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Green Acres

A new land law attempts to reset China's complex land-use policies

Rico Chan

A raft of new laws and regulations guiding PRC land use has entirely overhauled the system in place since 1986. The Land Administration Law of the People's Republic of China (the New Land Law), the highest legislation on land matters in China, came into effect on January 1, 1999, replacing the 1986 law. Between December 1998 and March 1999 the State Council and the Ministry of State Land and Natural Resources (MSLR) enacted the Implementing Regulations for the New Land Law and a number of other important land regulations. Completing the overhaul of China's land administration system, in April 1998 China's national land authority, the State Land Administration, was merged into the newly established MSLR.

Preserving farmland

In 1986, the State Council established the State Land Administration to regulate and monitor China's land system. The same year, the National People's Congress promulgated the Land Administration Law, with the protection of arable land as its key objective. The law adopted a size-limit approval mechanism, under which different levels of local government, according to the land area involved, were given authority to approve the use of arable land for construction purposes. But experience has proven this size-limit approval mechanism to be intrinsically flawed. Collaborating local governments and land users easily circumvented it, and from 1985 to 1995, China lost about 60 million hectares of arable land. Faced with such an alarming situation, the central government had no choice but to restructure the land system.

Land-title system

Commercially, land-use rights (tudi shiyongquan), rather than land ownership (tudi suoyouquan), is the relevant concept. Chinese law prohibits transferring ownership of state-owned land, but permits the Chinese government to grant, lease, or allocate land-use rights for state-owned land. For collective land, Chinese law has imposed so many restrictions that the transfer of ownership of collective land, while theoretically possible, is practically infeasible. But rural collectives may provide land-use rights and land-contracting rights (tudi chengbao jingyingquan) for collective land to peasants and other land users, subject to stringent legal procedures.

The 1990 Urban Land Regulations and the 1994 Urban Real Estate Law authorize local land bureaus at county and municipal levels to grant long-term land-use rights, known as granted land-use rights (churang tudi shiyongquan) to local and foreign land users. Granted land-use rights can be created for state-owned land only, not collective land.

To obtain granted land-use rights, the land user must sign a land-grant contract with the local land bureau and pay a substantial land-grant fee up front. The grantee will enjoy a fixed land-grant term and must use the land for the purpose specified in the land-grant contract. Prior to the expiration of the term, the government may take back the land only for reasons of public interest, and in such a case the government must compensate the grantee for the value of the unexpired term and the costs of the superstructures. The maximum term of a land grant ranges from 40 years for commercial use to 70 years for residential use.

Apart from security of tenure, the other important legal feature of granted land-use rights is marketability--that is, granted land-use rights may be transferred, leased, or mortgaged in accordance with the law and the terms of the land-grant contract.

Other types of land-use rights include allocated land-use rights (huabo tudi shiyongquan), which are obtained through an administrative approval by the government without the payment of a land-grant fee, and collective land-use rights, which are obtained through contracts with rural collectives. In contrast, these non-granted types of land-use rights (feichurang tudi shiyongquan) lack either marketability or security of tenure. Hence foreign banks normally do not accept these non-granted types of land-use rights as security for lending, particularly in limited-recourse project finance transactions. And, generally speaking, the government may take back these non-granted land-use rights at any time without any compensation. Most Chinese joint-venture parties possess only non-granted types of land-use rights, because their rights were acquired long before the creation of the land-grant system in 1990.

Tightened approval procedure

There are five major changes in the approval procedures for using arable land for non-agricultural purposes. First, the law significantly tightens the existing size-limit approval mechanism. Beijing has revoked the statutory power to approve land requisition (zhengyong tudi) previously enjoyed by county and municipal governments. Moreover, provincial governments' statutory power to approve land requisition has been cut in half. Now provincial governments may only approve land requisitions of up to 35 ha of arable land (previously 70 ha), or 70 ha of non-arable land (previously 140 ha). Requisition of larger sites must be approved by the State Council.

Second, the New Land Law has further tightened the control over basic cropland, used to produce staple and cash crops. Local governments are now required to designate no less than 80 percent of their arable land as basic cropland. Moreover, the State Council must approve all requisitions of basic cropland for construction use, regardless of the size involved. Between January and March 1999, MSLR granted preliminary approval to the land-use proposals of 33 state- and provincial-level key projects, 22 of which have already received the State Council's final approval. These 22 projects include 10 transportation projects, nine water conservancy projects, and three power projects.

Third, the New Land Law has introduced an arable land-usage conversion (nongyongdi zhuanyong) procedure for approval of new construction land. This, combined with the t ightened size-limit approval procedure, is aimed at stopping local authorities from circumventing the law by sub-dividing large sites into smaller sites. Although the New Land Law and its Implementing Regulations are still unclear on the detailed procedures, it appears that virtually all new conversions of agricultural land into construction land must be either specifically approved by the State Council or the provincial governments, or supported by prior general approvals from these bodies.

Fourth, the New Land Law specifically requires project owners to attach the local land bureau's preliminary examination report when they submit the feasibility study of their projects for approval. Earlier regulations also contained this requirement, but it was ignored by many local governments. By reinforcing this requirement, the New Land Law now compels project owners to consult the land authorities so that they may raise objections at the feasibility study stage of construction projects.

Fifth, the legal effect of master land-use plans (tudi liyong zongti guihua) and annual land-use plans (tudi liyong niandu jihua) has been significantly enhanced. Previously, local governments and land users did not pay much attention to these plans. Experience has shown that unless adequate mechanisms are put into place to identify and monitor the country's arable land and basic cropland, merely tightening the approval limits will be ineffective. All local land-use plans (and their subsequent amendments) require the approval of the State Council or the provincial governments. The New Land Law specifically states tha t land-use approvals given in violation of the relevant land-use plans will be legally void.

Financial disincentives

In these cheap, illegal sales of arable land, the only loser is the long-term well being of the nation. The central government has recognized that unless these underlying economic factors were addressed, tightening the approval procedures alone would not succeed in changin g the situation. The New Land Law therefore includes a number of measures to induce local governments to minimize the use of arable land for construction purposes and make better use of existing construction land.

The New Land Law stipulates that 30 percent of the land revenues generated from all new conversions of arable land into construction land must be surrendered to the central government. (Previously, local governments kept land revenues from all types of land.) In contrast, local governments will be allowed to keep all land revenues generated from the use of existing construction land.

Moreover, the New Land Law has doubled the costs for requisitions of arable land. It stipulates four statutory items of compensation in the requisition of arable land, namely, a land compensation fee (tudi buchangfei), resettlement allowance (anzhi buzhufei), young crops and fixtures compensation fee (qingmiao buchangfei), and vegetable land development fund (xincaidi kaifa jianshi jijin). The fees are calculated according to the average annual agricultural output of the relevant site over the three years preceding the requisition. The exact cost scales will be determined in local implementing measures, to be promulgated by the provincial people's congresses.

As a further financial disincentive, the New Land Law has strengthened the levy and collection of the new cultivation fee (kaikenfei). Any land user who obtains approv al to convert a plot of arable land must cultivate a new plot of arable land of the same size and quality. Land users may undertake the cultivation themselves, but it is more common for users to pay a fee to local governments to do so.

As a result of the financial measures introduced by the New Land Law, greenfield projects that need to use arable land, such as new infrastructure facilities, will incur significantly higher land costs than before. Although the New Land Law has not increased the costs for using existing construction land, increased costs and tightened legal procedures for the use of arable land will soon result in increased demand for existing construction land and, consequently, higher prices. In fact, since the promulgation of the New Land Law, the Pudong New Area of Shanghai has already seen real estate prices increase.

Legal and practical implications

Second, the risk of penalties and legal invalidity will also be higher bec ause many aspects of the law and its ancillary regulations remain ambiguous. For example, the New Land Law declares that land contracts and approvals obtained in violation of the relevant "land-use plans" will be legally invalid. The new National Master Land-Use Plan Outline (1997-2010) was promulgated by the State Council on April 19, 1999. MSLR and the State Council are currently examining provincial master land-use plans. While foreign investors and legal practitioners are familiar with the previous size-limit approval mechanism, few have much experience in dealing with land-use plans.

Third, the Implementing Regulations for the New Land Law authorize the government to lease (rather than grant) land-use rights. One basic difference between a land grant and a land lease is that a land grant would require a substantial downpayment and a "peppercorn" land-use fee annually, whereas a land lease instead calls for a higher annual rent but no huge downpayment. Experimental local land-lease regulations in Pudong and other places suggest that leased land-use rights (chuzu tudi shiyongquan) may not be transferred, sub-leased, or mortgaged. Although leased land-use rights lack marketability, they would be acceptable for industrial projects which require security of land tenure, but not marketability, of land-use rights. Currently, there is a heated intellectual debate under way in China as to how this annual land-lease system (tudi nianzu zhidu) should be developed. Foreign investors who are evaluating alternative ways to acquire land should watch for legal developments in this area.

Fourth, another subtle but important implication is that the New Land Law reaffirms the legality of contribution of land-use rights as capital. In the early 1980s, the standard method of land acquisition in joint-venture projects was through the contribution of land-use rights by Chinese parties, pursuant to the joint-venture law issued in 1979. However, since the creation of the land-grant system in 1990, the legality of such land contribution has been questioned. Though the New Land Law and its ancillary regulations confirm the legality of land contribution, they are still unclear on the legal procedures for it, such as whether specific approval by the local land bureau would be required.

Unfortunately, it is still also unclear whether this mode of land acquisition would give joint ventures a security of land tenure. This is because the land contribution would be a transaction between the investors only, albeit with the consent of the government. There would not be a land-grant or land-lease contract with the government if a joint-venture site were acquired in this way. Without a binding contract with the government, it is still legally uncertain whether a joint venture obtaining land from its Chinese partner can be asked to leave its site when the local government wants to redevelop the site. In other words, there is still no assurance that a "Beijing McDonald's" case will not arise again in the future.

Liabilities for contaminated land

Nevertheless, the New Land Law itself does not contain any provision on land-related environmental liabilities, which will continue to be regulated by general Chinese environm ental regulations. Currently, Chinese environmental regulations are silent on cleanup and successor liabilities of new users for pre-existing land contamination. There is not yet any Chinese equivalent of the US Comprehensive Environmental Response, Compensation, and Liabilities Act of 1980. But the prudent view is that the new users could potentially be liable for pre-existing contamination under general Chinese civil law principles. Therefore, it is important to conduct an on-site environmental audit prior to acquisition. If contamination is revealed, investors should require the present owner to clean up the site, or alternatively, to obtain a written comfort letter, waiver, or indemnity from the present owner, the local land bureau, or the local environmental protection bureau, as appropriate.

More options, more pitfalls, higher costs

Rico Chan is a senior associate with the China Practice Group of Baker & McKenzie's Hong Kong office.