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Contracting leases with landlords of Shanghai¡¯s larger offices or even private landlords who have purchased individual units, should be a relatively straight forward undertaking. There are of course various checks which should be done, for example; ownership documents, Representative Office registration license (if applicable) etc. All of these issues should, in the normal course of events, be explained to potential tenants by their real estate agent. However, when dealing with less mainstream offices, there are significantly more issues potential tenants need to consider.
Earlier this month, the ¡®Shanghai Daily¡¯ covered an interesting story concerning a new art gallery on Suzhou Creek ¨C the ¡®Creek Gallery¡¯. The story involved a disputed lease over the building. It was a typical case of where the landlord (owner) has granted a lease to an entrepreneurial developer (head lessee), who in turn has sought to lease the property to end users (sub-lessee). These cascading leases are fraught with problems. Any tenant considering entering into a lease contract with a party, who themselves are leasing the property (normally called head lessee) should be particularly vigilant.
The starting point for a transaction of the above type, is to see a copy of the ownership title for the property and a copy of the lease granted by the owner to the head-lessee (who will in turn be your landlord). If the head-lessee refuses to produce a copy of this ownership title, don¡¯t do the deal. If they do produce a copy, make sure the exact name of the owner/company on the title, is the same as the party granting the lease to your potential landlord. (We have seen situations where this is not the case). If the relevant parties on the ownership title and lease are aligned, this is the first step solved.
Second, make sure the head lessee is (i) Permitted to sublease the premises (often this is not permitted) and (ii) Is able to grant a lease of the duration being promised. Both sound pretty obvious but are often missed. When examining the lease of the head lessee make sure you see the explicit clause allowing sub-letting and, ensure they have actually been granted a lease which is long enough in duration to enable them to honour their contract with you. (The main issue at Suzhou Creek being that the head-lessee had been granted a lease expiring 2009 but had then granted a new lease to the art gallery, expiring 2007). They had neither a legal right to do this nor any means of delivering on this promise.
Second, check what the ¡®Yong tu¡¯ (ÓÃ;) on the ownership title is. The ¡®Yong tu¡¯ defines how the property may be used and might typically state ¡®industrial¡¯, ¡®commercial¡¯ ¡®office¡¯ use etc. If you wish to use your unit as an office and the ¡®Yong tu¡¯ on the ownership title doesn¡¯t state this, be careful. Frankly, most of these older industrial buildings are not registered as offices but are used as such. In general, this is not a problem but potential tenants should at least enter the transaction being aware of what they are doing.
So, on cascading leases, you must ensure you see copies of both the ownership title and original head lease. The name on the ownership title must be the same as that granting the head lease. The head lessee must have a right to sublet and, be of sufficient duration to enable the grant of the lease they are promising to you. For the other issues, particularly registered use of the building etc. you can probably take a view on the risks (for example if a large office community is already in existence you are likely to feel more comfortable). This is part of the risk and rewards associated with unusual space. They are often worth taking, but should only be done after thorough checks and full knowledge of the potential downsides.
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