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Legal Update

China Enacts A Landmark Law To Regulate Rights Over Tangible Property

11 April 2007
Mayer Brown JSM Legal Update


The new PRC Law on Property Rights was approved by the Fifth Session of the Tenth National People's Congress on 16 March 2007, and will come into effect on 1 October 2007. The Property Rights Law is the first piece of Mainland PRC legislation that comprehensively regulates the different types of rights which can be created or acquired over tangible property.

Full Update

1.  Property And Property Rights

"Property" is defined in the new PRC Law on Property Rights (the "Law") as including both movable and immovable property, and the term "Property Rights" includes various types of rights which can be acquired over property, including ownership rights, rights to use property, rights to create a security interest over property and disposal rights, etc.

2.  Protection Of Private Property
The protection of private property is highlighted in the new Law. For instance, the Law includes the following provisions:

  • Rights to private property are protected by law and infringement of such rights will not be permitted.
  • If privately owned houses or other real property are expropriated for the sake of public interest, the owners of such houses or other real property should be fully compensated so as to ensure that their standard of living condition and legitimate interest will be maintained or preserved.
  • When the term of land use right (or leasehold) of land used for construction of residential property expires, such term will be renewed automatically. This provision does not, however, rule out the right of the state land administration authority to impose a fee for renewal.

3.  Jointly Owned Facilities In Real Estate Development Zones

The Law takes the unprecedented step of providing that owners of housing units enjoy rights and assume obligations over the common areas in real estate developments and mixed-use buildings. The Law highlights the following provisions:

  • Roads, green belts, public areas, public facilities and buildings or structures used for property management services are jointly owned by all owners of housing units in the real estate development or building.
  • The satisfaction of the needs of the housing unit owners for car parking spaces in the common areas or building zones of the real estate development shall be given first priority.
  • The ownership rights over car parking spaces in a real estate development may be negotiated and agreed between the developer and the housing unit owners.

Under the Law, limitations will be imposed on the right of real estate developers to dispose of car parking spaces even if those car parking spaces are owned by them.

4.  Creation Of Security Interest Over Property

The Law contains provisions relating to the creation and registration of mortgages over property which are more detailed than the PRC Security Law (effective as of 1 October 1995). Such provisions include the following:

(a)  The types of property over which a security interest can be created have been greatly expanded. The new Law provides that property which is not yet obtained (or which does not currently exist), but which may be obtained in the future, can be mortgaged. Units in trust funds and accounts receivable can be pledged. In fact, the Law expressly provides that any kind of property, the creation of security interest over which is not prohibited by any law or regulation, can be mortgaged or pledged.

(b)  Contracting parties can agree on the situations or events which will trigger the enforcement of a security interest. Therefore, apart from non-payment of a debt on a due date, the happening of other events may also give the beneficiary of a security interest the right to enforce that security interest. Such provision should override the provision in the PRC Security Law which states that a secured creditor can only exercise his rights to enforce the security in the event of non-payment of a debt by the debtor.

(c)  The PRC Security Law provides that where a creditor is secured by both a collateralized asset and a guarantee, the secured creditor should first enforce the security over the collateralized asset before calling on the guarantee. However, the Law now provides that the secured creditor has a choice to call the guarantee before enforcing the security interest over property, if such choice has been expressly given to the secured creditor by the security contract. If there are no provisions in the security contract giving such choice to the secured creditor, or if the provisions in the security contract are not clear, the secured creditor can still choose to call the guarantee before enforcing the security interest over property where such security interest was granted by a third party other than the debtor.

(d)  The period of limitation for enforcement of security has been clarified by the new Law. The judicial interpretation of the PRC Security Law states that the people's courts will support any enforcement action taken by a secured creditor within a period of 2 years after the expiry of the time period for litigation of the secured debt.  The Law now correctly provides that a mortgagee must exercise its rights to enforce the mortgage contract within the statutory period of limitation for obtaining judgment on the principal debt (i.e. within 2 years from the date on which the principal debt falls due or is accelerated, or on which demand for repayment is made), and any enforcement action taken after the expiry of such period will not be entertained by the people's courts.

It should be noted that where the provisions of the PRC Security Law differ from those of the Law, the provisions of the Law shall apply (Article 178).

5.  Registration Of Real Estate

The Property Rights Law sets out the following new provisions regarding registration of real property:

(a)  A unified system of registration shall be adopted for the registration of all real property, and guidelines are laid down for the performance by the registration authorities of their duties. For instance, a registration authority is not permitted to require an appraisal of the value of real property, and must not require duplicate registrations of the same property.

(b)  An advance notification system is to be implemented for real property registrations. The new Law provides that when parties enter into an agreement for the sale and purchase of real property, they can apply for an advance notification registration with the registration authority in order to protect their rights which have arisen as a result of the signing of that agreement. Once the advance notification registration is carried out, disposal of the real property in question cannot be effected without the prior consent of the party whose rights have been registered under the advance notification system. Hence, once an advance notification of a sale and purchase agreement (such as a pre-sale contract for an uncompleted housing unit) has been registered, the seller or developer of the property in question will be prevented from disposing of that same property, and the purchaser's rights will be protected.

(c)  A flat fee will be levied for the registration of each real property transaction, and registration fees cannot be charged as a percentage of the value, price or area of the real property in question.

(d)  An objection registration system is to be implemented whereby an interested party may apply to a registration authority to rectify the records of a real property registration which is deemed to be incorrect.

It is anticipated that a law on the registration of immovable property will be enacted in due course to implement the provisions of the Property Rights Law.

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