Flashback: Revisions on Administrative Regulations on Urban Real Estate Development and Operation

China

1. Background

The Administrative Regulations on Urban Real Estate Development and Operation refer to acts of infrastructure construction and housing construction carried out by real estate development enterprises on state-owned land within urban planning zones, and those of transfer of real estate development projects or sale and rental of commodity houses (“Regulations”).

The Regulations applicable for both foreign-invested and Chinese domestic real estate development enterprises specify the establishment of real estate development enterprises, requirements concerning real estate development (and construction), and urban real estate operation. The latter includes mainly the transfer of real estate development projects and its sale in advance of commodity housing with further specifications on the legal rights of the buyer. Besides, the enterprises shall bear the legal liability if they develop and operate real estate projects without the required licenses such as business license, certificate of human quality grade, construction permit or license for the sale in advance of commodity housing. In practice, there are still various real estate development projects without sufficient permissions in the PR China, notably without the obtainment of the human quality grade certificate or beyond the human quality grade. The author of this newsletter explained in full about this practice and legal consequences in his presentation on ‘Interesting Facts about Construction Disputes in China – New Interpretation Rules of the Supreme People’s Court" on July 4, 2019 in Shanghai (SwissCham, “China Real Estate Market Update and Forecasts Q3 and Q4 2019”).

2. Revisions

The State council, the chief administrative organ of the Chinese government, has promulgated the Regulations as for the first time on July 20, 1998 (Order No. 248). The Regulations have been revised three times until 2019, firstly on January 8, 2011, secondly on March 19, 2018 and thirdly on March 24, 2019. All the revisions are based on the standard practice of the State counsel to repeal and amend existing administrative regulations.

Since the implementation of the Regulations in 1998, collectively owned land within urban planning zones may be used for real estate development and operation only upon requisition and turning into state-owned land. After the first revision in 2011, the legal act “expropriate” substituted the term “requisition” “which shall be read as “expropriate and requisition”. This widening of the scope of application has also been implemented in several other administrative regulations at the same time.

The second revision in 2018 abolished the previous application procedure according to which a real estate development enterprise shall on completion of construction, including cluster real estate development projects like a residential area, at first file an application for acceptance checks with the competent authority before it undertakes any delivery of its real estate development project. In this regard, the competent application authority (department of real estate development) had organized the relevant departments or units concerned of project quality supervision, planning, fire prevention and people's air defense to carry out acceptance checks on contents involving public security. Now, the Regulations (Article 17) require the real estate development enterprise to pass the completion-based inspection and acceptance before any delivery of the construction project for use in accordance with the Administrative Regulations on the Quality of Construction Engineering which has been revised recently in April 23, 2019 (Order Nr. 714). Insofar, the real estate development enterprise itself shall organize the design, construction, and project supervision contractors concerned and other relevant contractors to conduct completion-based check and acceptance for a construction project which shall satisfy the following requirements:

1) Matters included in the relevant design and stipulated in the contract for the construction project must have been completed;

2) Complete technical archives and construction management materials are available;

3) Reports on entry tests of major building materials, components, fittings and equipment used for the construction project are available;

4) Quality conformity documents as signed respectively by the survey, design, construction, project supervision and other contractors concerned are available; and

5) Written quality warranty for the repair of construction project as signed by the construction contractor concerned.

After passing the completion-based check and acceptance, the real estate development enterprise shall submit an acceptance report, recognition documents or use approval documents issued by the planning, public security and firefighting, environmental protection and other departments to the competent construction authority for the record within fifteen days. If the developer delivers the construction project for use either without completion-based check and acceptance, or which fails to pass the completion-based check and acceptance after delivery, it shall be subject to a fine of between 2% and 4% of the contractual price for the construction project, and where there is any loss resulting therefrom, it shall be liable to compensate for any such losses.

The third revision of the Regulations (only) deleted the requirement to file a capital verification report issued by a certified public accountant with the competent registration authority after the establishment of the real estate development enterprise. The elimination of the verification report is in line with the simplification of the incorporation procedures which has already been implemented for limited liability companies according to the company law effective since March 1, 2014.

3. Restrictions of Foreign Investment in Real Estate Development Enterprises

In terms of the establishment of real estate development enterprises by foreign investment, the Regulations (Article 6) set the requirement to go through relevant formalities of examination and approval in pursuance of the provisions of laws and administrative regulations on foreign-invested enterprises without further specifications.

In this regard, investments in construction and real estate are still restricted. The Special Administrative Measures (Negative List) for Access of Foreign Investment (2019 Edition) and the Special Administrative Measures (Negative List) for Foreign Investment Access in Pilot Free Trade Zones (2019 Edition) require in particular the (partly relative) control by a Chinese Party in various construction projects. Besides, the Negative List for Market Access (2019 Edition) still restricts investment in the construction industry for example requiring various permits and qualifications of foreign-invested construction companies including approval of their construction projects.

For example, but a major concern in this regard, foreign-invested companies still cannot take part in public procurement compared with the participation of Chinese local companies in public bids. However, it is hoped that the new Foreign Investment Law of the People's Republic of China (promulgated March 15, 2019 with an effective date on January 1, 2020) will accelerate the ongoing process of removing the market access barriers for foreign-invested companies. According to its Article 16, the State shall guarantee that foreign-funded enterprises can participate in government procurement activities through fair competition, and (products produced and) services provided by foreign-funded enterprises within the territory of China shall be treated equally in a government procurement.

Furthermore, there are still various restrictive policies on market access and administration of foreign Investment in the China’s real estate market to observe, for example strict controls towards the acquisition of and investment in domestic real estate development enterprises, see in particular The Notice on Further Strengthening and Regulating the Examination, Approval and Supervision of Foreign Direct Investment in the Real Estate Industry on May 23, 2007 (Circular No. 50). In the meantime, there have been recognizable improvements, for example the Circular Concerning Further Improvement of Filing Process for Foreign Investment in Real Estate on November 6, 2015 (Circular 895), which simplified the approval process with respect to foreign-invested real estate development enterprises. However, the further opening of the still existing rigid market access barriers in terms of strict capitalization requirements of foreign-invested real estate development enterprises needs to be carefully observed.

Foreign investors must also consider the still existing practice that the Chinese governmental authorities might privilege local real estate development enterprises in construction projects for several (understandable) reasons, for example, even if it is only to shift the business risk in terms of relocation of occupants and/or demolition projects for redevelopment to local developers, which would be more difficult to handle by wholly foreign-owned developers without Chinese partners. Another notable point of the real estate practice, foreign-invested real estate development enterprises might face unfair competition since Chinese state-owned enterprises are still operating in real estate development projects in which they might receive beneficial treatments from the Chinese governmental authorities with respect to land sales and from Chinese banks in terms of financing the relevant construction projects.

Conclusion

The three revisions of the Regulations are based on general administrative reform efforts rather than the intention to further restrict the establishment of real estate development enterprises and provided for simplification of administrative procedures mainly for the relevant authorities. The Regulations are formulated in accordance with the relevant provisions of the Law of the PR China on the Administration of the Urban Real Estate including the Land Administration Law of the PR China both of which were recently revised, promulgated on August 26, 2019, and will become effective on January 1, 2020. It is expected, that these revisions will result into strategy changes of or more opportunities for developers with respect to future investments in real estate projects. The author of this newsletter will report separately on both the revised Land Administration Law and the revised Administration of Urban Real Estate law.