Lease Dispute Over Unpaid Rent Leads to CNY 90,000 Damages
A lease dispute between a food production company and a packaging company in Eastern China City has been resolved by the local court, which awarded damages of CNY 90,000 to the landlord while refusing to terminate the lease agreement. The landlord had sought to end the ten-year lease and collect unpaid rent and penalties, but the court found that the tenant’s breach did not justify termination and reduced the requested penalty.
The case involved Guihuazhuang Food Company, the landlord, and Xinda Packaging Company, the tenant. In May 2008, the parties signed a lease agreement for a factory located in Eastern China City, covering approximately 20 mu of land and 7,000 square meters of building area. The lease ran for ten years. Rent payment terms and penalty clauses were included. Because the tenant did not always pay on time, the parties signed a supplemental agreement in June 2010, which specified the exact payment schedule. However, the tenant continued to delay rent, leading the landlord to file a lawsuit in July 2011 seeking termination of the lease, payment of CNY 225,000 in overdue rent, and CNY 400,000 in contractual penalties.
At trial, the landlord presented the original lease and the supplemental agreement, along with court hearing records. The tenant argued that the factory had construction permit issues and suffered from leaking roofs and poor drainage, which justified the delayed payments. The tenant also claimed the penalty of CNY 400,000 was excessive. During the litigation, the tenant applied for a 60-day extension to mediate, but the parties reached no settlement. Notably, the tenant later paid the full year’s rent of CNY 450,000 plus CNY 10,000 for a transformer fee to the landlord’s legal representative, Mr. Qian, and the landlord accepted the payment.
The court held that the original lease agreement was valid because both parties freely consented and the terms did not violate any mandatory legal rules. Regarding the request to terminate the contract, the court found that the tenant’s delay in paying rent did not amount to a fundamental breach of contract. Since the tenant had paid the overdue rent during the lawsuit and the landlord accepted that payment, the legal basis for termination no longer existed. Therefore, the court rejected the termination claim.
On the issue of penalties, the court acknowledged that the tenant had breached the agreement by not paying rent on time, which entitled the landlord to compensation. However, the requested CNY 400,000 penalty was disproportionately high compared to the actual loss suffered. Applying relevant legal principles, the court adjusted the penalty to 20 percent of the annual rent, which equaled CNY 90,000 (20% of CNY 450,000). The court ordered the tenant to pay this amount within ten days of the judgment. All other claims by the landlord were dismissed, and the tenant was ordered to bear the case fee of CNY 10,050.
This case illustrates that Chinese courts will enforce lease agreements but will not automatically grant termination for minor breaches, especially when the tenant cures the default by paying overdue rent during litigation. It also shows that courts have discretion to reduce contractual penalty clauses that are deemed excessive relative to actual damages. Parties to commercial leases should ensure clear terms and reliable payment records, and understand that late payment may result in reduced penalties rather than contract cancellation.
Disclaimer: This article is for informational purposes only and does not constitute legal advice.