China: Real Estate

The People’s Republic of China is a unified and 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 the governments at provincial level as well as at 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.

As far as real estate is concerned, China has formed a legal system consisting of the Civil Code, the Urban Real Estate Administration Law and the Land Administration Law as the main laws, along with some other special laws and regulations and the relevant provisions of the Constitution, the Criminal Law and the administrative laws and regulations.

China has carried out intensive real estate reforms. Currently the reform continues to adhere to the fundamental principle of “not using real estate as a short-term economic stimulus”, while at the same time appropriately maintains room and flexibility for policy optimization in accordance with the basic principle of “applying policies according to local actual conditions”.

The main laws and regulations relating to real estate ownership are as follows:

Civil Code of the People’s Republic of China (adopted on May 28, 2020 and shall come into force as of January 1, 2021);

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.

In China, the establishment, modification, transfer and elimination of 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 administered 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 that in the real estate register, unless the real estate register is proved wrong, it shall prevail.

In addition to the real estate property certificate, 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 right holders have acquired the ownership of the house through other means, but have 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 holders have the ownership in the relevant real estate, such as a gift contract, certificate of inheritance, or documents issued by courts or arbitration commissions which have entered into legal effectiveness.

Under Article 9 of the Land Administration Law of China, the subjects of land ownership only include the State and farmers’ collectives, and do not include 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 real estate market, some cities in China have introduced different policies on restricting real estate purchases. Taking Guangzhou in southern China as an example, the main provisions relating to purchase restriction policy are as follows: (1) married residents with permanent household registration of Guangzhou can only purchase two properties; (2) single residents with permanent household registration of Guangzhou can only purchase one property; (3) persons without permanent household registration of Guangzhou who have paid personal income tax or social insurance premium for 5 consecutive years can only purchase one property. In addition, at present, foreigners (as well as Hong Kong, Macao and Taiwan residents) can purchase one residential unit if they provide evidence of their study, work and residence in Guangzhou, their employers’ certification, certification that they own no properties in Guangzhou, and their warranty that the properties are purchased for self-dwelling, and upon the authority’s verification.

In China, real estate proprietary rights that can be created include: (1) the right to possess: the actual holding and control of real estate; (2) the right to use: the right to use real estate according to its nature and purposes to meet the needs of production and life; (3) the right of income: the obtaining of economic income or benefits by virtue of real estate property, such as rents collected by owners from renting out houses; (4) the right of disposition: the right of real estate owners to finally dispose of real estate within the scope provided by law; and (5) the mortgage right: the security right established over real estate owned by debtors or third parties.

In China, the ownership of land rests with the State or farmers’ collectives. However, civil subjects have the right to use land and to own buildings on land. China implements the policy of “real estate and land under one entity”, which means that the ownership in buildings on land and the right to the use of land for construction use shall belong to the same subject.

The ownership structures of commercial real estate are separate ownership and 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 shares; co-ownership by share means that co-owners share rights and assume obligations for the common property in accordance with determined share ratio.

In China, there are two main ways to acquire commercial real estate: one is to directly acquire the ownership of commercial real estate, and the other is to acquire the equity of the target company to achieve the purpose of owning commercial real estate.

In case the first approach is taken, the following issues require particular attention when conducting legal due diligence: (1) acquisition of land use right certificate, details of State-owned land transfer contract, and 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, lawyers needs to make site visits and investigate information and documents relating to the project’s relocation and demolition, demolition permit, as well as relocation and demolition compensation contracts; (4) verification of sales of real estate, with emphasis on documents such as external sales lists, contract filing materials, signed sample contracts, etc., and (5) investigation on other information, documents or facts that may have a significant impact on the project.

In case the second approach is taken, in addition to the above five key issues to be reviewed, at least another four further aspects need to be investigated when conducting legal due diligence: (1) major transaction contracts of the target company; (2) credit and debts of the target company; lawyers should conduct complete investigation and have access to corporate credit reports, audit reports for the last three years, latest financial statements, external guarantees and other documents; (3) litigations and arbitrations involving the target company to understand judicial risks facing the target company, and (4) labor and human resources status of the target company.

In China, a usual legal due diligence often does not provide access to documents and information including: undisclosed judicial documents (which cannot be disclosed under law, or are yet to become legally effective); payment of land transfer fees (especially if there is any payment required to be made up); changes of land planning conditions; restrictions on the ownership and use of real estate property (these restrictions may be imposed under government policies, but are not reflected in the real estate register and disclosed documents).

In practice, the key to a smooth legal due diligence rests with the level of cooperation of the parties under investigation. The facts that can be verified by legal due diligence are directly proportional to the level of cooperation of the parties under investigation. If the parties under investigation are unwilling to cooperate with the due diligence, the target company’s labor and human resources status, its creditor’s rights and debts, contract performance, credit information, etc. may not be ascertained.

In the meantime, the effect of legal due diligence on business risk assessment depends on the due diligence practitioner’s understanding of the deal structure, business logic and their professionalism.

In China, the procedures for transfer of commercial real estate have become increasingly convenient: (1) the parties to 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 real estate registration authority for commercial real estate transfer registration. The required documents mainly include 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 documents submitted, real estate registration department will go through real estate transfer registration procedures within 30 working days.

Yes. A share transfer is an acquisition that takes all or part of the equity of the target company’s shareholders as the acquisition target, and through which the transferee indirectly owns the target real estate by owning the target company’s equity. It includes both 100% share transfer and majority share transfer with controlling power, as well as minority share transfer without controlling power.

An asset transfer involves legal acts of acquiring the target real estate as the 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 concurrently at the time of transfer: (1) all the land use right transfer fees have been paid and the land use right certificate as stipulated in the transfer contract has been obtained; (2) investment and development have been carried out in accordance with the provisions in the transfer contract; this means that for housing construction projects, more than 25% of the total development investment should have been completed, and for development of large tracts of land, land has been available for the construction of industrial or other projects. If the land use right is acquired by allocation, according to Article 40 of the Urban Real Estate Administration Law, the application for transfer of real estate should be submitted to the competent government department for approval.

Firstly, in China, there are no permanent real property rights and interests in State-owned land. Firstly, in respect of land use right acquired by way of transfer, the validity term of land use right is 70 years for civil housing, 50 years for land for educational, scientific and technological, cultural, sports and industrial use, and 40 years for commercial, tourism and recreational facilities. The validity term of ownership of buildings on land shall be consistent with that of the land use right. Secondly, although there is no restriction on the validity term of land use right acquired by way of allocation, Chinese governments may recover the allocated land use right for public interest according to law, at which point the original allocated land use right will terminate.

On the other hand, there are permanent real property rights on collectively owned land.

Regardless of the nature of land as aforementioned, during the term of lease, even if the owner sells the land to another party, it does not have impact on the lease relationship. The buyer cannot deny the original lease on the grounds that he has become the owner of the leased property and demand the return of the leased property by the lessee. Upon the completion of the transfer of land use right, the possession of the leased property and lease income will be transferred to the transferee at the same time.

Usufruct rights that can be set on real estate include the following five types:

(1) Right to use State-owned land for construction and right to use collectively-owned land for construction. The subjects of the right to use collectively-owned land can only be collectives and their members. When construction requires the use of collectively-owned land, it must be expropriated and converted to State-owned land before the right to use it can be acquired.

(2) Right to use homestead. Ownership in homestead goes to village collectives. Farmers have ownership in the fixtures on land, and have the right to buy, sell and lease them, without interference of any other party. However, the ownership of homestead is always collectively owned. Applications for a further homestead after selling or renting out the house built on the original homestead is not approved.

(3) Right to the contracted management of land. It is created mainly through conclusion of a contract between the parties, which is an acquisition based legal act. Some of it is subcontracted, leased, exchanged, assigned or otherwise transferred; some also include share transfer, mortgage or other means of transfer.

(4) Easement. The parties concerned shall conclude an easement contract in writing. If the parties request registration, they may apply to the registration agency for easement registration; without registration, it may not act against 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 right. The mortgagor and the mortgagee shall conclude the mortgage contract in writing and arrange for the mortgage to be registered.

According to Article 209 of the Civil Code, China adopts the policy of publicity of real estate rights. The creation, variation, transfer and extinguishment of real estate rights require registration in accordance with the law in order to be effective. The legal ownership of real estate has absolute ownership effect once it is publicized. Therefore, under Chinese real estate law, there is no the concept of “beneficial ownership”, but only the concept of “legal ownership”. If, in practice, “beneficial ownership” is established through trust or agreement between civil subjects, it does not lead to changes in property rights, and only results in a debt relationship.

Article 209 of the Civil Code provides that the 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.

As mentioned above, the concept of “beneficial owner” doesn’t exist under Chinese real estate law. Therefore, in China, only the legal ownership or right holder is required to be disclosed by law.

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 land use, costs and expenses spent in real estate development, tax payments relating to transfer of real estate and other items; (2) business taxes, payable at 5% of real estate sales income; (3) corporate income tax, payable at 30% of taxable income; (4) stamp tax, deed tax, urban construction and maintenance tax, etc.

According to Article 704 of the Civil Code, a lease contract generally includes terms such as: (1) name of the leased property; (2) quantity of the leased property; (3) purpose of the leased property; (4) time limit and method for rent payment; (5) lease term; (6) maintenance of the leased property and other clauses.

Lease terms are regulated by the Civil Code, and the term of lease agreed by the parties shall not exceed twenty years. Where the term of lease exceeds twenty years, the part 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 contract shall be registered with the real estate administration department.

There are laws, regulations and departmental rules that regular the use, planning and zoning restrictions of real estate in China, including the Urban and Rural Planning Law, the Urban Real Estate Administration Law, the Construction Law and the Regulation on the Administration of Development and Operation of Urban Real Estate. The competent department of urban and rural planning under the State Council shall take charge of urban and rural planning administration of the whole nation. The local people’s governments at or above county level shall take charge of the urban and rural planning administration work of their respective administrative region. The planning includes urban system planning, city planning, town planning, township planning and village planning. Among them, city planning and township planning are divided into overall planning and detailed planning, and detailed planning is further divided into regulatory detailed planning and site detailed planning.

When real estate developers develop and build houses in the early stage, they shall apply for a number of certificates and licenses, such as Certificate of Right to Use State-owned Land, Certificate of Construction Project Planning, License for Planning of Land for Construction Use, Construction License for Construction Projects, etc.

According to Article 1229 of the Civil Code, in the event of damages to 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 actor shall bear the burden of proof of the circumstances in which the liability shall not be assumed or shall be mitigated as provided by law and the absence of a causal relationship between the act and the damage.

In China, real estate can be expropriated, which needs to be carried out in accordance with the authority and procedures prescribed by law. Article 243 of the Civil Code provides that collectively-owned land and housing properties and other real property organizations and individuals may be requisitioned pursuant to the authority and procedures stipulated by law for public interests. 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 premium for farmers with land requisitioned, guarantee their livelihood and safeguard their legitimate rights and interests. If any houses or other real property of organizations and individuals are to be expropriated, compensation for expropriation shall be made to protect the lawful rights and interests of the expropriated parties; and if residential houses of individuals are to be expropriated, steps should be taken to ensure the housing conditions of the expropriated individuals.

Yes, 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, which provides that where a building is mortgaged, the right to use construction land as possessed by the building shall be mortgaged together with the building. The 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 if 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.

In accordance with 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 creating mortgage on real estate is charged according to different situations: (1) where the parties create a mortgage on residence and its construction land and register the mortgage (including the initial registration, registration of change, and transfer registration of the mortgage), with respect to residential immovable property, the registration fee shall be collected at the rate of RMB80 per item; (2) mortgage registration fee of non-residential immovable property shall be collected at the rate of RMB550 per item; (3) where an applicant handles a loan with several collaterals on a same land lot and applies for undergoing registration of the right to mortgage, registration fee 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 registration of the right to mortgage, registration fee shall be collected on the basis of multiple pieces.

It’s possible. A real estate mortgage loan is a loan borrowed by a borrower from a bank, pawnbroker, small loan company or other institutions using the real estate registered under the borrower’s name as collateral for personal consumption or production and operation. With regard to real estate mortgage loan products issued by trust companies, trust companies mainly cooperate with small loan companies, pawnbrokers, third-party service platforms and other institutions to grant loans to borrowers who have their real estate mortgaged as security. 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. Cooperative institutions grant real estate mortgage loans, and partners adopt several methods such as pledge of the underlying asset package to trust companies as a means of credit enhancement.

(2) Loan aid model. Trust companies provide funds, and loan assistance agencies (usually small loan companies, pawnbrokers, third-party service platforms, etc.) provide qualified borrowers, conduct due diligence, evaluate collateral, apply for relevant mortgage certificates and other loan assistance services. Trust companies and loan assistance agencies assume their own risks and benefits through contracts.