China: Milestone – Novelties In Chinas Law On Ownership, Pre-Registration And Land Use Rights

Last Updated: 19 December 2007

On 16 March 2007 the National People's Congress has also finally adopted the PRC Property Law ("Property Law") which shall become effective as of 1 October 2007. As the first legislation of the PRC focusing on property ownership, the Property Law defines "property" as "real estate and movable property owned by the State, by collectives or by private individuals and enterprises". Rights on properties are defined as the "right of the property owner to exclusively and directly dispose the properties, including the ownership, the right to benefit from the property and security rights". The contents of the Property Law which will be of particular interest for foreign investors is summarized as below:

1. Property Ownership System

In line with the PRC Constitution, the Property Law sets forth a system of three kinds of property ownerships, namely property ownership of the State, property ownership of collectives and property ownership of private persons.

Certain properties such as mineral resources, rivers, oceans and urban land may only be exclusively owned by the State represented by the State Council.

Forest, mountains, grassland, wastelands may be owned either by the State or by the collectives representing the farmers of the respective collective.

Private persons may legally own real estate and movable property such as income, premises, household materials, production tools and raw materials. Lawful heirship, bank deposits and investment as well as the respective interests thereof are also protected by the Property Law.

State, collectives or private persons may invest their properties as capital contributions to establish limited liability companies, companies limited by shares or other types of enterprises.

Enterprises with a legal person status are entitled to possess, use, benefit from and dispose real estate and movable property owned by them in accordance with the relevant laws and regulations as well as their articles of associations.

2. Pre-registration Of Real Property

As a novelty the Property Law provides for a "pre-registration" system for real estate transactions. Under such pre-registration regime, after conclusion of a real estate sales contract and prior to the registration of the real estate transaction in the real estate register, in order to ensure that the real estate transfer will take place, the parties to the sales contract may pre-register the contemplated transaction with the real estate authority. Upon such pre-registration the disposal of the real estate without the consent of the buyer shall be deemed invalid.

Since the official registration of real estate ownership usually requires considerable time, it is now possible and strongly recommended to pre-register the contemplated transaction upon the execution of the respective contracts. However, it will certainly take some time, until the system is implemented.

3. Special Regulations On Construction Land Use Rights

The Property Law acknowledges for the first time a construction land use right as a separate property right.

A construction land use right may be granted or allocated by the State whereby allocation by the State shall be strictly controlled and the usage of the allocated land shall be in line with the relevant laws and administrative regulations.

Farmland owned by a collective may only be transformed into construction land after being expropriated by the State due to public interests. However, the State shall undertake special protection measures for farmland and its transformation into construction land shall be strictly controlled by the State.

Construction land use rights which shall be acquired for profit-making purpose such as commercial and entertainment or construction land use rights acquired for domicile construction, shall, if more than one potential purchaser intends to acquire the land, be acquired through public bidding or auction. In case construction land use rights are acquired through public bidding, auction or sale, a construction land use right transfer agreement shall be concluded between the Parties. Such land use right transfer agreement shall provide for the following:

  • names and addresses of the parties;
  • location and area of the land;
  • building, other built items and the space of their auxiliary parts;
  • usage of the land;
  • duration of use;
  • transfer fees and payment terms;
  • dispute resolution.

For the transfer it is not mandatory to use the standard land use right contracts as provided by the real estate authorities. In case the construction land use right is taken back by the State prior to its expiration due to public interest, reasonable compensation shall be paid for the land use right and the buildings on the respective land. Moreover, the respective land use right transfer fees shall be refunded to the owner of the construction land use right. Under the current PRC real estate regime land use rights shall expire in 40 to 70 years. The Property Law contains new regulations according to which the term of domicile construction land use rights shall be extended automatically upon its expiration whereby land use rights for land other than domicile land shall be extended according to the relevant laws.

4. Special Regulations On Acquisition Of Ownership By Goodwill

The Property Law contains an institution according to which third parties in good faith may acquire the ownership of a real estate or movable property upon fulfillment of all the following pre-conditions:

  • third party as transferee is in good faith when the property is transferred;
  • a reasonable transfer price has been paid;
  • registration has already been conducted in case the transfer of real estate or movable property is subject to registration according to the laws, or otherwise handing over of the property to the transferee has already taken place.

Based on such legal institution, parties to a transaction relying on the ownership of their contractual partners in good faith may acquire the ownership of a property even if their contractual partners transferring the property were not entitled to dispose such property.

5. Other Regulations

Security rights on property

Guarantee rights on property as provided for in the PRC Security Law such as guarantee, mortgage, hypothecation, lien and deposit are further specified in the Property Law.

Property rights for residential premises

Owners of domicile premises have exclusive ownership of the premises owned by them. The public properties of the residential quarter other than their solely owned parts such as road, public facilities and real estate used for the property management shall be owned by the owners jointly.

Owners of the domicile premises within a residential quarter may elect a premises owner commission which shall be entitled to manage the essential issues of the residential quarter.

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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