Hard landing

In China, land belongs to the state. An amendment to the constitution in 1982 has allowed the state to parcel out the use of land to the private sector, but ownership has been retained. This distinction has created a complicated system of `land use rights'.

There are three forms of land use rights: collective, allocated and granted. Allocated and collective land use rights are similar but they are inferior forms of right. Of the two, investors encounter allocated land more often.

Allocated land rights were originally intended to be used by state-owned enter-prises. Users of allocated land do not have to `buy' the rights up front from the state, but pay yearly fees. The term of allocated land use rights is not explicitly determined by law, as is the term for granted.land use rights. As part of its privatisation programme of state-owned enterprises, the government must face the issue of how to treat allocated land use rights. In the Provisional Rules Concerning Administration of Allocated Land Use Rights in the Reform of State-owned Enterprises, promulgated in February this year, the State Land Administration Bureau sets out ways in which allocated land use rights can be converted to granted land use rights or leased directly from the land administration bureaux. Only state-owned enterprises which remain wholly state-owned after restructuring and state-supported public infrastructure projects may retain allocated land use rights.

Some complications

Granted- land use rights are bought with a `land grant fee' from the state for a specified term. The maximum term varies from 40 to 70 years depending on the land use. A land use grant contract must be signed with the local land administration bureau, which should identify the land and specify the grant fee, purpose of the land, term, construction parameters and other conditions of land use. In theory, the grant fee must be paid in full within 60 days after the execution of the grant contract; in reality this is negotiable. The commitment to develop the land stipulated in the grant contract must be partially fulfilled before a granted land use rights certificate is issued, so as to prevent speculation.

Granted land use rights can be transferred to other users; but before this can happen, the grant fee must have been fully paid and a portion, usually 25 per cent of the investment and development commitment stipulated in the grant contract must have been fulfilled. A new contract may be negotiated with the land administration bureau in the transfer process, in which the use of land and the grant fee may be revised.

Land use rights can be leased, although the land must be developed first. The lessor remains bound by the obligations specified in the original grant contract. Leases of land use rights and structures on land must be registered with the local land administration bureau. Land use rights may also be mortgaged. However, the transfer, lease and mortgage of allocated land use rights are restricted.

Only the holder of land use rights, either granted or allocated, may own buildings on the land. Ownership of buildings is demonstrated by a building ownership certificate. Recently, some land administration bureaux have combined building ownership certificates with allocated or granted land use certificates.

Foreign involvement

The Provisional Regulations concerning the Grant or Transfer of the Right to Use State Land in Urban Areas state that `any company, enterprise, other organisation or individual in or outside the People's Republic of China may acquire' land use rights. In practice, foreigners most often acquire land use rights through foreign investment enterprises incorporated in China (FIEs).

FIEs can acquire land use rights directly from the land bureaux. FIEs established within one of China's many economic or technological development zones may deal with land use rights in a more streamlined manner. These zones are often run by management committees, which are the original holders of granted land use rights and are responsible for the initial development of the land. These management committees, and not the often cumbersome land bureaux, parcel out land use rights through transfer.

FIEs may also lease land from other land users. Land is generally not allocated directly to FIEs or foreign companies, because it is intended to be government-supported land for state-owned enterprises.

However, probably the most common way for an FIE which is a joint venture to acquire Iand use rights is by contribution of land use rights from the Chinese partner.

The Chinese partner may try to convince the foreign investor to accept its contribution in the form of allocated land. Allocated land is cheaper than granted land for the Chinese party because, as already explained, no grant fees need be paid. However, land use rights contributed by the Chinese party, whether granted or allocated, are often valued at the market value for granted land use rights. Since allocated land use is more restricted than granted land, it is generally sensible for the foreign investor to require the Chinese party to convert its allocated land use rights into granted land use rights.

Some precautions

Any foreign investor wishing to acquire land use rights in China should take the following precautions:
If land is being contributed by the Chinese partner to a joint venture, the land use certificate and, if applicable, grant contract should be inspected to see if the land is granted or allocated. The term, land use and other specifications should be compared against the needs of the joint venture.

The investor should ensure that the investment and other criteria as set out in the land use certificate and, if applicable, grant contract have been fulfilled. The receipt for payment of grant fees for granted land use rights should be obtained. The state has the authority to reclaim granted land use rights if these requirements have not been satisfied.

The foreign investor should check if the granting or allocating authority has the authority to do so. Sometimes local authorities will act beyond their powers.

If the foreign investor is leasing land or buildings, the relevant certificates should be examined to see if the lessor has the authority to lease them.

The foreign investor should check if any encumbrances on land or buildings have been registered with the land administration bureau.

Freshfields is an international law firm. Most of its offices throughout Asia, Europe and North America include China specialists. For further details, contact Matthew Cosans through their Hong Kong (tel: +852 2846 3400) or Beijing (tel: +8610 6410 6338) offices or by e mail (mcosans@freshfields.com).