please feel free to contact us.