Restriction and Risk for Making Capital Contributions in the Term of Land Use Right

In accordance with “Company Law” and relevant regulations, the investor may make capital contributions (“CC”) in other non-currency properties that may be assessed on the basis of currency and may be transferred according to law, excluding the properties that shall not be treated as CC according to any laws or administrative regulations. In view of this, it has the possibility to make CC in the term of land use right (“LUR”) in principle. However, legally transference is the key element in deciding whether the special LUR can be used to make CC. In practice, the possibility and risks of the transfer of LUR shall be analyzed with the following aspects in the legal point of view:

Firstly, the nature of LUR. In accordance with the relevant laws and regulations, the allocated LUR and collective LUR cannot be used as CC directly. So, for an allocated LUR, the shareholder shall make CC in the term of LUR after it has obtained the approval of the government and accomplished the transference’ procedures.

Secondly, whether LUR with guarantees. There are no laws or regulations which has clearly defined whether LUR with guarantees can be used to make CC, and there are different opinions in practice. Nevertheless, pursuant to the capital principle of “Company Law”, the guarantees may lead the indeterminacy of the capital, so LUR with guarantees shall not be used to make CC.

In addition, Article 14 of “Regulations on the Administrative of Company Registration” (“No shareholder may make any contribution with capital that evaluated from …… properties to which any guarantee has been made.”) has stipulated the forbidden requirement. For the litigation aspect, Article 8 of “Provisions of the Supreme People’s Court on Several Issues concerning the Application of the Company Law of the People’s Republic of China (III)” has stipulated that where an investor makes capital contribution with ……LUR with guarantees, and the company, other shareholders or a creditor of the company makes a claim requesting the people’s court to determine that the investor has not fulfilled the capital contribution obligation, the people’s court shall order the investor to…… relieve LUR from the guarantees within a reasonable period specified. If the investor fails to……relieve LUR from guarantees within the prescribe time period, the people’s court shall determine that the investor has failed to fully fulfill his/her capital contribution obligation pursuant to the law. The prerequisite for the investor to make CC with LUR with guarantees is that the investor shall relieve LUR from the guarantees, rather than the investor shall obtain the consent of the mortgagee and keep LUR with guarantees in accordance with “Property Law”. To sum up, if the investor makes CC with LUR with guarantees which has not been relieved from guarantees, it has a higher risk in the approval and registration procedures.

Thirdly, problems related to divided LUR. Article 25 of “Interim Regulations Concerning the Assignment and Transfer of the Right to the Use of the State-owned Land in the Urban Areas” has stipulated that divided transfer of LUR and of the ownership of the above-ground buildings and other attached objects shall be subject to the approval of the land administration department and the housing administration departments under the people’s governments at the municipal and county levels……. “Reply of State Land Administration for the identification standards on the divided transfer method” has stipulated that the divided transfer in Article 25 indicates transferring the partial land parcels of LUR, which means after the original land parcel has been divided into 2 or more than 2 smaller land parcels, the smaller land parcels of LUR can be transferred. To sum up, the owner of LUR can make CC with divided LUR, but it shall obtain the approval of the land administration department and the housing administration departments under the people’s governments at the municipal and county levels. In practice, it would be better to stipulate in the contracts that the effectiveness of the relevant contracts be subject to the approval of the land administration department and the housing administration departments.

Finally, the development status of land. There are disputes on whether the LUR which has not been developed yet, can be used to make CC in practice. Article 38 of “Urban Real Estate Administration Law” has stipulated that the restrictions on the transfer of real estate with LUR, eg. 25% of the total investment has gone through and etc.. Some opinions state that making CC with LUR is not equal to transferring LUR, however, for the commerce department and administration of industry and commerce, they will pay more attention on whether LUR can be transferred, but less attention on the development status; for the land administration department, they will refuse to register the LUR for CC with the reason that its development status fails to fulfill the statutory requirements.

In practice, if an investor makes CC with LUR has the above risks, but other investors have to accept this CC for any special reasons, it is highly recommended that the contract shall stipulate the guarantee by the investor for the risks of the CC with LUR.