Civil matter / House lease dispute / Zhongshan Intermediate People’s Court, Guangdong / March 27, 2026 / (2026) Yue 20 Min Zhong 408 / Second instance

I. Holding

A “malicious breach” refers to a party that has the ability to perform but refuses to perform its principal contractual obligations, intentionally breaches the contract to obtain an improper benefit, or obtains an improper benefit through fraud, concealment of material facts, or harm to the other party. The defendant terminated early because its own factory had been completed and it needed to relocate its operations as a whole—not to obtain lower rent, shift business risks, or pursue another improper benefit, and not because it had no legitimate reason to refuse performance. Although the defendant failed to give the contractually required advance written notice and therefore committed a serious procedural breach, the available evidence was insufficient to prove a subjective intent “to breach deliberately for an improper benefit and intentionally harm the plaintiff.” The conduct therefore did not constitute a malicious breach.

II. Facts

On July 9, 2021, Hua Technology Co., Ltd. leased a factory complex from its owner, Ying Co., Ltd., in a town in Zhongshan. The premises consisted of Buildings A, B, and C and an open area. The lease term was nine years, and Hua paid Ying a deposit of RMB 3 million. The agreement required Hua to give three months’ written notice before early termination; otherwise, the deposit would not be returned. In December 2021, Hua subleased the entire factory complex to Chun Electric Appliance Co., Ltd. under a factory lease for the same nine-year term, with rent increasing periodically. Chun paid a rental security deposit of RMB 2.46 million. The agreement expressly prohibited Chun from terminating early; if early termination became necessary, Chun had to give three months’ written notice, or the deposit would be forfeited and Chun would owe twice the deposit as compensation. The agreement also required the breaching party to pay attorneys’ fees, litigation preservation insurance premiums, and other enforcement costs. Both parties knew that Building C had not obtained a construction project planning permit.

During performance, Chun responded to Zhongshan’s policy for the renovation and upgrading of inefficient industrial parks, built its own factory, and planned to relocate its operations as a whole. On May 6, 2025, Chun’s legal representative notified Hua by WeChat that Chun would clear the premises that day and requested a handover the next day. On May 7, without giving the contractually required three months’ written notice, Chun unilaterally cleared out and returned the keys to Ying’s gatekeeper. Hua expressly rejected that method of handover on the spot. On May 30, Hua, citing its own business development, entered into a lease termination agreement with Ying and voluntarily terminated its lease; Ying forfeited Hua’s RMB 3 million deposit. On June 17, Hua sent Chun a notice of termination, confirming that the contract had ended on May 30 and seeking forfeiture of the deposit, rent, and liquidated damages.

Hua sued Chun in the court of first instance, seeking RMB 618,515 in rent for May 2025, forfeiture of the RMB 2.46 million deposit, RMB 4.92 million in compensation, RMB 30,000 in attorneys’ fees, and RMB 3,220 in litigation preservation insurance premiums. Chun argued that its relocation was policy-driven and not malicious; that it owed rent only for May 1 through May 7; that the deposit corresponding to Building C should be returned because that building was an illegal structure; that the agreed liquidated damages were excessive and should be reduced; and that Hua’s forfeited RMB 3 million deposit was the result of Hua’s own business decision and was unrelated to Chun.

The first-instance court held that Chun’s notice of early termination was too abrupt, that Chun had not negotiated with Hua, and that Chun had acted maliciously. Relying on Article 65(3) of the Supreme People’s Court Interpretation on Several Issues Concerning the Application of the General Provisions of the Civil Code’s Contract Book, which generally does not support a malicious breacher’s request to reduce liquidated damages, the court refused to reduce the compensation claimed by Hua and granted all of Hua’s claims. Chun appealed to the Zhongshan Intermediate People’s Court, seeking reversal of the compensation and rent awards and arguing that rent should be calculated only for the period of actual occupation.

III. Issues in Dispute

(1) Did Chun’s abrupt, unilateral vacating without negotiation constitute a malicious breach?

The first-instance court held that Hua’s claim for RMB 4.92 million—twice the deposit—was based on the contractual clause providing that the deposit would not be returned and that twice the deposit would be paid as compensation. Under Article 585(1) of the Civil Code, the parties may agree on a fixed amount of liquidated damages or a method for calculating compensation for losses caused by a breach. The clause reflected the parties’ true intention and was valid. Chun argued that Hua’s losses had already been covered by the forfeited deposit but offered no evidence. Hua, which did not bear the burden of proving its losses for this purpose, submitted evidence of its losses, while Chun failed to provide sufficient contrary evidence. The first-instance court also found Chun’s notice too abrupt and malicious and therefore refused to reduce the liquidated damages. It granted Hua’s claim for RMB 4.92 million.

Current laws and regulations do not provide a clear definition of “malicious breach.” Courts therefore face difficulty distinguishing a good-faith breach from a malicious one. A breach rarely appears entirely “good faith”; it usually involves some degree of intent or negligence. But intent or negligence is not equivalent to malice. In individual cases, courts have had to explain the distinction in the reasoning section of their judgments, leaving room for discretion and making a uniform standard difficult to establish.

The Supreme People’s Court has not provided a single, clearly applicable definition of “malicious breach.” In Understanding and Application of the Contract Book of the Civil Code (II), the Supreme People’s Court, with reference to Article 48 of the Minutes of the National Conference on Civil and Commercial Trial Work, states that a breaching party seeking termination must satisfy three conditions, including that its request must not be malicious. The purpose is to prevent opportunistic conduct that harms the non-breaching party. Deliberately breaching because performance has become difficult or economically unreasonable may create moral hazard and violate the principle that no one should profit from its own unlawful conduct. For example, a seller may maliciously terminate after property prices rise and sell the same property to multiple buyers. Allowing such termination would seriously harm transaction order and security. This explanation, however, does not itself provide a complete definition of malicious breach.

Some judicial views describe malicious breach in two ways: a debtor deliberately chooses to breach despite having no obstacle to performance, or chooses to breach in order to pursue a greater economic benefit and cause loss to the counterparty. An example of the first type is a homebuyer who no longer wants to buy after prices fall, despite having the ability to perform, and brings various arguments to seek termination. The principle of strict performance should apply, and the breaching party’s request should not be supported. An example of the second type is a seller who sells one property to two buyers after prices rise, with the purpose of obtaining an improper benefit or shifting risk unfairly to the non-breaching party.

On appeal, Chun argued that it responded to Zhongshan’s policy for upgrading inefficient industrial parks, invested in land and the construction of an intelligent small-appliance research, development, and production project, completed its own factory in May 2024, and then began production. Its purpose in terminating the lease was to relocate its operations as a whole. That conduct had a legitimate policy background and a proper business purpose, rather than a motive to benefit itself by harming Hua. Beginning in July 2023, reports by Nanfang Rural News, Huangpu Publish, and the company’s official account had disclosed Chun’s new factory. Hua could therefore have anticipated in 2023 that Chun would relocate after the project was completed. As a professional factory leasing business, Hua should have tracked the market and could not reasonably have been unaware of Chun’s construction plans. By focusing only on the lack of three months’ written notice and treating the notice as abrupt and malicious, the first-instance court failed to consider Chun’s prior communications, cooperation in clearing the premises, and the public disclosure of the relocation. Chun argued that it had no intention to profit at Hua’s expense, had a legitimate reason for terminating, and had cooperated with the handover; its failure to provide formal advance written notice was a procedural breach, not a malicious breach.

The second-instance court held that the RMB 4.92 million compensation and RMB 2.46 million forfeited deposit, totaling RMB 7.38 million, were both forms of liquidated damages under the contract. However, the “malicious breach” referred to in Article 65(3) means that a party with the ability to perform refuses to perform its principal obligations in order to obtain an improper benefit, or uses fraud, concealment of material facts, or harm to the other party to obtain an improper benefit.

The WeChat public-account articles submitted by Chun showed that, from July 18, 2023 to July 28, 2025, Zhongshan Industry and Information Technology, Huangpu Publish, Nanfang Rural News, and Chun’s official account had reported Chun’s participation in the renovation and upgrading of inefficient industrial parks and the construction of its intelligent small-appliance production base. There was therefore no evidence that Chun had defrauded Hua or concealed the construction of its own factory. Chun terminated because its own factory was complete and it needed to relocate, not to obtain lower rent, shift business risks, or refuse performance without justification. Chun did breach the contract by failing to give three months’ written notice, but the evidence did not prove that it deliberately breached to pursue an improper benefit or intentionally harm Hua. Its conduct was not a malicious breach. The first-instance court erred by treating an abrupt notice alone as a malicious breach and then refusing to consider Chun’s request to reduce the liquidated damages.

(2) Was the lease of Building C invalid because the building lacked a construction project planning permit?

The first-instance court held that Building C’s lack of a construction project planning permit was a defect in part of the leased premises, but that Building C represented a small proportion of the total leased area. The parties knew the condition of the premises, and performance of the agreement had only a minimal effect on public order. The court therefore held the lease valid as a whole under Article 16 of the Supreme People’s Court’s interpretation of the General Provisions of the Civil Code’s Contract Book.

On appeal, Chun argued that Article 157 of the Civil Code and Article 2 of the Supreme People’s Court Interpretation on Several Issues Concerning the Application of Law in the Trial of Disputes over Urban House Lease Contracts rendered the lease of Building C invalid. The court could distinguish the invalid portion from the valid portions under the principle of separability. Because Buildings A and B were permitted structures and the parties’ agreement regarding them was otherwise valid, the deposit corresponding to the invalid portion should be returned without affecting the rest of the contract.

The second-instance court agreed. Article 2 of the urban house lease interpretation provides that a lease concluded for a house that has not obtained a construction project planning permit, or that was not built in accordance with such a permit, is invalid, unless the permit or approval is obtained before the close of first-instance oral arguments. Building C still lacked the permit at that time, and Hua did not prove that the relevant authority had approved its construction. The agreement concerning Building C was therefore invalid from the outset and had no legal binding effect. The first-instance court erred by treating the entire agreement as valid merely because Building C was a small part of the premises and the impact on public order was limited.

Article 156 of the Civil Code provides that if part of a civil juristic act is invalid but the remainder can remain effective, the remainder remains effective. Buildings A and B had obtained the required permits, and the agreement concerning them reflected the parties’ true intention without violating a mandatory provision of law or administrative regulation. The invalidity of the Building C portion therefore did not affect the remaining provisions, which the parties were still required to perform.

(3) Was Chun required to pay rent from May 8 through May 30, 2025 after vacating on May 7?

The first-instance court held that Chun had proposed early termination without the required three months’ written notice and had no other statutory ground for early termination, so Chun was in breach. Although Chun had cleared the premises and delivered the keys on May 7, its breach did not eliminate its liability. Because Hua needed a reasonable period to find a substitute tenant, the court treated May 8 through May 31 as that period and awarded Hua the claimed May rent of RMB 618,515.

Article 566 of the Civil Code provides that after termination, unperformed obligations cease; where a contract is terminated because of a breach, the party with the right to terminate may seek liability for breach. Chun vacated and returned the keys on May 7, so the lease ended on that date. The rent obligations after May 8 consequently ceased, and Chun should not have to pay rent for a period when it no longer used the premises. On appeal, Chun argued that it owed only RMB 144,320 for May 1 through May 7, calculated as RMB 618,515 / 30 days × 7 days.

The second-instance court found that on May 3, Hua’s employee had transferred RMB 137,923 to Ying’s legal representative, with the note “Ying Electric Appliance rent for May 1 to May 7.” Because Chun had not occupied, controlled, or used the premises after May 8, it owed Hua rent or a use-and-occupation fee only for May 1 through May 7, and not for May 8 through May 30. The first-instance court erred on this point.

(4) Was the forfeiture of a deposit equal to four months’ rent sufficient to cover Hua’s losses?

Hua argued on appeal that the loss of the RMB 3 million deposit forfeited by Ying, brokerage fees, and the cost of installing equipment for Chun’s needs were direct and inevitable losses caused by Chun’s malicious early termination. Because Chun knew Ying owned the premises, Hua argued that Chun could foresee that Chun’s breach might force Hua to terminate the head lease and become liable to Ying.

Chun argued that the head lease between Hua and Ying and the sublease between Hua and Chun were separate legal relationships. Hua had entered the head lease six months earlier, not specifically for Chun, but to sublease to the market and earn a rental spread. A new tenant occupied the premises in the month after Chun left, showing that Hua could have continued performing the head lease by finding a replacement. Hua’s decision to terminate the head lease and surrender the RMB 3 million deposit was a business choice made to avoid market risk, not a direct and inevitable consequence of Chun’s departure. The costs of the connecting bridge, transformer, and fire shutters were long-term capital investments attached to the premises and capable of generating value in future leasing; they were not irrecoverable losses caused by this particular termination. Hua’s recovery of a full month’s rent, forfeiture of the RMB 2.46 million deposit, and award of RMB 4.92 million in compensation would equal 13 months of rent and exceed its actual loss, resulting in duplicate compensation.

The second-instance court assessed the losses item by item. First, the RMB 3 million deposit forfeited by Ying resulted from Hua’s voluntary termination and had no necessary, direct causal relationship with Chun’s breach. Hua, as a sublessor, could have found a replacement tenant and continued the head lease; without proof of an objective obstacle to reletting, the deposit loss resulted from Hua’s own business decision. Second, the RMB 1.215 million brokerage fee was a business cost incurred to conclude the sublease. After the parties had performed for three years and four months, the reasonable loss allocated to the remaining five years and eight months was RMB 787,500 (RMB 1.215 million ÷ nine years × five years and eight months). Third, the RMB 353,183 cost of the connecting bridge, transformer, and fire shutters had become attached to the premises. Considering the installation dates and service lives, the depreciated loss attributable to the remaining term was RMB 220,000. Fourth, the vacancy loss was in substance the rent or use-and-occupation fee for May 8 through May 30 after Chun vacated, calculated as RMB 618,515 less RMB 144,320, or RMB 474,195.

Hua’s total actual loss was therefore RMB 1,481,695 (RMB 787,500 + RMB 220,000 + RMB 474,195), while the contractually stipulated liquidated damages totaled RMB 7.38 million. The liquidated damages were manifestly excessive compared with the loss caused by Chun’s breach, so Chun’s request for adjustment had a factual and legal basis. Applying the principles of fairness and good faith, and considering the parties’ performance and Chun’s degree of fault, the second-instance court held that the remaining deposit of RMB 2,347,156—after deducting RMB 112,844 corresponding to Building C—was sufficient to cover Hua’s actual losses. Hua’s separate claim for RMB 4.92 million was denied. The first-instance judgment had improperly awarded both the RMB 2.46 million deposit and the RMB 4.92 million compensation, and the second-instance court corrected it.

The second-instance judgment thus reversed almost the entire first-instance result, broadly matching our first-instance prediction that the deposit would be forfeited and that only rent for May 1 through May 7 would be supported. The reversal reduced our client’s economic loss by more than RMB 5 million.

IV. Case Analysis

The second-instance court clarified that a procedural defect in terminating a contract is not the same as a malicious breach. Malicious breach requires the ability to perform combined with an intentional refusal to perform principal obligations for an improper benefit, fraudulent concealment, or conduct intended to benefit oneself by harming the other party. The analysis must be both subjective and objective. Subjectively, there must be direct intent and an improper motive: the party knows it is breaching, seeks or accepts the harmful result, and aims to benefit itself at the counterparty’s expense. A termination for legitimate reasons such as policy changes, business relocation, or market conditions, without an intent to cause harm, should not be treated as malicious. Objectively, there should be conduct such as fraud, concealment, deliberate evasion, refusal to cooperate, or serious harm to the lessor’s interests.

Here, Chun relocated because it responded to an industrial policy and completed its own factory. The relevant information had been publicly disclosed; there was no fraud or concealment. Chun’s purpose was to improve its operating conditions, not to harm Hua. It had also communicated orally about the move and cooperated in clearing and handing over the premises. Its failure to strictly comply with the three-month written-notice requirement was a procedural breach, not a malicious breach. The first-instance court’s conclusion based solely on the abrupt notice was wrong in both fact-finding and legal application, and the second-instance court corrected it. The rule established by the second-instance judgment helps prevent a tendency to treat every early vacating as malicious and to grant excessive liquidated damages automatically. It returns breach liability to its compensatory core, with punitive effects remaining limited. Where an enterprise adjusts its premises in response to industrial upgrading, park renovation, or urban renewal policies, courts should exercise restraint and should not readily infer malicious breach, thereby preserving room for the real economy to develop.

This case brings together several recurring issues in house lease disputes: the determination of malicious breach, adjustment of liquidated damages, and the validity of leasing an unlicensed structure. By defining malicious breach more precisely and correcting the assumption that early termination automatically equals malice, the second-instance court provides useful guidance for balancing the rights and obligations of commercial leasing parties and improving the business environment.