[Handling Attorney]

Wang Tao

[Keywords]

If the landlord is not the owner of the property, the lease contract they sign is not automatically invalid.

【Key Points of the Ruling】

With regard to the validity of the two “Agreements” signed on August 16, 2014, and November 5, 2015, respectively, between the plaintiff, He Mou, who is not the property owner, and Liaoning某 Industrial Development Co., Ltd. (hereinafter referred to as “the Company”). According to Article 52 of the Contract Law of the People’s Republic of China, if the Company claims that the two “Agreements” it signed with the plaintiff are invalid, it must provide evidence to demonstrate that the signing of these two “Agreements” falls under one of the circumstances rendering a contract invalid as stipulated by law. Since the Company has failed to provide any evidence proving that the two “Agreements” fall under any legally prescribed grounds for invalidity, and merely asserts the invalidity of the contracts on the ground that the plaintiff is not the rightful owner of the land and buildings involved in the case, such assertion does not comply with legal provisions. Therefore, the People’s Court does not support the Company’s claim in this regard.

Regarding the claim by a certain company that the property and land in question are registered under the name of a Shenyang Grain Trading Co., Ltd., and thus the plaintiff has no right to claim occupancy and usage fees from it: The company fulfilled the agreement it had entered into with the plaintiff and also paid rent to the plaintiff. The company argued that since it was unaware that the property and land were registered under the name of a third party, its signing of the agreement and payment of rent to the plaintiff were inconsistent with common sense and everyday transaction practices. However, the People’s Court did not accept this defense.

Regarding whether the defendant company should pay the plaintiff compensation for the occupation and use of the property and land involved in the case, although the agreed-upon performance period under the agreement has expired and the parties have not subsequently entered into a new agreement, the defendant company continues to occupy and use the property and land in question. Moreover, during the period when the defendant company has been leasing and occupying the property and land, there has been no change in the ownership of the property and land. Therefore, the plaintiff’s request that the defendant company pay compensation for occupation and use according to the original agreement’s stipulated standard is legally justified.

[Basic Facts of the Case]

On August 16, 2014, the plaintiff, He Mou (Party A), and the defendant, a certain company (Party B), entered into an “Agreement.” The parties agreed that the plaintiff would lease to the defendant certain land and structures thereon for a term of one year—from August 16, 2014, to August 15, 2015—with an annual rent of RMB 80,000. During the lease term, the defendant was responsible for paying water charges, telephone charges, electricity charges, and equipment maintenance costs. After signing the agreement, the defendant paid the plaintiff the full annual rent of RMB 80,000. On November 5, 2015, the plaintiff and the defendant again signed an “Agreement.” Except that the lease term in the second clause was changed from August 16, 2015, to August 15, 2016, the remaining terms of the agreement were identical to those in the agreement signed by the parties on August 16, 2014. On the day the new agreement was signed, the defendant paid the plaintiff another RMB 80,000 in rent. Since then, the parties have not entered into any further lease agreements. However, the defendant has continued to occupy the premises and land specified in the agreement and has refused to vacate and return them. Therefore, the plaintiff brought this lawsuit to the court, requesting that the defendant immediately vacate and return to the plaintiff the premises and land located in Xinmin City, and ordering the defendant to pay the plaintiff occupancy fees for the premises and land from August 16, 2016, until the date of actual return (the occupancy fees to be calculated based on the unit price stipulated in the lease agreement). The defendant is also ordered to bear the litigation costs of this case. During the course of the trial, the defendant filed a counterclaim against the plaintiff, arguing that since the land use right holder and the owner of the premises are both a third party—a certain company—and not the plaintiff, the court should declare the two “Agreements” signed by the parties on August 16, 2014, and November 5, 2015, invalid. The defendant further requested that the plaintiff refund RMB 160,000 in rent already paid, and that the plaintiff bear the litigation costs as well as the costs of the counterclaim.

【Judgment Result】

Within ten days after this judgment becomes legally effective, the defendant company shall pay the plaintiff RMB 210,000 as compensation for the occupation and use of the house and land. The defendant company’s counterclaim is dismissed. The court filing fee and the counterclaim fee shall be borne by the defendant company.

【Reasoning of the Ruling】

Regarding the validity of the two “Agreements” signed between the plaintiff and the defendant company, the defendant company should have been fully aware of the registration status of ownership and usage rights pertaining to the property and land involved in the case. According to the terms of the two “Agreements” between the plaintiff and the defendant company, despite knowing that the property and land in question were owned by a third-party company, the defendant company agreed to pay the plaintiff an additional annual rent of RMB 80,000 for this portion of the property and land. This contractual arrangement between the parties reflects their true intentions and does not violate any mandatory provisions of laws and regulations; therefore, it should be deemed lawful and valid. Consequently, the defendant company’s counterclaim lacks both factual and legal basis, and the People’s Court will not uphold it.

With regard to the plaintiff’s claim that the defendant company should pay the plaintiff a monthly occupancy fee of RMB 6,666.67 for the use of the house and land starting from August 16, 2016, since the plaintiff provided, during the trial, a statement issued by Shao Jun, the legal representative of the defendant company, confirming that the defendant company agrees that the plaintiff is entitled to collect rent or occupancy fees for the portion of the house and land that was invested by the plaintiff, and given that the area of the house and land actually leased and used by the defendant company has remained unchanged since September 28, 2014, although the defendant company has not entered into a new lease contract with the plaintiff as of August 16, 2016, it continues to occupy and use the house and land originally agreed upon in the parties’ original contract. Therefore, the defendant company must continue to pay the plaintiff the actual occupancy fee for the house and land at the rental rate stipulated in the original agreement between the parties, and such payment shall be made until the date of the judgment.

Thereafter, if a certain company continues to occupy and use the property and land involved in the case, the plaintiff may separately assert its rights against that company.

【Relevant Statutes】

Article 61 of the General Provisions of the Civil Law of the People’s Republic of China states: “According to the provisions of law or the articles of association of a legal person, the person authorized to engage in civil activities on behalf of the legal person shall be the legal representative of the legal person. The legal consequences arising from civil activities undertaken by the legal representative in the name of the legal person shall be borne by the legal person.” Article 39 of the Property Law of the People’s Republic of China provides: “The owner of real property or personal property shall, in accordance with the law, enjoy the rights of possession, use, income, and disposal over such property.” Article 60 of the Contract Law of the People’s Republic of China stipulates: “The parties shall fully perform their respective obligations in accordance with the agreement. The parties shall abide by the principle of good faith and fair dealing and, according to the nature, purpose, and trade practices of the contract, fulfill obligations such as notification, assistance, and confidentiality.”

[Lawyer’s Perspective]

Is a lease of another person’s property by someone who does not hold title to it necessarily invalid? Article 51 of the Contract Law provides: “If a person without the right to dispose of property disposes of another person’s property, the contract shall be valid if the rightful owner subsequently ratifies the disposition or if the person without the right to dispose acquires such right after entering into the contract.” According to Article 3 of the Supreme People’s Court’s Interpretation on the Application of Laws in Adjudicating Disputes over Sales Contracts, “If one party claims that the contract is invalid on the ground that the seller did not have ownership or the right to dispose of the subject matter at the time of contracting, the people’s court shall not support such claim. If the seller fails to obtain ownership or the right to dispose of the subject matter, thereby preventing the transfer of ownership, and the buyer requests the seller to assume liability for breach of contract or seeks to rescind the contract and claim damages, the people’s court shall support such claims.” Thus, it can be seen that leasing or selling another person’s property may affect only the performance of the contractual obligation and might lead to the failure to effectuate the intended change in property rights; however, this does not automatically render the contractual obligation invalid. In this case, even if the legal representative of the property owner does not ratify the lease agreement, the lease contract between the plaintiff and the company would not extend its effect to the property owner, yet it would remain valid between the parties to the contract. In light of Article 3 of the Supreme People’s Court’s Interpretation on the Application of Laws in Adjudicating Disputes over Sales Contracts and Article 15 of the Property Law, it should be held that a contract involving unauthorized disposal remains valid, and the change in property rights will naturally occur once the rightful owner ratifies the contract or the person without the right to dispose acquires such right. If the rightful owner does not ratify the contract or the person without the right to dispose cannot acquire such right, no change in property rights will take place, and the person engaging in unauthorized disposal will bear liability for breach of contract. Until the disposal act is ratified or rectified, whether the change in property rights will occur remains uncertain; however, the validity of the contract itself is not left in limbo—it is definitively valid. In modern society, countries with developed market economies no longer simply adhere to the principle that “ownership takes precedence over all else,” but instead regard the protection of transactional security as a highly important legal value to be pursued.