China: China Update: Chinese Real Estate

Last Updated: 5 June 2007
Article by Paul D. McKenzie

China’s New Property Right Law

The PRC Property Right Law ("Property Law") was promulgated and approved by the National People’s Congress ("NPC") on March 16, 2007 and will become effective from October 1, 2007. The Property Law, which covers a wide range of matters affecting both personal and real property, is one of the most important pieces of legislation to be promulgated in the People’s Republic of China ("PRC") in recent years. Work on the Property Law started in 1993 and previous drafts underwent a record number of readings by the Standing Committee of the NPC.

The Property Law expands existing provisions regarding property rights and is a major milestone in the development of a more systematic regime for protection of property rights. It, like the PRC Contract Law, promulgated in 1999, is a core constituent part of China’s civil law and it confers, for the first time, equal protection for property rights of the state, collectives and individuals.

Below are some of the more significant provisions of the Property Law affecting real estate in China.

Equal Protection for Private Property; Strengthening the Protection of State-Owned Property

Protection of Private Property Rights: The Property Law for the first time places private property rights on the same footing as state and collective property rights in enjoying legal protection. Private real property may only be expropriated for "public interest" and compensation must be given in accordance with laws. There is, however, no clarification on what amounts to public interest or how compensation will be computed. Official commentaries on the Property Law note that in practice, due compensation for expropriation has often not been paid or not been paid in full. It is anticipated that the Property Law will serve as the basis for tightening expropriation procedures and increasing compensation paid. In some cases this will have the effect of increasing the land price a developer pays when it acquires State-owned land use rights in connection with a development project.

Strengthening Protection of State-Owned Property:The Property Law specifies that certain types of property -- such as urban land and public infrastructure including railroads and public roads -- are owned exclusively by the State and may not be in private hands. It also provides that the State Council exercises ownership of State-owned property on behalf of the State except where otherwise provided by law.

These provisions serve to reaffirm certain key aspects of the Chinese economy, most notably in relation to the real estate sector that urban land is State-owned and that only land use rights but not private ownership is available to developers and other private users.

Real Property Registration

Uniform Real Property Registration System:The Property Law contemplates that China’s real property registration system will be unified nationwide and property right holders and interested parties may apply to retrieve the information filed with the registry. Currently, information on land use rights, building ownership and mortgage rights may be separately filed with different local real estate or construction administration authorities. That information is usually not accessible except with the registrant’s written consent. The new law therefore ought to facilitate searches on title and related property rights. However, it remains unclear whether any person will be entitled to search the registry or whether applicants must establish some relationship to the property at issue. Implementation of these provisions of the Property Law will need to be monitored closely.

Effect of Real Property Registration:The Property Law provides that a contract relating to real property rights is binding upon conclusion of such contract, unless otherwise provided by law or contract.

At the same time, it states that the creation, alteration and extinguishment of real property rights are "effective" upon registration. Registration of an interest in real property therefore is necessary in order for the interest to be protected against third party claims against the property. The Property Law stipulates that the registration record maintained by the relevant registration authority will be evidence of ownership and other relevant property rights.

It is unclear how far PRC courts will be prepared to look behind the "veil" of registration under the new regime, although the Property Law does provide that if the property right ownership certificate issued to the relevant owner and the real property registration record are inconsistent, the latter will prevail unless the contrary is proven. Furthermore, the new law provides for the first time that the registration authority is liable for losses caused to holders of property rights if it has entered the title registration incorrectly.

A unified property registration system, if implemented properly, should considerably enhance certainty in real estate transactions although implementation throughout the country can be expected to take some time.

Scope of Pre-registration System Expanded:The Property Law has expanded the scope of China’s real property pre-registration system. The Property Law provides that parties who enter into a contract for the sale and purchase of real property or other forms of immovable property may, for the purpose of protecting the establishment of relevant property rights, apply for pre-registration with the registration authority. After pre-registration has been completed for a particular property, the registered owner of the property may not sell the property to a third party without consent from the party whose interest in the property has been registered. Note that pre-registration under the Property Law becomes ineffective if the underlying property right is extinguished or a registration application is not made within three months following the pre-registration.

In contrast under current rules, pre-registration is principally available only in connection with sales by a developer of residential property where the developer has obtained a pre-sale permit.

In principle, the pre-registration system under the new law will help protect the interests of buyers of real property during the interim period between contract signing and formal registration of the transfer of property rights.

Exclusive Ownership and Joint Ownership

Significantly, the Property Law clarifies the ownership rights of individual owners in a building. Specifically, an owner of a unit in a building enjoys (i) exclusive ownership over its own unit, and (ii) joint ownership and right of management along with other owners over the common areas and facilities. Before promulgation of the Property Law, ownership of common areas and facilities in residential and commercial buildings was largely regulated by municipal level regulations, if any, which led to developers to often remain the de facto owner.

Easements and Rights of Access

Before promulgation of the Property Law, there were no specific statutory provisions expressly providing for easements over real property. The closest equivalent under prior law are certain provisions and court pronouncements regarding adjacent owners’ relations and access rights and easement rights that were contractually created did not generally run with land.

The Property Law recognizes an easement as a registrable right of use of the immovable property of another party. An easement is created by written contract between the parties, but is enforceable against third parties only upon registration. Once registered, an easement will generally be binding on the transferee upon the transfer of the land use rights, unless terminated by the owner/user of the land under specific circumstances.

The Property Law also clarifies the scope of "access rights" an owner or user of immovable property has to the property of a neighbor. Specifically if an owner or user of real property requires access to adjacent land or structures for construction or repair of buildings or laying of electrical lines, cables, water pipes, heating and gas pipes, then the adjacent owner must grant the necessary access, subject to compensation for any damage caused by such work. Whether such an access right is recognized will depend on the principles of "facilitating production, convenience, unity and cooperation, fairness and reasonableness," and laws, regulations and local customs will be respected when determining such a right.

Extension/Expiration of Land Use Rights

Grants of use rights in respect of urban land were first made in the 1980s, with applicable use terms of between 40 and 70 years and an open issue has been what would happen to the land and building on the land when the term of use rights expired.

For the first time, the Property Law states that the land use rights to land for residential purposes will be extended automatically upon expiration of its term. The new law leaves unstated what fee, if any, is payable for the extension of land use rights.

No similar provision applies to the commercial or industrial land use rights. The Property Law simply states that ownership of buildings and other related real property rights upon the expiration of the relevant land use rights may be determined by contract.

Mortgage Rights

The Property Law updates existing legislation governing security interests, including mortgage interests in immovable property. In particular, the Property Law permits buildings under construction to be mortgaged, with such mortgage taking effect from the date of registration of the mortgage. The Property Law also provides that the mortgage of construction land does not automatically extend to newly constructed properties on the mortgaged land. These aforementioned provisions serve to clarify and confirm the current judicial practice in these areas.

Shanghai’s New Bidding Rules for Land Use Rights

On April 27, 2007, the Shanghai Housing, Land & Resources Administration Bureau (the "SHLRA") published the No. 1 State-owned Land Use Right Bidding Announcement (the "2007 No. 1 Announcement"), which further relaxes the restrictions imposed on a foreign investor’s ability to bid for land use rights in Shanghai. Pursuant to the 2007 No. 1 Announcement, successful bidders of land use rights now have a choice of paying the land premium deposit either in Renminbi or in 4 other currencies, namely the US dollar, the HK dollar, the Euro and the Japanese yen.

Prior to the promulgation of the Opinions on Regulating the Entry into and the Administration of Foreign Investment in the Real Estate Market ("Opinion 171") on July 11, 2006, foreign investors had been allowed to bid for land use rights in Shanghai without having to incorporate a PRC subsidiary. Thereafter, in response to the restrictions imposed on foreign investment in the real estate market set out in Opinion 171, the SHLRA amended its bidding rules in the No. 1 State-owned Land Use Right Bidding Announcement of 2006 published on August 17, 2006 ("2006 No. 1 Announcement") which prohibited foreign investors who had yet to obtain the approval certificates and business licenses for their PRC subsidiaries, from bidding for land use rights. Pursuant to the 2006 No. 1 Announcement, a foreign investor had to establish a PRC subsidiary and contribute at least half of the project costs as registered capital to the PRC subsidiary before it could bid for, and acquire land use rights. This effectively increased the barriers to entry for many foreign investors looking to invest in the Shanghai property market as it made the implementation of such an investment structure financially unfeasible.

The SHLRA subsequently relaxed its bidding rules on October 23, 2006 with the publication of the No. 2 State-owned Land Use Right Bidding Announcement ("2006 No. 2 Announcement") which re-allowed foreign investors to bid for land use rights without having to set up a PRC subsidiary, but which stipulated that any such land premium deposit had to be paid in Renminbi. Both the aforementioned eligibility requirement and currency limitations were repeated in the subsequent bidding announcements of 2006 in Shanghai. Though technically eligible to bid for land use rights pursuant to the 2006 No. 2 Announcement, in reality, most foreign investors were still constrained by the Renminbi currency limitations.

The new 2007 No. 1 Announcement effectively removes these restrictions on a foreign investor’s ability to bid for land, and gives a foreign investor enhanced flexibility in structuring its investment in the Shanghai real estate market. However, it is worth noting that the 2007 No. 1 Announcement is limited in its scope to Shanghai, and in particular, to the land parcels listed in the 2007 No. 1 Announcement. Eligibility requirements may and do vary in other provinces and cities. For example, only domestic PRC companies holding real estate development qualifications are allowed to bid for land use rights in Beijing. Furthermore, this new eligibility requirement in the 2007 No. 1 Announcement pertains only to land bidding activities. Upon the conclusion of a successful bid, foreign investors are still required to set up PRC subsidiaries to acquire the land, to pay the land premium (less the land premium deposit) and to develop the project in accordance with Opinion 171 and other applicable PRC laws and regulations.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Paul D. McKenzie
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions