Understanding the Key Documents in China Property Deals

As one of the primary targets of investment in China, real estate is an important part of many investors portfolios. However, given the unusual structure of property ownership in China, buyers need to know the government documents that specify land rights. This week, RightSite spoke with Shen Wenhao from Jones Day to clarify how industrial property transactions are conducted and give the details on what documents investors should check first.

RightSite: What are the general procedures for buying industrial property in China?

JD: There are two types of transactions for industrial property in China. In the primary market, companies buy State-owned land-use rights from local land bureaus. In the secondary market, companies buy land-use rights and buildings from other companies who own industrial properties.

The first type of transactions must be conducted through a public bidding or auction process. The winner will enter into a land-use right grant contract with the local land bureau, pay the full amount of the land grant premium, and obtain the relevant State-owned land-use Right Certificate issued by the land bureau.

The second type of transactions, with certain exceptions, may be conducted through private negotiations. A seller and a buyer may enter into a sale and purchase agreement, and then go through the process of title transfer with the relevant land and building authorities.

RightSite: If all land purchases must be conducted through public auction or tender, then are there alternate transaction models that investors can use to develop their industrial site?

JD: As discussed above, purchase of land-use rights in the secondary market, for instance from a company which already holds title to land-use rights, can be a privately-negotiated deal. However, the seller must fulfill certain conditions on investment in, and development of, the land before the land-use rights can be sold to a buyer.

Another option for foreign investors is to buy the equity or shares of a domestic company which holds title to land-use rights. This type of transaction is subject to a set of foreign acquisition laws and regulations, which are complex.

A third option for foreign investors is to establish a Sino-foreign joint venture with a domestic company which will contribute its land-use rights to the joint venture as capital.

RightSite: In terms of land transactions, what kind of documents should the buyer check to ensure that the seller has full legal rights to sell the land to the buyer for the buyer to use for their intended purpose?

JD: I assume you refer to land transactions in the secondary market here. Due diligence with respect to land transactions should include review of the following documents:

• the State-owned land-use Right Certificate;

• the relevant State-owned land-use Right Grant Contract;

• the payment receipts of the relevant land grant premium;

• the relevant security agreements (if any) which create mortgage over the land-use right.

RightSite: Are these documents consistent across different provinces and cities in China?

JD: Generally yes. Note that in certain regions of China, land authorities issue combined “Real Estate Ownership Certificates” instead of separate land-use right certificates and building ownership certificates.

Rightsite: Many foreign investors are confused about the difference between granted and allocated land. How can investors tell from the property's documents whether a property is granted or allocated?

JD: A review of the relevant land-use right certificate will solve this problem. The land-use right certificate will expressly indicate whether the land-use right is “granted” or “allocated”.

RightSite: What are the major transaction fees and taxes involved in industrial property transactions in China?

JD: The seller is subject to the following major transaction fees and taxes:

1. Business Tax (5% of the taxable sales proceeds);

2. Land Appreciation Tax (30% - 60% of the taxable sales proceeds on a progressive basis);

3. Stamp Duty (0.05% of the contract price);

4. Transfer Handling Fee charged by land authorities.

The Buyer is subject to the following major transaction fees and taxes:

1. Deed Tax (3% of the transaction value);

2. Stamp Duty (0.05% of the contract price);

3. Transfer Handling Fee charged by land authorities;

4. Title Registration Fee (which is a nominal amount)

RightSite: Can you think of a few cases where troubles with transactions could have been avoided if the parties involved had reviewed the documents more carefully?

JD: Several years ago, one of our U.S. clients entered into a land acquisition agreement with the administrative committee of an industrial zone with the belief that it was dealing with the right government authority and would be granted land-use right soon. Several months later, the company surprisingly found that the same piece of land had already been granted to another company. That company entered into a land-use right grant contract with the local land bureau. Needless to say, our client entered into an invalid agreement because it was not dealing with the competent government authority in terms of grant of land-use right.

As one of the most recognized and respected law firms in the world , Jones Day now encompasses more than 2,400 lawyers resident in 32 locations worldwide and ranks among the world's largest and most geographically diverse law firms. To find out more bout Jones Day please visit www.jonesday.com or reach Shen Wenhao at wshen(at)jonesday.com