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China’s First Foreign Nail House. Dude, Where’s Your Contract?

Posted in Legal News

Lara Farrar and Xie Yu have written an excellent article for the China Daily and AsiaOne on the recent controversy swirling around what is being called China’s first foreign nail house case. The article is entitled, “1st foreigner ‘nail household’ in China,” and it details the travails Tim Hilbert has been having in getting compensation from his landlord for the demolition of the Beijing building that housed Hilbert’s restaurant, “Tim’s Texas Roadhouse.
This is an excellent article because, near as I can tell, it is the only English language article out there that actually correctly analyzes the legal issues. And yes, it is from the China Daily!
The article starts out by setting the factual stage:

Tim Hilbert may have been the first foreigner holed up in one of China’s famous “nail houses” — buildings occupied by stubborn tenants who refuse to leave despite the demolition of structures around them.
But he told China Daily that he does not want to be tagged a “troublemaker”.
“I am not proud to be a ‘nail household’. I just want to get justice and be normal,” Hilbert said.
Last Thursday morning Hilbert went to collect some belongings, including a few pots and pans and an old Phillips 66 gasoline sign, on a final visit to his Beijing restaurant.
Less than 24 hours later, Tim’s Texas Roadhouse, the last business left standing in what was once a dusty neighborhood in northeastern Beijing called Super Bar Street, was demolished, opening the way for a massive new development project.
The restaurant’s destruction marks at least the symbolic end of what has been a four-month standoff between Hilbert, his landlord and a local court over compensation Hilbert says he is entitled to receive.

The article then talks about the intensive media coverage and it provides more history:

The ordeal started on May 12 when Hilbert and neighborhood tenants were informed of the impending relocation. The lights and water would be shut off in early June, they were told, and bulldozing would start shortly thereafter.
Tenants were also advised to arrange compensation meetings with their landlords, said Hilbert, a Texan who moved to China in 2003.
For Hilbert, no meeting would take place. Instead, the Texan said he received a document from his landlord, a company called Seven Colors, notifying him he would receive one month free rent and his security deposit would be returned.
For someone who had invested nearly $650,000 in his business since opening it in 2007, this was something he just couldn’t swallow. And so Hilbert decided to put up a fight.

Hilbert then hired “a Chinese lawyer and a team of security guards to protect his restaurant to fend off wrecking crews.” At one point, Hilbert’s landlord offered to pay him about 360 yuan ($52) a square meter. “That would have been less than 10 percent of what I invested,” said Hilbert.
Hilbert then went through a lengthy legal process that involved him “endless trips to government offices, arbitration centers and courtrooms followed by more trips to meet with local officials and lawyers followed by letters sent to Beijing authorities. Hilbert also sought help from the US Embassy in China, which, completely predictably and justifiably, told him “his case is a commercial dispute with his landlord, and they will not intervene.”
Hilbert has so far been unsuccessful in court but proceedings are still pending:

A district court ruled against Hilbert in a lawsuit filed by his landlord in mid-July seeking to break their contract and carry on with the demolition.
Yi Li, from the Chaoyang District People’s court, told China Daily they were carrying out “prior execution” to tear up Hilbert’s restaurant while the case was actually not closed. She emphasized they acted in line with legal procedures, and the case has not been tried yet.
Hilbert said the Beijing High People’s Court accepted his document last Thursday, and promised to give him a reply within 30 days.
Hilbert said he hopes to present this evidence in Beijing High People’s Court where he has filed an appeal on the August verdict issued by the Chaoyang District Court. It remains unknown whether the court will agree to hear Hilbert’s case. It also remains unclear whether Hilbert will ever receive any compensation from his landlord or the government – or whether he is entitled to it.

THE CONTRACT IS ALMOST EVERYTHING
The article then looks at the case from the correct legal angle, thanks in large measure to CLB co-blogger Steve Dickinson.

According to legal experts, unless a contract between a landlord and a tenant clearly stipulate remuneration for a structure that is going to be destroyed, tenants have no right to demand compensation.
“Most Chinese leases provide very explicitly that if the property is torn down, the landlord gets the compensation and the tenant gets nothing,” said Steve Dickinson, a China-based lawyer at Harris & Moure.
“It depends 100 percent not on property law but on what the lease document says,” said Dickinson.

SO WHAT DOES THE CONTRACT/LEASE ACTUALLY SAY?
The article then gets a little fuzzy as to what the lease actually mandates regarding the landlord’s having to compensate Hilbert for a teardown:

Hilbert said he made an amendment to his lease stipulating compensation if in the future the building housing his restaurant were to be torn down. Hilbert’s landlord could not be reached for comment to verify this.
A woman surnamed Liang, Hilbert’s assistant, told China Daily that they signed the contract with the landlord on March 30, 2007 and the contract should be valid until May 15, 2010.
But they did not make it clear in the contract how much the landlord should compensate Hilbert if the landlord ends the contract ahead of schedule, according to Liang.

THE FUTURE IS UNCERTAIN
It is not clear what Hilbert will do next:

Hilbert would not disclose the next steps he will take in order to secure the money he is owed for the death of Tim’s Texas Roadhouse.
“It is an ongoing matter,” he said. “Obviously nobody ever discusses strategies in ongoing matters with the media until after the actions take place.”

For the record, my firm counsels our clients who lease property in China to think about putting a provision into their lease agreement setting forth exactly what the landlord’s requirements will be if the building is demolished. Buildings get demolished in China all the time and one absolutely must at least consider this when entering into a lease agreement there.
YOU WANT TAKEAWAYS? I’VE GOT TAKEAWAYS.
There is much to be learned from this event.
1. First off, and most importantly, you must realize that your contract is king. Even in China. If you are going to do business in China, you absolutely must realize that the starting point on most legal issues is going to be your contract.
I cannot tell you how many times I have been contacted by someone who wants my law firm’s assistance in suing some manufacturer in China for having provided bad product. One of their first questions nearly always is whether they can win such a lawsuit or not. Here’s my standard reply:

That is going to depend on your contract. If you have a really well crafted contract, that clearly sets out the standards to which your Chinese manufacturer was to build your product, then your chances are going to be a lot better than if the contract is vague or, even worse, if you do not have a contract at all. And if your contract is written in Chinese and if it calls for disputes to be resolved in China, well that’s going to help you a lot as well. But I have to tell you that the mere fact that you are calling me for the first time makes me think you did not use a qualified lawyer to draft your contract and in virtually all of those cases where this has been the case, the situation is pretty bad. So send me the contract and we will get back to you.

For more on China product (OEM) agreements, check out “China OEM Agreements. Why Ours Are In Chinese. Flat Out.
I also cannot tell you how many times I have had a similar conversation regarding a joint venture gone bad (most of these have been in the last year or so as economic shifts have caused these to blow up in even greater numbers than usual). These usually start out with the company going through a long litany of horrible things that are being done to them by their Chinese joint venture partner and then the question as to whether Chinese law prohibits these things. My response (and you have probably guessed it by now) is that virtually all depends on their joint venture agreement. For more on China joint ventures, check out this article “Chinese Joint Ventures — The Information The Chinese Government Does Not Want You To Know “.
2. Secondly, when reading articles about foreigners getting “screwed” in China, you should always ask whether it is China’s laws that are messing with the foreigner or is it the foreigner who tried to mess with China’s laws. I do not even purport to know what the real situation is regarding Mr. Hilbert because I have not seen his lease contract, but the point is that the inquiry should start with that lease contract.
Three or four years ago, there a whole spate of articles came out on foreign companies whose trademarks had been “stolen” by Chinese companies. I realized that most of these articles were leaving out an essential fact in that they did not say whether the foreign company had actually registered its trademark in China or not. So I called some of the reporters who had written these articles and every single time they did not know whether the companies had registered their trademarks in China or not. Seeing as how one cannot have one’s trademark stolen without first owning such a trademark and owning a trademark in China requires registering the trademark in China, these articles had it all wrong. Their thrust should not have been, “China is a country without laws.” Their thrust should have been on how foreigners were going into China without first making any real effort to understand China’s business laws. For more on China’s trademark laws, check out “China Trademark Law: Simple And Effective.
So what do you think?

  • Sean

    So when is the contract everything, and when do you have to be worried about a judge ruling against you in the interest of “fairness” to the Chinese counterpart? (“Fairness” in terms of your previous post here: http://www.chinalawblog.com/2009/05/china_sex_mistresses_improper.html

  • therunningman

    And this is in an economy that woos foreign investment. What will it be like when they decide they don’t need you anymore?

  • Handan

    haha, Sean, my reaction to reading your comment was to search this entry for the word “everything” and found the wording to be “THE CONTRACT IS ALMOST EVERYTHING”…
    I don’t think this entry contradicts what this blog has been saying about other important things for doing business in China.It just focuses on the absolute necessity of a good contract without really mentioning or ruling out the importance of other things.A good read as ever.
    Glad to have time for CLB again as my baby boy get a bit less demanding:)

  • http://www.chinalawblog.com Dan

    Sean/Handan,
    I will be answering Sean’s question in the form of a post coming out tomorrow morning.
    Handan,
    Welcome back and congrats on the kid. Please realize that CLB ought to take priority over family.

  • http://twofish.wordpress.com/ Twofish

    Dickinson: “Most Chinese leases provide very explicitly that if the property is torn down, the landlord gets the compensation and the tenant gets nothing,” said Steve Dickinson, a China-based lawyer at Harris & Moure.
    It would seem to me that those lease clauses would be clearly invalid under Article 121 of the Property Rights Law. Chinese land law works *very* differently than US land law.
    Under Chinese law, the state is the owner of all land, and people hold a right to use that land rather than the ownership of that land. If someone gets a land use right from the state, and then rents out that land use right, there isn’t any reason under Chinese law that I can see of that the first person would have a larger claim to state compensation than the tenant.
    Article 121
    Where the expropriation of the real or movable properties lead to the lapse of the usufructuary right or affect the exercise of the usufructuary right, the owner of the usufructuary right shall be entitled to gain relevant compensations pursuant to the provisions of Article 42 and 44 of this Law.

  • http://twofish.wordpress.com/ Twofish

    Also some municipalities have regulations that specifically require that that tenants be compensated in case land is expropriated. I’m not familiar enough to know if these apply, but if they do then they override any contractual provisions to the contrary.
    This is something to remember when someone complains about poor compensation to evictees in China. In the United States, people that rent usually get nothing when their apartment is taken by the state, whereas it’s standard in China for the government to provide some compensation to tenants in cases of demolitions. It’s pretty standard because it’s legally required.

  • http://twofish.wordpress.com/ Twofish

    Also, it’s very unwise to overgeneralize. In joint venture agreements. it’s assumed that both parties have equal negotiating power and so the laws tend to be rather general in allowing the contract to govern the situation.
    This isn’t the case with labor law, securities law, and land law, when the parties do not have equal bargaining power and so the tendency in both the United States and China is to write a lot of the regulations in law, and to allow for relatively little flexibility. If you allow for a lot of flexibility then all of the landlords or employers will put together “take it or leave it” contract clauses in which there is no real room for any bargaining.
    There’s also the matter of transaction costs. You don’t want to get through a long serious of protracted negotiations every time you buy an apple or rent an apartment, and a lot of provisions of both US and Chinese law are to provide standard provisions for economic transactions so that you don’t need a lawyer to do everything.

  • http://twofish.wordpress.com/ Twofish

    Also in another thread, I posted regulations from the state council that mandate payments of “reasonable amounts” to tenants in case of demolition, and I’m sure that Beijing has local regulations regarding this issue. The tenant meetings that the landlord has with their tenants is something that is legally required under Chinese law (and let me again point out that this is an area where Chinese law is very, very different from and provides much greater protection than US law in which tenants aren’t entitled to anything).
    Finally, I’m pretty sure that Hilbert is going to get something. We can argue over what is “reasonable compensation” but it’s a number greater than zero. If it was clear that Hilbert would get nothing, then there would be no reason for a court to hear the case.

  • bert

    It seems that the guy shouldn’t have invested so much money into a place that isn’t his. Would any landlord even bother to tell a tenant, “oh, don’t put too much money into that place, you never know what will happen tmrw in BJ”? It appears the Texan just didn’t know Beijing.