Knowing China's New Property Law

This paper seeks to provide a summary overview of the new law, beyond just those provisions directly relevant to foreign investors in China real estate. However, because this new law is so sweeping and so important, it would be difficult to argue any of it is irrelevant to someone planning to invest in China real property.

On March 16, 2007, the National People's Congress of the PRC adopted the New Property Law (wuquan fa 物权法, literally: "Law of the Rights in Things"). For the first time in the legal history of the PRC, this law provides for basic ownership rights in immovables (real property) and movables (personal property). Since individual property rights are the foundation of any market economy, the promulgation of a full Property Law is significant. For businesses and persons engaged in real property investment in China, the law is of fundamental importance. In providing for absolute ownership rights for private individuals and businesses, the Property Law marks a major change in the rights of both Chinese citizens and foreign investors. This law is set to go into effect on October 1, 2007.

The Property Law is quite difficult to understand. There are three reasons for this.

The first and most significant reason is that the Property Law is based on civil law models, primarily Chapter 3 of the German Civil Code. The Law also draws heavily on the Swiss and Japanese Civil Codes. Its fundamental principles differ significantly from the U.S. and British common law based real property system. In addition, the civil method of exposition is quite unfamiliar to most civil law practitioners. The structure and method tends only to make sense to those familiar with the German and Japanese codes.

Second, understanding of the Property Law is further complicated because it incorporates many provisions intended to deal with unique Chinese characteristics that would never be mentioned in a pure, German civil law type code, including those provisions meant to address the Chinese government's monopoly on land ownership and those dealing with prohibitions on illegal land transfers and theft of government property.

Third, the Property Law was a hotly debated law, opposed by many elements of Chinese society. It is therefore intentionally vague on many important issues. This vagueness was the price paid to allow any form of Property Law to be adopted. The drafters frankly admit that if all the critical issues concerning property rights in China had been resolved in the Property Law, the law would never have been adopted. These issues are explicitly left for later resolution.

The Law is divided into Five Parts, 19 Divisions and 247 Sections. The Property Law covers both immovables (real property) and movables (personal property).

General Principles

The Property Law contains three Divisions.

A. Division 1: Fundamental Principles

A major focus of debate over adopting the Property Law centered on two concerns. First, many opponents of the Law argued that providing for private property would violate the fundamental principles of China's socialist system. Second, many opponents argued that allowing for private property would protect prior illegal acquisitions of state property by local officials and would prevent the state from taking back such property. The eight sections of this division center on responses to these concerns.

The relative protection afforded to state owned property versus privately owned property is the most important issue addressed in this division. Many opponents of the Property Law argued for giving state property rights priority over individual property rights. The Property Law rejects this position by according equal protection to the property rights of the state, the collectives and private individuals. Section 4. The drafters provide two reasons for why this equal protection is necessary. First, the purpose of the Property Law is to provide for property rights as the basis for a market economy. Since the state and collectives are heavily involved in ownership rights in the economy, it is necessary for the smooth functioning of the economy to treat them on the same basis as private persons. Second, the drafters refer to the most recent revision to the Constitution which provides that the party (CCP) and the state must represent the vast majority of the people. The drafters quite openly pointed out that the vast majority of the people in China insist on individual property rights being on an equal footing with the state. The drafters essentially indicate they had no real alternative on this issue.

B. Division 2: Creation, Change, Transfer and Termination of Property Rights

This division focuses on the technical issues relating to Property Rights. For immovables, the key provisions are as follows:

1. The Property Law requires creating a unified registry for all interests in land. Under the Property Law, there are three fundamental interests in land: ownership of land, ownership of buildings and fixtures on the land and mortgages affecting the land and/or the buildings and fixtures. All such interests must be recorded in the official government register. Under China's current system, it is not uncommon to register the three interests mentioned above in three different registries. As can be imagined, this creates uncertainty and confusion. Some of the major cities such as Beijing, Shanghai and Guangzhou have already adopted a unified registry but it is expected that the second tier and smaller cities may need some time to do so.


2. The Law provides that ownership or any change in ownership of land or buildings and fixtures is effective only upon registration in the official land register. The land register is also conclusive evidence of ownership. This means that in the case of multiple sales of the same property, the first party to register the sale will prevail over any other claimants to the property, no matter who was first with the contract of sale. This follows the German approach to this issue, and rejects the French and Japanese approach which provides that the contract of sale is effective to transfer ownership and registration simply provides notice to innocent third parties.


3. Since registration in the land registry is such a critical matter, the Law provides for two important protections:
   1. An interested party has the right to petition for a correction of mistakes in the land registry. If the registrar declines to make the correction, the interested party has the right to file suit. If a mistake in the registry causes damage to an interested party, that party has the right to claim for damages against the registry. Section 19.
   
   
   2. An interested party has the right to sue for damages against any person who submits falsified documents for an entry in the land registry and to receive from the registry that accepted the falsified documents. Section 21.


4. Multiple sales of a single property are a major issue in China. The Property Law addresses this issue by providing for a system of notice filing. Notice of the pendency of any transaction that would affect land or buildings may be filed with the land registry. During the pendency of such filings, no competing transactions will be processed. Section 20.

C. Division 3: Protection of Property Rights

Division 3 provides for the standard civil set of legal measures for protection of property rights. These are:

1. Claim for recognition of right.
2. Claim for return of the original property.
3. Claim to eliminate or mitigate danger/damage to property.
4. Claim to repair, rebuild, exchange or restore property to its original condition.
5. Claim for damages due to injury to property.

These claims are all made through arbitration or through the people's courts. The claim for the right to return of the original property can be used by the state itself to require the return of property illegally taken for private purposes by local government officials. Since this is a major concern of the Property Law, such claims should be anticipated. It is not clear how this will affect transactions in land and buildings entered into by innocent third parties such as foreign investors. Since the government itself estimates 50% to 70% of transfers of land use rights are illegal, this provision has the potential to cause significant uncertainty.

Reference: http://knows.jongo.com/res/article/18553