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Legal Update

China Bans Developers with Idle Land from Buying More Land

19 October 2010
Mayer Brown JSM Legal Update

On 27 September 2010, the Ministry of Land and Resources of China, together with the Ministry of Housing and Urban-Rural Development of China, said in a joint circular (Circular) that developers failing to develop land within a year after the construction commencement date set out in land use right grant contracts will be banned from bidding for more land. The ban will also be extended to cover the majority shareholders of the guilty developers.

The Circular also reiterated that local governments must allocate at least 70 percent of land for public bidding for the development of subsidised public apartments and small and medium-sized apartments. Those cities that fail to do so must not offer land for bigger and more luxurious housing.

The purpose of the Circular are to curb land hoarding by developers and to support public housing in order to stabilise home prices.

Certain Developers Banned from Land Bidding

For any developers found to have committed any of the following illegal acts, the Circular provides that such developers and their majority shareholders will be banned from bidding for new land sites as long as the default has not been fully dealt with by the government or remedial actions have not been entirely completed:

  1. having committed criminal acts such as forgery of documents for the purpose of obtaining land, illegal speculations of land;
  2. having committed unlawful acts such as illegal transfer of land use right;
  3. possession of land which has been idle for more than a year; or
  4. development of land in breach of the land grant conditions set out in the land use right grant contract.

Current Provisions on Idle Land

The term “idle land” is not specifically defined in the Circular. However, according to the authoritative “Measures for the Disposal of Idle Land” (Measures), issued by the Ministry of Land and Resources and came into force on 28 April 1999, a land is considered “idle” if, inter alia, its developer has failed to commence construction on the land in accordance with the contractual construction commencement date set out in the land use right grant contract.

Under the Measures, the government has the right to re-enter the land without having to pay any compensation if the land has remained idle for more than two years. If the land has remained idle for more than a year but less than two years, the developers can face an “idle surcharge” of not more than 20 percent of the land grant premiums.

Other Provisions in the Circular

In addition to allocating portions of land for developing public housing, the Circular also provides that, for residential projects, a developer must start construction within one year after the land is delivered, and construction must be completed within three years from the construction commencement date.

Conclusion

The Circular is regarded as an extension of efforts by the central government to cool the property market since April this year, which include curbing lending to developers, banning loans for third-home purchases and requiring higher down-payments for second-home purchases.

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