I am in the process of writing an article for a leading publication on the things I am seeing that tell me China’s economy is cooling. The statistics from China seem to be saying everything is just fine, but man, all I can tell you is that my firm has been absolutely inundated with matters that tell me we are in the throes of a crash.
The email I just received has become unbelievably typical over the last few months:
Hi. I am an avid reader of China Law Blog. I run a small _________ company in Shanghai and have come upon my own situation in which I would like to ask for a legal opinion. It’s not a very big issue and maybe not even worth pursuing it but since we are a very small company with limited funds it’s still of relevance for us.
A part of our business is renting out _________ machines to customers such as restaurants. One of these restaurants has just gone out of business. Since several months of rent are due to the landlord, the landlord has locked the shop down with all equipment (our _______ machine, the restaurant’s employees’ personal things, etc.) all still inside. The landlord is saying that they will release everything inside the restaurant only after discussing with the restaurant operators, all significant employees of which have now left town.
I am not exactly sure what will happen, the situation is vague as many things are here, but we would like to get our machine back (wholesale cost of about 20k RMB).
My questions now are if the landlord has the right to keep our property (e.g. the machine) and if not, if there is anything worthwhile that we can do about it?
Thank you.
Here is my response:
Without reviewing your contract with this restaurant, I have no way of knowing what you can and should do. If you have a really good contract (preferably in Chinese) that makes clear that the ______ machines belong to you unless and until they are fully paid-for, then you should show that to the landlord and odds are good he will let you walk off with your machines. If you don’t have such a contract, I wish you good luck because at that point it is not likely to be very clear who owns what.
We have lately been getting a ton of these sorts of requests and I am going to do a blog post on it, stripping your email of any identifiers.
This is China’s new reality, brought about by the fact that businesses are failing and foreigners are now much more intwined in China’s economy than ever before. We are right now working on the following matters, all of which I am being intentionally vague about for obvious reasons:
- Chinese manufacturer gets shut down because it has fallen behind on its loan(s) from the government/private company/private individual. Foreign company has X dollars worth of product sitting in this factory. In some cases, the foreign company has paid for the product, but lacks a good contract to prove that it has paid in full for it and the lender is seeking more before it will release it. In other cases, the foreign company has yet to pay anything for the product but it needs it really badly because it has already sold much of it on to others, with an incoming delivery date.
- Chinese manufacturer gets shut down because it has fallen behind on its loan(s) from the government/private company/private individual. Foreign companies molds/tooling are in the factory and it wants those back so it can quickly and cheaply move on to having some other Chinese manufacturer make its product. The lender is saying that the molds/toolings now belong to them. We have previously written on what you can do to protect your molds in China and that advice holds doubly true for the situation when someone else has come in and taken over the factory of your Chinese supplier. For those How Not To Lose Your Molds In China. Want Your China-Based Molds? You’re Probably Too Late For That How To Protect Your Molds And Tooling In China.
The contract really is the key. In most cases, there typically will be some negotiating with the landlord or lender, with the key to that negotiation being your leverage and your leverage will depend on the quality of your contract. If your contract makes clear that the asset belongs to you, the lender/landlord typically will choose to give you your asset. If your contract is less than clear on this point or if you have no contract at all, it typically becomes a negotiation between you and the landlord/lender and you will need to pay about as much for the assets as the landlord/lender thinks it can get by selling the assets to someone else.
