Investing In China: Chinese Real Estate Law

Land Use Rights

What the Law Says

In China, neither domestic companies nor Foreign Invested Enterprises may own land outright; instead they own Land Use Rights. There are two kinds of Land Use Rights – Allocated and Granted. In comparison with Western common law concepts, Allocated Land Use Rights are in some way similar to leaseholds, and Granted Land Use Rights are in some ways similar to life estates.

Allocated Land Use Rights are generally provided by the government for an indefinite period (usually to state-owned entities) and cannot be pledged, mortgaged, leased, or transferred by the user. Furthermore, Allocated land can be reclaimed by the government at any time.

Granted Land Use Rights are provided by the government in exchange for a grant fee, and carry the rights to pledge, mortgage, lease, and transfer within the term of the grant. Land is granted for a fixed term – generally 70 years for residential use, 50 years for industrial use, and 40 years for commercial and other use. The term is renewable in theory (although no foreign investor has been in China long enough to find out how this works in practice). Unlike the usual case in Western nations, Granted land must be used for the specific purpose for which it was granted.

Allocated Land Use Rights may be converted into Granted Land Use Rights upon the payment of a grant fee to the government. Even Granted Land Use Rights are subject to expropriation by the government under unusual circumstances (in exchange for fair compensation similar to the eminent domain power in the US). This state of affairs tends to work in favor of the foreign investor – land granted to Foreign Invested Enterprises is seldom expropriated, but agricultural land is often expropriated in order to make room for foreign invested projects.

How the Law Applies to Foreign Invested Enterprises

Most foreign invested Joint Ventures obtain Land Use Rights from the Chinese party. A common problem is that the Chinese party holds only Allocated Land Use Rights for the land it occupies (be looking for this if the Chinese party is a state-owned entity). In this case, the authority to transfer the Land Use Rights is vested in the local Land Administration Bureau, and the Chinese party will not have the right to transfer it to the Joint Venture.

Nevertheless, if the Joint Venture can purchase long-term Granted Land Use Rights from the Land Administration Bureau through a land use grant contract, the Joint Venture will then be able to mortgage the land or transfer it to a third party. Keep in mind, however, that vacant land must be 25% developed before Granted Land Use Rights can be acquired. Do not attempt to acquire Granted Land Use Rights if you do not intend to develop it within a short time, because even if the land qualifies as 25% developed and thus eligible for a grant, it can still be classified as “vacant”, and vacant land can be reclaimed if development is not begun within 2 years of transfer.

A second option would be for one of the investors to obtain Granted Land Use Rights and then lease the land to the Joint Venture. However, vacant land cannot be leased to a third party (such as a Joint Venture or other Foreign Invested Enterprise) by the grantee. It is also worth noting that a lease needs to be registered in order to protect the leasehold against potential competing claims.

Thirdly, if you are willing to settle for Allocated Land Use Rights, the Foreign Invested Enterprise could simply have the land allocated to it by the local Land Administration Bureau.

In the case of a Joint Venture, a fourth option would be to have the Chinese party contribute its Allocated Land Use Rights to the Joint Venture as part of its capital contribution, in which case the Chinese party would be liable for annual land use fees.

Another common problem is that the land and the building(s) on it are owned by different parties, creating a potentially messy legal situation if all parties are not willing to cooperate.

Most importantly, it would be a good idea to require the Chinese party to prove the status of its Land Use Rights with documentary evidence before applying for project approval. Further, pre-transfer due diligence should include a thorough environmental impact self-assessment (see the Glossary for details). Finally, keep in mind that payment and transfer of ‘title’ through public registration with the Land Administration Bureau cannot take place simultaneously – registration of land transfers will not be allowed unless a receipt for payment is submitted with the registration transfer application.