When a real estate lease is entered for a defined period, pursuant to Paragraph 1 of Article 450 of the Civil Code, the lease terminates at the end of such period. As such, if the lessee has intent to continue the lease, the parties may renew the lease under new terms such as rent. However, if the lessee continues to use the property after the lease expires and the lessor does not immediately object, pursuant to Article 451 of the Civil Code, it will be deemed as the lessee is extending the original lease for an indefinite period.  

Once the lease becomes an indefinite period lease, terms such as rent will continue as stipulated in the original lease. However, since real estate value fluctuates according to market conditions, the amount of original rent may become unreasonable after a certain period. To resolve such an issue, Article 442 provides that either the lessor or the lessee may apply the court for an increase or reduction of the property’s rent because of the fluctuation of the real estate value. Moreover, pursuant to the common Principle of Changes in Circumstances of a contract stipulated in Paragraph 1 of Article 227-2 of the Civil Code, the parties of a lease may also petition to the court based on such provision for an adjustment to the rent.

Paragraph 1 of Article 227-2 of the Civil Code provides: “If there is change of circumstances which is not predictable then after the constitution of the contract, and if the performance of the original obligation arising therefrom will become obviously unfair, the party may apply to the court for increasing or reducing his payment, or altering the original obligation.” How does such a provision apply to a real estate lease for an indefinite period? The Taiwan Supreme Court 109-Tai-Shang-Zi No. 1405 Civil Judgment provides the following opinions:

1. The rent of the original lease is calculated based on a fixed percentage of the declared value of the land. If the declared value of the land is changed, the rent would be increased or reduced according to the original lease. Therefore, the court may adjust the rent pursuant to Paragraph 1 of Article 227-2 of the Civil Code only when an unforeseen change of circumstances occurred after the lease is entered, and the calculation of the rent based on the original lease is obviously unfair.

2. When the court adjusts the rent, it shall consider matters such as the rent stipulated in the original lease, the environment of the property after the lease is entered, the degree of business prosperity of the area, the economic value and benefits the lessee can receive from the use of the property. The court shall not use market price as the only basis for determination.

In this case, the lease relationship between the parties has existed for many years. After the original lease expired on March 31, 2010, the parties have not renewed the lease. As such, starting on April 1, 2010, the parties have entered a lease of an indefinite period. The Taiwan Supreme Court considered that the lessor knew and could foresee that the rent would be below market price based on that calculation method in the original lease. However, the lessor still agreed to the lease after its evaluation and assessment. It is the freedom of contract of the parties. Moreover, the lessee did not change the way they used the land. Therefore, we must ask whether the Principle of Changed in Circumstances still apply? In addition, even if the lessor may petition to adjust the rent, one should use the difference between the “rent stipulated in the original lease” and the “market price at the time the lease was entered” as the basis to calculate the rent amount to be adjusted at the time of the complaint. Since the lower court adjusted the rent directly based on the market price at the time of the complaint, the lower court shall conduct a retrial and provide further explanation.

This judgment shows that if a real estate lease is turned into a lease of an indefinite period and one desires to petition to the court for increase or reduce the rent based on the Principle of Changed in Circumstances, the Taiwan Supreme Court considered that there are still relevant conditional restrictions. Lessors are advised to be aware of the term of their lease and not to inadvertently turn their lease into a lease of an indefinite period so that their right to adjust the rent will not be restricted.

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