Registration Headaches
So, you’ve found the perfect office space. The question now is whether to register it or not.
With Christmas fast approaching, we thought it might cheer readers to get stuck into some real red tape before the break. In this instance, the red tape in question is the registration of lease contracts at the relevant Real Estate Exchange Bureau. But before we get into the unwrapping of Yuletide bureaucracy, I should make a rather unseasonal qualification: this article does not constitute legal advice on what is required to register a lease in Shanghai - it is in the form of working notes on various issues of which clients should make themselves aware.
In Shanghai, after a lease has been contracted between two parties, whether private or corporate, the lease needs to be registered. Registration must take place at the Real Estate Exchange Bureau in the relevant district where the property is located. Actual market practice dictates that in the case of private (residential) transactions, leases are rarely registered. For commercial leases, registration will often depend on the commercial and legal requirements of both landlord and tenant. So, unless the lease needs to be registered for a particular purpose, neither party is usually rushing to the Exchange.
Reasons and requirements for registration fall into two categories. The first is legal theory. According to the theory of law, a lease which has been registered and obtained a ‘lease registration certificate’ (租赁登记证)is recognised in law by the government and therefore has a clear legal channel of redress through the courts or arbitration as provided in the contract. Leases which have not been registered apparently fall into a grey area in terms of legal validity and redress. However, we have not heard of a case which was rejected by the courts on account of the relevant lease not being registered with the local Real Estate Bureau.
The second reason for registering a lease is more to do with legal practice. For companies establishing their operations in Shanghai for the first time, the paperwork they are required to submit includes a valid 12-month lease contract and a lease registration certificate. Without these two documents, the company cannot be established. In reality this is one of the big drivers for having leases registered.
Once a company has decided to register its lease, the interesting part starts. Firstly, the local real estate exchanges will not normally accept leases for registration unless they are the officially issued Shanghai Municipal Lease. Frankly, this is rather a simplistic document and certainly not sophisticated enough for more complicated or high value commercial transactions, which leads to a curious situation wherein the client is obliged to complete two leases: first, the commercial lease with the relevant landlord, second the legal lease to enable registration. This unsatisfactory situation can usually only be avoided if the landlord in question happens to be a local (district) government company, in which case, our experience is that the Real Estate Bureau will waive the need for their official lease. Sometimes the Real Estate Bureau will also accept printed versions of the official Municipal Lease with significant additions in the appendix. The point is that acceptance of non-standard leases is patchy at best.
Another consideration, particularly for companies leasing offices in former industrial buildings, is the use permitted on the title (用途). In order to register a lease as an office, the title deed held by the landlord must also specify ‘office’ use. If it doesn’t, while the building can be occupied for an office, the Real Estate Bureau will not permit the lease to be registered for the purposes of an office. Hence, no lease registration certificate will be issued and thus a key piece of paperwork to establish a company in China will be missing. There is an exception (unofficially) to this situation: if the company is going to register its tax in the relevant district the Real Estate Bureau will waive the requirement for the title to specify office (with future tax revenues in mind).
Just to reiterate, if you do lease a property for use as an office where the title does not specify office (it may, for example, be industrial or commercial) you can still use it as office space. You will just not be able to register the lease. If this is a branch office – or you already have registration set up elsewhere – this is not a huge problem. Tenants in search of alternative space usually have to remain flexible on this too. If this is your first office site in China, you will probably want to tread more carefully.
