China's New Property Law

China's New Property Law

Selected Notes and Commentary

Richard H. Lawrence III

Holland & Knight LLP

Richard H. Lawrence III is a partner in Holland & Knight's Beijing office and a member of the International and China practice groups. He is a corporate generalist who has advised on a wide range of banking, joint venture, mergers and acquisitions, private equity, project development and finance, corporate finance, technology transfers, workouts and general corporate and commercial matters over the years during postings in New York, Tokyo, Hong Kong and Beijing. He has extensive experience in China related matters, having represented both PRC government agencies and state owned enterprises and foreign investors.

Mr. Lawrence is admitted in New York and is a member of the Hong Kong Law Society.

Mr. Lawrence received his B.A. summa cum laude from the University of Massachusetts, Amherst and his J.D. from ColumbiaLawSchool where he was a Stone Scholar, an International Fellow and the recipient of a certificate of achievement with honors from the Parker School of Foreign and Comparative Law. He attended TunghaiUniversity in Taichung, Taiwan as an exchange student.

Mr. Lawrence is fluent in Mandarin Chinese.

Introduction

China’s new Property Law was promulgated on March 16, 2007 and will go into effect on October 1 of this year[1]. The new law, comprised of five volumes containing 19 chapters and 247 articles, is lengthy and complex and sets forth in a comprehensive fashion rules governing the creation, change, transfer and termination of ownership, use and security rights in both movable and immovable property, among other things.

Work on drafting the Property Law began in 1993 and its promulgation marked the end of a long and at times controversial legislative process. The law went through six readings by the Standing Committee of the National People’s Congress, an unusually long process by Chinese standards.[2]At the risk of over-simplification, the debate over the law might be described as involving two broad groups. One group was concerned that the law would tend to undermine the primacy of socialism as the theoretical basis of the Chinese economy and state and some argued that the law violated the PRC Constitution.[3] Others hoped that the law would serve to strengthen and consolidate the legal basis of certain forms of property ownership and use which have been present in China for some time but perhaps lacked a sufficiently clear legal foundation – such as, for example, private ownership of houses. The tensions that these contending views created during the legislative process may help explain why many of the concepts addressed in the Property Law tend to deal in general principles only and leave the specifics to be defined by subsequent legislation and administrative regulation.

In fact, many of the concepts and principles contained in the Property Law are not new, but already exist in other Chinese statutes or regulations. For example, much of Volume 4 of the Property Law, which relates to the creation of security rights in property, is generally consistent with provisions contained in the Secured Interests Law[4], which has been in effect since October 1, 1995. Even the recognition and protections provided to private property, an aspect of the new law widely reported in the international press, arguably do not represent new innovations.Article 13 of the PRC Constitution provides that: "[t]he state protects by law the right of citizens to own private property and the right to inherit private property. … The state protects according to law the right of citizens to inherit private property." These constitutional provisionswould appear to provide the basis for the protection of private property.[5] Thus,in this sense, it might be misleading to characterizethe Property Law as representing a significant departure from the status quo.Rather,it offers incremental improvements in clarifying, further defining and, in some instances, expanding property rights.

This paper is in three parts. Section 1 will provide a brief overview of the Property Law and its scope. Section 2 will discuss the Property Law's treatment of ownership rights and title to real property and how such rights are created, changed, transferred and extinguished. Section 3 will cover the scope and creation of security rights (mortgages, pledges and liens) under the new law.

I. Overview

The Property Law covers both immovable and movable property and governs the creation, alteration, transfer and termination of interests in property. In respect of immovable or real property such rights do not become effective until they are registered unless otherwise provided by law (see Article 9). The creation and transfer of rights in movable property generally become effective upon delivery, unless otherwise specified by law (Article 23).

Categories of Ownership

The Property Law delineates and clarifies the nature and scope of three types of property ownership recognized in China: state, collective and private ownership. State and collective ownership in relation to real property in particular will be discussed in greater detail below.

In respect of private ownership, the Property Law restates the constitutional recognition of private property and inheritance rights contained in Article 13 of the PRC Constitution. Thus, private individuals may own both immovable and moveable property, such as income, houses, articles of daily use, production tools and raw materials (Article 64). Savings and investments of individuals and the return thereon are protected by law (Article 65). Individuals may own interests in companies and other enterprises (Article 67). Individuals may enjoy inheritance rights in accordance with law (Article 65). The lawful property of private individuals is protected by law (Article 66). While much of this lacks specificity and detail and arguably is already established principle in the PRC Constitution, the reiteration of such rights should serve to enhance certainty with respect to the recognition and protection of privateproperty rights.

Condominium Ownership

Articles 70 through 83 of the Property Law set forth principles and guidelines relating to ownership of multi-owner buildings. Under Article 70 an owner enjoys exclusive ownership of the part of the building exclusive to such owner (for example, an apartment) and enjoys co-ownership of the common areas and adjacent ancillary facilities such as internal roads and green space. The Property Law permits owners to form an owners’ committee (Article 75) and sets forth matters that may be jointly decided by owners with respect to the building (Article 76). It prohibits an owner from changing the use of his property (for example, from that of a residence to use as an office) in violation of laws, regulations and the building management rules.

Usufructuary Rights

Article 40 of the Property Law recognizesthat an owner has the right to create usufructuary (or use) rights over its immovable and movable property. The holder of usufructuary rights has the right to possess, use and benefit from property owned by another (Article 117). Thus, for example, an individual or entity may possess, use and benefit from land owned by the state pursuant to land use rights obtained by such person from the state.

Security Rights

Article 40 of the Property Law also recognizes that an owner has the right to create security rights in its immovable and movable property. Volume 4 of the Property Law contains extensive provisions relating to security rights which will be discussed in greater detail below.

Easements

The Property Law recognizes and sets forth guidelines governing the creation of easements including the requirement that an easement must be created by a written contract thatincludescertain mandatory provisions (Article 157). An easement comes into being once the contract is effective but must be registered with the registration authority in order for it to be effective against a bona fide third party.

Adjacent Rights

Articles 84 through 92 of the Property Law specifies rules relating to adjacent relationships and addresses such matters as the discharge of water into neighboring property, the diversion of watercourses, the obligation to provide rights of passage over land, the obligation to refrain from obstructing air circulation, daylight and sunlight of adjacent buildings, limitations on disruption caused by construction, among other matters.

Special Rules on Obtaining Ownership

Part 9of the Property Law sets forth special rules relating to obtaining ownership to property. Perhaps the most interesting is contained in Article 106 which deals generally with the issue of how a transferee might obtain "good" title to property that was transferred by a person who did not have the right of disposal. Article 106 provides as a general rule that if a party without the right of disposal transfers immovable property to a transferee, the owner shall have the right to recover such property. However, unless otherwise specified by law, the transferee shall obtain ownership of such property if the following criteria are met:

(1)the transferee acquired such property in good faith;

(2) the property was transferred at a reasonable price; and

(3)the transferred property has been registered if registration is required, or if registration is not required, the property has been delivered to the transferee.

II. Ownership Rights in Real Property

Overview of the System of Real Property Ownership

In order to understand the Property Law’s treatment of establishing interests in real property it is important to have a basic understanding of the system of real property ownership in China. The concept of fee simple ownership of real property does not exist in China. Rather, all land in China is owned either by the state or by rural collectives. Articles 45 through 63 of the Property Law delineate, or more properly restate, principles found in the PRC Constitution, the PRC Land Law[6] and other PRC laws and regulations, the scope of state ownership and collective ownership of land and other property and certain procedures relative to the exercise of such ownership.[7]

State Ownership of Land

Thus, land in urban areas is owned by the state as is land in rural and suburban areas that the law specifies as being owned by the state (see Article 47). In addition, natural resources, such as forests, mountain ranges, grasslands, wastelands and tidal flats, with the exception of those otherwise provided by law to be collectively owned, are also owned by the state.

Collectively Owned Land

Article 8 of the Land Law provides that land in the rural and suburban areas, except as otherwise specified, is collectively owned. Land and other real property that is collectively owned includes land, forests, mountain ranges, grasslands, wastelands and tidal flats that the law specifies is collectively owned as well as collectively owned buildings and production facilities and other collectively owned immovable property (see Article 58).

State Owned Land Use Rights; Granted and Allocated

Althoughland in China is owned either by the state or the collective a system does exist for the grant or allocation of rights for individuals or entities to use both state owned and collectively owned land (see generally the Land Law). The grant of rural or collectively owned land for uses other than agricultural purposes or by the collective is generally prohibited. In order to use such rural land for such other purposes it must first be requisitioned by the state and converted into state owned land, and compensation should be paid by the state to the collective owners in respect thereof.

In respect of land that is state owned, land use rights – that is, the right to possess, use and benefit from the use of the land in question, including the right to erect buildings, structures and ancillary facilities thereon – may be created either by way of compensated land grant or by allocation (see Article 137 of Property Law; Article 2 of the Land Law).

Granted Land Use Rights Are Transferable

Land use rights that are created by compensated grant are transferable by the holder and may be owned by individuals or entities.

Allocated Land Use Rights Are Not Transferable

Allocated land use rights, which are largely a legacy of the days of the centrally planned economy when state enterprises and other state institutions were allocated the right to use land, are not transferable. Article 137 of the Property Law provides that the creation of land use rights by way of allocation is stringently restricted and, while legacy allocated land use rights will continue to exist and provide a potential trap for the unwary in real estate transactions involving such allocated land use rights, newly created allocated land use rights will likely be limited to military, public educational and health and other government and social uses.

Term of Granted Land Use Rights

Granted land use rights are subject to terms of varying maximum durationdepending on the purpose for which the land is to be used. Article 12 of the Land Use Rights Transfer Regulations provides a maximum term of 70 years for land used for residential purposes;50 years for land used for industrial purposes; 50 years for land used for educational, scientific, cultural, public health and physical education purposes; 40 years for land used for commercial, tourist and recreational purposes; and 50 years for land used for mixed use or other purposes.

Creation of Land Use Rights

Granted land use rights in urban areas may now only generally be created through public auction or competitive tender – the creation of such rights by agreement is now permitted only in certain limited circumstances – in an attempt by the government to reduce corruption in the granting of transferable land use rights (see Article 137).

The creation of land use rights in urban land comes into effect only upon registration with the relevant land registration authority (see Article 139) and any changes in ownership must also be registered with the registration authority (see Article 146).

Renewal of Granted Land Use Rights on Termination of Term – Unanswered Questions

What happens when the term of a transferable land use right expires? Article 149 of the Property Law provides land use rights for residential premises shall be renewed automatically upon the expiry thereof. This provision has attracted a lot of attention and may have raised some unreasonable expectations. Does the automatic renewal of residential land use rights under the Property Lawcreate the functional equivalent of fee simple ownership for owners of residential property? The short answer is that it is too early to tell because Article 149 fails to answer a number of critical questions relating to the renewal of land use rights. For example, will a holder of residential land use rights on the renewal thereof still be required to enter into a new land use rights grant contract and pay additional land use grant fees asis currently required by existing law generally relating to the renewal of land use rights? [8] What would the automatic renewal term for residential land use rights be? How would any renewal premium be calculated? Would compensation be payable to the holder of the residential land use rights if the holder is unable or unwilling to pay any required renewal premium?What would the standard of such compensation be? The Property Law quite deliberately fails to address these and other related issues leaving the resolution or answer to subsequent legislation.

The resolution of some of the practical issues relating to the renewal of land use rights may well be addressed in respect of non residential land use rights before such issues are clarified in respect of residential land use rights as the term for non residential land use rights is shorter and land use rights in respect of some commercial and industrial properties are beginning to near the end of their term. Article 149 of the Property Law does not provide for the automatic extension of non residential land use rights. Rather the Article provides that such renewal will be handled in accordance with law, which currently provides only general guidance at best.

Creation, Change, Transfer and Termination of Real Property Rights

Chapter II of Volume 1 of the Property Law contains provisions which govern the creation, alteration, transfer and termination of property rights in immovable property. The Property law contemplates the creation of a single registration authority and a uniform system for the registration of interests in immovable property, delineates the scope of authority of the registration authority and provides a framework for property interest holders and interested parties to access and review information contained on the public register maintained by the registration authority and to challenge and seek rectification of erroneous information contained therein.

Registration Required

Article 9 of the Property Law sets forth the basic rule with respect to property interests in immovable property – unless otherwise provided by law, the creation, alteration, transfer and termination of an interest in immovable property does not come into effect until such right is registered. While a contract concerning the creation, change, transfer or extinguishment of rights in immovable property generally becomes effective upon its conclusion, if registration is required in respect of the creation, change, transfer or extinguishment of an interest in immovable property such right “shall become effective once recorded in the immovable property register.” (Article 15 and Article 14). Registration of property rights should be handled by the registration authority at the place where the real property is located. (Article 10).