WEH Kanton © 2010
Fri, 10 Sep 2010 00:53:41 +0800
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The status of land in China and importance of due diligence
[By Dezan Shiru & Associates]
Although the principle of private property is broadly accepted in China following the last amendment to the Constitution in 2004, all land in China is still owned by either the state or by village collectives.
State land includes mainly construction land in the urban areas, but also a small amount of agricultural land in the rural areas. State land is the main source of industrial and commercial construction land, and if the foreign investor wants to acquire state land, they must obtain the relevant rights granted to them by the local bureau of the Ministry of Land and Resources. Collective land includes land in rural and urban areas that does not belong to the state, mostly agricultural land with some construction land.
Requisition is the main method of converting collective land into state land. If people who are not members of a village collective wish to use collective land, they must first make an application to the government. If this is approved, the government requisitions the collective land and turns It into state land, and then grants the land to the other party for an appropriate fee. If the targeted land is collective agricultural land, provincial level approved is required for the conversation to industrial land.
At present, most foreign-invested enterprises (FIEs) will build factories on state construction land. There are two types of land use rights:
Ø Allocated rights – meaning someone else has the title but permission to use for specific purpose is provided to you. These take the form of an issued certificate in your name.
Ø Granted Rights – meaning you have title (ownership) of the land.
For obvious reasons, granted rights are more expensive than allocated rights. Granted rights mean you can profit from increase in the value of the land if you develop it, whereas with allocated rights this is not the case. A certificate is also issued demonstrating the owner has legal title.
If you are offered a piece of land, you should conduct proper due diligence. If you need to know what kind of land it is, the easiest way is to ask the landlord for their land certificate. If they cannot provide it, this may mean there is a problem. If this is the case, you need to ask the landlord to provide the land’s status.
Foreign investors should take into account the following issues:
Ø strictly speaking, only local bureaus of the Ministry Land and Resources are authorized to sign land grant contracts, but in some economic development zones, such contracts are signed by the zone administrative committee
Ø collective land, especially agricultural land, can only be used for this special purpose, although in some areas, the transfer to collective construction land of collective construction land has been permitted recently
Ø the state will withdraw the land use right if the transferee does not utilize the land after two years of acquisition.
Despite the rule that only village collectives can use collective land, many collectives have in fact rented their land to foreign investors and private enterprises for a long term uses for factory or warehouses.
Also important to note is the scope of use – this appears on the certificate and identifies exactly how the land can be used. Again for obvious reasons, this needs to be consistent with your business. Problems can occur in several ways:
Ø Granted Rights were paid for, but Allocated Rights provided – we have even had problems with local governments being devious here – negotiating a higher premium, yet actually only handing over allocated rights. If you want title to the land, you must specify granted rights in all circumstances.
Ø Invalid scope of use – agricultural land is at a premium, and permission to convert it to commercial use has to be obtained at State level. Yet many local governments themselves issue fraudulent certificates, taking land from farmers for pittance, illegally changing the rights, the selling it on as commercial udage to foreign investors. It is a common scam, and if you get caught, no matter how innocent you are, you stand to lose you investment. You must check with the land bureau on land use, scope of use etc to verfy what you are told is correct.
Ø Access rights – some land can have issues with access rights, and details to provide for this must be hammered out as part of any agreement.
Fraudulent use of land is a common problem when deceiving foreign investors in China, as the premiums are high and you can easily lose significant sums if your due diligence is not carried out properly. Putting it right is almost impossible if you have been many recent cases of unrest involving such fraudlunt seizure of agricultural land, and the subsequent publicity could reflect badly on you as a foreign investor even if you were innocent of any wrongdoing.
Buying, selling and renting property
Property ownership is provided through the exchange of a land use right certificate corresponding to the to the related land. Unfortunately, there is not a central registry, and you have to check locally it is possible to check whether the property’s owner is entitled to sell you the rights. We strongly advise that you ask the land bureau to search for any mortgages, loans or other encumbrances attached to the property.
Once there is change of ownership, both parties should go together to the land bureau to submit documents for the ownership transfer procedures. The bureau also defines the exact borders of the property.
[…]
We discuss financing issues later, but in most cases an individual would need to put down around 30-40% of the purchase price as cash, with the rest funded by a mortgage.
Due diligence is important, as ever in China, like in all other markets – the principle of caveat emptor (“let the buyer beware) applies here. If you wish to invest in a foreign market, you should pay close attention to examining and understanding the true condition of the property, and/ or seek the assistance of a real estate professionals before purchasing. There are international real estate agencies and expert valuers in China who can assist you to judge whether the purchase price of a property is fair, and whether it is structurally sound. The more due diligence, the better, as taking legal action if something goes wrong is much more difficult than in countries with more developed rule of law. The status of land in China and importance of due diligence
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