Land Use Rights as a Cooperation Condition:An Analysis

The ownership of land can be divided into two categories: state-owned and collectively owned land. An enterprise can only obtain land use rights for a certain limited period. State-owned land use rights can be classified into (i) "granted" land use rights and (ii) "allocated" land use rights. Transfer of an allocated land use right is strictly limited. Generally speaking, an FIE can obtain state-owned land use rights by acquiring land use rights from the government directly by an initial grant or from a third party by a transfer, or by obtaining land use rights from the Chinese party as a registered capital contribution. A CJV has an additional method, i.e., obtaining the right to use a piece of land (including collectively owned land) from the Chinese party as a cooperation condition pursuant to a joint venture contract.

Registration Requirement

The Ministry of Foreign Trade and Economic Cooperation (now the Ministry of Commerce) issued a notice in 1996 (the MOFTEC Notice) interpreting the PRC Cooperative Joint Venture Law Implementing Procedures. According to the MOFTEC Notice, the cooperation conditions provided by each cooperating partner shall be the assets of the CJV and such cooperation conditions shall be subject to ancillary registration and shall be used to satisfy the CJV's debts. In addition, an approval letter issued by the then State Administration of Land (the SAL, currently the Ministry of Land and Resources) to the Guangdong Administration of Land on March 28 1996 (Approval Letter) raised a similar requirement.

According to the Approval Letter, a land use right as a cooperation condition should be transferred to the CJV and relevant registration change formalities should be completed if the CJV is incorporated as a legal person. Chinese law also provides that allocated land use rights cannot be capital contributions for a CJV unless and until it has been converted into granted land use rights and the relevant land use right grant fee has been fully paid. In practice, Chinese investors in some cases provide allocated land use rights as a cooperation condition without converting allocated land use rights to granted land use rights.

Vulnerability

In practice, the relevant registration change formalities for land use rights as cooperation conditions are often neglected. In addition, some allocated land use rights are never converted into granted land use rights. The JVC can enjoy the actual land use right under normal conditions but may be exposed to some latent legal risks. If a CJV is not the registered owner of a land use right, a cooperation condition provided by the investors can be understood as their contractual obligation under the joint venture contract. Such a contractual arrangement is similar to a land use right lease. A lessee under a real property lease is free from any disturbance caused by a sale of the real property because the buyer will take the real property subject to the lease. However, whether land use as a cooperation condition can be recognized as lease by the court is still uncertain.

As discussed above, since many CJVs are not registered land use rights owners and the nature of land use rights as a cooperation condition is not settled, problems may occur when encumbrances are created over the relevant land use right. Assuming that (i) the Chinese partner providing land use for the CJV was involved in litigation and lost in the court proceedings and (ii) that the land use right was ordered to be sold to repay the debts of the Chinese partner, the new land use rights holder might be able to evict the CJV from the land. In addition, assuming that the Chinese partner was forced into bankruptcy, all of its assets, including the land use right and the buildings, will be subject to the liquidation committee/court's disposal. The court could auction them, in which case the CJV might be subject to eviction.