[Direct answer]You still have to pay. The rent for financial leasing corresponds to the interest on the financing capital, not the daily usage fee for the equipment. If the leased asset is damaged or lost during the lessee's possession, there is no automatic exemption from the obligation to pay the remaining rent in principle. There are only a few exceptions: the contract explicitly stipulates that the risk transfers with the transfer of ownership; the damage is caused by the lessor or a defect in the leased asset itself; and the contract is terminated through negotiation or arbitration. If the lessee wants to reduce the burden, the approach is not simply to stop paying the rent, but to first determine the cause of the damage and the residual value, report the damage in time, and then determine whether to request a reduction or exemption according to the contract and legal judgment, use the insurance money to offset the payment, or claim to terminate the contract and liquidate the assets.

1. Problem background and typical scenarios

There is a structure of financial leasing that is often overlooked: the ownership of the equipment is registered under the lessor's name, but the lessee retains the right to possess, use, and benefit from it. The two parties remain separated for a long time. The lessee signs a fixed-amount rental payment schedule, with each installment calculated at the time of signing and unrelated to the actual usage of the equipment or any malfunctions. Therefore, in the event of fire, flooding, collisions, equipment theft, force majeure, or operator errors, many lessees initially assume that since the equipment is damaged, they no longer need to pay rent, and promptly stop making payments. However, the lessor insists that the rent represents the consideration for financing, and the risk should be borne by the party in possession according to the contract, demanding on-time payments and even claiming accelerated maturity of the remaining rent. This leads to disputes. Common industries involved include manufacturing equipment, construction machinery, medical devices, vehicles, and information systems, as these assets are high-value and heavily used, with downtime often impacting the lessee's operations. Insurance arrangements add another layer of complexity: who purchases the insurance, who is the beneficiary of the policy, how the deductible and exclusion clauses are written, and whether claims are filed promptly all affect who ultimately bears the losses. Disputes often escalate into legal proceedings, where lessees face three options: continue paying rent and seek additional compensation, use insurance proceeds for repairs or offsetting damages, or terminate the contract for a one-time settlement. Each path requires different evidence and costs.

II. Key points of contention

One of the disagreements lies in the nature of the rent. If the rent is understood as a usage fee, it seems that the lessee should not pay if the subject matter is damaged. However, if it is characterized as a phased repayment of the principal and interest of the financing, the condition of the subject matter does not necessarily affect the payment obligation. In a financing lease contract, the lessor mainly assumes the function of financing and does not bear the risk of using the equipment. This characterization determines all subsequent inferences. The second disagreement concerns how to draft the risk-bearing clause and whether it is effective. Most contracts stipulate that after the delivery of the leased item, the lessee shall bear the risks of custody, maintenance, and damage or loss. Such clauses are generally respected. However, if the damage results from the lessor's failure to deliver qualified equipment according to the contract, hidden defects in the equipment itself, or the lessor's interference with the use, the responsibility must be redistributed. The third disagreement concerns the proof of the cause of the damage. There are four causes corresponding to four consequences: force majeure, third-party infringement, improper operation, and normal wear and tear. The proof relies on fire investigation reports, accident certificates, weather data, operation logs, and damage assessment reports, rather than simply saying that the equipment is broken. The fourth disagreement concerns termination and liquidation. After the contract is terminated, whether the remaining rent should be paid in full, how the residual value should be offset, who should receive the insurance proceeds, and how to calculate the proportion of the paid rent all need to be handled within the same accounting framework. Finally, there are procedural issues: equipment-related disputes often involve appraisal and identification. Jurisdiction is determined by the contract or the defendant's domicile. If there is an arbitration clause, court litigation is excluded. Whether the appraisal application can be submitted in time within the evidentiary period directly affects the pace of the trial.

III. Professional analysis by Hengluo Lawyers

When reviewing such cases, we typically start by examining three documents: the financial leasing contract and its appendices, the rent payment schedule, and the insurance policy. The contract appendices typically contain detailed provisions on risk burden, maintenance obligations, insurance beneficiaries, notice periods for damage and the consequences of termination; the payment schedule is used to calculate the number of installments paid, the outstanding principal and interest; and the insurance policy determines whether there are third-party guarantees in the event of a loss. Only when these three documents are aligned can we begin to make judgments. Next, we examine the cause of the damage. If it is due to the lessee's improper storage or operational errors, the risk is generally borne by the possessor, and the lessee's rent obligations continue. The lessee can use insurance compensation to cover repair costs. If it is due to hidden defects in the equipment or the lessor's failure to deliver as agreed, the lessee can claim corresponding responsibilities from the lessor and request rent reductions or compensation for losses. If it is due to force majeure or third-party infringement, we need to check whether there are special provisions in the contract, whether the insurance covers it, and whether the lessee has fulfilled its notice and mitigation obligations in a timely manner. Next, we proceed to the financial settlement. Path one is to continue the contract and pay the rent as usual, while seeking compensation from the responsible party or insurer for repair costs and downtime losses. Path two is to use insurance compensation to repair or offset the damages, but we need to verify the beneficiary, deductible, and coverage scope to avoid mixing insurance compensation with rent payments. Path three is to negotiate or arbitrate the termination of the contract, in which case a one-time settlement is required: offsetting the outstanding rent and agreed compensation against the residual value of the leased asset and insurance compensation to determine the final amount payable or refundable. In terms of evidence organization, the fire or public security authorities' accident determination, the insurer's loss assessment report and insurance claim receipt, full-scale and detailed images of the damage site, equipment operation logs and maintenance records, repair quotes or residual value assessments, and written notifications and delivery receipts sent to the lessor constitute a complete chain of evidence. By arranging these documents chronologically, we can verify whether and how much rent should be reduced.

IV. Practical suggestions and legal basis

It is recommended to follow four steps in the order of actions: 1. Immediately report the accident or damage and preserve the scene after discovering it. Obtain the case number and inspection records, and take panoramic and detailed photos with time stamps. Do not move the wreckage or declare it scrapped without authorization. 2. Notify the lessor in writing within the contractually agreed timeframe and manner, stating the time and location of the damage, the preliminary cause, and the current condition of the equipment. Keep the letter and the delivery receipt on file to avoid being accused of failing to notify them in time. 3. Entrust a qualified agency to conduct damage assessment and residual value evaluation, and collect the insurance policy, maintenance records, and operation logs to prepare for subsequent deductions or claims. 4. Choose a dispute resolution path according to the contractual provisions: - If negotiation is possible, discuss the scope of deductions, insurance compensation, or termination and liquidation. - If negotiation fails, initiate or defend litigation in accordance with the provisions of the Civil Code of the People's Republic of China (effective January 1, 2021) regarding financial leasing contracts, risk burden, and breach of contract liability. The Interpretation of the Supreme People's Court on Several Issues Concerning the General Provisions of the Contract Chapter of the Civil Code (effective December 5, 2023) can be used to determine the scope of losses and breach of contract consequences. The Civil Procedure Law of the People's Republic of China (amended on December 24, 2021, effective January 1, 2024) stipulates the evidentiary deadline, appraisal, and trial procedures. The Payment Methods for Litigation Fees (effective April 1, 2007) specify the filing fees based on the amount of the claim. The Arbitration Law of the People's Republic of China (amended on September 1, 2017) determines whether the arbitration clause can exclude court jurisdiction. Specific rules applicable to individual cases shall be subject to the currently effective laws, regulations, and judicial rulings. For review criteria of similar equipment contracts, please refer to our firm's guidelines.Business and contract disputes in enterprisesThe scope of services provided by the special consultation service.

The procedures and organizational laws need to be specified separately: the Company Law of the People's Republic of China (amended on December 29, 2023 and implemented on July 1, 2024); the Civil Procedure Law of the People's Republic of China, the amended version of which came into effect on January 1, 2022, and the amended version of which came into effect on September 1, 2023 and January 1, 2024. When searching for legal precedents, the historical changes should be checked separately.

5. Hengluo Law Firm's Advice

There are three pitfalls that are easy to fall into. Firstly, don't stop paying the rent just because the equipment is broken. Stopping payment itself may be considered a breach of contract and trigger the accelerated maturity of the remaining rent. Discounts and exemptions need to be negotiated and adjudicated, not unilaterally announced. Secondly, don't just report the loss verbally or leave only a few partial photos. The police report receipt, inspection records, panoramic images, and operation logs are all indispensable. Both the original documents and original carriers must be preserved. Thirdly, don't ignore the details of the insurance policy: beneficiaries, deductibles, exclusion clauses, and reporting deadlines. Any discrepancy in any of these items may result in the failure of the claim. The disposal of residual value also requires prior confirmation from the other party before proceeding. It's also worth noting that there are differences in the risk burden provisions for different types of equipment, insurance application habits, and residual value evaluation criteria. The contract structure, proportion of paid rent, and cause of damage in individual cases will also affect the conclusion. For high-value cases with complex causes or where the lessor has claimed accelerated maturity, it's essential to evaluate the path of action as soon as possible with the contract, payment statements, insurance policies, and damage assessment materials, and act within the statutory time limits to protect rights and interests in a legal and secure manner. Don't trust any verbal result guarantees.

VI. Frequently Asked Questions

Q1: If the equipment is burned during use, does the lessee still need to pay the remaining rent according to the original contract?

In principle, it is necessary. The lease payments of financial leasing are the installment repayment of the principal and interest of the financing, which does not correspond to whether the equipment is available at the current time. If the leased item is damaged during the lessee's possession, the risk is usually borne by the possessor according to the contract, and the remaining lease obligations will not be automatically extinguished. The exceptions are limited to three cases: the contract explicitly stipulates that the risk transfers with the transfer of ownership; the damage results from the lessor's failure to deliver qualified equipment according to the contract or hidden defects in the equipment; and the contract has been terminated through negotiation or arbitration and the liquidation has been completed. According to the provisions of the Civil Code of the People's Republic of China (effective January 1, 2021) on financial leasing contracts and breach of contract liability, simply stopping payment may easily be claimed as a breach of contract and even be required to pay off the remaining rent in full. A safer approach is to first report the loss, determine the cause, and then discuss reductions or offsets with the insurance money.

Q2: If a tenant claims that the leased property has been damaged and refuses to pay the rent, what fire safety and damage assessment materials are required to be provided?

There should be at least four sets of materials. The first set includes the accident identification and proof of loss issued by the fire department, public security authority, or industry supervision department, which are used to determine the cause and time of the accident; the second set includes the insurance company's claim receipt, inspection records, and loss assessment reports; the third set includes panoramic and detailed images of the damaged scene, equipment operation logs, and maintenance records; and the fourth set includes repair quotations or third-party residual value assessment reports. The written materials should be submitted in original or copies with verification stamps, and the images and electronic data should retain the original carriers. According to the provisions of the Civil Procedure Law of the People's Republic of China (amended on December 24, 2021 and implemented on January 1, 2024) on the types of evidence and the burden of proof, both the cause of the accident and the amount of the loss shall be proved by the party claiming a reduction or exemption. If the materials are not coherent, the request for a reduction or exemption will be difficult to be supported.

Q3: When suing for the difference between the remaining rent and the residual value, which amount should be used to calculate the filing fee?

The litigation fees are calculated based on the cumulative amount of the disputed subject matter, not the total contract amount. According to the "Measures for the Payment of Litigation Fees" (implemented on April 1, 2007), the acceptance fees for property cases are calculated based on the amount involved in the litigation request. When filing a lawsuit, the plaintiff pays the fees in advance, and the losing party ultimately bears the fees or shares them according to the proportion of liability; for cases applying the summary procedure, the acceptance fees are reduced by half. If the plaintiff simultaneously claims for fee reduction, refund of paid rent, and compensation, the subject matter amount shall be calculated cumulatively; the residual value appraisal fees and appraisal fees shall be separately paid. There is no unified government pricing for attorney fees. Based on the complexity of the case, the subject matter amount, and the workload, the fees are agreed upon in the entrustment contract by the hour, as a percentage of the subject matter amount, or on a time basis. It is more prudent to calculate the amount that can be reduced or exempted together with the advance fees and appraisal costs before deciding on the scope of the lawsuit.

Q4: When is the appraisal of the damage to the leased property scheduled to take place, before the fourth court hearing after the case is filed?

It is usually submitted within the evidentiary period and completed before the court hearing. According to the Civil Procedure Law of the People's Republic of China (amended on December 24, 2021 and implemented on January 1, 2024), the party applying for appraisal shall submit the application within the evidentiary period. Whether to approve it shall be decided by the court, and the appraisal period shall generally not be included in the trial period. The ordinary procedure of the first instance generally lasts six months, and the summary procedure lasts three months. The second instance generally lasts three months. If appraisal, evaluation, or public notice of service are required, the period will be extended accordingly. It is recommended to submit the appraisal application, the damage assessment materials, and the shortlist of evaluation institutions on the same day as the case is registered, rather than raising the issue at the first court hearing, otherwise the scheduling will be postponed as a whole, and the rent and downtime losses will continue to accumulate.

Q5: At the scene of equipment damage, what images and insurance claim records should the lessee fix first?

First, fix three groups of evidence. The first group consists of panoramic and detailed images with time information, which can show the overall location of the equipment as well as the damaged parts and the serial number of the nameplate; the second group includes the insurance claim receipt, the case number, the surveyor's records, and the call record; the third group includes on-site witness statements, operation logs, and the latest maintenance records to demonstrate the condition of the equipment before the damage occurred. At the same time, notify the lessor in writing within the time limit stipulated in the contract and retain the delivery receipt. Do not move the wreckage or scrap it without authorization. According to the provisions of the Contract Chapter of the Civil Code of the People's Republic of China (effective January 1, 2021) regarding notification, custody, and the obligation to mitigate losses, the more complete the on-site fixation is, the more basis there will be for subsequent determination of the cause of the damage, claims settlement, and rent reduction.

The above answer is based on the judicial practice in Beijing. The judicial interpretations in other provinces or cities may vary. For specific cases, please refer to the local rules and evidence situation.

If you are currently facing similar problems, it is recommended that you consult a professional lawyer as soon as possible with the relevant evidence materials, to avoid missing the statutory time limit. →Business and commercial legal services·Beijing Hengluo Law Firm

Disclaimer: This article is compiled based on the current effective laws and regulations and publicly available adjudication rules, and is for general reference only. It does not constitute a formal legal opinion on specific cases. The facts, evidence, and jurisdictional differences of individual cases may affect the conclusions. In case of disputes, please consult a practicing lawyer in time.