Title Insurance in China Land Transactions

Introduction 

It is not uncommon for American companies to construct and develop manufacturing or R&D facilities in China or, in the case of a joint venture with a Chinese partner, to have the partner contribute its land and buildings to the venture.  Of course, in China the land itself is owned by the State, and therefore it cannot be owned, sold or transferred by private enterprises or individuals.  However, private parties can obtain land-use rights under Chinese law that are comparable to ground leases in the United States and permit the holder of these rights to improve the land for a specific period of time.  Where the land is improved for an industrial or commercial use, the land-use rights can be for a term of up to 50 years and the holder can in theory request an extension of that term.  Direct ownership of the buildings and fixtures constructed on the land is also permitted by law.  In the case of residential use, the term of the land-use rights can be even longer.

Unlike the United States, these land-use rights are not established or transferred by a deed or other form of conveyance between the parties.  Rather, the land-use rights are registered with the local land registry in China.  Ownership of the rights is determined by this filing and proof of the holder’s right to use the land for the permitted use is evidenced by a certificate issued by the state land office.  In the case of a later transfer of these rights, a new land-use certificate is issued.  China enacted a new law dealing with property rights, which became effective on October 1, 2007.  Among the changes made by this law, a procedure was established that allowed the holder of a land-use right or another “interested party” who disagreed with the information contained in the land-use certificate to petition for a correction.  In addition, if the aggrieved party disagrees with the corrections made to the certificate by the government that party can apply for a registration of its objections to the state’s purported corrections.

Under these circumstances, an American company may well conclude that receipt of the land-use certificate is sufficient for its purpose of developing the land for its manufacturing facilities and that the procedure for contesting any adverse claim to the land-use rights is adequate to deal with such matters.  After all, the thinking goes, if the government certifies to me that I hold the rights in question, what better evidence do I need?  The problem with that theory, however, is that the government is not in a position to resolve, by itself, any disputed claims to the property rights.  It merely registers the competing claims; it does not determine which party is correct.  Moreover, the certificate does not deal with issues such as fraud or criminal activity in connection with the transfer of such rights and it certainly does not reimburse or underwrite a party for its legal fees and expenses in contesting an adverse claim.  In short, the state’s certificate is merely prima facie evidence of a party’s land-use rights.

Problems with land-use rights in China are not merely theoretical risks.  There are legions of cases and legal disputes involving dispute rights and fraudulent activity.  Some illustrations may be instructive. 

In one case, an employee of a local land bureau conspired with accomplices to forge land-use certificates using the names of the actual rights holders and sell the rights to unsuspecting sellers.  The employee had one of his accomplices escort the innocent buyer to his counter at the land bureau where he confirmed the genuineness of the sellers’ signatures on the title certificate and permitted the buyer to proceed with the transaction and pay the purchase price to him.

And, in a recent 2011 court decision, a residential land developer in Hebei Province acquired and paid for certain land rights through a public auction conducted by the local authorities.  It then proceeded to complete the construction of 276 residential units on the property, all of which were presold to individual purchasers.  The farmers who previously held the land rights complained that the land-use rights did not permit the construction of residential units, noting that the rights permitted by the local municipal authorities were different than those authorized by the provincial government.  The court cancelled the land-use rights contract and returned the land to the local authorities, refunding the land premium paid by the developer.  In turn, the developer was forced to refund the prices paid by the individual buyers with interest.  The local authorities then gave the completed units to the local farmers for their living purposes.

Use of Title Insurance 

The risk of possible loss of title rights illustrated by the above examples, not to mention the legal fees and costs of the ensuing litigation, may have been prevented had the parties purchased title insurance as part of the transaction.  Some American title companies do offer policies to cover such risks in China, although they are not necessarily inexpensive.  In the case, however, of constructing a large R&D or manufacturing facility in China, the cost of such a policy may well be cost effective in light of the overall strategic importance and expense of such a facility.

In addition to covering the defense costs related to any challenge of the company’s land-use rights, such title policies cover risks such as title not being as shown on the land-use certificate issued by the government; a lien or encumbrance on the land not shown by the public records; title being other than as shown on the public records due to forgery, fraud, undue influence, duress, incompetency, incapacity or impersonation; title different than that shown on the public records due to unauthorized transfers or conveyances or on account of any document that was not properly executed, sealed, acknowledged, notarized or delivered, or because of a false, expired or otherwise invalid power of attorney or authority; and other related risks.

These risks could arise out of either the issuance of land title in favor or the American company or its Chinese joint venture partner.

Conclusion 

Like in any other foreign countries, doing business in China as a foreign firm has its challenges and not having a sound risk management policy regarding important land rights can be dangerous.  The purpose of this article is not to advocate the purchase of title insurance policies in China, but rather to suggest them as one method of containing the risks that arise in connection of land development and improvement in that country.  A U.S. company would do well to contact U.S. title insurance companies doing business in the PRC and examine in detail the costs and benefits provided by such insurance as part of an overall risk management program.