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.
By: David Carnes
About the Author:
David Carnes is licensed to practice law in California. He speaks and reads Mandarin Chinese and has several years experience working with Chinese law firms and Sino-American joint ventures. Check out his website, Import From China [http://importfromchina.blogspot.com].
