Originally published 1st Quarter 2004
One of the striking features of the economic reform process in China is the coexistence of public ownership and central planning with private property rights and free markets. Although a commingling of private and public controls exists in other sectors of the Chinese economy, this paradigm’s notable existence in Chinese urban land markets reflects a critical philosophical change: that the market can achieve greater efficiency than can central planning.
Allocated Land Use Rights v. Granted Land Use Rights
There are two types of land-use rights in China: the "granted land use right" and the "allocated land use right." The difference is that granted land use rights are limited in time, cost the holder an amount proportionate to the land’s expected return and may be held by private individuals and entities, while allocated land use rights are usually given without the exchange of consideration and without time limitations, but may not be held by private individuals and entities.
Individuals in China cannot hold fee simple title to land. Under the Constitution of the People’s Republic of China, the state owns the nation’s lands and grants licenses to those who inhabit, utilize, and improve it.
Under China’s real property regime, the state retains ownership while individuals or organizations may possess rights akin to leaseholds. Legislation regarding the right of individuals and organizations, both domestic and international, to use land and their ability to transfer those rights was enacted in 1990.
Legal protections for landholders are written into China’s land administration laws. No governmental unit or individual may interfere with an individual’s land use rights according to the Land Administration Law. Once the land use rights are granted, however, the grantee must develop the land in strict accordance with the granting document as well as the overarching urban land use plan. Any departure from the constraints of these two sources of guidance constitutes grounds for intervention by the land administration authorities. The penalties available include warnings, fines and outright revocation of the land use grant.
Allocated Land Use Rights
Allocated land use rights represent a restricted non-ownership interest in land. The Land Administration Law provides an allocated land use right is one obtained without the exchange of consideration and exists without term limits. It is conveyed by the land authority for specified purposes and is not transferable without conversion into a granted land use right. Reasons to convert the allocated land use right into a granted land use right include the restructuring of a state-owned enterprise into a limited liability company or joint venture, the lease or outright sale of an entire state-owned enterprise, or the bankruptcy or dissolution of the allocatee.
Incident to the non-transferability of allocated land use rights and the inability of their holder to obtain any interest remotely resembling an alienable title to the land, is the fact that the land held subject to these rights technically may not be mortgaged. The Land Administration Law, however, explicitly permits this practice. This legislation came as a result of the Chinese government recognizing that mortgages are needed to raise required levels of investment capital.
Granted Land Use Rights
Granted rights may only be acquired by auction, tender or negotiation. These rights are subject to a fixed term, a reversion interest held by the grantor and limitations on development to general purposes similar to zoning classifications. Private individuals and entities are able to obtain and hold granted land use rights, while allocated land use rights cannot be obtained and held by private individuals or entities. Additionally, the land under granted land use rights need not be developed within a narrow frame of time, as is the case with allocated land use rights. This is the case, despite the law instructing that development must begin soon after the receipt of the grant.
Perhaps most importantly, the differences between the two rights stem from their respective origins: Allocated land use rights are a product of the socialist planned economy, while granted land use rights are a reflection of the conscious efforts the Chinese central government has made to promote a market economy.
Once the land use rights are granted, the grantee acquires the right to transfer, lease or mortgage the remainder of the surface rights in conformance with the granting language. With respect to the transfer of land use rights, the transferee must ensure that the chain of title demonstrates that approval for the land use rights was properly secured, both in the initial grant and through all subsequent transfers, in order to avoid extinguishment of the rights and invalidation of the transaction. Individuals may also inherit these granted land use rights if the grantee is an individual.
Since the land use rights have a fixed term, however, the value of the granted rights is much different than it would be if the rights bore an unlimited term and were sold in the market. The granted land use rights in this way reflect the Chinese government’s uncertainty about its future stance on land control, particularly toward international investors.
In addition to the right of the government to revoke the rights of the landholder for violations of the land grant contract, land use rights also may end with the passage of the term of years specified in the grant contract. Once the term of years passes, all improvements upon the land, including all buildings and fixtures, revert to the government without compensation.
As in the United States, China is concerned with the current and anticipated future availability of developable land. With respect to urban land, primary concerns include the environment, water supply, housing, economic opportunities, energy consumption, traffic congestion, visual blight, natural hazards, and rising public costs per capita for providing utilities and services. These urban land problems will only become more difficult for China in the near future, as its overall urban population is expected to increase by more than 400 million people by 2020. However, China, through its legislation and policy goals, has begun to proactively tackle its urban land problems. Public and private utilization of land use rights will play a large role in helping solve these problems.
The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.