Land use rights in China

August 21 2012

Land use rights in China 

By Brad Herrold, Lovells Beijing

China’s legal framework on property ownership and development : legislative and administrative system for property development in China, land use rights system, property development approvals process, and licensing requirements for enterprises involved in a development project.

The Legislative and Administrative System

The legislative pillars of China’s legal system in regard to land are the Law of the People’s Republic of China on Property Rights, enacted by the National People’s Congress (NPC) and effective on 1 October 2007 (“Property Rights Law”), the Law of the People’s Republic of China on Land Administration, adopted by the NPC and effective on 1 January 1999 (“Land Administration Law”) and the Law of the People’s Republic of China on the Administration of Urban Real Estate, enacted by the NPC and effective on 1 January 1995 (“Urban Real Estate Law”).

The Property Rights Law and the Contract Law of the People’s Republic of China, enacted by the NPC (as amended) and effective 1 October 1999 (“Contract Law”), govern contracts for transfers of buildings and other immovable property. The construction of buildings and other improvements are governed by the Construction Law of the People’s Republic of China enacted by the NPC and effective 1 March 1998, and a slew of other administrative regulations, rules, decrees and orders issued by the relevant departments in charge of the administration of construction quality control, environmental protection, fire protection, safety, labour and health.

The Ministry of State Land and Resources is in charge of the administration of land at the national or “central” level. Provincial land authorities are commonly referred to as the Real Property and Land Resources Administration Bureaux, while district-level authorities under each Provincial Land Bureau generally are called the District Planning and Land Administration Bureaux, or the District Real Property and Land Administration Bureaux. For simplicity, we refer to each department in charge of the administration of land at the various levels in China’s bureaucracy as the “Land Authority”.

The Land Use Rights System

There is a fundamental distinction in China between “rights of ownership in land” and “rights to use land”. All land is owned by the State or by a rural collective. Rights of ownership in land are not transferrable. By contrast, the right to use State-owned land use rights is transferrable and such land use rights can be leased or mortgaged. Provided that the land is first requisitioned by the State and, in effect, converted to state-owned land, the land use rights to collectively-owned land can be transferred, leased or mortgaged.

Land is classified in China as agricultural, construction or unused, and as a general rule only state-owned land for construction purposes may be requisitioned and used for development of commercial or profit-making real estate projects.

The State Council reviews and revises the national land use plan, i.e., it alters the classification of specific parcels of land, only once every five years. Despite frequent claims to the contrary by

developers and local government officials, provincial, municipal, district and county level governments are prohibited from issuing land use plans that are not in strict compliance with the State Council’s plan.

Generally, land use rights can be obtained only by grant or by allocation. Allocated land use rights refer to land use rights that were allocated by the Land Authority to a State-owned enterprise or other public entity for an indefinite term and without the payment of consideration.

Allocated land use rights cannot be transferred, leased or mortgaged. Granted land use rights, by contrast, involve the execution of a State-owned Land Use Rights Grant Contract (“Land Grant Contract”) between the land user and the Land Authority and the payment of a grant fee.

The grantee of properly granted State-owned land use rights to land that is properly planned forindustrial or residential use (1) may enjoy an enforceable right to use the land for a fixed term of between 40 and 70 years, (2) may use the land for the purposes specified in the Land Grant Contract during such term, and (3) subject to certain restrictions, generally is free to transfer, lease or mortgage the land use rights freely.

Land Grant Contracts often form documents prepared and promulgated by the Land Authority, but should be scrutinized — they often set tight deadlines for payment of the land grant fee and the commencement and completion of construction. Penalties for non-compliance can be draconian. Land Grant Contracts also contain planning parameters for the development of land and describe the location of the land, identify the type of user (residential, commercial, industrial, comprehensive) and prescribe the grant period.

Property developers in China may choose from several options to acquire land use rights, including a grant to develop a new project, the acquisition of an existing development project, the acquisition of an equity interest in an entity that holds land use rights or a lease of land use rights.

Developers rarely lease land use rights. The State is not permitted to lease land use rights for commercial developments, though land use rights may be available for lease in the secondary market, i.e., previously granted rights. Under the Contract Law, the term of a lease is not valid for more than 20 years. Instead, the term must be renewed. In addition, lessees are seldom able to successfully negotiate for the right to assign, sublease or encumber land use rights.

Land use rights may be granted by means of negotiated agreement, public bidding, auction or listing process, though a grant by negotiated agreement is no longer permitted in relation to land intended for industrial, commerce, tourism, entertainment and residential use. Instead, pursuant to the Provisions on the Assignment of State-owned Construction Land Use Right through Bid

nvitation, Auction and Quotation, promulgated by the Ministry of Land and Resources and effective 1 November 2007, such land, as well as land intended for more than one user, must be granted by way of public bidding, auction or listing on a land exchange. Land use rights granted by auction or public bidding may not be sold below a government specified minimum price rate.

Land use rights also may be obtained by transfer from the original land user in the secondary land market, and a transfer may be conducted by exchange or gift, subject to government supervision. Transfers of land use rights normally occur pursuant to a transfer agreement.

The use term obtained by the transferee of land use rights is equivalent to the remaining term of the granted land use rights at the time of the transfer.

Though ownership rights in regard to other forms of immovable property such as buildings and other improvements are regulated separately from land use rights (and, generally, different certificates are issued to evidence the ownership rights in each), Chinese law recognizes the principle of unity of title. Hence, where land use rights are granted, transferred or bequeathed, improvements to the land are disposed together with the land use rights.

Under the Property Rights Law, the creation, modification, transfer or termination of property rights in regard to immovable property, including land use rights and buildings, is effective only upon registration. To be clear, if a transfer of land use rights occurs pursuant to an enforceable transfer contract, the parties would have enforceable rights and obligations under the contract, irrespective of a failure to register the transfer. If, however, the transferor under the land transfer contract were to again transfer the land use rights to a bona fide third party purchaser and the purchaser were to register the transfer, it would be the legal owner of the land and the original transferee’s only recourse would be an action for damages under its contract.