Just Bought a Home—Only to Find Strangers Living There? A Lawyer Explains the “Sale Does Not Terminate Lease” Trap

Case Summary

A sold a house owned by him to B, and the two parties executed a formal contract for the sale of the property. However, prior to the transfer of ownership, A unilaterally leased the same house to C and entered into a lease agreement. Upon learning of this, B contends that A’s leasing activity has infringed upon his rights and demands that A cease the lease and complete the transfer of title. In contrast, lessee C maintains that, having already paid the rent, he is entitled to continue occupying the premises.

How, then, should this series of legal relationships be clarified? Is the lease agreement valid prior to the transfer of ownership of the property? To whom does the rent belong? And which rights and interests of Party B have been infringed upon by Party A’s conduct?

Is the lease agreement valid?

In accordance with the “sale does not terminate lease” principle set forth in Article 725 of China’s Civil Code, if the ownership of the leased property changes during the period in which the lessee is in possession under the lease agreement, such a change shall not affect the validity of the lease contract. This means that even if the ownership of the property is transferred, the original lease contract remains valid and binding on the new owner (the buyer).

However, the application of this principle is subject to an important precondition: the lease agreement must have been validly concluded prior to the transfer of ownership of the property, and the lessee must have already taken actual possession of the premises. In the present case:

Effectiveness of the Lease Agreement: After Party A sells the property to Party B but before the transfer of ownership is completed, Party A remains the owner of the property and retains the right to lease it to third parties. Therefore, the lease agreement entered into by Party A and Party C is valid in itself.

Binding effect on Party B: In accordance with the principle of “sale does not terminate lease,” this lease agreement is binding on Party B. Even if Party B acquires ownership of the property, it shall have no right to require Party C to vacate during the term of the lease, unless the lease agreement is invalid.

Legal Basis: Article 725 of the Civil Code provides: “If the ownership of the leased property changes during the period in which the lessee is in possession pursuant to the lease contract, such change shall not affect the validity of the lease contract.”

Who should the rent go to?

The issue of rental income attribution should be considered in stages:

Prior to the transfer of ownership: Party A remains the owner of the property, and any rent paid by Party C shall be attributable to Party A.

Upon the transfer of the property, Party B becomes the new owner, and the right to rental income shall accordingly be transferred. If Party A continues to collect the rent, such conduct constitutes unjust enrichment, and Party B is entitled to demand that Party A return the improperly obtained funds.

A’s act of leasing the property after its sale amounts in substance to the disposition of the proceeds from property that is about to belong to another party. As the purchaser, B is entitled, upon payment of the purchase price, to all rights and interests in the property, including the rental income. Accordingly, from the date on which ownership of the property is transferred, the rental income shall vest in B.

Legal basis: Article 985 of the Civil Code provides: “Where a beneficiary obtains an undue advantage without legal basis, the party suffering loss may request the beneficiary to return the benefit obtained.”

Which rights and interests of Party B have been infringed?

A’s conduct is suspected of infringing the following rights and interests of B:

1. Full ownership interest

The purpose of Party B’s purchase of the property was to acquire full and unrestricted ownership. Party A’s unauthorized subletting has imposed a leasehold encumbrance on the property, thereby preventing Party B from immediately using or deriving income from the property upon acquisition and potentially even affecting Party B’s plans for occupancy or resale, thus substantively undermining Party B’s legitimate expectation of ownership.

2. Contractual Rights

Under the house purchase and sale contract, Party A is obligated to deliver a property free from any defects in title. By establishing a leasehold interest in the property, Party A has created a burden on the title of the delivered property, which may constitute a breach of contract.

3. Right to Rental Income

As stated above, upon the transfer of ownership of the property, the rental income shall vest in Party B. Party A’s continued retention of the rental income constitutes an infringement of Party B’s property rights.

How should Party B protect its rights?

1. Assertion of Liability for Breach

If the house purchase and sale contract expressly stipulates that the property shall be delivered free of any encumbrances, Party B may require Party A to bear liability for breach of contract, including compensation for losses incurred due to the inability to use the property in a timely manner.

2. Demand for the return of rent

Party B is entitled to request Party A to refund the rent collected from the date on which ownership of the property was transferred.

3. Exercise of the Creditor’s Right of Subrogation

If Party C has paid to Party A the rent accruing after the transfer of ownership of the property, Party B may also directly claim such portion of the rent from Party C, because Party A owes a duty of restitution to Party B, and Party A’s claim for rent against Party C constitutes part of its liable assets.

4. Termination of the Lease Agreement by Mutual Consent

Party B may negotiate with Party C to provide appropriate compensation in order to terminate the lease agreement early and regain the right to use the premises.

Recommendations for All Parties

To Buyer B:

Prior to signing the purchase agreement, the buyer should conduct an on-site inspection to verify that the property is not already occupied or used by another party, and the contract should expressly stipulate that, upon delivery, the property shall be free of any encumbrances such as leases or mortgages, together with the corresponding liability for breach of contract.

For Seller A:

The principle of good faith shall be observed: no new encumbrances may be imposed on the property after its sale but before the transfer of ownership, so as to avoid liability for breach of contract.

To Lessee C:

When entering into a lease agreement, the lessee should verify that the lessor is the owner of the property and request to see the real estate ownership certificate. If the lessee is aware that the property is about to be sold, the lease agreement should clearly stipulate the procedures for handling the situation upon transfer of ownership, in order to safeguard the lessee’s rights and interests.

Real estate transactions involve significant property rights and interests; all parties should act with due diligence, respect existing legal relationships, and adhere to the principle of good faith and fair dealing. When conflicts of rights arise, the law seeks to strike a balance between safeguarding transactional security and upholding the established legal order, and clear contractual provisions coupled with honest performance remain the most effective means of preventing disputes.