FEATURES

The Landmark PRC Property Rights Law

The National People's Congress ('NPC') of the People's Republic of China ('PRC') adopted the Property Rights Law (Ȩ·¨) ('New Law') on 16 March 2007, some 14 years after the idea of such a law was officially mooted. The New Law which is widely regarded as a landmark legislation, will take effect on 1 October 2007. This article begins by briefly examining property rights in the PRC from a historical perspective, before touching on the legislative history and certain key aspects of the New Law, and concludes by assessing its significance and impact.

Historical Perspective1
In 1949, the Communist Party of China ('CPC') swept into power after its victory against the Nationalist Party in the civil war. The CPC abolished the entire legal system and all the law codes in effect prior to 1949, including the laws relating to property rights.

In the first PRC Constitution adopted in 1954, private property rights were still recognised, alongside collective ownership by the whole people and working people.2 It went so far as to provide that the state shall protect its citizen's private property and right of inheritance.3 This reflected the transitional period at that time, as the PRC was in the early stages of moving towards what would eventually be a centrally-planned economy, where nearly all economic activities were nationalised and came under the control of the CPC.

In the second Constitution adopted in 1975, only collective ownership by the whole people and working people was recognised as the main categories of property ownership.4 The third Constitution adopted in 1978 was similar to the 1975 Constitution in this respect.

Economic reforms to transform the centrally planned economy to a market economy (with socialist characteristics) were introduced only from 1978 by the late Deng Xiaoping. This was reflected in the fourth, and current, Constitution adopted in 1982. While recognising only collective ownership as in the 1975 and 1978 Constitutions (referred to in the 1982 Constitution as socialist public ownership5), the 1982 Constitution provides that the individual economy is a complement to the socialist public economy and that the state protects the lawful rights and interests of the individual economy.6 The right to inherit private property, which appeared in the 1954 Constitution but not the 1975 and 1978 Constitutions, was reinstated in the 1982 Constitution.7

The 1982 Constitution has since been amended in 1988, 1993, 1999 and 2004. In 1988, the 1982 Constitution was amended to permit the 'private sector economy' to exist and develop as a complement to the socialist public economy.8 As a reflection of the growing importance of market forces, the 1993 amendments introduced the term 'socialistic market economy' for the first time.9 The 1999 amendments elevated the private sector economy to being an 'important component' of the socialist market economy.10

The amendments culminated in 2004, when the Constitution was amended to provide that the development of the 'non-public economy' is 'encouraged' and 'supported'.11 In addition, there is a clear statement that citizens' lawful private property is inviolable.12

Legislative History of the New Law
The idea of having a property rights law was officially mooted around 1993, but drafting began only in 1998. The draft law was submitted to the NPC for its first reading in December 2002.

In mid-2005, the NPC issued a full draft of the law for public consultation. The draft law generated widespread debate. More than 10,000 comments and suggestions were received. There was a diversity of views, with some criticising the law as undermining the PRC's socialist foundation, and others as not going far enough to protect private property rights.

The draft law was presented to the NPC for an unprecedented seventh time on 8 March 2007. In introducing the draft law, Wang Zhaoguo, the Vice-Chairman of the NPC's Standing Committee, explained that enacting the property rights law was necessary to: (a) uphold the basic socialist economic system, regulate the order of the socialist market economy and safeguard the immediate interests of the people (so as to stimulate their vigour to create wealth and promote social harmony), and (b) achieve the goal of establishing a Chinese-style socialist legal system by 2010, of which property law is an important part. He also stressed the need to 'keep to the correct political orientation and the Chinese characteristics of the property law and persist in proceeding from the realities in all aspects'.13

After an unprecedented 14 years and seven readings in the NPC, and a rare public consultation exercise that generated widespread debate, the New Law was finally passed by the NPC on 16 March 2007. We now turn to examine the New Law.
Certain Key Aspects of the New Law
The New Law contains 247 articles divided into five sections, ie General Provisions, Ownership, Usufructuary Right, Security Interest and Possession. We examine below certain key aspects of the New Law.14

1 General

1.1 Purpose
The New Law states clearly its purpose from both a technical perspective, which is to clarify the ownership of property, give effect to the meaning of property and protect property ownership in accordance with the Constitution - and a political perspective, ie to maintain the national basic economic system and the economic order of the socialist market.15

1.2 Scope of operation
The New Law applies to the civil relationship arising from ownership and utilisation of property. For this purpose, 'property' is defined to include movable and real property. 'Property rights' is defined as the exclusive right enjoyed by the holder of the rights (hereinafter referred to as 'holder') to directly control specific properties, including ownership, right of use and security right in property rights.16

1.3 Equal protection
The property rights of the state, collective, individual and other holders shall be protected by law and shall not be infringed.17 As is apparent from the drafting and as confirmed by Wang Zhaoguo,18 the New Law contemplates equal protection for state, collective and individual property rights. This is significant as it is the first time that there is a clear statement of law that puts public and private property rights on an equal footing.

1.4 Establishment, modification, transfer and lapse of property rights

The establishment, modification, transfer and lapse of real property right which requires registration shall become effective upon registration,19 while the establishment and transfer of a movable property right shall become effective upon delivery, except otherwise prescribed by law.20

1.5 Real property registry
In connection with real property, the New Law contemplates the setting up of a unified registration system.21 We highlight below certain key aspects of the registration system:
a The establishment, modification, transfer and lapse of real property rights has to be registered.22 The register forms the basis of ownership of the real property rights,23 while the ownership certificate shall be evidence of ownership.24

b There are general guidelines on the operation of the land register, eg the registration department may not require property evaluation for registration purposes or repetitive registration,25 and may not charge for registration of property according to the size or price of the real property26 within three months.

c Parties who have entered into an agreement for the sale and purchase of property may apply for advanced registration, following which no rights in the property can be disposed of without their consent. The advanced registration will lapse if registration of the property is not carried out within three months there from.27

d There are some provisions dealing with procedures for rectification of the register by the holder or other interested persons. Certain persons may become liable to pay compensation in connection with the land register, eg a person who submitted false documents for registration and caused loss to others, or the land registry if it caused loss to others as a result of errors in the register.28
These provisions on registration are not entirely new in that the PRC Land Administration Law and Urban Real Estate Administration Law and their implementing regulations already provide for such registration. However, the New Law clarified and elaborated on the existing law in certain respects, and also introduced certain novel features such as the advanced registration system.

2 Ownership

2.1 Nature of ownership rights
The owner shall have the right to: (a) possess, utilise, dispose of and obtain profits from its real or movable property in accordance with law;29 and (b) establish usufructuary right and security right in property rights30 (as to which see sections 3 and 4 below).
2.2 State, collective and private ownership
As mentioned above, the New Law recognises, and confers equal protection on state, collective and individual ownership.

The New Law reaffirms existing law by setting out certain property which is owned by the state, including all urban land and all rural land not owned by the collectives.31 Certain specific provisions were inserted to address the issue of loss of state-owned property, which was one of the key concerns when the New Law was being drafted. These include providing that no individual is allowed to obtain ownership of real or movable properties that are exclusively owned by the State,32 and that any person who caused the loss of state-owned property by transferring it at a low price or other means will have to bear legal responsibility.33

On individual property rights, the New Law states that the legitimate properties of individuals shall be protected by law and shall not be occupied or damaged by any institution or individual.34 In addition, an individual shall enjoy ownership of real and movable properties such as legitimate income, houses, household items, production tools and raw materials, and the state shall protect the right of inheritance and other legal rights and interests of an individual.35
2.3 Condominium ownership rights36
The owner shall enjoy ownership in respect of exclusive parts within a building and the co-ownership and common management right with regard to jointly-owned parts other than the exclusive part. The owners may establish and elect an owners' committee to make decisions relating to the apartment building and its management, and its decision will be binding on all the owners. These are novel rights introduced by the New Law to regulate the rights and interests of owners of buildings or units thereof, in view of the increasing number of residential and office buildings.
2.4 Certain other ownership rights
The New Law also contains provisions relating to the relationship between owners of neighbouring land,37 joint ownership38 and the attainment of ownership rights in certain situations (eg the bona fide purchaser will obtain good title if certain conditions are satisfied).39 These are not new concepts and are regulated by existing laws, but the New Law has clarified and elaborated on these concepts to some extent.

3 Right of use

3.1 General
As noted under Section 2.1, the owner of property has the right to create right of use or usufructuary rights40 in respect of its property. In general terms, this refers to the right of use and is necessary particularly in the context of land, since all land is owned either by the state or collectives. Under the New Law, a holder of usufructuary rights may generally deal with those rights in accordance with laws.41

The New Law mentions four types of usufructuary rights, ie land contractual management rights, rural residential housing land use rights, construction land use rights, and easements. The first three are not new and are regulated by existing laws such as the Land Administration Law, although the New Law clarifies and elaborates on certain aspects of it. The fourth, ie easement, is entirely new. We will deal briefly with certain key changes to construction land use rights and easements below, but not with the other two categories which relate to agricultural and rural residential land.
3.2 Construction land use rights
Construction land refers to land for constructing buildings and other structures.42 The New Law generally preserves the system provided for under the Land Administration Law but introduces clarifications and changes in certain respects, including the following:
a The New Law states that land for industrial, commercial, tourism and entertainment use and land intended to be used by two or more persons shall be allocated by way of competitive bids through auction or tender.43 This appears to be aimed at reducing incidences of loss of state-owned assets through illegal transfers at artificially low prices.

b Construction land use rights must be registered at the land registry, and the owner will be issued a land use right certificate.44 Such rights may be transferred or mortgaged, and any such dealings must also be registered at the land registry.45

c Prior to the New Law, the applicable law provides that land use rights in residential property has a maximum term of 70 years but does not deal with the issue of extension upon expiration. The New Law seeks to address this issue by providing that the land use right for residential property will be automatically renewed upon expiry.46 However, it does not state the period of extension or the amount payable for such extension. Presumably, the implementation regulations to be promulgated in due course will deal with these issues.
3.3 Easement
Easement refers generally to the rights obtained by the owner of land in respect of another person's land to improve the benefits which it may obtain from its own land. An easement must be established by written contract between the parties.47 It is not mandatory for easements to be registered. If the easement is not registered, the easement may not be enforced against any bona fide third party.48 This appears to be a new form of land rights introduced by the New Law, and is different from the prescriptive type of easements arising from neighbouring rights.49

4 Security interest

As noted under Section 2.1, the owner of property has the right to create security interest in respect of its property. The New Law provides that unless otherwise stipulated by law, the holder of security interest shall have priority in satisfying its claim if the debtor defaults on its obligations.

The New Law mentions three types of security interest, ie mortgage, pledge and lien, all of which are already regulated by the PRC Security Law. However, the Property Law changes the scope of security interests in certain significant respects, including the following:
a The types of property over which security interest may be created has been expanded. For example, the list of property that may be mortgaged has been expanded. Essentially all property may be mortgaged unless specifically prohibited by law.50 A mortgage may also be created over existing and future production equipment, products and raw materials.51 The mention of future property is regarded as permitting the creation of a floating charge for the first time under PRC law. Another example is the pledge over receivables, which is now specifically permitted under the New Law and must be registered.52
b The New Law provides that the right of enforcement may be exercised upon the occurrence of any agreed triggering event. This essentially permits the parties to agree on the events of default. Under the existing Security Law, a holder of security interest may enforce the security only when the debtor has failed to repay the debt when due.

Conclusion
Since 1978, the PRC has moved gradually from a centrally planned economy to a socialist market economy, and this is reflected by the various Constitutional amendments from 1982 to 2004. The New Law represents another step in the progress and development of the PRC as it moves towards a market economy with Chinese characteristics.

We would suggest that this is a significant step, in two respects. First, from a political perspective, it can be viewed as a clear signal of the commitment of the PRC to market reform. Second, from the legal perspective, whilst the New Law is more of a codification of existing laws, it is still significant in that it introduces certain substantive changes to existing laws, some of which have been discussed above. Its practical impact, however, remains to be seen as we await the promulgation of the detailed implementation regulations.

Andrew Lai
Tracy Chen
China Practice Group, Kelvin Chia Partnership
E-mail:andrew.lai@kcpartnership.com, tracy.chen@kcpartnership.com

Notes

1 This section deals only very briefly with certain key milestones relating to property rights in PRC history. The entire process was, of course, much more complex and longer and is beyond the scope of this article.
2 Article 5 of the 1954 Constitution provided that there are four main categories of ownership of the means of production: (a) the state, ie by the whole people; (b) the cooperative, ie. by the working people; (c) the individual worker; and (d) the capitalist. However, Article 9 provided that the state shall protect the citizens' right of ownership to their income from work, savings, houses and other means of livelihood.
3 Article 9 of the 1954 Constitution.
4 Article 5 of the 1975 Constitution provided (inter alia) that there are two main categories of ownership of the means of production at the present stage, being socialist ownership by the whole people and socialist collective ownership by the working people.
5 Article 6 provides (inter alia) that the basis of the socialist economic system is socialist public ownership of the means of production, namely, ownership by the whole people and collective ownership by the working people.
6 Article 11 provides that 'The individual economy of urban and rural working people, operated within the limits prescribed by law, is a complement to the socialist public economy. The state protects the lawful rights and interests of the individual economy. The state guides, helps and supervises the individual economy by exercising administrative control.'
7 Article 13 provides that 'The state protects its citizens' right to own lawfully earned income, savings, houses and other lawful property. The state protects by law the right of citizens to inherit private property.'
8 Pursuant to the 1988 amendments, Article 11 provides that 'The state permits the private sector of the economy to exist and develop within the limits prescribed by law. The private sector of the economy is a complement to the socialist public economy. The state protects the rights and interests of the private sector of the economy, and exercises guidance, supervision and control over the private sector of the economy.'
9 Pursuant to the 1993 amendments, Article 15 provides that 'The State has put into practice a socialist market economy. The State strengthens formulating economic laws, improves macro adjustment and control and forbids according to law any units or individuals from interfering with the social economic order.'
10 Pursuant to the 1999 amendments, Article 11 provides that 'Individual, private and other non-public economies that exist within the limits prescribed by law are important components of the socialist market economy. The state protects the lawful rights and interests of individual and private economies, and guides, supervises and administers individual and private economies.'
11 Pursuant to the 2004 amendments, Article 11 provides that 'The State protects the lawful rights and interests of the non-public sectors of the economy such as the individual and private sectors of the economy. The State encourages, supports and guides the development of the non-public sectors of the economy and, in accordance with law, exercises supervision and control over the non-public sectors of the economy.'
12 Pursuant to the 2004 amendments, Article 13 provides that 'Citizens' lawful private property is inviolable. The state, in accordance with law, protects the rights of citizens to private property and to its inheritance. The state may, in the public interest and in accordance with law, expropriate or requisition private property for its use and shall make compensation for the private property expropriated or requisitioned.'
13 Based on the full text of the explanation on the draft law by Wang Zhaoguo, vice-chairman of the Standing Committee of the NPC when he introduced the draft law for its seventh reading in March 2007, available on the NPC official website at http://www.npc.gov.cn/zgrdw/english/down/pdf3.pdf.
14 This article touches briefly only on certain aspects of the New Law and is not exhaustive and necessarily selective.
15 Article 1.
16 Article 2.
17 Article 4.
18 See Note 13. Wang stated that 'On the premise that ownership of property is established according to law … , no matter whether it is the State, collective or individual, their right of property shall be given equal protection.'
19 Article 9.
20 Article 23.
21 Article 10.
22 Article 13.
23 Article 16.
24 Article 17.
25 Article 13.
26 Article 22.
27 Article 20.
28 Articles 19 and 20.
29 Article 39.
30 Article 40
31 Articles 46 to 52.
32 Article 41.
33 Article 57.
34 Article 66.
35 Article 65.
36 Chapter VI, Articles 70 to 83.
37 Chapter VII, Articles 84 to 92.
38 Chapter VIII, Articles 93 to 105.
39 Chapter IX, Articles 106 to 116.
40 The term in Chinese is 'Ȩ' which can be translated as right of use.
41 Article 117.
42 Generally, the usage of land in the PRC is divided into three categories, ie agricultural, construction and un-utilised land.
43 Article 137.
44 Article 139.
45 Articles 143 and 144.
46 Article 149.
47 Article 157.
48 Article 158.
49 See the discussion under Section 2.4.
50 Article 180. The Security Law sets out specifically the property which may be mortgaged and this has in practice severely limited the creation of security interest over property. Article 184 sets out the property which may not be mortgaged.
51 Article 181.
52 Article 228.