The Chinese Ministry of Land and Resources introduced a new
circular aimed at avoiding waste and the overdevelopment of land
resources. Effective as of 1 September 2014, this circular will
change the current Chinese land use regime in various important
aspects. The use of land in China for commercial purposes is likely
to become more expensive and, at the same time, less secure.
Companies for which real estate is important should keep track of
these developments and engage with local authorities on this.
Land in China can either be owned by the State or by
farmers' collective organisations. The State-owned land plots
can be developed and used by governmental agencies for the public
interest, or by private parties for housing or commercial purposes
based on land use rights ("LUR"). Land
resources owned by farmers' collective organisations are for
their farming or residential use only, and they are restricted from
using the land for other commercial purposes.
The LUR granting regime was established by the Chinese central
government around 30 years ago to meet the need for the private and
foreign-investment development of land in China. Private parties
can acquire LUR by participating in a statutory bidding process as
organised by local governments. The highest bidder pays the LUR
grant premium and can then develop and use the land for the
designated purposes. LUR are granted for a statutorily determined
Until recently, LUR were always granted for the statutorily
determined maximum term: 70 years for residential purposes, 40
years for retail, sports, entertainment and tourism, and 50 years
for industry, mixed-use or other purposes not specified by law.
Upon the expiry of the term, local governments can require the
payment of additional LUR grant premiums for the renewal of
non-residential plots, or can organise a new bidding process. The
law is unclear on how to proceed when the term of use for
residential plots expires.
Although detailed implementing rules for the circular are yet to
be published by the Ministry, the new circular encourages the local
first enter into a short-term lease with the potential LUR
acquirer, and then consider whether to grant LUR, and then
grant a tenure shorter than the statutory maximum period.
In fact, local authorities, for example in Shanghai and
Guangdong, have already started employing this practice, by
granting industrial LUR for a 20-year term only.
Taking into account that the land resources market in China has
become more and more competitive in recent years, the new rules may
force investors to pay more LUR grant premiums for a shorter land
use period. In addition, that use may also turn out to be less
secure if the local authorities are initially only prepared to
grant LUR for a short-term lease. In the absence of detailed
implementing rules, however, it is hard to estimate the
consequences of the circular for investors. It is likely that the
implementing rules will leave discretionary powers to the local
authorities, and that the practical implications will vary from
locality to locality.
Both Chinese and foreign investors, especially those engaged in
businesses for which land and buildings are of vital interest,
should keep track of these developments when considering future
investments. Understanding the implications of the latest
developments for specific investments will require close engagement
with local authorities.
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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