Professional Interpretation

Abstract: As prescribed in Contract Law article 230, “the landlord who intends to sell a leased real estate property shall notify the tenant within a reasonable period of time prior to the sale, in which case the tenant shall enjoy the right of first refusal under equal conditions”. According to this article, a tenant is granted a preemptive right to purchase the leased property. Such special design leads to a question that when tenant sublets to the third party, who shall be deemed to have the right of first refusal, the tenant or sublessee?

I. The clarification of Sublessee in this article.

By virtue of the differences existing between civil law system and common law system, we need to first clarify which form of leasehold will be discussing in this article.

As we know, under common law, the transfer of lease interest could be taken in two forms, assignment or subletting, while there is no clear distinction under civil law system. The criteria of distinguishing those two is to determine whether landlord and tenant are in privity of estate. According to China Contract Law article 224, “the lessee may, with consent of the lessor, sublet the leased item to a third party. The lease between the lessee and the lessor shall continue to be valid of the lessee sublets the leased item and the lessee shall be liable for compensation if the third party causes losses to the leased item.” Such clause should be interpreted as: (a) after transfer of interest, landlord and tenant remain in privity of contract; (b) the tenant is responsible for any losses to property caused by sublessee, which implies that the sublessee is not in the privity of estate with landlord, (or it should be the sublessee who bear the responsibilities).

As Indicated above, the sublease prescribed in China Contract law is by virtue, a sublease but not assignment. The legal relationship will be discussing is diagramed below:

II. Sublessee’s legal status

As shown above, a sublessee is not responsible to landlord, or, a sublessee shares no nexus with landlord. To elaborate, the landlord and sublessee are in neither privity of estate nor privity of contract while the sublessee and tenant are in privity of estate and privity of contract.

To be exact, the tenant’s lease-based rights and obligations are not reduced or ended due to the actual possession of property by sublessee, which in turn leads to another question, why sublessee have actual possession over the property when there is no rights transfer? In this case, the action of subletting is not deemed as a transfer of interests, instead it is regarded as an agent action, which means the sublessee represents tenant in exercising rights and preforming duties. The subletting action is not motivated by the possession over the property of tenant (this surely is a premise), but more by the payoff for the effort he makes to integrate resources and as a result, to rent the property again with a premium.

III. Conclusion: the sublessee does not enjoy the right of first refusal.

Let’s get back to the key question, who has the right of first refusal, tenant or sublessee? We conclude that only the tenant enjoys such right, below is the reasoning.

First, the authority scope of agent limits sublessee’s ability to exercise right of first refusal. Undoubtedly that tenant has the right of first refusal in case of no subletting. Then in the case of existence of subletting, sub lessee’s rights are from the authorization of tenant. Without specifying, the sublessee is only the general agent for whom performing the right of first refusal is out of the scope of her general authority.

In addition, granting the sublessee right of first refusal would destabilize the original leasehold relationship. Before the landlord intend to sell property, there is a third-party leasehold relationship between landlord, tenant and sublessee. Such relationship is harmonious and stable. Now suppose we granted the sublessee the right of first refusal, which equals to forcibly remove tenant from the original three- party relationship. It is not hard to predict that the tenant would protest angrily. His legal status is no longer admitted and his effort to integrate resources is not compensated. Under this circumstance, the original three parties relationship collapses, and interests of tenant is left unprotected. This must cause much more potential chaos.

Furthermore, not granting sublessee the right of first refusal doesn’t have negative affect on original leasehold relationship. Suppose tenant purchased the property by exercising his right of first refusal, he would become the new landlord. Under the principle of “No Break of Lease in Case of Purchase”, the sublessee can still have the possession of the property while his legal status has changed to tenant. The transfer of property is rather smoothly proceeded, and nobody need move out.

To conclude, the Docvit law firm dispute resolve team believe that the reason for sublessee to enjoy the right of first refusal cannot be established. The goal for this system is to stabilize the leasehold and protect interest of lessee. On the contrary, to clarify that the tenant is the only person who enjoys the right of first refusal could not only to stabilize the leasehold relationship, but also could put every party in this relationship to the right place in case of transfer.