This is Part III of our posts based on Steve Dickinson’s paper on China’s New Property Law. This post deals with China’s real property ownership rules, as set forth in Part II of the law itself. Part IV of this series will come tomorrow and will deal with real property use rights in China. Part I of this series of posts, entitled, China’s New Property Law, Part I — Introductioncan be found here. Part II, entitled, China’s New Property Law, Part II — General Principles, can be found here. Part 2 of China’s new Property Law provides various rules of ownership.

For the first time in the PRC, the Property Law provides for ownership by private persons. Private persons have the right to own all property except land. Private ownership includes buildings and fixtures located on land. This Part also includes the rules for real property concepts of neighboring rights, common ownership and condominium ownership,

A.  Division 4: General Principles 1.

The Property Law provides for the following general principles:

a.  An owner of property has the right to occupy, utilize, enjoy the fruits of and dispose of property.

n.  An owner of property has the right to subject the property to use rights and security interests.

The Property Law provides for certain special measures limiting ownership rights in land and buildings. Ownership of land and buildings is subject to state seizure by through eminent domain. The state has the right to take land owned by collectives and buildings and personal property owned by private persons for a public purpose. The state is required to provide compensation for such takings. The state taking farmland for commercial buildings and taking urban residences for urban redevelopment is a major social issue in China. Abuses in this area are common, well documented, and a cause of unrest.

Two major issues arise. First, what is a public purpose? Many Chinese argue urban redevelopment and commercial development for manufacturing and leisure activities are not public purposes. However, the vast majority of land and building seizures are for just such primarily commercial purposes. Second, what is the standard for determining compensation when land and buildings are taken by the state? Many Chinese believe the standard should be fair market value, not the tiny amounts of compensation currently paid.

Earlier drafts of the Property Law included various provisions that would have defined “public purpose” and would have required payment of fair market value or some market based compensation for land and buildings. However, all of these protective provisions were eliminated from the law as adopted. In the commentary issued by the NPC, the drafting committee admits the statute is purposely vague in not addressing these issues. The controversy over these issues was too great and an attempt to resolve them in the Property Law would have indefinitely delayed adoption. The NPC candidly admits these major issues await resolution in some other forum.

c.  Protection of agricultural land. Land owned by collectives is reserved exclusively for agricultural purposes. To be used for housing, manufacturing or other commercial purposes, such land must first be transferred to state ownership. Much unrest in the rural areas of China arises from such transfers.  Section 42 of the Property Law attempts to address the issue of improper transfers of agricultural land: “The state engages in special protection of agricultural land, severely limits the conversion of agricultural land for construction purposes and controls the quantity of land used for construction purposes. It is not permissible to seize collectively owned land in violation of the limits and procedures provided by law.” It is difficult to know what to make of this provision. It seems to forbid transferring agricultural land to the state for construction purposes, but it does not absolutely prohibit such transfers and, in fact, it says nothing more than that parties must obey the law when such transfers occur. Since this section has no mandatory effect, its purpose is not clear.

B.   Division 5: Ownership Rights of the State and Collectives and Ownership Rights of Private Persons.

1.  Ownership rights of the state.  This Division provides that the state owns all land not owned by collectives.  The state also owns natural resources, radio wave spectrums, cultural relics, mineral resources, military installations and basic infrastructure.  The rights of the state with respect to ownership are exercised by the State Council.

2.  Ownership rights of collectives.  Collectives own agricultural land and land for residential purposes located in rural villages and townships. Collectives also own businesses founded by collectives using their own capital.  A major issue in China is that the term “collective” is quite vague.  It is often extremely difficult precisely to identify the collective or to determine who is authorized to make decisions on behalf of the collective. The Property Law makes no decisive pronouncements in this area and leaves the decision to the “relevant laws and regulations” even though such “laws and regulations” often do not exist.  All of this increases the uncertainty in dealing with land ownership issues in the rural areas.

3.  Ownership rights of private persons.  Private persons have the right to ownership in their income and basic property such as homes, items of daily use, tools, and materials of trade.  The ownership right extends to their savings and capital investment in businesses.  The right to inheritance is guaranteed.  In addition to natural persons, the right of ownership of legal persons is also protected.  Where the state, collectives and natural persons all invest in a single legal person, the rights of all three are protected on an equal basis depending on the amount of the investment.

C.  Division 6: Condominium Ownership Rights The vast majority of urban Chinese live in multi-family structures.  The property law provides for the first legal regime governing condominium ownership.  When these units were owned and operated by the state, there was no need for any special legal regime.  The explosion in private ownership of condominium units over the last ten years began with conversions of state owned units to private ownership, but has now expanded to purely commercial residential housing sales.  The condominium rules are based on the condominium law of Japan.  Most civil law countries provide for condominium laws in a separate statute. China has included condominium law rules in the Property Law because they are so important and to make the Property Law as complete as possible. An owner of a condominium has three distinct sets of rights:

1.  Individual ownership right in the specific dwelling unit and the parking space assigned to that unit.

2.  Common ownership right in the common areas of the residential complex.  Under Chinese law, common ownership is either common ownership or common ownership by shares.  The Property Law does not specify which type applies in the case of condominium ownership, but common ownership is the most probable.  The Law does not delineate between what constitutes individual portions and what constitutes common portions, leaving this to the formation documents for each condominium project.  Many condominiums already exist that have not clearly addressed this issue.  Newer condominiums are also often very vague on these issues. Division of private and common areas is therefore likely to be the source of some dispute in the future.

3.  Right to participate in managing condominium affairs, either through voting in the general meeting of owners or through voting for or participating in the condominium owners association.  The rules for operation and voting for the general meeting and owners association are general and unspecific. The stated reason for this is that the tremendous variety of condominium type arrangements in China makes one set of rules virtually impossible to impose.  This lack of detailed rules is likely to be a source of dispute, especially for existing condominium projects that have never had a formal owner management structure. Because of the newness and uncertainty of China’s condominium system, the local government is charged with supervising and assisting in forming condominium management for condominium owners.  Since many existing condominium projects have never implemented any form of owner management, a primary task of the local government is to ensure owners associations are formed.  Local governments are to act in a consulting capacity, providing examples of form agreements and advising on formal procedures.  Local governments do not have the right to interfere with or direct the affairs of the owners once a proper owner’s management system has been implemented.

D.  Division 7: Neighboring Rights As in all civil law jurisdictions, rights in real property are not absolute.  All rights in real property are burdened with basic obligations owed to neighboring property.  These obligations to neighboring property are the following:

1.  The obligation to allow access to water and to allow discharge of water.

2.  The obligation to allow access to roads other means of transportation.

3.  The obligation to allow access for construction, laying of cables, laying of pipe, etc.

4.  It is not permissible to allow construction that will interfere with access to sunlight, view or airflow of the neighboring property in violation of government regulation. In densely populated areas like Chinese cities, access to sunlight, view and airflow are important and frequently disputed rights. This is particularly true as traditional neighborhoods are converted to high-rise projects and as large buildings are constructed within residential neighborhoods. Chinese building regulations have extensive rules related to these rights. However, these rules are frequently violated. Though this provision limits claims to circumstances where government regulations are violated, the fact such violations are common means this provision could be the source of substantial litigation.

5.  It is not permissible for the interested party on one parcel of land to expel onto neighboring land solid waste, polluted air, polluted water, noise, light or electromagnetic radiation in amounts exceeding government regulations. This provision basically allows an interested party to sue to enforce government environmental regulations. Given the weak enforcement of such regulations in China, this provision could be the source of substantial litigation.

6. During excavation, construction of buildings, laying of cables and the like, it is not permissible to endanger neighboring property. Reckless excavation is very common in China.  This provision too could be the source of substantial litigation.

E.  Division 8: Common Ownership There are two forms of common ownership: ownership by shares and undivided common ownership.  Absent a specific agreement, common ownership is assumed to be ownership by shares except in the case of a family relationship, where the opposite assumption is made.

1.  The basic attributes of ownership by shares is:

  • Each common owner has a percentage ownership in the undivided property.  The amount of each share is based on the amount contributed by the party to purchase the property.   If this amount cannot be determined and there is no express agreement, the common owners will all have equal shares.
  • The common owners share in income and expenses in proportion to their share interest.  However, with respect to third parties, common owners have joint liability.
  • Each common owner has the right to sell his share in the property, subject to the right of first refusal of the other common owners to purchase that share.
  • Each common owner has the right to petition for partition of the commonly owned property.

Many of these features of common ownership by shares are disadvantageous in a commercial setting.  Any of the provisions can be modified by agreement except for joint liability to third parties.

2.  The basic attributes of undivided common ownership is:

  • Each common owner has an undivided ownership interest in the entire property.
  • Each common owner has a right to the income of the property and also the obligation for the expenses of the property.  The common owners have joint liability with respect to third parties.
  • No common owner has a right to sell any portion of the property absent the consent of all of the other common owners.
  • As a general rule, a common owner does not have the right to petition for partition of the property.  However, partition is permissible if a) there is a compelling reason or b) the underlying relationship is terminated.  A compelling reason is not defined in the statute, but the commentaries suggest a major medical expense would be such a reason. Termination of the relationship most commonly would be divorce.
  • As with ownership by shares, the default rules for undivided common ownership can be modified by agreement.

The Law does not provide whether ownership by a partnership is ownership by shares or undivided ownership. The majority of scholars believe the answer should be ownership by shares. Partnerships that do not desire such a result should clearly set out the terms of their relationship in a partnership agreement.

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Dan Harris

I am a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain.

I mostly represent companies doing business in emerging market countries. It has taken me many years to build my network and it takes constant communication and travel to maintain it. My work has been as varied as securing the release of two improperly held helicopters in Papua New Guinea, setting up a legal framework to move slag from Canada to Poland’s interior, overseeing hundreds of litigation and arbitration matters in Korea, helping someone avoid terrorism charges in Japan, and seizing fish product in China to collect on a debt.

I was named as one of only three Washington State Amazing Lawyers in International Law, I am AV rated by Martindale-Hubbell Law Directory (its highest rating), I am rated 10.0 by AVVO.com (its highest rating), and I am a SuperLawyer.

I am a frequent writer and public speaker on doing business in Asia and I constantly travel between the United States and Asia. I most commonly speak on China law issues and I am the lead writer of the award winning China Law Blog (www.chinalawblog.com). Forbes Magazine, Fortune Magazine, the Wall Street Journal, Investors Business Daily, Business Week, The National Law Journal, The Washington Post, The ABA Journal, The Economist, Newsweek, NPR, The New York Times and Inside Counsel have all interviewed me regarding various aspects of my international law practice.

I am licensed in Washington, Illinois, and Alaska.

In tandem with the international law team at my firm, I focus on setting up/registering companies overseas (via WFOEs, Rep Offices or Joint Ventures), drafting international contracts (NDAs, OEM Agreements, licensing, distribution, etc.), protecting IP (trademarks, trade secrets, copyrights and patents), and overseeing M&A transactions.

  • The purpose of that section on agricultural property seems to me to give the central government more control over the conversion of agricultural property to non-agricultural use. Collective property is under the ultimate control of village governments, whereas state property is under the ultimate control of the central government through the State Council. By requiring that agricultural property be converted to state property before being disposed of, the central government is adding a step in which it can directly regulate these conversions.
    The other consequence is that if a local government sells a piece of property directly to a commercial developer, the central government can rule that this sale was illegal disposal of state property and thereby void it, which wouldn’t be the case if it was collective property.

  • Joseph Wang —
    I completely agree with you. Absolutely. However, this is not a new law for China, it is just a clarification of existing law that is frequently violated.

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    Thanks very much for these blog posts, very useful. I’m a common law lawyer thinking of heading to China to work and trying to find out as much info as possible before I get there. Quality blogs are a great help. Keep up the good work.

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  • Jenny

    Can a foreign company ( registered in S’pore ) own a private apartment in Suzhou ? Besides the sales, incremental tax and stamp duty, is there any other tax or cost that i should know ?
    when i ultimately sell this apartment, is the sales proceed subject to withholding tax or any other tax ??

  • Cyprian

    My girlfriend and I bought an apartment jointly for her parents to live in. The apartment is registered in my girlfriends name and she now wants to put my name on the deeds so that we own it jointly.
    Is this possible and how do we go about it. She is a Chinese citizen and I am a British Citizen