The rental contract is deadlocked, who will bear the relevant losses?

　In the practice of housing leasing, it often happens that the lessee is unable to continue to perform the contract due to various reasons, and the lessor does not agree to terminate the contract, thus falling into a deadlock in the contract.

Brief facts of the case

　　On June 10, 2022, Zhang and Tang signed a "Housing Lease Contract", stipulating that Zhang would lease a house owned by Tang for the operation of a restaurant. The lease period is from June 10, 2022 to June 9, 2025, with a rent of 10,000 yuan/month, and Zhang shall pay half a year's rent on the day the contract is signed, and the rent shall be paid every six months thereafter. If either party breaches the contract, it shall pay 20% of the total contract amount to the other party as liquidated damages. On the same day, Zhang paid Tang 60,000 yuan in rent from June 10, 2022 to December 9, 2022 according to the agreement. At the end of September 2022, Zhang communicated with Tang about early surrender due to poor management of the restaurant, but the two parties did not reach an agreement. Zhang informed Tang in November 2022 that he had emptied the house and moved out, and Zhang had not paid rent since then.

　　Now Tang sued Zhang to the court, requesting that the lease contract signed by the two parties be terminated on April 9, 2023, and that Zhang pay Tang a rent of 40,000 yuan and liquidated damages of 72,000 yuan from December 9, 2022 to April 9, 2023.

　　Zhang argued that he negotiated with Tang three months in advance to quit the lease, and moved out of the house in October 2022, and did not ask for the rent for the remaining three months, and he had already borne the corresponding responsibility, and Tang allowed the loss to expand, and he should no longer be required to bear the liability for breach of contract, and the liquidated damages were too high.

Heard by the courts

　　There are two issues in this case: first, whether and when should the contract in question be terminated? Second, should Zhang bear the liability for breach of contract?

　　After trial, the court held that the contract involved in the case was an expression of the true intention of both parties, and the content did not violate the mandatory provisions of laws and administrative regulations, and should be legal and valid, and both parties should fully perform their respective obligations in accordance with the contract.

　　About the cancellation of the contract. The lease term stipulated in the lease contract involved in the case was three years, and Zhang had actually paid the rent until December 9, 2022, and had not paid the rent since then. Zhang had made it clear that he would no longer lease the house involved in the case, and had communicated with Tang several times on the termination of the contract, but it was shelved because the two parties could not reach an agreement. On November 5, 2022, Zhang sent a WeChat message to Tang saying that "the house has been emptied, and the rent for the remaining months is gone", and Tang replied "whatever you want". Based on this, it can be determined that the two parties have been unable to reach an agreement to continue to perform the lease contract involved in the case, and it is difficult to enforce the performance of the obligations of such contracts, and in fact a contractual deadlock has been formed. If the contract is not terminated, on the one hand, the lessee will be liable for the loss of rent without using the premises, and on the other hand, the lessee's ability to pay rent will be limited, which will be detrimental to the realization of the lessor's claim. Therefore, in accordance with the provisions of Article 580 of the Civil Code and the principle of fairness, the housing lease contract involved in the case should be terminated. Zhang actually paid the rent until December 9, 2022, and informed Tang in advance about moving out, saying that the remaining rent was gone. Judging from the photos submitted by Zhang, the house involved in the case has basically returned to the state before the lease, and judging from the evidence submitted by Tang and the receipt of the house, it can also be seen that there is no actual performance of the contract between the two parties since December 2022, so this court determines that the termination of the lease contract involved in the case is December 9, 2022 based on the evidence in the case and the actual circumstances of the case. Tang's claim that Zhang paid the rent for the period from December 10, 2022 to April 9, 2023 lacked factual and legal basis and was not supported by the court.

　　Regarding liquidated damages, Zhang's early termination of the contract has constituted a breach of contract and should bear the corresponding liability for breach of contract, but Tang claimed that the liquidated damages should be calculated in accordance with the contract, that is, 72,000 yuan, which was significantly higher than his actual loss, and Zhang objected to this, so the court adjusted it in accordance with law. Considering the actual circumstances of this case and the principle of fairness taking into account the interests of both parties, the court decided to use 4 months' rent as the calculation standard for liquidated damages, and did not support the excess.

　　In the end, the court ruled that the contract involved in the case was terminated on December 9, 2022, and Zhang should pay 40,000 yuan in liquidated damages to Tang. After the judgment was handed down, neither party appealed, and the judgment has now entered into force.

What the judge said

　　The deadlock in the housing lease contract refers to the situation where the performance period of the contract has not expired, and the parties to the contract have a great dispute over whether the contract will continue to be performed as agreed, resulting in the complete or almost lost basis for the continued performance of the housing lease contract. After the contract reaches an impasse, it often causes certain losses to the non-breaching party, and the question of how to bear the loss: on the one hand, the breaching party should bear the liability for breach of contract. The parties may agree to pay a certain amount of liquidated damages to the other party according to the circumstances of the breach, and may also agree on the method of calculating the amount of compensation for losses arising from the breach. If the agreed liquidated damages are lower than or excessively higher than the losses caused, the people's court or arbitration institution may increase or appropriately reduce them at the request of the parties. On the other hand, the non-breaching party shall take appropriate measures to prevent the expansion of losses, otherwise it will bear the increased losses on its own. Therefore, the way to solve the contract deadlock is that both parties should stop the loss in a timely manner in good faith. In the event of a dispute, the parties shall uphold the concept of negotiation, take the initiative to communicate and resolve the conflict, the breaching party shall actively bear the liability for breach of contract, and the non-breaching party shall terminate the contract in a reasonable and legal manner, claim liquidated damages and corresponding losses, and take appropriate measures to prevent further expansion of losses, so as to get out of the contract deadlock as soon as possible and protect the rights and obligations of both parties.

Links to legal provisions

　　Civil Code of the People's Republic of China

Article 585, Paragraph 2 Where the liquidated damages agreed upon are lower than the losses caused, the people's court or arbitration institution may increase them at the request of the parties; Where the agreed liquidated damages are excessively higher than the losses caused, the people's court or arbitration institution may appropriately reduce them at the request of the parties.

　　Article 591.1 After one of the parties breaches the contract, the other party shall take appropriate measures to prevent the expansion of losses; Where failure to take appropriate measures results in an increase in losses, compensation for the increased losses shall not be claimed.

Source: Shandong High Court, Huaiyin Court