China Law Blog

This is the last in our series of posts on China's New Property Law.  This post deals with real property use rights in China.  For our previous posts on China's New Property Law, click here, here, and here. 

IV.  Part 3: Use Rights

Since the state and collectives own all land, a major issue under the Property Law was to determine the nature of the rights of private persons who make use of land for agriculture, residential construction and commercial construction. Since all of these rights involve the long-term use of land owned by another, the Chinese settled on characterizing all of these rights under the category of use rights. The Chinese term employed is yong yi quan ().  The term is based on the German Civil Code concept of  nutzungen BGB 1030-1089, which is in turn based on the Roman Law concept of usufruct. However, use rights as defined in the Property Law are dramatically different from German nutzungen and from Roman usufruct. In order to avoid any confusion, I will use the term "use rights".

Section 117 defines use rights as follows: "The holder of use rights enjoys the legal right to occupy, use and take the benefit from the immovable or movable property owned by another person." In terms of basic rights, the holder of use rights enjoys all the fundamental benefits of property ownership except the right to alienate or otherwise dispose of the ownership interest. Though the ownership of the underlying land cannot be alienated, use rights are property rights that can be purchased and sold, mortgaged, gifted and inherited. Thus, classification of use rights as a form of property is essential to the creation of a market economy in China.

Before the adoption of the Property Law, Chinese courts often characterized use rights as contract rights, a type of obligation under civil law. Contract rights cannot form the basis for a free exchange based market economy. Contract rights are particular and personal to the contracting parties while property rights are general and abstract rights. Contract rights are defined by the terms of the contract, while property rights are determined by the provisions of the law. Contract rights are not alienable and are not inheritable, while property rights are both alienable and inheritable. Since all rights concerning land held by private persons in China fall under the classification of use rights, categorization of use rights as property rights has an enormous impact.

Almost as an afterthought, Part 3 includes a section on easements created by agreement.

The major impact of the Property Law is in characterization of use rights as property rights. The major use rights are defined in great detail in other statutes and regulations concerning real property law that have been adopted during the past ten years. The Property Law for the most part merely repeats the provisions of the existing law in basic terms and makes little or no change to the existing law. The discussion below focuses on the provisions of the Property Law that make substantial changes or clarifications in existing law.

      A.  Division 10: General Principles

In addition to defining use rights, this division provides the following:

            1.  As a general rule, the state follows the policy of transfer of use rights in land and natural resources to others in exchange for a fee.

            2.  After use rights are granted, the owner does not have the right to interfere in the enjoyment of such rights on the part of the holder of use rights.

            3.  When the government seizes land through eminent domain, the holder of use rights in that land is entitled to compensation under the same terms as the owner of the land.

      B.  Division 11: Farmland Contract Management Use Rights

Farmers in China work their land under household land use contracts between the rural household and the rural collective that owns the land. This system is detailed in the Land Management Law and the Household Land Contract Law. The Property Law mostly follows these laws, but makes the following adjustments and clarifications:

            1.  Household land contracts must be in writing.

            2.  The contracts must be registered in the local land registry.

            3.  Any changes in the contracts must be registered in the local land

           registry.

            4.  Once land use contracts are granted, the local authorities are prohibited from changing the terms of the land contract through reapportionment or other measures. This is a significant change from current practice. In many rural areas, the terms of land contacts are adjusted on an annual basis to account for changes in residence patterns and in cropping patterns. This practice was commonly used to punish households for disagreeing with local leaders. This practice is now prohibited and rural households are given the right to defend their land contract rights against these improper acts by local authorities.

            5.  The basic term of the land contract is 30 years. Section 126. Many rural residents have complained this 30-year term is too short and it takes away their incentive to make long-term improvements in "their" land. The Property Law seeks to address this issue by providing that at the end of the 30 year term, the contract right will automatically renew "in accordance with relevant national law." This provision appears to provide for a permanent right to rural farmland in a form similar to fee simple ownership. However, the term of the renewal and any additional conditions for renewal, including payment of fees, is not specified. As a result, the uncertainty regarding rights in rural farmland has not been removed.

            6.  Holders of rural land contract rights have the right to alienate such rights through transfer and exchange, but only in accordance with local regulations and only after approval by the regulatory authorities. These restrictions severely limit this right to sell or exchange rural land rights. In general, rural land contract rights can only be sold or exchanged with another farmer in the same collective who has the requisite farming experience. Sale or exchange with outsiders, even those with farming experience, is prohibited. This section does not change the current situation. The Property Law commentaries explain it is not possible to establish a rule on this issue appropriate for every part of China and then encourage the local regions to promulgate their own rules on this issue that are in accordance with local conditions. For example, Guangdong Province has already issued rules that have substantially opened the market in transfer of farmland contract rights. It is expected other more developed provinces will follow Guangdong's lead, while the less developed provinces will continue taking a highly restrictive approach. The concern in the less developed regions is that the lack of employment opportunities outside farming will cause the farmers to transfer their land for small payments to deal with immediate monetary needs and then end up landless. In regions with no alternative employment, there is fear this will lead to local unrest and unplanned migration to the major cities.

      C.  Division 12: Urban Land Construction Use Rights

Under the system established by the Land Management Law, land in urban areas owned by the government is transferred to persons for development. For the most part, the Property Law follows the provisions of the Land Management Law. The key clarifications and adjustments in the Property Law are as follows:

            1.  Land use rights can be transferred for a fee or by land grant. No fee is received for a land grant. The Property Law provides that land to be developed for commercial purposes must be transferred by agreement for a fee. Transfer by land grant for commercial purposes is strictly prohibited. For land transferred by agreement, the transfer should be conducted by auction, bid or other public method. Private sale by agreement is prohibited. This provision is significant because land for development purposes is often transferred in China today in violation of these provisions. Much or all of the profit in many development projects relies on the transfer of land use rights to the developer at an artificially low price. Compliance with this provision would prevent that practice, and would therefore undermine the basis of much of China's commercial real estate development.

The risks to a truly innocent party who acquires land use rights where the initial transfer was illegal are not clear. Often the foreign investor will enter into a project only after several transfers of land use rights, making it difficult or impossible for that investor to determine whether the initial transfer was in compliance with law. It is not clear if the remedy will be limited to punishing only the parties in the initial transaction of if the penalty will be for the state to retake the land use right.   

However, where the foreign investor participates in the initial transaction, the risk of the government retaking the land use right is high. Purchase by a foreign investor of land use rights in a non-public transaction is a clear violation of the law. Likewise the subsequent purchase of land use rights at an obviously artificially low price is clear evidence that a violation of the law has occurred somewhere in the process and would make it difficult for the investor to plead ignorance. Most of the conditions of initial transfer of land use rights are easily determined under the current system and should be investigated.

            2.  Land use rights must be reduced to writing and must be registered in the appropriate land registry.

            3.  Land use rights can be alienated, mortgaged and inherited in the same manner as ownership rights. All changes must be registered in the appropriate land registry.

            4.  Under current law, land use rights in residential property is for 70 years, in industrial property for 50 years, and in recreational property for 40 years. The Property Law addresses the issues surrounding expiration of land use rights as follows:

                  a.  For residential property, the land use right will automatically renew at the end of its term. The Property Law is intentionally silent on the term of that extension and on whether a fee will be required for it. The NPC commentary on the Law indicates this silence was intentional, since there was substantial disagreement on the issue.

                  b.  For non-residential property, the Property Law does not change to existing law. Existing law provides that at the end of the term, the holder of land use rights may apply for an extension, with the state having total discretion as to whether to grant or deny the extension. If no request for an extension is made, or if the extension is denied, then the land use right reverts back to the state. At that time, all ownership interest in buildings and fixtures also reverts back to the state with the state having no obligation to reimburse the owner of the buildings and fixtures. The provision does provide that an agreement binding the state on renewal will be honored. However, since the state never agrees to such limitations on its power, this provision is essentially meaningless.

      D.  Division 13: Rural Residence Land Use Rights

In rural areas, residents obtain land use rights for housing from the local cooperative. The rules for such rights are set out in the Land Management Law. Since land for housing construction is extremely limited in rural areas, the housing right is also highly restricted and the right to transfer and sell such rights is limited. The Property Law makes no changes in the existing law, other than to emphasize that all such land use rights must be registered in the local land registry.

      E.  Division 14: Easements.

Division 14 provides for easements by agreement. This is a new form of use right in China. This division provides for free creation of easements by agreement between landowners. These are easements by agreement and differ from the prescriptive type easements arising from neighboring rights discussed above. Presumably, however, the written easement approach of this division will be used to formalize the arrangements concerning certain neighboring rights. This would certainly be advisable for rights such as the right to access roads and rights to lay cable and pipe. However, this issue does not seem to have been formally considered by the drafters of the Property Law.

The basic provisions for creation of easements by agreement are as follows:

            1.  Easement agreements must be made by written contract containing the basic terms of the agreement.

            2.  The agreement takes effect when executed. There is no requirement for recording. Agreements that are not recorded do not bind innocent third parties.

            3.  Easement agreements cannot be assigned independent of the property they encumber. Absent an agreement to the contrary, when the underlying property right is transferred, the easement agreement transfers with it.