Getting the most out of property purchase contracts – Guangdong Focus

According to the Opinions on Regulating the Access to and Administration of Foreign Investment in the Real Estate Market (Opinions), a foreign institution or individual that wishes to purchase a house in China must comply with the following regulations, which have been in effect since July 11 2006:

• A branch or representative office, established in China by an overseas institution (except for an enterprise that has been approved to engage in real estate operation) or a foreign individual that has worked or studied in China for more than one year may purchase a commercial house according to his actual needs of self-use or self-accommodation, but may not for other reasons. An overseas institution without any branch or representative office in China or a foreign individual that has not yet worked or studied for more than one year in China may not purchase a commercial house. A Hong Kong, Macau or Taiwan resident or an overseas Chinese may purchase a commercial house of a certain area for self-accommodation within China in line with his needs.
• Overseas institutions and individuals that meet the relevant provisions must adopt a real-name system for purchasing commercial houses for self-use or self-accommodation, and, upon effective certification (an overseas institution must hold the certification issued by the relevant departments on the establishment of a China-based branch, while a foreign individual must hold the certification for his work and study in China issued by the Chinese party), they may register for rights to land use and/or house property with the administrative departments of land and real estate. The administrative department in charge of the registration of property rights will, in strict accordance with the principles of self-use and self-accommodation, handle the registration of the overseas institution and individual, and will not register for any house that fails to meet the relevant conditions.

Validity of the purchase contract

According to the Opinions, a foreign buyer cannot purchase a house in China if it does not satisfy the right conditions. However, in practice, due to reasons such as the rapidly-appreciating value of property, there are foreign buyers signing to purchase houses in China from time to time. They often resort to the Chinese courts after disputing with the other party of the purchase contracts.

The Chinese courts' understanding and application are different from those of the administrations. Even if a foreign buyer's contract to purchase a house in China does not comply with the Opinions, the Chinese courts may still deem them as valid due to the following reasons:

• Article 52.5 of the PRC Contract Law (implemented on October 1 1999) provides that a contract that violates mandatory provisions of laws and administrative regulations is invalid.

• Pursuant to the PRC Legislation Law, while the law is formulated by the National People's Congress and its Standing Committee, the administrative rules and regulations are formulated by the State Council.

• Article 4 of the Interpretation on Several Issues Concerning the Application of the «PRC Contract Law» (1) by the Supreme People's Court (SPC) provides that after the implementation of the Contract Law, the courts shall confirm a contract as invalid based on the laws formulated by the National People's Congress and its Standing Committee, and the administrative rules and regulations formulated by the State Council, rather than on regional laws and administrative rules.

• The Opinions belong to an administrative normative document created by ministries and commissions directly under the State Council, and its effect is even below the administrative rules.

• Therefore, according to the Contract Law and the Interpretation on Several Issues Concerning the Application of the «PRC Contract Law» (1), the court will not apply the Opinions to avoid the contract of a foreign buyer's house purchase in China.

This has become the common approach of the Chinese courts. For example, the SPC's verdict of the 2012 Civil Appeal No. 1268 states that the Opinions do not affect the validity of the related house-purchase contract and the reason raised by the involved party does not support the invalidity claim.

The SPC is increasingly respecting party autonomy. Even when laws and administrative regulations have mandatory provisions, the SPC will further divide them into regulatory and validated mandatory provisions and will not avoid contracts purely based on the regulatory mandatory provisions.

Cancelling the contracts

Although the courts deem the foreign buyer's house-purchase contract as valid, the contract cannot be enforced and the property of the house cannot be transferred to the foreign buyer due to the Opinions. As a result, the courts will generally decide to cancel the contract.

However, courts in different regions have different approaches to cancelling a contract. Most courts decide that only the purchase price paid together with certain interests are returned to the foreign buyer. Some courts decide that the added value also belongs to the foreign buyer.

For example, the Guangzhou Intermediate People's Court awarded the added value of a purchased house to a foreign buyer in a recent case. In that case, Mr C (a natural person from America) entrusted Mr Z (a natural person from China) to purchase a house in Guangzhou. Later, Mr C provided Mr Z with a purchase price of over Rmb1.5 million. In 2012, the property was registered under the name of Mr Z and the market value of the house rose to Rmb3 million. Mr C sued Mr Z for returning the house property or the market price of the house. After the trial, the court deemed that there were policy barriers regarding Mr Z's return of the house to Mr C and transfer of the title to the house under the assistance of Mr C. Thus, the property was only able to be registered under the name of Mr Z. As Mr Z did not provide opposing evidence concerning the value of the house, Mr C's claim for Mr Z's return of over Rmb3 million of the estimated market value was deemed reasonable and lawful, and was therefore upheld by the court.

Given the situation above, we suggest that a foreign buyer who signs a contract to purchase a house in China should add a specified clause in the contract to secure his returns. The clause would provide that if the contract must be cancelled because it cannot be performed according to the related Chinese provisions, the foreign buyer has the right to own the added-value income in addition to the returned purchase price.

Liability for breaching a contract

A foreign buyer needs to consider another factor when signing a house-purchase contract. Related contracts generally specify a similar clause such as “the foreign buyer is aware of the related policies regarding the limitations of house purchasing, and the foreign buyer undertakes that if the purchase contract cannot be recorded, registered or transferred due to the unconformity of the related house with the provisions of Chinese laws, regulations and policies, the foreign buyer shall bear all the risks and liabilities arising therefrom.” In other words, the foreign buyer alleges that, as an overseas subject, it is not familiar with the policies of China, and thus shall not assume the corresponding liabilities (which usually refers to the liability of late payment) for a breach of contract. The Chinese courts will probably not uphold this allegation. In contrast, the courts will require the foreign buyer to assume the corresponding liabilities for a breach of contract, and the foreign buyer must assume the heavy liabilities for this breach because it usually cannot pay due to the administrative policies on foreign exchange. We suggest the foreign buyer to revise the above-mentioned clause in the house-purchase contract to “the foreign buyer shall not be liable if the late payment or cancellation of the contract is attributable to the related provisions of China”.


Kent Woo, Guangda Law Firm, Guangzhou