China: Administrative Measures For The Lease Of Transferable Property - March 2011

Introduction

On 1 December 2010, the Ministry of Housing and Urban-Rural Development of the People's Republic of China established a new order with regards to the lease of Transferable Property: Measures for the Administration of Lease of Transferable Property (the "New Measures"). With its coming into force on 1 Feburary 2011, the Measures for the Administration of Lease of Property in Urban Areas (the "Old Measures") will cease to have effect.

Owning property in China is not straightforward. For a start, there is no private ownership of land. However, companies, organisations and individuals can own buildings and structures over the land. This is possible through ownership of the right to use the land. This land use right is distinct and separate from land ownership.

The right to use such land will generally be for a fixed period of time and, during that period of time, the property which is on that land can be freely and legally bought and sold - i.e. transferred. This is the type of property to which the subject matter legislation applies.

The New Measures, generally speaking, pay more attention to the protection of lessees' rights and to the administration of lease activities. For your information and guidance, we have summarised the main changes brought in by the New Measures below.

Section I: The competent authority

Under the Old Measures, the competent authority for the administration of lease activities was the competent administrative authority for construction of the State Council. Under the New Measures, the housing and urban-rural development administrative department of the State Council shall take over such powers and shall, accordingly, have responsibility for the guidance and supervision of lease activities in China.

Section II: Prohibition on the leasing of specified types of Transferable Property

The New Measures list four types of Transferable Property which are prohibited from being leased: 1) illegal property; 2) property which does not conform to compulsory standards such as safety and disaster prevention; 3) property which has undergone unauthorized changes in its use; and 4) property prohibited from being leased due to other circumstances as prescribed by laws and administrative regulations.

Please note that the third type is newly added by the New Measures.

Section III: Content of a lease contract

The New Measures list ten provisions that should be included in the lease contract. The ten provisions listed are: 1) the name and address of the lessor and lessee; 2) the location, proportion, structure, ancillary facilities and indoor facilities (such as furniture and electric appliances) of the property; 3) the amount and method of payment of the rent and deposit; 4) the purpose or use (i.e. residential or business) of the property and any restrictions of use; 5) the safety performance of the property and indoor facilities; 6) the term of the lease; 7) the housing maintenance responsibilities; 8) the payment of associated fees such as for property services, water, power and gas, etc; 9) the liability of a party for breach of contract and the method of dispute resolution; and 10) miscellaneous provisions.

Five of these ten provisions (3, 4, 5, 8 and 9) are being stipulated for the first time by the new legislation.

In addition to adding provisions, the New Measures have also deleted two provisions previously required under the old legislation, namely: the agreement of sublease and the conditions for variation and termination of the contract. This does not mean that such terms should no longer be contained in a lease contract, only that they are no longer an indispensable part of a lease contract.

Section IV: Determination of the Increase of Rent

Article 9 of the New Measures provides substantial protection to the right of the lessee in relation to rent increases. Article 9 stipulates that the lessor shall not unilaterally raise the rent within the contractual lease period.

This is a significant addition as it has long been a tradition in China that the lessor was free to determine the rent at its discretion. The New Measures place the lessor and lessee on a far more equal footing. The lessee, going forward, will have the benefit of clarity and certainty as to the amount of rent that it will be paying within the lease period.

Section V: Registration and archiving of lease contracts

The New Measures place greater emphasis on the registration and archiving of lease contracts. Compared with the Old Measures, the new legislation modifies the documents required for registration, sets the deadline for competent authorities to complete registration (i.e. within 3 days upon receipt of the documents), sets out the punishment for failure to register and includes new rules for the amendment of registration.

The New Measures list four categories of documents required for the registration and archiving of a lease contract, namely: 1) the lease contract; 2) identification papers of the lessor and lessee; 3) certificate of ownership or other lawful certificates of title; and 4) any other documents needed by the competent construction (real estate) department of a province, autonomous region or municipality of the People's Government.

Article 14 of the New Measures requires the parties to a lease contract to register the lease contract at the competent construction (real estate) department of a province, autonomous region or municipality of the People's Government within 30 days after the signing of the contract.

Article 19 of the New Measures requires the parties to a lease contract to go through the amendment, continuation or cancellation of registration within 30 days after any change to the content of registration, renewal or termination of the lease has taken place.

The New Measures stipulate that if any party violates articles 14 and 19, the following punishments will be applicable: it shall be ordered by the competent construction (real estate) department of a province, autonomous region or municipality of the People's Government to make corrections within a stipulated time limit; if corrections within the time limit are not made, an individual shall be fined an amount not more than RMB1,000 and an entity shall be fined an amount not less than RMB1,000 but not more than RMB10,000.

Section VI: Illegal Sublease

The New Measures stipulate that if the lessee subleases the property without the written approval of the lessor, the lessor has the right to terminate the lease contract at its discretion, repossess the property and request the lessee to pay compensation for any loss incurred.

Section VII: Other amendments

In addition to the amendments listed above, the New Measures also contain other amendments such as: recommending that the competent authority cooperates with the administrative bureau of industry and commerce to provide model lease contracts; stating clearly the pre-emptive right of lessee to purchase the property when the lessor wishes to sell; and permitting the lessor and lessee to authorise other parties to apply for registration. These amendments do not change the Old Measures substantially and, generally, the same are already complied with in practice.

Conclusion

There are two noticeable features in the New Measures. The first is that the government has attached greater importance to the protection of the lessee. This can be noticed most obviously by preventing the lessor from raising the rent at its discretion within the period of the lease contract. The second is that the government has placed more emphasis on the administration of leases by clarifying the procedure for registration and restating that registration is an essential part of a lease which cannot be omitted.

With the New Measures having come into force on 1 Feburary 2011, parties under a lease contract will be obliged to pay more attention to the registration and archiving requirements but they will also have a clearer knowledge of their rights and obligations moving forward.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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