A tenant who rents a street-front shop for a restaurant expects to obtain a business licence and operate lawfully. When the premises cannot support that purpose, the entire commercial plan collapses. In a case decided in Jiangsu, the tenant signed a shop transfer agreement and a lease, paid the transfer fee, rent, and deposit in full, and then discovered that the premises were subject to policy restrictions: no new restaurant business licence could be issued, and the landlord could only produce a photocopy of an expired licence. The tenant sued to rescind both contracts and recover the transfer fee, rent, and deposit, together with interest. The first-instance court upheld the claim in full, and on appeal by the landlord the second-instance court dismissed every ground of appeal and affirmed the judgment.
The case offers practical guidance on when a lease can be rescinded for frustrated purpose, how refund obligations are allocated among transferor and landlord, and why courts refuse to entertain inconsistent positions on appeal.
Contract Purpose and the Right to Rescind
Chinese contract law protects the purpose for which a contract is concluded. The Civil Code of the People's Republic of China (2021), Article 563, lists the circumstances in which a party may rescind a contract, including the situation where the purpose of the contract cannot be achieved due to a major change in circumstances or the other party's failure to perform. A lease of premises for a restaurant carries an implied and usually explicit purpose: the tenant must be able to operate the restaurant lawfully, which requires a valid business licence for the premises.
The parties may rescind the contract where the purpose of the contract cannot be achieved due to a major change in circumstances or any other cause.
Civil Code of the People's Republic of China (2021), Article 563, paragraph 1, item 5
In the Jiangsu case, the landlord and transferor had known about the licence restriction before signing but had failed to disclose it. The tenant discovered only afterwards that a new licence could not be issued and that the only documents available were photocopies of an expired licence. Operating with another business's licence, or with an expired licence, is not lawful operation; it exposes the tenant to administrative penalties. The purpose of the lease was therefore impossible to achieve, and the tenant was entitled to rescind.
Disclosure Duties of the Landlord and Transferor
Whether a leased shop can obtain the required business licence is a core fact in any restaurant lease. The landlord and the transferor knew, or ought to have known, of the policy restriction. Their failure to disclose it before signing, and their disclosure only afterwards, was a concealment of a material defect affecting the tenant's use of the premises.
The evidence assembled by the tenant's counsel followed the full timeline of the transaction: the signing video, WeChat records, the handwritten receipt, and the bank transfer vouchers. Together they proved that the restriction was never disclosed before signing, and that the tenant only learned of it when asked to accept photocopies of an expired licence. Courts treat the failure to disclose a known impediment to the contractual purpose as conduct that entitles the other party to rescind and recover payments.
The Refund Obligation: Receipts, Third-Party Accounts, and Estoppel
Three refund issues arose in the case. First, the landlord argued that the rent and deposit had been paid through a third party's account and that it should not be obliged to refund them. The court rejected this argument because the landlord had personally issued the handwritten receipt acknowledging receipt of the funds. A receipt issued by the landlord is an acknowledgment that binds it, regardless of which account the money passed through.
Second, the landlord argued that a temporary lock on the shop did not amount to taking back the premises, and that the tenant should not escape the rent obligation. The court found that the tenant had never moved in, that a rescission dispute had already arisen, and that the landlord's unilateral locking of the shop was an exercise of control over the premises. The tenant owed no further rent.
Third, the landlord sought to reverse on appeal factual positions it had admitted at first instance. The second-instance court applied the principle of estoppel: a party that has made a clear admission at trial cannot casually overturn it on appeal without new objective evidence. Litigants must be consistent; the courts will not reward strategic inconsistency.
How Rescission Is Exercised and What Follows
Rescission does not happen automatically when the ground exists; it must be exercised. Article 565 of the Civil Code provides that a party exercising the right to rescind must notify the other party, and the contract is rescinded when the notice reaches the other party. Where the other party objects, the matter may be resolved by a court or an arbitration institution, which may confirm the rescission. In the Jiangsu case the tenant sued to rescind both the transfer agreement and the lease, and the court confirmed the rescission and ordered restitution.
Article 566 sets out the consequences: after rescission, the parties must restore what each received under the contract. Money paid must be returned, with interest where the law or the circumstances require. The refund of the transfer fee, rent, and deposit in the Jiangsu case was exactly the restitution regime of Article 566 in operation. Because the tenant had never moved in, there was no use of the premises to offset against the refund, and the full amounts were returned.
The Judgment and Its Allocation of Liabilities
The final judgment reflected the two contracts involved. The transferor was ordered to return the transfer fee of RMB 33,000 within ten days, with interest on the LPR basis from the date of filing. The landlord was ordered to return the rent and deposit totalling RMB 13,500, also with LPR-based interest. The court costs of both instances were apportioned between the transferor and the landlord, and the debtor's failure to pay on time would trigger the statutory doubling of interest for delayed performance.
The allocation is instructive: each party that received money under the rescinded arrangement must return it, and the parties whose concealment caused the rescission bear the costs. The tenant was not required to prove that it had suffered any additional loss; once the contract was rescinded for frustrated purpose, the refund followed as a matter of course.
Practical Guidance for Commercial Tenants
For tenants of commercial premises in China, particularly in the food and beverage sector, the practical steps are: verify the licensing position before signing by asking the landlord for the current licence and confirming with the local market regulation authority whether a new licence can be issued for the premises; record all negotiations in writing or by recording; insist on receipts issued by the actual landlord; and include in the lease an express representation that the premises can be used for the intended business and a remedy if that representation proves false. For landlords and transferors, the message is that concealment of licensing restrictions is a high-risk strategy that leads to rescission, full refunds, interest, and costs. Xin Lu of Shanghai advises clients on commercial leases, restaurant operations, and the recovery of payments following contract rescission.
