China Regulates the Granting of State-owned Land Use Rights

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Since establishing a system for the granting of state-owned land use rights by invitation for tenders, auction and listing in 1999, China has promulgated various regulations including the Regulations on Granting State-owned Land Use Rights by Invitation for Tenders, Auction or Listing and the Regulations on Granting State-owned Land Use Rights by Agreement (collectively, the Regulations), which state that the rights to use state-owned land for commercial purpose can only be granted by way of (i) invitation for tenders, (ii) auction, or (iii) listing. Statistics show that state-owned land use rights granted by one of these three methods have amounted to 35% of the total granted state-owned land use rights in 2005.

To further regulate the land granting process, China's Ministry of Land and Resources recently issued the Guidelines for Grant of State-owned Leaseholds by Invitation for Tenders, Auction and Listing and the Guidelines for Grant of State-owned Leaseholds by Agreements, effective on August 1 2006 (collectively, the 2006 Guidelines). The 2006 Guidelines are based on the Regulations and they provide more detailed procedures and rules that are applicable during the state-owned land use rights granting process.

Classification of six types of land

The Regulations provide that the rights to use state-owned land for commercial, tourism or recreational purposes or for commercial residential housing can only be granted by invitations for tenders, auction or listing. Also, if the state-owned land is to be used for purposes other than those stated and there are more than two enterprises and/or individuals seeking to use it, the rights can only be granted through one of the three aforementioned methods. The Regulations are silent in terms of the rights to use state-owned land for industrial purpose. In practice, the government authorities generally granted state-owned land use rights for industrial purpose by agreements.

The 2006 Guidelines extend the scope of rights to six types of land use purposes. It stipulates that the state-owned land use rights will be granted by invitations for tenders, auction or listing in any of the following circumstances:

(i) granting of land use rights for commercial purpose or for industrial purpose;

(ii) granting of land use rights with more than two enterprises and/or individuals seeking to use the land;

(iii) changing of allocated land use purpose, if required;

(iv) assignment of allocated land use rights, if required;

(v) changing of granted land use purpose, if required, or

(vi) other circumstances as stipulated by relevant laws and regulations.

For the first time the PRC government has expressly classified and required six types of land use rights to be granted by invitation for tenders, auction or listing. Compared with the Regulations, the most significant clarification in the 2006 Guidelines is that the rights to use the land for industrial purpose must now be granted only by invitations for tenders, auction or listing. However, due to the complicated nature of granting state-owned land use rights, there may be difficulties in practice to identify the precise method of granting certain land. The 2006 Guidelines took this into account and it is expected that the government will establish a collective decision system to evaluate the land in question accordingly.

Establishment of pre-application system

One of the most remarkable changes in the 2006 Guidelines is the introduction of the pre-application system. In accordance with the 2006 Guidelines, enterprises and/or individuals may submit pre-applications to the relevant land administrative departments and provide their proposed purchase price. If the relevant land administrative departments consider the proposed purchase price and conditions acceptable, they will further arrange the invitation for tenders, auction and listing of state-owned land use rights and notify the applicants to participate in the activities. The final purchase price must not be lower than the purchase price provided in the pre-applications.

The PRC government intends to set up a channel to better understand and control the land market by establishing the pre-application system and has authorized the local authorities to establish such a system. This may become an additional procedure and land users should pay close attention to the local practice.

Public notice system – mandatory requirement

Under the 2006 Guidelines, public notification will be a mandatory procedure for granting state-owned land use rights by agreement. The land administrative departments will publish a notice at designated land exchange places, as well as the China Land Market website (www.landchina.com), disclosing information such as the location, land use purpose, area, granting period, land use conditions, potential leaseholders and the land's proposed purchase price.

During the 3 days public notice period, if an objection arises against the disclosed conditions and such objection is confirmed by government examination, the land granting process will be terminated. However, if no objection is raised or if any objection is vetoed by government examination, the parities may proceed with the execution of the land grant contract, provided that the results of the land grant are publicly disclosed at the designated places for 'public supervision' for no less than 15 days.