Overview
The People’s Republic of China is a unified, unitary country with 34 provincial administrative regions under its jurisdiction. The National People’s Congress and its standing Committee, as well as the State Council and its ministries and commissions, formulate laws, regulations and rules that are applicable throughout the country, while the people’s congresses and their governments at the provincial level as well as at the municipal level with district can formulate local laws and regulations or local government regulations in accordance with local realities and within the scope of their respective statutory legislative powers.
Main sources of law: China has formed a legal system consisting of the Civil Code, the Urban Real Estate Administration Law and the Land Administration Law as the backbone, individual statutes and relevant regulations as the skeleton, along with the Constitution, criminal law and administrative law.
Real estate reform direction: the real estate regulation policy continues to adhere to “not using real estate as a short-term economic stimulus”, while at the same time appropriately maintains the space and flexibility for policy optimization in accordance with the basic principle of “policy by city”.
What is the main legislation relating to real estate ownership?
- Civil Code of the People’s Republic of China
- Land Administration Law of the People’s Republic of China
- Urban Real Estate Administration Law of the People’s Republic of China
- Interim Regulations on Real Estate Registration
- Provisions on the Administration of Urban Real Estate Transfer
How is ownership of real estate proved?
In China, the establishment, modification, transfer and elimination of the ownership of real estate can only take effect after registration in accordance with the law. The real estate property certificate issued by the real estate registration authority is a certification document held by the owner of the real estate. However, the real estate register managed by the registration authority is the basis for the ownership of real estate.
Under normal circumstances, the contents of the real estate property certificate are consistent with the real estate register. However, in case there is a discrepancy between the registration in the real estate property certificate and the real estate register, unless the real estate register is proved wrong, the real estate register shall prevail.
In addition to presenting the real estate property certificate, the real estate registration information can also be checked at the real estate registration agency or the housing management department, and the real estate registration agency or the housing management will issue a query result document to prove the ownership registration. In case the right holder has acquired the ownership of the house through other means, but has not had time to apply for registration, relevant supporting materials should be provided to prove that the ownership of the house has been transferred, so as to prove that the right holder has the ownership of the real estate, such as the gift contract, the certificate of inheritance, the effective legal document of the people’s court or the arbitration committee.
Are there any restrictions on who can own real estate?
In China, according to article 9 of the Land administration law of the People’s Republic of China, the subjects of land ownership only include the state and peasant collectives, but not natural persons. In other words, natural persons cannot own land.
In order to balance supply and demand, stabilize housing prices, and promote the stable and healthy development of the real estate market, some cities have introduced different real estate purchases restrictions policies. Taking Guangzhou as an example, the main provisions of the purchase restriction policy are as below: (1) Guangzhou household registration residents are limited to purchase 2 properties; (2) Singles with household registration in Guangzhou are limited to purchase 1 property; (3) Non-Guangzhou household registration residents who have paid personal income taxes or social insurance for 5 consecutive years are limited to purchase 1 property. In addition, at present, foreigners (including Hong Kong, Macao and Taiwan) can purchase 1 residential unit after review as long as they provide relevant study, work and residence certificates, clearly have no housing in Guangzhou, and must be committed for self-occupation.
What types of proprietary interests in real estate can be created?
In China, the real estate exclusive rights that can be created include: (1) the right of possession: the actual holding and control of real estate. (2) The right to use: exercise the right to use according to the nature and purpose of real estate to meet the needs of production and life. (3) The right of income: refers to the economic income or benefits obtained by virtue of the real estate property, such as the rent collected by the owner of the house for renting out the house. (4) The right of disposition: refers to the right of the real estate owner to finally dispose of the real estate to the extent provided by law. (5) The mortgage: the security property right established on the real estate of the debtor or a third party.
Is ownership of real estate and the buildings on it separate?
In China, the ownership of land is owned by the state or collectively by farmers. However, civil subjects can have the right to use the land and the ownership of buildings on the ground. China implements the policy of “real estate and land as one entity”, which means that the ownership of buildings on the ground and the right to use construction land must be the same subject.
What are common ownership structures for ownership of commercial real estate?
In China, the ownership structure of commercial real estate is usually divided into separate ownership or joint ownership. Among them, joint ownership includes common joint ownership and co-ownership by share. Common joint ownership means that each co-owner enjoys common rights and assumes common obligations for the common property regardless of share; co-ownership by share means that the co-owners share rights and assume obligations for the common property in accordance with a determined share.
What is the usual legal due diligence process that is undertaken when acquiring commercial real estate?
In China, there are two main ways to acquire commercial real estate: one is to directly acquire the ownership of real estate, and the other is to acquire the equity of the project company to achieve the purpose of holding commercial real estate.
In case the first approach is taken, the following points require particular attention when conducting legal due diligence: (1) the acquisition of the land use right certificate, the details of the state-owned land transfer contract, and the payment of land transfer fees and deed taxes. (2) In terms of land development and construction, a full set of government approval documents and completion acceptance documents need to be reviewed. (3) If the project land involves demolition, the lawyer needs to visit and inspect the information and progress list of the project’s relocation and demolition, demolition permit, as well as relocation and demolition compensation contract. (4) verification of sales of real estate, with emphasis on documents such as external sales lists, contract filing materials, signed sample contracts, etc. (5) Investigation on other information, date or facts that have a significant impact on the cooperative development project.
In case the second approach is taken, in addition to the above five key-point investigation aspects, at least four more aspects need to be investigated when conducting legal due diligence: (1) detailed review of the major transaction contracts of the project company. (2) Investigation on the credit and debt of the project company. Lawyers should conduct complete investigation and have access to corporate credit reports, audit reports for the last three years, the latest financial statements, foreign guarantees and other documents. (3) Situation of the involvement of the project company in litigation and arbitration to understand the judicial risk of the project company. (4) Labor and personnel situation of the project company.
What legal issues (if any) cannot be covered by usual legal due diligence?
In China, general legal due diligence cannot find out the undisclosed judicial documents (the statutory non-disclosure or the trail documents which are not yet effective); the payment of land transfer fees (especially if retroactive payments are required); changes of land planning conditions; restrictions on the ownership and use of real estate property (these restrictions may be derived from government policies, but are not reflected in the real estate register and disclosed documents).
In practice, the key aspect of legal due diligence is the level of cooperation of the party under investigation. The facts that can be verified by legal due diligence are directly proportional to the level of cooperation of the party under investigation. If the party under investigation is unwilling to cooperate with due diligence, the project company’s labor and personnel, company claims and debts, contract performance, credit information, etc. cannot be identified.
In the meantime, the impact of legal due diligence on business risk judgments depends on the due diligence practitioner’s understanding of deal structure, business logic and professionalism.
What is the usual process for transfer of commercial real estate?
In China, the procedure for the transfer of commercial real estate has become increasingly convenient: (1) the parties to the real estate transfer sign a written transfer contract; (2) buyers and sellers pay their respective taxes and fees in accordance with the law and obtain the Certificate of Tax Payment (Exemption) from the taxation department; (3) all buyers and sellers apply to the real estate registration authority for commercial real estate transfer registration. The required materials mainly include the real estate property certificate, real estate registration application form, applicant’s identity certificate, sales contract, land transfer price payment certificate, and tax payment (exemption) certificate; (4) after reviewing the materials, the real estate registration department will go through the real estate transfer registration procedures within 30 working days.
Is it common for real estate transfers to be effected by way of share transfer as well as asset transfer?
Yes. The share transfer, acquisitions that take all or part of the equity of the target company’s shareholders as the acquisitions target, which indirectly holds the target real estate by holding the target company’s equity. It includes both wholly-owned and absolute controlling acquisitions, as well as non-controlling equity participation acquisitions. The asset transfer, legal acts of acquiring the target real estate as subject matter. However, there are certain restrictions on direct transfer of real estate. If the land use right is acquired by way of transfer, according to article 39 of the Urban Real Estate Administration Law, the following conditions must by met at the time of transfer: (1) have paid all the land use right transfer fees and obtained the land use right certificate as stipulated in the transfer contract; (2) have carried out investment and development in accordance with the agreement of the transfer contract: for housing construction projects, more than 25% of the total development investment should have been completed; for piece of development land, industrial land or other construction land conditions should have been formed. If land use rights are acquired by allocation, according to article 40 of the Urban Real Estate Administration Law, the transfer of real estate should be submitted to the people’s government with the right to approve for approval.
On the sale of freehold interests in land does the benefit of any occupational leases and income automatically transfer?
Firstly, in China, there are no permanent real estate rights and interests on state-owned land: (1) for the land use rights acquired by way of transfer, the term of the civil housing use rights is 70 years; the term of education, science and technology, culture, sports and industrial land use rights is 50 years; the term of the land use rights for commerce, tourism and recreational facilities is 40 years. The number of years of house ownership on the land shall also be consistent with the age of land use rights. (2) Although there is no limit to the duration of land use rights acquired by way of allocation, the government may recover the allocated land use rights according to the needs of public interest, at which point the original allocated land use rights will also terminate.
On the other hand, there are permanent real estate rights on collective land.
Regardless of the above-mentioned type of land, during the term of lease, even if the owner assigns the lease to others, it does not have any impact on the lease relationship. The recipient cannot deny the original lease on the grounds that he has become the owner of the leased property and demand the return of the lease by the lessee. Upon the completion of the transfer of land use rights, possession of the leased property and lease income will be transferred to the transferee at the same time.
What common rights, interests and burdens can be created or attach over real estate and how are these protected?
The usufruct rights that can be set on real estate include: (1) state-owned construction land use right and collective construction land use right. The subject of collective land construction land use rights can only be owned by the collective and its members. When construction requires the use of collective land, it must be expropriated and converted to state-owned land before the right to use it can be acquired. (2) Homestead use right. Ownership goes to the village collective. Farmers have the ownership of the attachments on the homestead, and have the right to buy, sell and lease, without being violated by others. However, the ownership of the homestead is always collectively owned. Applications for homestead after selling or renting out a house shall not be approved. (3) Land contract management right. It is created mainly through the conclusion of a contract between the parties, which is an acquisition based a legal act. Some of it is subcontracted, leased, exchanged, assigned or otherwise transferred; some also include shares, mortgages or other means of transfer. (4) Servitude. The parties shall conclude an easement contract in writing. If the parties request registration, they may apply to the registration agency for the establishment of easement registration; without registration, they may not confront bona fide third parties. The right holder of the easement shall, in accordance with the contract, allow the easement owner to use its land, and shall not hinder the easement owner from exercising his rights. (5) Mortgage. The mortgagor and the mortgagee shall conclude the mortgage contract in writing and register the mortgage.
Are split legal and beneficial ownership of real estate (i.e. trust structures) recognised
In China, ownership and income rights are separable, i.e. the owner of the real estate may not be the ultimate beneficiary. The ownership of a house is divided into four: the right of possession, the right to use, the right to profit and the right to dispose. The right of possession of a house is usually exercised by the owner, but sometimes it is also exercised by others. This is the separation of the right to use and ownership. The right to use the house is the right to actually use the house. By means of certain legal contracts, non-owner of the house can also obtain the right to use the house. The right to income of a house refers to the various income generated by the owner of the house property which can be transferred to a third party through a civil legal act.
Is public disclosure of the ultimate beneficial owners of real estate required?
According to article 209 of the Civil Code of the People’s Republic of China, “creation, variation, transfer and extinguishment of real right of real property shall take effect upon registration pursuant to the law; and shall not take effect without registration, unless otherwise stipulated by the law.” The information registered in the real estate register should include the owner or the occupant of the real estate.
According to the above-mentioned legal provisions, in China, the law requires disclosure of the ownership or use of real estate, but not of the ultimate beneficiary of the house.
What are the main taxes associated with commercial real estate ownership and transfer of commercial real estate?
The main taxes include: (1) land value-added taxes levied in four progressive levels: a. the tax rate is 30% for that part of the added value which does not exceed 50% of the deducted amount; b. the tax rate is 40% for that part of the added value which is greater than 50% but less than 100% of the deducted amount; c. the tax rate is 50% for that part of the added value which is greater than 100% but less than 200% of the deducted amount; d. the tax rate is 60% for that part of the added value which exceeds 200% of the deducted amount. The aforesaid deducted amount refers to: the lease price paid for the use of the land, costs and expenses spent in the development of the real estate; (2) business taxes, payable at 5% of real estate sales income; (3) corporate income taxes, payable at 30% of taxable income; (4) stamp tax, deed tax, urban construction and maintenance tax, etc.
Besides, two types of registration fees are also included: (1) real estate property registration fee: residential property registration fees are at the rate of 80 yuan per item; for registration fees for housing other than residential housing: 100 yuan for each case up to 100 square meters, 160 yuan for each case from 100 to 500 square meters, 200 yuan for each case from 500 to 1000 square meters. 200 yuan for each case from 1000 to 5000 square meters, and 300 yuan for each case over 5000 square meters. (2) Real estate transaction fees: 3 yuan per square meter for newly built commercial housing, to be borne by the transferor (50% reduction for affordable housing); 6 yuan per square meter for stock housing, 50% on each side of the transfer.
What are common terms of commercial leases and are there regulatory controls on the terms of leases?
According to article 704 of the Civil code of the People’s Republic of China, the lease contract needs to include the following clauses: (1) the name of the leased property; (2) the quantity of the leased property; (3) the purpose of the leased property; (4) the time limit and method for the payment of the rent; (5) the lease term; (6) the maintenance of the leased property and other clauses.
The lease terms are regulated by the Civil Code of the People’s Republic of China, and the term of the lease agreed by the parties shall not exceed twenty years. Where the lease exceeds twenty years, the part of the lease beyond the said limit shall be invalid. At the expiration of the term of the lease, the parties may renew the lease contract; however, the renewed term may not exceed 20 years commencing on the date of renewal. Where the lease term is six months or longer, the lease shall be in writing. If the parties fail to adopt a written form, and it is impossible to determine the term of lease, the lease shall be deemed as a non-term lease. In general, the lease contact needs to be registered with the real estate management department.
What (if any) Covid-19 related regulatory controls are in place which affect landlords' abilities to enforce tenant obligations in commercial leases?
Since the outbreak of Covid-2019 Pandemic, various departments of central and local governments have released related regulations to relieve the renters by advocating private leasers to reduce or exempt rents for the purpose of overcoming difficulties together, while for leasers who are state-owned entities, such requirements for reduction or exemption are in principle compulsory.
Form the judiciary side, the People’s Supreme Court has issued Guidelines for Proper Settlement of Covid-2019 Related Leasing Disputes II to address this issue as set out in Articles of 5 and 6. In gist, renters may raise defense based on hardship or force majeure caused by epidemic control measures resulting in difficulty of liquidity or significant income deficit. Once the renter can furnish evidence in this regard, the court would grant a series of reliefs including reduction or exemption of rents, variation of original contract like postpone of payment and extension of leasing duration, dissolution of contract or exemption of contractual liabilities depending on different scenarios of different case. On the contrary, the request for dissolution of contract from leaser’s side on the basis of fundamental breach by renter will not be upheld.
The reduction margin will be decided on a case-by-case analysis by which the ex aequo et bono principle shall be taken into account. While the landlord falls into the scope of public institution such as state-owned entities, governmental department, universities etc., the court will decide by referring to relative policies by local governments.
Some other courts in provincial and prefectural levels have issued similar guidelines in this regard so as to strike balance between the interests of renter and landlord.
How are use, planning and zoning restrictions on real estate regulated?
In China, there are laws, regulations and departmental rules, such as the Urban and Rural Planning Law, the Urban Real Estate Administration Law, the Construction Law, the Regulation on the Administration of Development and Operation of Urban Real Estate, that regulate the use, planning and zoning restrictions of real estate at the legal level. The competent department of urban and rural planning under the State Council shall take charge of the urban and rural planning administration of the whole nation. The local people’s governments at or above the county level shall take charge of the urban and rural planning administration work of their respective administrative region. The planning level is divided into urban system planning, city planning, town planning, township planning and village planning. Among them, city planning and town planning are divided into overall planning and detailed planning. Detailed planning includes regulatory detailed planning and site detailed planning.
When real estate developers develop and build houses in the early stage, they shall apply for certificates such as the Certificate of right to the use of State-owned land, the Certificate of construction project planning, the License for planning of land for construction use, the Construction license for construction projects.
Who can be liable for environmental contamination on real estate?
According to article 1229 of the Civil Code of the People’s Republic of China, in the event of damages of others caused by environmental pollution and ecological destruction, the infringer shall bear tort liability. In the process of real estate development and construction, the responsibility for environmental pollution should be borne by those who cause environmental pollution, such as developers and construction parties. In addition, the perpetrator shall bear the burden of proof for the circumstances in which the liability is not assumed or mitigated as provided by the law and the absence of a causal relationship between the act and the damage.
Are buildings legally required to have their energy performance assessed and in what (if any) situations do minimum energy performance levels need to be met?
Requirements for building energy performance are set out in Energy Conservation Law (as revised in 2018) and Regulations on Energy Conservation of Civilian Buildings (having come into effective since 2006) by then Ministry of Construction (Ministry of Housing and Urban-Rural Development). These rules set forth general obligations encompassing the whole proceedings of plan, design, construction and exploitation of civilian buildings, including use of new wall materials, execution of energy, tightening supervision of energy-saving facilities, reasonable design of the thermal performance of the building envelope, enhancement of efficiency of heating, cooling, lighting, ventilation, water supply and drainage, access systems, use of renewable energy sources, reducing building energy consumption and using energy in rational and efficient manner on the premise of ensuring the function of building and quality of the indoor thermal environment.
Moreover, the Ministry of Housing and Urban-Rural Development released Standards for Design of Energy Efficiency of Public Buildings on 2 February of 2015, which provides technical specifications on the buildings as well as the systems of heating, ventilation and air conditioning, water supply and drainage, electrical attached hereto, and the use of renewable energies, among the other things, Articles 3.2.1, 3.2.7, 3.3.1, 3.3.2, 3.3.7, 4.1.1, 4.2.2, 4.2.3, 4.2.5, 4.2.8, 4.2.10, 4.2.14, 4.2.17, 4.2.19, 4.5.2, 4.5.4, 4.5.6 of the standards are compulsory and thus legally executable.
Is expropriation of real estate possible?
In China, real estate can be expropriated, which needs to be carried out in accordance with the authority and procedures prescribed by law. According to article 243 of the Civil Code of the People’s Republic of China, “Collectively-owned land and housing properties and other real property organizations and individuals may be requisitioned pursuant to the authority and procedures stipulated by the law for public interest needs. When requisitioning land owned collectively, it is required to, in accordance with law and in a timely manner and in full amount, pay land compensation fees, resettlement subsidies and compensations for rural residential houses and other above-ground fixtures as well as young crops, arrange for social security fees for the farmers with land requisitioned, guarantee their livelihood and safeguard their legitimate rights and interests. If any houses or other real property of organization and individuals are to be expropriated, compensation for expropriation shall be made to protect the lawful rights and interests of the expropriated; and if residential houses of individuals are to be expropriated, the housing conditions of the expropriated shall be guaranteed.”
Is it possible to create mortgages over real estate and how are these protected and enforced?
It is possible to establish a mortgage on real estate.
Chapter 17 of the Second Part (Property) of the Civil Code of the People’s Republic of China (security property right) provides for the creation and protection of mortgages. Where a building is mortgaged, the right to use construction land as possessed by the building shall be mortgaged together with the building. Right to use construction land that is mortgaged shall be mortgaged together with the buildings on the land. However, the ownership of land, and the right to use such collectively-owned land as homestead, land and hills allotted for private use may not be mortgaged (except or those that may be mortgaged as prescribed by any law). For establishing a mortgage right, a written mortgage contract shall be concluded. In general, a mortgage contract shall contain: the variety and amount of the secured obligee’s rights, the time limit for the obligor to fulfill obligations, the name and quantity of mortgaged property and the scope of guarantee. The creation of mortgage on real estate shall be registered, and the mortgage shall be established at the time of registration. When the obligor fails to pay its/his due debts or any circumstance as stipulated by the parties concerned for realizing the mortgage arises, the mortgagee may agree with the mortgagor to discount the mortgaged real estate or to receive priority payment from the auction or sale of the mortgaged property. In case the main creditor’s right is extinguished or the mortgage is realized or the creditor waives the mortgage, the mortgage on the real estate shall be extinguished.
Are there material registration costs associated with the creation of mortgages over real estate?
According to the Notice of the National Development and Reform Commission and the Ministry of Finance on Issues concerning the Fee Charge Rates for the Registration of Immovable Property, the registration fee for setting up mortgage on real estate is charged according to different situations: (1) the parties set up a mortgage on the residence and its construction land, and register the mortgage (including the initial registration, registration of change, and transfer registration of the mortgage); residential immovable property registration fees shall be collected at the rate of 80 yuan per item. (2) Mortgage registration fees of non-residential immovable property rights at the rate of 550 yuan per item. (3) Where an applicant handles a loan with several collaterals on a same land lot and applies for undergoing the registration of the right to mortgage, fees shall be collected on the basis of one piece; and where an applicant handles a loan with several collaterals on different land lots and applies for undergoing the registration of the right to mortgage, fees shall be collected on the basis of multiple pieces.
Is it possible to create a trust structure for mortgage security over real estate?
It’s possible. A real estate mortgage loan is a loan used by a borrower to apply for loans from banks, pawnbrokers, small loan companies and other institutions with the real estate under the name of an individual as collateral for consumption or production and operation. The real estate mortgage loan products issued by trust companies mainly cooperate with small loan companies, pawnbrokers, third-party service platforms and other institutions to issue loans to borrowers who provide real estate mortgages. In China, there are two types of transaction structures for real estate mortgage trust products that are currently popular in the market:
1) Asset package model. Trust companies directly or indirectly provide funds to cooperative institutions through trust plans. The cooperative institutions grant real estate mortgage loans, and the partners adopt several methods such as pledge of the underlying asset package to the trust company as a means of credit enhancement.
2) Loan aid model. Trust companies provide the funds, and loan assistance agencies (usually small loan companies, pawnbrokers, third-party service platforms, etc.) provide qualified borrowers, due diligence, and loan assistance services such as collateral evaluation and mortgage warrant processing. Trust companies and loan assistance agencies assume their own risks and benefits through contracts.
China: Real Estate
This country-specific Q&A provides an overview of Real Estate laws and regulations applicable in China.
Overview
What is the main legislation relating to real estate ownership?
How is ownership of real estate proved?
Are there any restrictions on who can own real estate?
What types of proprietary interests in real estate can be created?
Is ownership of real estate and the buildings on it separate?
What are common ownership structures for ownership of commercial real estate?
What is the usual legal due diligence process that is undertaken when acquiring commercial real estate?
What legal issues (if any) cannot be covered by usual legal due diligence?
What is the usual process for transfer of commercial real estate?
Is it common for real estate transfers to be effected by way of share transfer as well as asset transfer?
On the sale of freehold interests in land does the benefit of any occupational leases and income automatically transfer?
What common rights, interests and burdens can be created or attach over real estate and how are these protected?
Are split legal and beneficial ownership of real estate (i.e. trust structures) recognised
Is public disclosure of the ultimate beneficial owners of real estate required?
What are the main taxes associated with commercial real estate ownership and transfer of commercial real estate?
What are common terms of commercial leases and are there regulatory controls on the terms of leases?
What (if any) Covid-19 related regulatory controls are in place which affect landlords' abilities to enforce tenant obligations in commercial leases?
How are use, planning and zoning restrictions on real estate regulated?
Who can be liable for environmental contamination on real estate?
Are buildings legally required to have their energy performance assessed and in what (if any) situations do minimum energy performance levels need to be met?
Is expropriation of real estate possible?
Is it possible to create mortgages over real estate and how are these protected and enforced?
Are there material registration costs associated with the creation of mortgages over real estate?
Is it possible to create a trust structure for mortgage security over real estate?