The International Hotel Law Review: China
China is the second largest hotel market in the world by revenue, just behind the United States, with a wide gap to the third largest market, which is Japan. All market segments are well developed as it would be expected in such a large market but there are certain aspects to the landscape of operators that are unique to China. This is partly due to regulation, such as the separation between local and international players, only the latter being subject to the foreign investment legal regime that is still relatively restrictive compared to the legal framework applicable to the local hotel industry.
Market growth has been astonishing throughout the last twenty years and it is no surprise that all internationally operating hotel brands have flooded into China to get a piece of the huge market and the expected growth. The top end of the market has traditionally been dominated by the well-known international brands, but Chinese operators are working hard to develop new hospitality brands for the luxury segment. While room rates in particular in the luxury segment in China are comparatively low, the expansion of the market even in cities with saturated markets goes on, often as part of a branding strategy to make Chinese consumers familiar with the respective brand to benefit from future bookings in more profitable markets once people resume travel overseas. However, there is relatively little genuine outward expansion in the global hospitality sector from China so far, despite a short-lived spike of purchases of global brands and hotel properties around 2016, including the iconic Waldorf Astoria Hotel in New York City and the Club Med chain, investments often made by investment conglomerates rather than hospitality businesses.
An important aspect of the legal structures used for operating hotels is the form of real estate ownership. In China, ownership of land can only be held by the state or rural collectives. All other entities or individuals can only acquire land use rights on such state or collectively owned land. State-owned land can only be used by legal and other persons who hold a land use right over the land. Land use rights are generally conveyed by the state through a bid, auction and listing or grant.
Depending on the approved land use purpose, owners of a real estate property can only enjoy the land use right for a limited period of time. For example, the term of use for residential purposes is 70 years, whereas the term of use for commercial, tourism and entertainment purposes is 40 years. For the rest, i.e., industrial, education, science technology, culture, public health, sports purposes and so forth the term is 50 years.
In China, there are two popular types of hotels, one is the traditional hotel model, the other is the condominium hotel model. A condominium is an apartment building in which each apartment is owned by the person who lives there. Condominium hotels, deemed as commercial real estate, exist in almost all major cities in China beside the traditional hotels.
The term of use for residential real estate and commercial real estate is different. Taxes levied on commercial real estate, public utility costs, construction standards and property management fee standards are higher for commercial real estate than for residential real estate. A major driver of this has been the categorisation of condominium hotels as residential real estate.
With more and more condominium hotel developers trying to sell their hotels as residential real estate, in May 2010, the Beijing municipality issued a local regulation under which the development of condominium hotels were no longer permissible for hotel-related land use right purchases approved after 30 May 2010. This effectively meant that smaller property titles on a guest room by guest room basis could no longer be granted to individual owners in Beijing. Since then, governmental authorities in other first and second-tier cities issued similar local regulations to close the door on new condominium hotel projects.
According to the Circular of the Ministry of Housing and Urban-rural Development and Other Authorities on Adjusting Policies on the Market Access and Administration of Foreign Investment in the Real Estate Market, a branch or a representative office of a foreign institution established in China (except for the companies that are approved to operate real estate businesses) and a foreign individual that works or studies in China may purchase commercial property for the purpose of self-use or living. In the cities that implement such restrictive policies on property purchasing, foreign individuals shall satisfy such local policies before purchasing a property.
An overseas institution or individual that purchases real estate in China that is not for self-use must follow the principal of commercial presence. It means a foreign investment enterprise relating to foreign investment in real estate needs to be established. When applying to establish a real estate company, land use rights and ownership over relevant structures shall first be obtained. Alternatively, a preliminary agreement for transfer or purchase of land use rights or building ownership rights signed with the land administration department, the land developer, or the owner of said building(s) shall be obtained. Where an already established foreign-invested enterprise expands their business to include real estate development or management, or a foreign-invested real estate enterprise engages in the development or management of a new real estate project, an application for an increase in business scope shall be filed with the examination and approval authorities.
Popular business models include management and franchising models, which mainly focus on high-end and low-end to mid-level hotel brands respectively and are discussed below.
In principle, parties are free to negotiate and agree on the terms of hotel leases. However, a typical lease may contain the following provisions:
- details of the parties and leased premises;
- rental, deposit and payment term (including payment of property management and utility);
- lease term;
- liabilities on repair and maintenance;
- liabilities of breach;
- termination and indemnification;
- dispute resolution.
Longer lease term is generally preferred for hotel leases, however, the term of a lease cannot exceed 20 years for all types of leases. In general, tenants are not guaranteed right of renewal at the end of the contractual lease term under the prevailing Chinese law. In China, many hotel leases adopt fixed and tired rent, meaning rent payable remains the same during certain period of time, for instance, three years but is typically subject to an increase and reach next tier of rent rate. Turnover rent is not a prevailing market practice in China for hotel leases. Development clauses are very common and normally included in many hotel leases, which gives the landlord the right to redevelop the building over the course of a typically long-term hotel lease. Many hotel leases provide the landlord with a right to terminate and re-enter the leased premises in the event that the tenant breaches the lease agreement and fails to rectify such breach within a stipulated period of time upon notice. With regard to insurance under hotel leases, in practice, the landlord usually purchase insurance policy for the property and meanwhile require the tenant to purchase insurance covering damages caused to the leased premises or third parties and require its name to be added as additional insured.
Intellectual property and branding
Foreign hotels, whether or not entering the Chinese market, may face various challenges on intellectual property rights in China. Infringers and free riders can usually be found after the brands are known by Chinese customers. It is much easier and quicker now, thanks to the development of social media, for tourists to share their overseas travelling experience.
With respect to trade names, a hotel's unauthorised use of another business' corporate name (including its shortened name or trade name) or the name of an individual (including his or her pen name, stage name, translated name, etc.), which has influence to a certain extent in society, violates Article 6 of the Anti-Unfair Competition Law. Such hotels shall, in a timely manner, undergo name modification registration. Before its name is modified, the original enterprise registration authority shall substitute its unified social credit code by its real name.6
In China, company registration is handled by municipal level governmental departments separately. The officers will only check whether there is a hotel using a same or similar name in the same city. Therefore, one can register a local company using a name identical or similar to other brands to operate a hospitality business in China, unless the brand has a well-known Chinese name. In this case, the infringer may create a 'legitimate' ground of using the brand. The brand owner may push them to change their trade names based on the prior registered trademarks, reputation, and fame in China. However, such complaints need to be filed and tried case by case. The procedures will be costly and sometimes the outcome will be unfavourable. Failure to change the company names will be a setback but there are other available options. If the brand owner can prove a prior right and a reasonable reputation, it will have the right to forbid the infringer from prominently using the trade name. Therefore, it is important to conduct trademark registrations as a very first step, keep good records or evidence of promotions in China and regularly monitor the market even before the brand formally enters China.
With respect to trademarks, even if a hotel does not register a trademark similar to another hotel's pre-registered trademark within the same industry, its prominent use of other pre-registered trademarks (shape or text) in its trade name, service, decoration that could cause confusion in the market would infringe the exclusive right of pre-registered trademarks.
Brand owners need to choose a formal Chinese name or mark as early as possible and build a connection between the Chinese name and the original brand. Trademark hijackers may try to expand the scope of the goods (i.e., besides the goods most relevant to the hospitality industry (Classes 35 and 43)), they will also register the marks in the potentially linked classes (e.g., towels/bedding (Class 24), shampoo/soap (Class 3) and cabinets (Class 20)). Therefore, defensive trademark registrations are always useful to block the attempts of infringers and can secure own rights to use the hotel brand and logo on accessories. In the new Trademark Law, which took effect on 1 November 2019, 'registration not for the purpose of use'7 is added as a reason to invalidate the trademarks. It is deemed as a signal that the administration will not tolerate the abuse of registered trademarks by hijackers.
Establishing a fake website is cheap but useful to attract guests to the wrong hotel. Such copycat hotels are usually of low quality and price, which harms the reputation of the copied brand. Taking quick action (e.g., domain name dispute complaint) to shut down the infringing website should in these cases be a priority. More serious action can be taken against repeated infringers, including a civil action or an administrative action. A fraudulent website usually includes pictures copied directly from the original website, which is a straightforward case of copyright infringement. It is also possible that the counterfeiters take photos themselves in the genuine hotel and then use them to promote the copycat hotel. In theory, a person who takes a photo owns the copyright of the photo and it will be hard to claim copyright infringement. However, a competitor of the hotel who makes use of such pictures to promote their own hotel will be deemed to have falsely advertised and committed “other acts of confusion sufficient to mislead a person into believing that a commodity is one of another person or has a particular connection with another person',8 therefore violating the Anti-Unfair Competition Law of China.
Some risks may be experienced during cooperation with different vendors.
For the interior decoration, it is a common practice that international hotels will provide a unified style or internal standard for a local construction team to follow. The same construction team may serve other hotels and use its previous work as a template. When the decoration style is recognisable, it may be used to confuse guests. Besides setting a reasonable fine in the decoration agreement to forbid the construction team from using the materials in other projects, it is generally a good idea to clarify that any intellectual property rights generated during the construction shall be owned by the hotel. Similarly, the hotel shall seek to own and register all relevant intellectual property (e.g., design patents) of any customised furniture, ornaments and daily necessities. If there is any violation of the exclusive right to use these materials, the hotel may not only claim a breach of contract by the construction team, but also obtain an injunction for the use of the same materials.
All the hotels display artwork such as; sculptures, photographs or paintings, in their public areas. For valuable artwork, international hotels usually engage sourcing agents or artwork consultants to search relevant artwork, either domestically or globally. This may lead to issues with third-party intellectual property rights in such artwork. Hotels often defend themselves with a legitimate source, proven by the agreement, statement and warranty signed by the sourcing agent, the artwork consultant, or the artist. Such a defence may help to avoid paying compensation if the hotel can present good evidence to prove that it is the liability of the sourcing agent, the artwork consultant or the artist. However, the hotel may still be obliged to cease further infringement by destroying or removing the alleged artwork if the third party is seeking such an injunction, causing losses to the hotels. Therefore it is reasonable to ask for an indemnity from the contracted sourcing agent, artwork consultant or artist in case the final artwork infringes any other party's intellectual property right.
In China, the Music Copyright Society of China acts as a centrally authorised party for all the music copyright owners. They deal with music licensing issues between the owners and the users. There is usually a certain term for the licence and, therefore, the hotels need to pay attention to renew the contract in a timely manner, avoiding any infringement due to the expiration of the licence.
Data and hotel tech
Companies operating in the hospitality sector are currently facing significant challenges in reviewing their data collection and processing systems, particularly, if they are adopting new technologies to help them with room reservations, check-in and check-out, and payments as is currently the trend not only for luxury brands. In the normal course of business hotels are collecting highly sensitive data such as guests' identification numbers, accommodation information, mobile phone numbers, ethnic origin, passport number and credit card details.
The General Data Protection Regulation (GDPR) adopted on 27 April 2016 introduced a new regime for the protection of personal data in the European Union (EU) and it came into force on 25 May 2018. The EU Regulation applies both in the case of a company being established in the EU and where a company is located outside of the EU but offers goods or services to EU residents (e.g., through a website in the language or currency of an EU member state) or when the behaviour of individuals in the EU is monitored by a company located outside of the EU. The nU Regulation also applies when personal information is provided to reserve a room and obtain free Wi-Fi. It also includes medical information given for selecting an appropriate spa treatment or health and diet information in relation to allergies and food preferences so that hotel can provide food and beverage services safely to the guests. Under the GDPR, data controllers such as hotels will be required to keep records of the processing activities and all data breaches, even if not notified, to prove the observance with the accountability principle and to enable supervisory authorities to monitor compliance.
Apart from the application of the GDPR in some instances, China has recently taken significant steps to develop its data protection laws, both measures and sector-specific regulations. Currently, China does not have a single overarching national law that dedicatedly addresses the collection, storage, transmission and use of personal information. Relevant provisions are scattered in different sectoral laws and regulations, including, for example, the Constitution, the Cyber Security Law (the CSL), Criminal Law, Tort law, Consumer Rights Law, telecommunications regulations and so forth. In addition, personal information protection and data security has gradually been enhanced through the introduction of a number of legislations, including the newly-adopted Chinese Civil Code (effective from 1 January 2021), and the long-awaited draft Data Security Law (published on 3 July for public consultation). Meanwhile, the much-anticipated top-level legislation – the Personal Information Protection Law, has been included in the legislative agenda for 2020 (although the draft has not yet been public available at the time of drafting this book). Regarding enforcement, China also does not have a single authority responsible for enforcing provisions in relation to the personal data protection. The enforcement responsibilities are mainly shared by three government organs, namely the Cyberspace Administration of China (the CAC), the Ministry of Industry and Information Technology and the Ministry of Public Security.
China Cyber Security Law came into effect on 1 June 2017, together with a few other regulations and measures (some are still in draft status as of August 2020) broadly regulating the collection, storage, transmission and use of personal information by critical information infrastructure operators and network operators, which hotels are very likely to be. In the absence of a dedicated personal information protection law, the recommended National Standards on Information Security Technology – Personal Information Security Specification (GB/T 35273—2020) (the PI Specification),9 has played an important role in providing guidance for compliance in personal information processing. Ihe PI Specification is also called the 'China GDPR', as the GDPR has served as the primary model during the drafting of this set of national standards. This non-binding guideline contains detailed requirements on data handling and data protection (i.e., excessive collection of users' personal information, forced collection) and bundled authorisation is not allowed. Chinese government authorities are known to apply the PI Specification as an important measure of compliance coupled with binding data protection laws and regulations.
One of the challenges faced or will be faced by companies in the hospitality sector is the consent requirement for the transfer of data. Under the CSL, to obtain the informed consent of data subjects for transferring or disclosing any of their personal data to a third party is necessary though it lacks detailed requirements as to the nature of the consent.10 However, consent to an overseas data transfer may be implied by a person's actions. For example, when sending international emails or instant messages, making international phone calls or conducting international transactions over the internet in accordance with the draft Guidelines for Cross-Border Data Transfer Security Assessment released by The National Information Security Standardisation Technical Committee in May 2017. In addition, the latest revisions in the draft Security Assessment Measures issued by the CAC require all network operators to obtain regulatory approval for transfers of personal data outside of China.11 This burden is more onerous than the self-assessment procedure under the previous draft and would have significant implications for companies in the hospitality sector as network operators. However, regulatory approval for repeat or continuous transfers of personal data to the same recipient would not be required unless there is a change to the type of data being transferred, the purpose of the transfer, or the permitted retention period.12
In light of these new regulations being subsequently adopted, companies are required to carefully review their IT structure, internal processes and internal data protection or privacy policies and develop new governance procedures or revise the existing ones to safeguard guests' privacy rights. The CSL imposes a mandatory obligation on companies to promptly inform data subjects of a data breach or other loss of personal data. A network operator is also required to report the cyber incident to the relevant sector regulator and to take immediate remedial action.13 Draft Regulations on the Multi-Level Protection Scheme (MLPS) of Cyber Security require network operators to report cyber incidents to the local branch of the Ministry of Public Security within 24 hours. In addition, under the National Contingency Plans for Cyber Security Incidents effective on January 2017, cyber incidents are required to be reported to the Cyber Security Coordination Office of the CAC under several circumstances.
With the rapid growth of the internet and information technology, there have been cases in which personal data was improperly collected, abused and leaked. This undermines people's rights, according to a spokesman for the second session of the 13th National People's Congress, the country's top legislative body.14 On 10 September 2018, the National People's Congress included personal data protection law, which is being perceived as a single comprehensive data protection law in China into the first category of items of the legislative plan, which will be submitted for consideration during the term of the office.15 In June 2020, this much-anticipated law was included again in the legislative agenda for 2020.16 There was a draft for China's personal data protection law a decade ago, which modelled the 95 EU Directive on data protection. It will take some time before we get to see the draft of the personal data protection law.17
For multinational companies operating in the hospitality sector or multinational companies doing business in China in general, it is necessary to know about the China-specific add-on to its global data protection compliance programme. For instance, data localisation, security assessments prior to cross-border data transfer, personal information security impact assessments, and a multiple-level protection system.
Hospitality was the third-most targeted industry after retail and finance in an onslaught that has left few corners of the industry untouched, according to a 2018 report from information-security firm Trustwave Holdings.18 Hilton Worldwide Holdings Inc., Hyatt Hotels Corp. and InterContinental Hotels Group have all been targeted in past attacks as well as Trump Hotels, Radisson Hotel Group and Mandarin Oriental. The most recent investigation of a large industry player was Marriott International, which announced that it had taken a US$126 million charge in the second quarter, primarily as a result of the data breach it announced in 2018. Coincidentally, on 9 July 2019, the UK Information Commissioners Office, which enforces the GDPR in the UK, announced that it intended to impose a fine of £99,200,396 on Marriott for its data breach.19 The stakes are only getting higher. Hotel companies are experimenting with voice-operated technology and internet-connected rooms that could mean storing an increased amount of personal information; such as biometric data or what time guests go to sleep.20 Although cost-sensitive investors see more immediate returns from money spent on new carpeting rather than intangible security measures, ignoring compliance with new regulation, in particular around technology, may come at a very high cost.
Hotel management agreements
In China's hospitality industry, the business model of management contract dominates the high-end hotel market, especially for quasi-five-star and above hotels. Foreign management companies coupled with foreign management teams are the major business model, while domestic management companies are still facing challenges. Under the management contract business model, hotel owners generally provide land use rights (land use rights are capable of being sold, leased or assigned provided certain conditions are fulfilled, i.e. the land has been suitably developed pursuant to the land grant contract), buildings, furniture, facilities, equipment and various certificates for operation to the management company. The first hotel in China using a hotel management contract structure is the Jianguo Hotel, which opened in the early 1980s on Chang'an Street in Beijing . The management company is the Hong Kong based luxury hotel Peninsula Group formally known as 'The Hongkong and Shanghai Hotels, Ltd'.
Otherwise, the standards and practices for hotel management contracts are much in line with international standards because this model has been imported to the China hospitality market by international chain brands when they entered the market, looking for a suitable business model in this so far unknown market.
As a labour-intensive industry, the hospitality industry is always populated by employees with various levels of professional skills, experiences and issues.
Unlike other industries, employees in the hospitality industry are required to work long and irregular hours. Most hotel staff work eight hour shifts but many employees actually work up to 12 hours a day or overnight without proper overtime payments because hotels use a comprehensive or flexible working hours system that gives them greater flexibility and lower costs. Many front-line staff face challenges when clocking in overtime or extra shifts during holidays. Common cost management measures include the widespread use of student interns and agency workers, who are often paid less than the minimum wage and have no social insurance.
China's strict employee-friendly labour laws pose hurdles to such practices. Article 36 of the Labour Law provides that the state shall adopt a working hour system, where labourers work for no more than eight hours a day and no more than 44 hours a week on average. Article 38 of the Labour Law provides that the employing unit shall guarantee that its staff and workers have at least one day off in a week.
Lack of workplace protection is another significant issue in relation to employees' health and safety. Many hotels, whether budget hotels or luxury hotels have minimum protection provided to their employees. Though many have a magnificent lobby and gorgeous dining rooms, the back of the house is oftentimes sub-standard. Employees must walk in narrow, dark, dirty and low-ceiling spaces with potential safety risks. It is not uncommon that employees who work in the kitchen get hurt by equipment, cuttings, fire burn or other common injury due to the lack of or incorrect training or misleading instructions. To create a safe and harmonious workplace environment is the duty and responsibility of the hotel as an employer.
Given the general market conditions in China's hospitality industry, many international hotel chains employ foreign employees in China, particularly at the managerial level or above. Therefore, expatriate recruiting and management is one of the key components of a successful HR strategy for China's hotels. Problems often arise out of or in connection with work permits or residence permit applications. Immigration policies are subject to constant changes and require regular monitoring to comply with these, particularly considering the regular enforcement campaigns against foreign nationals illegally staying or working in China. Most recently, China introduced a classification mechanism (classification into three different levels) according to the labour market's needs. Taxation of foreign nationals' income can be complex and rather different from other countries. This means that dedicated management capacity is required to understand and correctly apply these taxation rules. Examples include; tax breaks on worldwide income, tax exempted allowances and social insurance payment exemptions for expatriates from certain foreign countries.
As a result of the seasonal patterns the hospitality industry is exposed to, there is often a shortage of staff in frontline and low-end service positions. For numerous reasons, many hotels outsource certain routine work that is not customer facing, or does not require in-depth training of respective staff. China may pose issues to such practices because staff outsourcing is subject to specific labour dispatch regulations and labour dispatch licences to be held by the dispatching entity. These need to be carefully reviewed to ensure compliance with the law. In practice, there may be numerous situations that constitute 'de facto labour dispatch'.25 For example, where an employer uses workers under the name of 'hire of work', 'outsourcing', etc. To determine 'de facto labour dispatch', decisive factors are usually; employment management, the main payer of labour remuneration, the settlement method of contract expenses, and the qualification or licence of labour dispatch.
Many businesses, small or large, in the hospitality industry do not have a clear set of employment related policies and procedures (i.e., employee handbook or code of conduct). In some cases, employee handbooks have been issued but did not go through the required formal process. In other cases, the code of conduct is formed, but fails on reasonableness requirements. Therefore, every hotel should have a set of well-crafted written standard policies and procedures, so that employees know what is expected of them. If an accident happens or a legal action is brought against the hotel, the hotel may use the set of policies and procedures as part of a defence in a court of law or an arbitration tribunal.
There are no updates at this time.
1 Sven-Michael Werner is a partner and Grace Zhao is an associate at Bird & Bird.
2 Part I Article 1 of the Standardization of Access to and Administration of Foreign Investment in the Real Estate Market (Jian Zhu Fang  No.171).
3 Part II Article 7 of the Standardization of Access to and Administration of Foreign Investment in the Real Estate Market (Jian Zhu Fang  No.171).
4 Part 2 of the Circular of the Ministry of Housing and Urban-rural Development and Other Authorities on Adjusting Policies on the Market Access and Administration of Foreign Investment in the Real Estate Market (Jian Fang  No. 122).
5 Article 2 of the Interim Measures for the Recordation Administration of the Formation and Modification of Foreign-Funded Enterprises (Order No. 6  of the Ministry of Commerce of the People's Republic of China).
6 Article 18 of Anti-Unfair Competition Law.
7 Article 4 of Trademark Law of the People's Republic of China.
8 Article 6 of Anti-Unfair Competition Law.
9 The PI Specification entered into force on 1 May 2018, but drafts of proposed revisions were subsequently issued in 2019. With the finalised revision published on 6 March 2020, the PI Specification became effective from 1 October 2020.
10 Article 22 of the Cyber Security Law of the People's Republic of China.
11 Article 3 of the Circular of the Cyberspace Administration of China on Seeking Public Opinions on the Measures for Security Assessment for Cross-border Transfer of Personal Information (Draft for Comment).
12 Article 3 of the Circular of the Cyberspace Administration of China on Seeking Public Opinions on the Measures for Security Assessment for Cross-border Transfer of Personal Information (Draft for Comment).
13 Article 42 of the Cyber Security Law of the People's Republic of China.
21 Article 11 of the Administrative Regulations on Commercial Franchising.
22 Article 12 of the Administrative Regulations on Commercial Franchising.
23 Article 8 of the Administrative Regulations on Commercial Franchising.
24 Article 5 of the Measures for the Administration of Information Disclosure of Commercial Franchises (Order of the Ministry of Commerce  No. 2).
25 Article 27 of Interim Provisions on Labour Dispatch.
26 Article 149 of PRC Civil Procedure Law.
27 Article 270 of PRC Civil Procedure Law.
28 Article 40 of PRC Arbitration Law.
29 Article 6 of PRC Arbitration Law.
30 Article 8 of PRC Arbitration Law.
31 China acceded to the New York Convention on 22 January 1987, which became effective on 22 April 1987. When acceding to the Convention, China agreed only to recognise and enforce awards (1) made in the territory of another contracting state; and (2) concerning differences arising out of legal relationships, whether contractual or not, that are considered commercial under the national law
32 Article 282 of PRC Civil Procedure Law.
34 Article 3 of Law of the PRC on Application of Law in Foreign-related Civil Relations.
35 Article 1 of Interpretation of the Supreme People's Court on Several Issues Concerning the Application of the Law of the PRC on Foreign-Related Civil Relations (I).
36 Article 126 of PRC Contract Law.
37 Article 4 of Law of the PRC on Application of Law in Foreign-related Civil Relations.
38 Article 5 of Law of the PRC on Application of Law in Foreign-related Civil Relations.
39 Article 15 of the Anti-Monopoly Law.
40 Article 3 of the Anti-Monopoly Law.
41 Article 17 of the Anti-Monopoly Law.