Land Use Right in China and Long-Term Ground Leases – 中国的土地使用权与外国的长期土地租约

Land Use Right in China and Long-Term Ground Leases

While granted land use rights (LUR) in China are analogous to long-term ground leases (LGL) used in the United States, the United Kingdom and Hong Kong, they ultimately have fundamental differences. Unlike LGL, LUR are restricted in use, term, transferability and origin.

There are a few similarities between LUR and LGL. Both separate the ownership of the land from the ownership of the buildings constructed on the land. In the case of LUR, the government retains ownership of the land, while the party has term-limited ownership of the improvements on the land. Gregory M. Stein, Mortgage Law in China: Comparing Theory and Practice, 72 Mo. L. Rev. 1315, 1352 (2007). In the case of LGL, the lessor retains ownership of the land, while the party has term- limited leasehold ownership of the ground and improvements. 31 C.J.S. Estates § 197 (2010). In both cases, the use is limited to a specific period of time. With LUR, the term is determined by the use of the property - between 30 and 70 years. Dale A. Whitman, Chinese Mortgage Law: An American Perspective, 15 Colum. J. Asian L. 35, 38 (2001). The term of LGL is determined by the contracting parties and are generally between 50 and 99 years in length. Peter A. Sarasek, Commercial Real Estate Lending: Mortgages and Beyond, in 543 PLI Course Handbook, Commercial Real Estate Financing 2006: What Borrowers & Lenders Need to Know Now 177, 186 (2007).

Aside from the above similarities, LUR and LGL have some fundamental differences. In general, LUR are significantly restricted by the Chinese government. LGL can be acquired from one of many kinds of lessors - be it a private party, corporation, charitable organization or government entity. Pamela L. Westhoff, Ground Lease Financing: A Framework for Ground Lessor Considerations, in 535 PLI Course Handbook, Commercial Real Estate Financing 2007: What Borrowers & Lenders Need to Know Now 279, 283 (2007). In contrast, LUR may only be granted by the Chinese government. Whitman at 38. LUR are limited to certain kinds of use and development. Id. LUR must be developed within a fixed amount of time or risk forfeiture. Stein at 1352. Finally, under Chinese law, LUR are not considered leases, and not subject to landlord-tenant law. Whitman at 38.

The holder of a land use right has limited rights of transferability. The holder may not register the right until it has been paid in full. Stein at 1322. The right cannot be held for speculation and may not be transferred until it has been developed. Patrick A. Randolf Jr., The New Chinese Property Law, Probate and Property, Oct. 21, 2007, at 16. Finally, “in some parts of China, the purchaser apparently may not use borrowed funds for the acquisition of a land use right.” Stein at 1323. However, it should be noted that after the land has been developed, the holder gains ownership rights that are similar to LGL. The right can be transferred, leased, and mortgaged without state approval, and if the right is revoked, the holder is entitled to compensation. Whitman at 38.

Finally, LUR and LGL differ in their financing and use. LGL are often a financing vehicle for land developers. Stein at 1352. They provide the lessee or developer with a way to avoid up-front land acquisition costs. Id. In contrast, the holder of LUR must pay the entire fee in advance of development. Id. “The developer must incur the capital expense of acquiring the land use right in its entirety at the beginning of the construction process.” Id.

This has created an uncertain market for credit securities based on LUR. One author has suggested that LUR may see a steep decline in value as they approach the end of their term. Whitman at 39. This is very similar to LGL which also see steep declines in value as they approach their termination date. Id. However, as many of the LUR have yet to approach that point, the legal community remains speculative as to the government's future response. Id. In the meantime, the Chinese government has created some rules to govern the leasing, mortgaging and sale of LUR. Patrick Randolph, Ownership with Chinese Characteristics: Private Property Rights and Land Reform in the PRC, Cong.-Exec. Comm. on China Issues Roundtable, Feb. 3, 2003, http://www.cecc.gov/pages/roundtables/020303/randolph.php (last visited Aug. 15, 2010). These rules strictly control how much may be lended against the value of the land and restrict leases to no more than 20 years. Id.

While LUR and LGL share some similarities, LUR are considerably more restricted by the Chinese government than LGL are restricted by their respective countries. Unlike LGL, LUR are restricted in use, term, transferability and origin. While LGL can defer land acquisition costs for developers, LUR present a heavy initial financial investment for developers in China. Finally, while there are some similarities, LUR are not leases, not subject to landlord-tenant laws, and ultimately, very different from LGL.