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A step forward for property owners in China, but risks remain

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Summary: Guidelines recently issued by China’s highest court - the Supreme Peoples’ Court - provide increased transparency on when courts can refuse enforcement of state expropriation of buildings1. Together with other recent legal developments, the 2012 Enforcement Regulations are part of China’s efforts to reduce social tensions caused by forced relocation of residents.

Foreign real estate developers and investors in real estate in China can equally benefit from the enhanced protection of ownership rights as it extends to all owners of property in China’s urban areas.

Background

Forced relocation of rural and urban residents for real estate development, infrastructure or urban renewal projects has been a cause of major social discontent in China. Many of the disputes arising from these relocations revolve around inadequate compensation and forced evictions. As conflicts escalate, citizens have resorted to civil disobedience as well as desperate actions. Recently a man subject to an expropriation order detonated an explosive device in the local housing office, killing himself and two bystanders.

The Chinese leadership, aware of the danger public discontent over housing policies poses to its grip on power, has reacted by enacting regulations and policies aimed at ensuring owners have a say in the expropriation process and receive fair compensation.

Legislative developments

The Regulations for the Administration of the Demolition of Urban Buildings and Relocation (“2001 Demolition Regulations”) formed the first legislative piece attempting to bring some order in the practice of forced expropriations. These regulations conferred upon government authorities wide powers to demolish urban buildings to achieve the vaguely defined legislative purpose of ‘preserving the smooth progress of construction and urban management’. Local governments used their powers extensively and over time the forced demolitions contributed to the impression that in China property rights are extremely precarious.

The amendment to China’s constitution of 2004 recognised for the first time the inviolability of the private property of citizens.  The amendment enshrined the right of citizens to own and inherit private property.  Most importantly, it made the state’s right to expropriate the private property of citizens for the public interest conditional on payment of compensation.  Legislative developments since then have provided the necessary detail to the Constitution’s broad statements of principle.

The 2007 Property Law of the People’s Republic of China (“2007 Property Law”) provided more details on the extent of the compensation the state is required to pay when expropriating buildings and other real property. The compensation should include the cost of demolition and resettlement and also guarantee the conditions of residence when expropriating residential dwellings. In other words, if expropriations involve the relocation of residents, the compensation should be sufficient for the resident to be able to afford a new dwelling.

The 2011 Regulations on the Expropriation of Buildings on State-owned Land and Compensation (“2011 Expropriation Regulations”) heralded a big leap forward in the legal regime for state expropriations.  For the first time a definition was provided of the types of public interests that justify state expropriation of property. The definition is not much different from what can be found in other jurisdictions and encompasses national defence and infrastructure necessities. Reflecting current concerns in China, public interests also include the need for the construction of social housing projects and the redevelopment of old, rundown urban neighbourhoods.

Two other major improvements in the 2011 Expropriation Regulations were to set out in detail the mandatory expropriation procedures and to require that compensation for expropriation be fair.

Another key difference of the 2011 Expropriation Regulations with the earlier 2001 Demolition Regulations (which they repealed) is that it makes clear it applies to all buildings and property on state-owned land.  As a result all property owners in urban areas can benefit from the expanded protection of their property rights.  This is definitely good news for existing and prospective foreign developers of, or investors in, real estate in China as they can take confidence from the fact that their property in China cannot be expropriated by the local authorities at their whim.  Expropriation must now strictly comply with procedures and owners must be paid fair compensation.

Expropriation procedure

The new expropriation procedures under the 2011 Expropriation Regulations have established greater transparency and government accountability. The replacement of the word “demolition” used in the 2001 Demolition Regulations by the word “expropriation” in the more recent regulations highlights the new emphasis on due process.

Government authorities are now required to follow a mandatory process when they plan to expropriate buildings. The first step is for the government authority to report its expropriation and compensation plan to the city or district level government. The plan must be published so the public has an opportunity to provide feedback. The period for public feedback should not be less than 30 days.  After this period has lapsed, the public’s comments and the revised plan must be published.

Demonstrating the importance the Chinese government attaches to avoiding social unrest caused by expropriations, the local government is required to conduct a social stability risk assessment before it reaches a final decision on whether to go ahead with the expropriation. To give additional reassurance to property owners, the government must deposit the full amount of the proposed compensation into a special purpose account. It cannot use these funds for any other purpose than the planned expropriation.

The 2011 Expropriation Regulations extend special protection to residents in old urban districts slated for redevelopment. Public hearings must be organised if a majority of these residents are of the view that there are irregularities in the expropriation and compensation plan. Once adopted, the expropriation decision must be published timely in an announcement that provides details of the expropriation and compensation plan.

Compensation

The 2011 Expropriation Regulations are the first Chinese statute to state clearly that compensation for expropriation should be fair. By giving a prominent role in the valuation process to a property valuer the new regulations introduce more objectivity into the compensation decision. The amount of compensation must include the following elements: compensation for the value of the building, relocation costs, and losses from the business interruption caused by the forced relocation.

The value of the building should not be less than the market rate for similar properties. This market rate is to be assessed by a certified property valuer. The 2011 Measures for Valuation in the Expropriation of Buildings on State-owned Land (“2011 Valuation Measures”) allow the owners to appoint the real estate valuer through consultation. If they cannot agree on whom to appoint within the specified time, the valuer must be appointed by majority vote, random lots or a similar method. The exact appointment procedures can be stipulated by the local governments. Regulations applicable in Shanghai2 require the owners to reach agreement on a valuer within five days of the announcement of the expropriation decision. It they fail to do so, they will need to resort to one of the other methods.

The value of the building is defined in the 2011 Valuation Measures as the value of the building that informed parties would arrive at where they do conduct a voluntary and fair transaction but must disregard factors such as existing leases, mortgages, preservation measures, etc affecting the building. An owner who finds the assessed value of the property too low can demand that the property valuer conduct a reassessment. If an owner is still unhappy with the reassessment result, he is entitled to apply to the expert committee for appraisal. The expert committee is composed of independent experts appointed by the government.

The amount of compensation must include compensation for business losses resulting from the expropriation. These losses are to be calculated by taking into account, amongst other factors, the proceeds prior to expropriation and the duration of the business interruption.

Compensation can take the form of a cash payment or an exchange of titles, i.e. the owner may choose to accept the title to other premises in exchange for the expropriated property. Any shortfall between the value of the replacement premises and the compensation payable must be made up by the government.

Objections and appeals

A major step forward in the 2011 Expropriation Regulations is that it offers property owners several opportunities to intervene in the expropriation procedure. On top of that, owners have a right to appeal if they are unsatisfied with the expropriation decision, procedure or compensation offered.

Property owners may propose objections or amendments during the public consultation process or air their views if hearings are organised. Further, they may challenge expropriation decisions by applying for administrative reconsideration or by filing an administrative lawsuit.

A key step in the expropriation procedure is the conclusion of a compensation agreement between the owner and the expropriating authority after the expropriation decision has been taken. The compensation agreement must contain all the expropriation details such as amount and form of compensation, timing of relocation etc.  If the two sides cannot reach an agreement, the government can unilaterally adopt a compensation decision which must be fair. An owner who disagrees with a compensation decision may contest it through administrative reconsideration or administrative litigation proceedings.

No forced evictions

It has been quite common in expropriation procedures in China for the government to relocate owners through coercion such as by using violence or threats, cutting off the supply of water, heating, gas or power or blocking road access. Construction companies and developers have also often taken the law into their own hands and coerced owners to relocate by force. The 2011 Expropriation Regulations explicitly prohibit such practices and require that any enforced removal of owners be first approved by a court through an enforcement order. The government nor anyone else can therefore no longer forcibly remove owners from their premises after the deadline for relocation has passed.  Instead, the government must apply to the court and seek a court enforcement order.

The recent 2012 Enforcement Regulations set out the factors that courts must take into account when deciding whether or not to issue an enforcement order. The court may refuse enforcement if it finds any of the following conditions to be clearly present:

    • absence of a factual or legal basis for the expropriation;
    • unfair compensation;
    • violation of the owners’ legitimate rights;
    • failure to guarantee owners’ living or business conditions;
    • administrative objectives and the public interest are harmed; and
    • excess of the limits of authority.

In other words, the PRC courts are given the power and the duty to revisit the whole expropriation process and to determine whether it was legal and in the public interest. If the court issues an enforcement order, it must notify both the government and the property owner of its decision. It may even make recommendations to the government as to how it can ensure that the expropriation and compensation proceed smoothly.

Conclusions

Recent regulatory developments show that China is earnest about reining in excesses in land and home expropriations that have affected social stability. The overall effect is better protection for home and property owners even if one makes allowance for the fact that in China it is not rare for local authorities to bend the rules to their advantage.

Foreign developers, investors and owners of real estate in China can also be more assured that their property and investments are safe. Their China properties are now less at risk of arbitrary expropriation as the authorities are bound by strict procedural rules and must pay fair, market-based compensation.

The expanded protections may be a boost to property prices as they may restrain supply of new land and push up the cost of redevelopments. The extent in which the new rules will contribute to an easing of social unrest involving expropriations remains to be seen: the rules only apply to expropriations on state-owned land and most land in rural areas is not owned by the state but by rural collectives. We should therefore not be surprised if there would be more reports of stand-offs between villagers and their local leadership over forced relocations.


1The Regulations of the Supreme People's Court on Several Issues in Handling Cases Involving Applications to the People's Court for the Enforcement of Decisions on the Expropriation of, and Compensation for, Buildings on State-owned Land (最高人民法院关于办理申请人民法院强制执行国有土地上房屋征收补偿决定案件若干问题的规定) (“2012 Enforcement Regulations”) were issued on 26 March 2012 and are effective from 1 April 2012.

2The Detailed Implementing Rules of Shanghai Municipality on the Expropriation of Buildings on State-owned Land and Compensation (上海市国有土地上房屋征收与补偿实施细则), effective from 19 October 2011.

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