Navigating the construction process

The long march to construction

Urban land belongs to the state in China, with rural and suburban land belonging to rural collectives. This differs from the simple fee-ownership system found in most jurisdictions. Land use rights, rather than ownership rights, are granted by the state to individual land users for construction primarily through bidding or auction. The process begins with an application for a Land Use Rights Certificate (LURC), then a Construction Land Use Planning Permit (CLUPP), a Construction Project Planning Permit (CPPP) and ends with the issuance of a Construction Project Work Implementation Permit (CPWIP). While this process usually takes less than a year, delays are common if developers are insufficiently funded or if the design or construction is complex.

Preliminary hurdles

The first step in developing land is to obtain land use rights. In recent years, land bidding has become the most popular means for local land administration authorities to transfer these rights. The developer who wins the bid will enter into a contract with the local authority. The contract sets forth key terms, including the amount and payment of the land fee, term of the grant, conditions for use of the land and timeline for development.

The LURC is issued upon receiving full payment. It contains basic information such as a description of the land, its location and permitted use and the term of the use rights. The maximum length of use rights under the law ranges from 40 years for commercial use, 50 years for industrial, cultural and educational use to 70 years for residential use. The LURC constitutes conclusive evidence of the vesting of land use rights to the developer. With an LURC in hand, the developer can begin the planning process.

Foreign investors should be aware of potential pitfalls at this initial stage of development. Although the bidding process is governed by laws and regulations promulgated at national level, regulations and guidelines implemented by local authorities are also at work during the bidding process. To avoid wasting time and effort, developers are advised to familiarise themselves with these regulations and guidelines. Developers must also adhere to respective deadlines for construction commencement and completion stipulated in their land use rights contract. The contract includes a mandatory timeline for development preventing cash rich developers from stockpiling land. If the developer fails to start construction within one year, they may apply for a one-time extension, not exceeding one year. There is sometimes a penalty attached with granting an extension. If developers fail to commence construction within two years from the date on the contract, local authorities have the right to take back the land and the grant fee forfeited.

Local variations exist in issuing the LURC and the CLUPP. In some regions, developers can obtain the CLUPP after signing the contract and before the LURC. The PRC Urban and Rural Planning Law (中华人民共和国城乡规划法) adopted in 2007 governs the CLUPP. The local planning authority handles regional planning regulations. This permit proves planning approval and details planning parameters. These include plot ratio, construction area and permitted use. The CLUPP also stipulates the effective period within which the developer must apply for the next permit, the CPPP. This period normally ranges from six months to one year, depending on local regulations and can be renewed twice. The application for the CPPP is a two-stage process, involving several government authorities.

Pre-approval Stage

During the pre-approval stage, the developer must submit a project design, together with the contract, the CLUPP and any other required documents to the local planning bureau. After the bureau reviews the design, they will issue a joint inspection form for further review by other government authorities. These include the environmental protection authority, land administration authority, construction administration authority and fire protection administration authority. The developer will need to engage a qualified design firm to prepare and submit the construction work plan or drawings.

Approval

Once all authorities listed on the inspection form have approved the design, developers may submit a signed form with the design scheme to the planning bureau. The bureau reviews the general construction work plan and the building design. If satisfied with its review and inspection, the bureau will issue the CPPP.

The CPPP includes the name of the developer and details of the project, like location of land, construction ratio and total area. The plan, elevation and cross-section maps will also be attached. This permit has an effective period ranging from six months to one year, during which the developer must obtain a CPWIP and commence construction. Developers must apply for an extension if failure to commence construction within this period occurs. None of the items listed on the CPPP can change unless the developer has first reapplied for a new CPPP.

After granting the CPPP, inevitably the project design will encounter changes. Commercial considerations and any practical issues that arise during construction are typical alterations. It is vitally important for the developer to consider whether changes will trigger the need to reapply for the permit. Developers should consult with local issuing authorities to ascertain whether a particular change will trigger reapplication. If reapplication is required, developers must submit an explanation stating why the changes are necessary. In some instances, developers have to pay extra fees for changes. For example, if the land is originally designed for hotel development and the developer subsequently wishes to wholly or partly change it to retail use, they will be required to pay an extra sum. This reflects an additional land grant fee determined as the difference between the appraised values for the hotel property and the retail property.

In March of this year, the Ministry of Housing and Urban-Rural Development issued the Measures for the Administration of the Plot Ratio of Construction Land (建设用地容积率管理办法), aiming to prevent local governments from changing the plot ratio approved when land use rights are granted. Reflected on the CPPP are the plot ratio and total construction area of the project. Once plot ratio is set and total construction area determined, the Measures prohibit any adjustment or change to any of these.

The final hurdle

After finalising planning and preparation work for construction, including execution of the construction contract, the final step is to obtain the CPWIP from the local construction commission. Application documents include the LURC, the CLUPP, the CPPP, finalisation report of the bidding process, bank statements showing sufficient funds, contracts signed with all contractors, designers and suppliers. In addition, approvals from various government authorities like the labour security authority, environmental administration authority, quality and technology supervision authority, and evidence showing the company supervising the project and any other documents as may be required. If the construction commission is satisfied with its review, they will issue the CPWIP.

Developers must begin construction within three months from when the commission issues the CPWIP. Failing that, developers must apply for a maximum of two extensions, not exceeding three months. None of the items listed on the CPWIP can change unless the developer has first reapplied for a new permit. The CPWIP details specifications for how developers carry out construction work. If construction is suspended for any reason, developers must report it to the authorities within one month, detailing the reason, site location and if any maintenance measures are in place. The authorities also need to be informed when construction resumes. Suspension of longer than a year will cause a review of the CPWIP. Upon completion, any noncompliance issues may result in a refusal to grant a completion inspection certificate.

Keep talking

Authorities have to approve certain changes during construction. These include planning specifications or design amendments. Relevant certificates and licences may need to be reissued. In practice, some developers choose not to reapply hoping that local governments may be lax in enforcement. This is a risky practice. Many developers have received large fines for failing to follow laws and regulations.

When working with local partners, foreign developers need to comply with the law and regulations. Performing due diligence in understanding laws and regulations, especially those in force locally are of paramount importance. They cannot rely on the advice of their local partners. They also have the responsibility of ensuring all requirements have been met. This strict compliance approach will save them time and money in the long run.

The importance of close, direct and frequent communication with all local authorities cannot be over-emphasised. Most of the issues during the construction process are operational in nature. To avoid delays and more importantly harsh penalties, foreign developers are encouraged to actively approach the various government authorities. Maintaining close channels of communication ensures any problems that may arise are detected and remedied as soon as possible.

Kai Wang, of counsel, DLA Piper, Beijing