The laws promulgated at the national level include:

• the Civil Code;
• the Land Administration Law;
• the Urban and Rural Planning Law;
• the Construction Law; and
• the Urban Real Estate Administration Law.

During 2023, office space remained the most sought-after asset class in terms of transaction value in the real estate market of the PRC, representing 45% of the total transaction value, retail properties accounted for 10%, representing a substantial increase of approximately 7% compared to the previous year, apartment buildings and hotels accounted for 15%, with a notable increase of about 5% (Source: Colliers International Group Inc, Review and Analysis of the Bulk Trading Markets in Major Chinese Cities in 2023, 2 February 2024). The majority of transactions continue to be driven by domestic demand, accounting for a staggering 89% of all transactions.

Notable transactions in 2023 include Bain’s acquisition of Chindata for RMB22.8 billion. Chindata Group Holdings Ltd (Nasdaq: CD) stands as a leading Chinese hyperscale data centre solution provider with more than 33 hyperscale data centres worldwide. Additionally, Swire Properties acquired the equity interests in two project companies of Lujiazui Group, each of whom owns a piece of mixed-use land in Yangjing and New Bund respectively, at a total price of RMB9,709.97 million.

China sustained a remarkably low inflation rate in 2023 and continued implementing interest rate cuts throughout the year. However, the real estate industry did not experience a positive bounce back in 2023 (source: China Lianhe Credit Rating Co., Ltd, Review of the Real Estate Industry in 2023 and Prospect for 2024, 27 December 2023). 

The PRC Company Law (as amended and republished on 29 December 2023), effective on 1 July 2024, has made material amendments in respect of company registration, corporate governance, equity capital, shareholders’ rights, employees’ rights, and special rules governing state-capital companies and public companies.

There are two main categories of property rights under PRC laws.

• Ownership right is the right to possess, use, receive proceeds from and dispose of the properties of the owner. Under PRC law, land may only be owned by the state or collectively owned by farmers.
• Usufructuary right is the right to possess, use and receive proceeds from the properties owned by other persons, such as land use rights, contracting rights for farmland, farmer’s rights to homestead land, rights of habitation and easement rights.

National laws and regulations mainly include:

• the Civil Code;
• Urban Real Estate Administration Law;
• the Interim Regulations Concerning the Assignment and Transfer of the Right to the Use of State-Owned Land in Urban Areas; and
• the Interim Regulation on Real Estate Registration.

No transfer of real estate is valid unless it is duly registered or otherwise provided by law. For example, a court judgment, arbitration award or, in the event of government taking or expropriation, an administrative decision of government, may serve to effect a title transfer if the same is effectively issued.

Title insurance is not common in the PRC.

A buyer typically performs due diligence investigations on various aspects, such as legal, tax, financial, environmental and technical.

Asset Deal

In terms of legal due diligence, the scope for an asset deal focuses more on the property, such as title, existing encumbrances, zoning and licence requirements, environmental compliance, leasing, operation and management status, but also covers verification of key aspects of the seller, which may prevent or materially affect the sale of the property, such as the corporate governance structure and legal capacity of the seller, restrictions under financing obligations, and ongoing or pending material litigation, arbitration and administrative penalties involving the property.

Equity Deal

The scope for an equity deal is generally a comprehensive investigation, subject to the client’s specific instruction, of the target company, in addition to the investigation upon the target property. The investigation of the target company generally covers the corporate history, corporate governance structure, business operation, material contracts (including financing contracts), environmental compliance, material litigation, arbitration and administrative penalty, intellectual property, labour and employment, taxes, subsidiaries and investment into other entities.

A buyer generally requests the seller to make representations and warranties on itself and on the target (ie, the target property in an asset deal, and the target property, the target company and the target equity/shares in the target company in the event of an equity deal). Typical representations and warranties on the seller include capacity, power, authority, solvency of the seller, all authorisations, consents and approvals obtained, the binding effect of the contract and the sale of the target without contravention or claim by third parties or other contracts.

Target Property

Typical representation and warranties on the target property in an asset deal include clean title to the target property (free from encumbrances or, as the case might be, with disclosed existing encumbrances), the state of the target property, leasing status, no pending fees and no knowledge of taking, seizure or expropriation.

Target Equity/Shares

In an equity deal, sellers are often requested to make additional representations and warranties on the clean title to the target equity/shares (free from encumbrances or, as the case might be, with disclosed existing encumbrances), legal capacity and status, financial condition, tax matters, compliance with laws, environmental matters, indebtedness and loans, leases and other material contracts, employees, intellectual property and no pending litigation in respect of the target company.

Coverage of Representation and Warranties

The coverage of representation and warranties is subject to business negotiations between the parties to a transaction. In general, parties to cross-border transactions are more comfortable with standard broad representation and warranties provisions, while domestic players tend to welcome a shorter version of an asset or equity transfer agreement; ie, a more condensed coverage of representation and warranties.

Breach of Representations and Warranties

If the seller is in breach of the relevant representations and warranties, the buyer is generally entitled, in accordance with the contract or relevant PRC laws, to claim for damages, refuse to proceed with the closing or even terminate the contract.

A sophisticated seller may insist that the buyer may only refuse to proceed with the closing or terminate the contract when the seller is in breach of fundamental representations and warranties, and otherwise only claim for damages in the event of breach of general representations and warranties.

The seller’s representations and warranties apply primarily to the facts and circumstances existing at the time of contract execution and are deemed to have been remade on and as of the closing date. A sophisticated seller may insist on adding a time limit for bringing claims for breach of such representations or warranties and capping the seller’s liability for breach of the same. A typical cap for the aggregate of all the claims is 100% of the total contract price, while a sophisticated seller generally sets different sub-caps for different categories of claims.   

Representation and warranty insurance is more often seen in cross-border transactions involving international players, mostly taken out by purchasers in cross-border transactions. Local parties, particularly state-owned enterprises, are becoming increasingly aware of and interested in such insurance.

See 1.1 Main Sources of Law, 2.2 Laws Applicable to Transfer of Title, 2.11 Legal Restrictions on Foreign Investors and 5.5 Applicable Governance Requirements.

The Environmental Protection Law and Soil Pollution Prevention and Control Law of provide that the person causing the soil pollution (the “causing person”) is responsible for managing the soil pollution risks and the remediation of the soil pollution it caused. However, if the causing person cannot be identified, the land use right owner (eventually the buyer, unfortunately) is responsible for managing the soil pollution risks and remediation of the same, even if the land use right owner did not cause the pollution or contamination.

A buyer can ascertain the permitted use of a parcel of real estate by viewing the construction land planning permit (建设用地规划许可证 in Chinese), land grant contract (土地出让合同 in Chinese), the construction works planning permit (建设工程规划许可证 in Chinese), other relevant zoning documents and the title certificate. In addition, a buyer may make further verification by accessing, with the authorisation of the seller, the relevant files of the real estate at the competent planning and natural resources authority (the Planning and Natural Resources Commission or PNRC) or the competent local urban construction archives.       

The state may, in the public interest:

• expropriate real estate, including land collectively owned by farmers and buildings or other real estate owned by any entities or individuals, with appropriate compensation; or
• temporarily requisition the real estate of any entities and individuals which will be returned to the said entities and individuals after such use.

The power of expropriation and temporary requisition must be exercised with due authority and legitimate process.

Compensation

The compensation must be fair and reasonable in the case of expropriation and temporary requisition. Where the land to be expropriated is collectively owned by farmers, they shall be compensated according to the principle that their living standard is not negatively affected; while the land user, in respect of land under a land grant contract to be taken back by the government for public interest, shall be compensated, considering the actual elapsed term of the land use and the status and condition of the developments made on the land. In the case of requisition, compensation shall be made for any damage to or destruction of the requisitioned real estate.

In respect of the purchase and sale of real estate, taxes payable may differ depending on the different transaction structures.

Asset Deal

In an asset deal, taxes payable include:

• enterprise income tax/individual income tax;
• VAT and surcharges; and
• land appreciation tax, stamp duty and deed tax.

Of these:

• the seller is obliged to pay enterprise income tax/individual income tax, value added tax and surcharges, land appreciation tax, and stamp duty; and
• the buyer is obliged to pay deed tax and stamp duty.

Equity Deal

In an equity deal (regardless of whether to purchase all or a portion of the equity/shares), taxes payable include:

• enterprise income tax/individual income tax, which the seller is obliged to pay; and
• stamp duty, which the seller and the buyer are both obliged to pay.

In addition, see 7.2 Assigning Responsibility for the Design and Construction of a Project for the potential exposure to land appreciation tax in an equity deal.

Tax Rates

Enterprise income tax

The rate ranges from 10% to 25%. The individual income tax rate is generally 20%, but an individual who transfers their sole residential housing after holding it for more than five years is exempt from individual income tax payment.

VAT

The rate ranges from 5% to 9%. Surcharges imposed on the VAT payable include tax for maintenance and construction of cities at an applicable rate ranging from 1% to 7%; education surtax at an applicable rate of 3%; and local education surtax, the rate of which varies in different localities. See 7.1 Common Structures Used to Price Construction Projects for more detailed analysis. 

Land appreciation tax

The rate for this is progressive, ranging from 30% to 60%, but an individual who transfers their residential housing is exempt from paying this tax.

Deed tax

This generally ranges from 3% to 5%, but an individual who purchases a sole residence for their family (including their spouse and underage children) with a gross floor area of more than 90 square metres is eligible for a reduced rate of 1.5% and with a gross floor area of no more than 90 square metres, of 1%.

Stamp duty

The rate is generally 0.05% for the seller and the buyer. Currently, an individual who purchases or transfers residential housing is exempt from paying this tax.

Foreign entities or individuals cannot acquire real estate in the PRC for non-personal use unless a foreign-invested enterprise is established or has been established in the PRC to own and operate the real property. The following restrictions also apply to foreign investors:

• a foreign individual is only allowed to purchase one housing unit (in practice, one title certificate represents one unit of housing) for their own use, subject to the requirement of residing or studying in China for more than one year; and
• a branch or representative office of an offshore entity in China is allowed to purchase non-residential real estate for its office use in the city where such branch or representative office is registered.

If commercial real estate is acquired by an onshore entity (including a foreign-invested enterprise), generally the onshore entity may seek financing from banks within the PRC, subject to certain restrictions required by the China Banking Regulatory Commission. If the onshore entity intends to arrange loans from offshore bank(s) or offshore entities, including shareholder(s), to acquire a commercial real estate, it must meet the requirements and restraints in relation to foreign debt under the PRC laws. Currently, no real estate companies are allowed to arrange loans from offshore, except for foreign-invested real estate companies incorporated prior to 1 June 2007.

Offshore Acquisition and Onshore Fixed-Asset Loans

Where a foreign investor acquires commercial real estate through an equity deal (by acquiring equity interest in the onshore company holding the real estate), the most common financing structure is an offshore acquisition loan accompanied by an onshore fixed-asset loan in renminbi. The offshore acquisition loan is extended by an offshore bank to the offshore buyer to pay for the equity/share purchase price in the same currency as that of the equity/share purchase price, secured by a pledge over the equity interest in the onshore target company acquired by the buyer. The onshore fixed-asset loan is generally extended to the onshore target company by an onshore subsidiary of the offshore bank, secured by a mortgage over the real estate owned by the onshore target company.

Where a commercial real estate investor that intends to acquire or develop real estate, acquires a loan from a lender, it will usually be required to provide the following forms of security:

• the mortgage over the real estate;
• the pledge of the equity interest of the target or project company by such investor;
• the guarantee made by the investor;
• the pledge of the account receivables, which are usually the rental proceeds generated from the real estate; and
• the agreement for the transfer of interests in material contracts, which generally include material lease contracts, the property management contract, asset management contract and insurance policies in relation to the real estate.   

Although the PRC laws do not prohibit an offshore lender from being the mortgagee of real estate collateral, in practice, certain local real estate registration centres, which serve as the competent authority in charge of real estate mortgage registration, such as in Xiamen, refuse to register an offshore entity (including offshore banks) as the mortgagee. Therefore, in terms of practicality, it may not be possible to register a mortgage in favour of offshore lenders in certain localities, resulting in a failure to create an effective mortgage. 

A borrower is generally able to make repayments to its offshore lender without further restrictions, provided that they have completed the relevant foreign exchange regulatory formalities for the cross-border loan (including, but not limited to, the registration of such cross-border loan) in accordance with the PRC laws.

If a mortgage is created over real estate, both the mortgagor and the mortgagee are obliged to pay stamp duty for the mortgage contract at a tax rate of 0.05% each of the secured debt. A minimal registration fee for a real estate mortgage (CNY80 for residential property and CNY550 for non-residential property, per registration) is charged by the registration authority and often borne by the mortgagee.

Furthermore, if the mortgagor and mortgagee agree in the mortgage contract to an enforcement notarisation, a fee for enforcement notarisation may be incurred, which is usually borne by the mortgagor. Such fee is charged by the notary public office at a rate equal to an agreed percentage of the amount of the secured debt, which may vary at different localities.

Under PRC laws, certain real estate may not be used as collateral to secure a debt, such as land ownership (other than land use rights that can be a valid collateral), land use right to certain collectively-owned land such as farmers’ homestead land (other than collectively-owned construction land), educational, medical and other public welfare facilities owned by non-profit schools, nurseries and/or medical institutions, real estate subject to title dispute or without clear title, real estate under attachment, detainment or custody orders.

When a lender enforces its security over real estate against a defaulting borrower, if the lender and the mortgagor have explicitly agreed in the mortgage contract to apply the enforcement notarisation approach, the lender may directly apply to the competent court for enforcement by presenting the duly notarised mortgage contract and the enforcement certificate issued by the notary public’s office. If the lender and the mortgagor have not explicitly agreed in the mortgage contract to apply the enforcement notarisation approach, the lender may, by agreement with the mortgagor, dispose of the collateral by negotiating a purchase price, by auction or sale of the collateral, and the lender may claim its senior debt against the proceeds from such a negotiated purchase price for auction or sale of the collateral. Failing an agreement between the mortgagor and the mortgagee on the means of disposal of the collateral, the lender may apply to the local court to auction or sell the collateral. In either case, the sale or negotiated purchase price of the collateral shall be based upon market price.

The timeframe required for the aforesaid enforcement varies, and typically ranges from six to 12 months.

Lenders tend to be prudent in exercising their foreclosure rights in the current market, except where the borrower is in fundamental breach or becomes insolvent.

An existing mortgage debt may become subordinated to a newly created mortgage debt, the mortgage interest of which has been duly registered, only if the mortgage over such existing debt has not been duly registered. But if the mortgage over the newly created debt has also not been duly registered, the existing debt will rank pari passu with the newly created debt.

The lender, being the mortgagee of the real estate, will not generally be held liable. However, if the lender becomes the land use right owner in respect of such real estate as a result of foreclosure (or enforcement) of the mortgage, the lender may be held liable for such non-compliance if the party that caused the pollution cannot be identified. 

The security interests created by a borrower in favour of a lender will not be made void if the borrower becomes insolvent, and the lender may continue to claim its senior debt against the collateral, although this will be subordinated to the contractor’s lien. In the event of restructuring during the bankruptcy proceedings, the lender will have to temporarily suspend its enforcement of the mortgage (unless damage to the collateral or a situation is likely to decrease the value of the collateral and might endanger the mortgagee’s interests). If the borrower enters into reconciliation or a liquidation procedure, the lender may continue to enforce the mortgage.

There are no existing, pending, or proposed mortgage recording or similar taxes in connection with mortgage loans or mezzanine loans related to real estate.

The PRC laws applicable to strategic planning and zoning at state level mainly include the Land Administration Law, and the Urban and Rural Planning Law.

Local governments shall, in accordance with these laws, prepare the urban planning and zoning, and reasonably determine the development scale, steps and construction standards of the urban locality.

In addition to the relevant laws and regulations, such as the Construction Law and Regulation on the Quality Management of Construction Projects, the design, appearance and method of construction are governed by the national standards promulgated by the relevant authorities of the state council, such as:

• the General Standard for Civil Building;
• the Unified Standard for Energy-Saving Design of Industrial Buildings;
• the Code for Fire-Protection Design of Buildings; and
• the General Standard of Quality Control in the Construction of Buildings and Municipal Projects.

Generally, these regulations and rules apply to both the construction of a new building and the refurbishment of an existing building. Local governments may promulgate detailed implementing rules according to the relevant national regulations and policies.

The development and designated use of real estate are generally governed by the competent authorities of the state and local governments, such as:

• the competent development and reform commission (DRC) for the approval or filing of the project initiation;
• the PNRC for planning and zoning approval, grant of land use right and issuance of land use right certificate; and
• the housing and urban-rural development authority (HUDA) for preliminary design approval, issuance of the construction works construction permit (建筑工程施工许可证) and filing for completion acceptance.

The approval process for development of a new building and/or infrastructure project can be divided into four phases:

• phase 1 for project initiation and land-planning permission, which includes approval or filing of the project, and issuance of the construction land planning permit (建设用地规划许可证);
• phase 2 for engineering and project permission, which includes project design examination, and issuance of the construction works planning permit (建设工程规划许可证);
• phase 3 for construction permission, which includes design confirmation of fire-protection and civil air defence, and issuance of the construction works construction permit (建筑工程施工许可证); and
• phase 4 for completion acceptance, which includes completion acceptance of zoning, land, fire protection, civil air defence and other relevant matters, and the completion acceptance filing.

Refurbishment and expansion of an existing building also require the relevant approval and permits, which generally include the construction works planning permit (建设工程规划许可证), the construction works construction permit (建筑工程施工许可证), and the completion acceptance filing. Local authorities may also issue detailed implementation orders.

In addition, for any modification to urban and rural zoning, the relevant authorities that prepared such urban and rural zoning shall solicit public opinion by holding hearings or using other methods. In the event of any modification to the approved detailed construction plan or master plan of a project design, the relevant zoning authorities shall solicit the interested parties’ opinions by holding hearings or using other methods. Also, any entity or individual is entitled to report any zoning non-compliance to the competent zoning or other relevant authorities.

If a real estate developer objects to the approval decision of the competent authority, generally such developer may submit applications for administrative review to the local government or the administrative department at the higher level. If such developer further objects to the administrative review decision, it may file an administrative lawsuit to the court, unless such administrative review decision is, as provided by law, a final decision.

A developer or investor may enter into an investment or joint development agreement with the competent subdivision of the local government, specifying, among other things, local regulatory requirements upon construction, progress and the investment intensity, and the fiscal preferential treatment offered by the local government. The specific contents of such agreement vary from project to project and are subject to local policies and negotiations.

The regulatory authorities may enforce restrictions on the development and designated use of a piece of land in various ways.

• If any entity occupies land without due approval or with approval obtained by deception, such entity shall be ordered to return the land, and any building and other structures newly constructed on the land may be ordered to be confiscated or dismantled. In addition, a fine may be imposed concurrently, and the relevant persons responsible for the illegitimate occupation may also be subject to criminal liability.
• In the event of any illegitimate land transfer, the income gained by the transferor from such transfer shall be confiscated, and the newly constructed buildings on the land may be ordered to be confiscated or dismantled.
• If construction work is carried out without a permit or the approval of the competent authorities (including failure to obtain permission or failure to carry out construction in compliance with the construction works planning permit), the project owner or developer may be ordered to correct the violation and dismantle the building or structures, they may be liable to pay a fine and the illegitimate properties may also be confiscated.

Under the Company Law, the types of companies include limited liability companies (有限责任公司) and limited companies by shares (股份有限公司). The liability of each shareholder of either a limited liability company or a limited company by shares is limited to its respective subscribed capital contribution to the company. Limited liability companies are the most common choice for acquiring real estate assets among both domestic and offshore investors.

Both limited liability companies and limited companies by shares are formed and governed by their articles of association (章程), which also govern their shareholders, directors, supervisors and officers, in addition to the companies themselves. These provide for, among other things, capital contributions, shareholding percentage, governance rights, distribution rights, dissolution and liquidation matters.

Both limited liability companies and limited companies by shares that hold real estate are subject to property tax and urban land use tax, as mentioned in 8.3 Municipal Taxes, and have access to tax benefits as mentioned in 8.5 Tax Benefits. There is no substantial difference in terms of tax costs, as mentioned in 2.10 Taxes Applicable to a Transaction, incurred as a result of purchase of real estate to limited liability companies and limited companies by shares.

China officially launched a pilot scheme on public REITs in the infrastructure field in 2020, which was further broadened on a pilot basis, to include department stores, shopping malls, and marketplace for agricultural products. Foreign investors can initiate these vehicles subject to satisfaction of “commercial presence” requirement and other qualification requirements, such as sound creditworthiness, robust internal control system, consistent business operations, and material legal compliance in past three years. Using a REIT can improve cash flow and asset-liability ratio, and increase asset turnover ratio of an enterprise. Recently, Shanghai and Shenzhen Stock Exchanges are, at the same time, exploring the introduction of private REITs to supplement public REITs and the first private REIT product is under way.

The minimum capital for companies engaging in real estate development may not be less than CNY1 million.

A Limited Liability Company

Pursuant to the Company Law (as amended in 2023, and coming into force on 1 July 2024), a limited liability company shall have:

• less than 50 shareholders and a shareholders’ assembly consisting of all the shareholders (or sole shareholder), which is the highest authority of the company;
• a board of directors consisting of three or more directors (or one director in lieu of a board of directors if there is a limited number of shareholders or the company is small), which reports to the shareholders’ assembly (or shareholder); and
• a board of supervisors of no less than three supervisors (or one supervisor in lieu of a board of supervisors, or zero supervisor upon unanimous consent by all the shareholders, if there is a limited number of shareholders or the company is small), or an audit committee composed of board directors to serve as the board of supervisors or the supervisor above.

Board directors are appointed by the shareholders’ assembly (or shareholder). A limited liability company may have a general manager, who reports to the board, to be appointed or dismissed by decision of the board.

A Limited Company by Shares

A limited company by shares is incorporated by one to 200 sponsors, with at least half of them having residence in the PRC, and has:

• a shareholders’ assembly consisting of all shareholders, which is the highest authority of the company;
• a board of directors consisting of three or more directors (or one director in lieu of a board of directors if there is a limited number of shareholders or the company is small), which reports to the shareholders’ assembly (or shareholder);
• a board of supervisors of no less than three supervisors (or one supervisor in lieu of a board of supervisors if there is a limited number of shareholders or the company is small), or an audit committee composed of board directors to serve as the board of supervisors or the supervisor above; and
• a general manager.

As in the limited liability company, board directors are appointed by the shareholders’ assembly (or shareholder), and the general manager is appointed or dismissed by decision of the board of directors.

A company must submit the annual report for the preceding year to the administration for market regulation through the corporate credit information disclosure system between 1 January and 30 June each year. No fees are required for the submission of such report.

Companies are also required to prepare financial accounting reports at the end of each fiscal year, which are audited by an accounting firm. In addition to such accounting expenses, additional fees may be incurred for other financial matters as agreed in a company’s articles of association. Such fees vary depending on the location of the accounting firm and the company’s assets and financial condition.

Leasing is the most common method to obtain the right to occupy and use any or all of a building for a limited period of time. In addition, the habitation right, if duly registered, is another method to occupy and use another person’s dwellings, generally free of charge unless otherwise agreed. The habitation right is a newly created right under the Civil Code.

Methods to obtain the use right to a piece of land vary depending on the type of land. Land is classified into farmland, construction land and unused land:

• farmland means land that is directly used for agricultural production, including cultivated land, forest land, grassland, etc;
• construction land mainly includes land zoned for the construction of buildings and other structures; and
• unused land refers to land other than farmland and construction land.

The use right to farmland may be obtained through a contracting arrangement, whereby contractors may enter into an agreement with a landowner or other entities with delegated authority to engage in agricultural production such as planting, forestry, animal husbandry, and fishery on the land, and benefit from such production.

The use right to construction land may be obtained by entering into a land grant contract (with land premiums to be paid) or a land allocation contract (no land premiums to be paid) with the competent local land authorities if it is stated-owned or the relevant collective if it is collectively owned.

In addition, real estate owners are entitled to use the land or buildings adjacent to their own real estate for the purpose of obtaining and draining water, passage, ventilation and lighting, etc that are necessary for their life or production. Such neighbouring right is mandatory and no agreement between the parties is required. Parties may also create easement through execution of agreements to obtain the right to use another party’s real estate.

In practice, commercial leases may be divided into the following categories depending on the different rent payment methods:

• lease with a fixed rent, often seen in office leases, under which the rent is a fixed amount as agreed by the parties;
• lease with a turnover rent, under which the rent is calculated at an agreed percentage of the tenant’s gross turnover generated from the leased property; or
• lease under which the rent is the higher of a fixed base rent or a turnover rent.

PRC laws stipulate that the term in a lease agreement cannot exceed 20 years. If the term exceeds 20 years, the excess period will be invalid. When the lease term expires, the parties may renew the lease agreement for up to 20 years from the date of renewal of the lease agreement. Lease agreements with a term longer than the remaining term of the land use right to the land located beneath the property may be at risk because it is uncertain whether the landlord will still have the right to use the land after the land use term expires.

The rent for a commercial lease is generally negotiable and subject to agreement between tenant and landlord. However, rent for affordable housing such as public rental housing (公共租赁住房) and low-rent housing (廉租房) may not exceed the guiding rental rate promulgated by the local government.

Generally, the length of a lease term is subject to the agreement between the landlord and the tenant but shall not exceed 20 years (see 6.3 Regulation of Rents or Lease Terms). The landlord and tenant may agree in the lease whether the term may be renewed and, if so, how the lease may be renewed.

PRC law provides that the landlord shall be responsible for the maintenance and repair of the leased premises, unless otherwise agreed by the parties. The tenant has the right to require the landlord to maintain and repair the leased premises within a reasonable time limit when necessary. Where maintenance and repair affect the use of the leased premises, the rent may be reduced, or the lease term extended accordingly.

The frequency of rent payment is, subject to the agreement between the landlord and the tenant, generally on a monthly, quarterly or yearly basis.

The tenant shall pay rent in the amount and manner as agreed in the lease agreement. If agreed in the lease, the rental rate may be adjusted based on the agreed adjustment mechanism. Parties are not allowed to unilaterally change rent payments, unless otherwise agreed by the parties or provided for by PRC laws, such as the occurrence of a force majeure, or an unforeseeable material change (other than commercial risks and force majeure) of circumstance.

When deciding the price adjustment mechanism, a fixed yearly increase rate, the consumer price index or fair market prices are often taken into consideration.

The landlord is responsible for the payment of VAT on the rent income generated from leasing real estate.

Generally, in addition to rent, a refundable security deposit, equal to rent plus a management fee of three to six months in most cases for commercial leases (or one to three months for residential leases), is required to be paid to the landlord at the start of a lease. If the tenant wishes to improve or fit out the property, the tenant may be required to pay a security deposit for the fitting-out or improvements, refundable after the completion of the work.

Unless otherwise agreed by the parties, the landlord is responsible for the maintenance and repair of the leased premises. In practice, small maintenance and repairs of common areas and shared equipment, machinery and facilities are generally conducted by the property manager engaged by the landlord, and covered by the management fees, which are payable to the property manager by either the landlord or the tenant, subject to the lease agreement.

In practice, the tenant pays their own utilities and telecommunications fees incurred in respect of, or consumed at, the leased premises. Utilities and telecommunications fees incurred in respect of common areas, and public equipment, machinery and facilities are often shared and charged to the end user (ie, the tenant in most cases, or the landlord if otherwise agreed in the lease, or if the premises are vacant) in proportion to the floor area of the leased premises.

The landlord will usually take out and maintain, at their own cost, property all risks insurance for the leased premises, which covers physical loss of or damage to the insured property arising from any natural hazards or accident. Damages caused or expenses incurred by intentional acts or gross negligence, confiscation, requisition, destruction or damage by any action or order of any government or public authority, war, coup d'état, or strike are generally excluded. On the other hand, the tenant is usually requested by the landlord to take out and maintain through the lease term construction/installation works all risks insurance for the tenant’s fitting-out or improvement works, and public liability insurance for the tenant’s business operations in the leased premises.

Business interruption insurance, an insurance ancillary to the property all risks insurance, generally only covers losses incurred by business interruption resulting from property damage.

In practice, the landlord commonly imposes various restrictions in the lease agreement on how a tenant shall use the leased property, including but not limited to restrictions on the permitted use, subleasing, assignment, and fitting-out of the leased premises. Applicable PRC laws also require that use of the leased premises shall be in accordance with the zoned usage, and the tenant shall not change the load-bearing structure or demolish indoor facilities without the landlord’s approval.

Typically, the tenant must obtain the landlord’s prior consent if the tenant intends to improve or fit out the leased premises. A fitting-out plan is typically required in order to obtain the landlord’s written consent. To ensure the safety of the leased premises, the landlord usually requires that the tenant takes out insurance for such improvement or fitting-out works and engages qualified contractors. As discussed in 6.12 Restrictions on the Use of Real Estate, the tenant may not change the load-bearing structure or other main structure of the leased premises without approval. Furthermore, it is common practice for the landlord to require the tenant to complete all the approval, filing and recording procedures required by the competent authorities (including but not limited to the planning, construction and fire-protection approvals and completion acceptance) for such improvement or fitting-out at the tenant’s own cost.

Leasing of various types of real estate are mainly governed by:

• the Civil Code of the PRC;
• the Administrative Measures for Commodity Real Estate Leasing; and
• the Interpretation of the Supreme People’s Court on Certain Issues Concerning Specific Application of Law in the Trial of Contractual Disputes over the Leasing of Urban Housing 2009 (as amended in 2020).

It is common practice to specify in the lease that the landlord is entitled to terminate the lease should the tenant become insolvent. Failing explicit agreement, the Enterprise Bankruptcy Law of the PRC shall govern. If the court accepts the tenant’s application for bankruptcy, the tenant’s bankruptcy administrator decides whether to rescind or continue to perform the lease agreement. Failure by the bankruptcy administrator to notify the landlord of its decision within two months from the date when the bankruptcy application was accepted, or to reply to the landlord within 30 days after receiving the landlord’s exhortation, will result in the rescindment of the lease agreement.

Where the lease agreement is so rescinded, the tenant shall reinstate and return the leased premises, and the landlord is entitled to declare its claims to the court, in accordance with the bankruptcy proceedings, for the damages incurred thereunder. Where the administrator decides to continue the performance of the lease agreement, the landlord must comply. However, the landlord has the right to request the administrator to provide security. The lease agreement will then be deemed rescinded if the administrator fails to provide security.

A refundable security deposit is commonly seen in leases to secure  the tenant’s performance of the lease. Security deposit is generally in the form of cash or bank guarantee.

After the expiry or termination of a lease, the tenant generally has no right to continue occupying the leased premises. However, if the tenant continues to use the premises after the expiry of the lease without any objection from the landlord, the original lease shall be deemed as remaining in force but without a fixed term. Under such circumstances, either party can terminate the lease at any time, provided that the landlord gives the tenant reasonable prior notice of such termination. In addition, if the landlord intends to lease the premises after the expiry of the lease, the tenant shall have a right of first refusal under the same terms and conditions.

A tenant may sublease part or all of the leased premises to a third party with the prior consent of the landlord. The sublease term should not be longer than the residual lease term of the original lease agreement. The tenant is liable for any damages caused by such third parties to the leased premises.

The following circumstances are often seen in a lease as causes for termination by the tenant:

• damage to the leased premises preventing the tenant from using the leased premises;        
• insolvency of the landlord; and/or
• frequent interrupted supply of water, electricity, air conditioning or elevators.

The PRC laws also give the tenant the right to terminate the lease in the event of:

• the leased premises endangering the safety or health of the tenant; 
• the occurrence of any of the following circumstances for reasons not attributable to the tenant, thus rendering the tenant unable to use the leased premises:
1. the leased premises being attached by judicial or administrative organs;
2. title claim to the leased premises; or
3. violation of the mandatory provisions of laws and administrative regulations in respect of the requirements on the use of the leased premises.

The following circumstances are often seen in a lease as causes for termination by the landlord:

• failure by the tenant to pay the rent, management fee, deposit or other amounts due, and the outstanding amounts remain unpaid for a reasonable period after receipt of notice from the landlord;
• insolvency of the tenant;
• unauthorised suspension or close of business operations; and/or
• damage to the main structure or unauthorised fitting-out or improvement of the leased premises by the tenant.

The PRC laws also give the landlord the right to terminate the lease should the tenant sublease the leased premises without the landlord’s consent.

A lease agreement shall, within 30 days of its execution, be filed with the competent real estate authority of the city where the real estate is located, otherwise the parties to the lease will be ordered to comply. Should the parties fail to comply within the prescribed time period, the parties shall be subject to a fine of CNY1,000 (in the case of an individual) or CNY1,000 to CNY10,000 (in the case of a legal entity).

The lease of real estate is not usually reflected in the Land Record.

If the lease is terminated as a result of the tenant’s default, the tenant must reinstate and return the leased premises in a timely manner. Should the tenant fail to do so, after the lease has been duly terminated, the landlord may cut off the water or electricity supply to force the eviction of the tenant.

The landlord may file a lawsuit to the court with competent jurisdiction for its confirmation that the lease is duly terminated. If the tenant still occupies the leased premises after the court has found that the lease has been terminated, the landlord may apply for an enforced eviction based on a valid judgment. In practice, the period required for a court to make a judgment and complete the enforcement procedure varies in different localities but is usually longer than a year.

A third party who is not a party to the lease cannot generally terminate the lease because it is not a party to the lease. However, under certain circumstances, third parties may make it impossible for the lease to be performed or fulfilled, resulting in early termination of the lease.

In addition to the collection from the tenant of outstanding rent and tenant eviction, the parties may agree, in the lease, upon the amount of liquidated damages in the event of a tenant breach and termination of a lease. However, if the amount of the liquidated damages agreed on by the parties exceeds 130% of the losses sustained, the party concerned may apply to the court or arbitration tribunal for an appropriate reduction in liquidated damages. Remaining rent is not generally supported unless it falls within the cap of 130% of the total losses incurred by the landlord, same as the security deposits, whether in the form of cash or bank guarantee, held by the landlord.

The most common pricing structures for construction include:

• fixed quota pricing (工程定额计价);
• bill of quantities pricing (工程量清单计价);
• fixed lump-sum price (固定总价);
• fixed unit price (固定单价);
• cost plus fee (成本加酬金); and
• adjustable price (可调价).

These are not mutually exclusive and sometimes, multiple pricing structures might be included in the same contract.

Fixed Quota Pricing

Fixed quota pricing means that the construction price, in accordance with the bidding documents, is a total of:

• the direct construction cost calculated based on the unit labour price, material price, equipment price and other information formulated by the relevant administrative authorities and the market price for the same during the same period;
• the indirect construction cost (including management salaries, office expenses, employees’ insurance);
• profit; and
• taxes.

Bill of Quantities Pricing

Bill of quantities pricing means that the aggregate of the price for each component of the construction work, which is calculated based on the integrated unit price and quantity of such component, is determined based on the construction drawing and construction management and engineering skills.

Fixed Lump-Sum Price

With a fixed lump-sum price, the total construction price is a fixed amount which is not adjustable within the agreed work scope and conditions.

Fixed Unit Price

This means that the unit price is a fixed amount, which is not adjustable in response to any change in conditions or quantities, and the total construction price is the product of the weighted summation of the fixed unit price multiplied by the quantity required.

Cost Plus Fee

Cost plus fee means that the contractor is paid a fee in the amount agreed between the parties, in addition to reimbursement of the actual construction cost.

Adjustable Price

With an adjustable price, the contract price is adjustable subject to agreed conditions, such as an increase in labour or material costs due to inflation or market change, a change in the order, a change of quantities or other geotechnical conditions.

An owner may either enter into an EPC Contract with a general contractor, or separately enter into a design contract and a construction contract with a local design institute and construction contractor, respectively.

EPC Contracts include the following according to market practices:

• an Engineering-Procurement-Construction (EPC) arrangement, under which the contractor is responsible for the engineering, procurement and construction of the project, and is fully accountable for aspects such as quality, safety, schedule and price;
• a Design-Build (DB) arrangement, under which the contractor is responsible for the engineering and construction of the project, and is fully accountable for aspects such as quality, safety, schedule and price;
• an Engineering-Procurement (EP) arrangement, under which the contractor is only responsible for the engineering and procurement of the project, and not the construction thereof;
• a Procurement-Construction (PC) arrangement, under which the contractor is only responsible for the procurement and construction of the project, and not the engineering thereof; and
• a Lump-Sum Turn-Key (LSTK) arrangement, under which the contractor is responsible for the engineering, procurement, construction and installation, commissioning service, and delivery of the project qualified for use.

Construction risks may be allocated between the parties to a contract, considering factors such as bargaining power, fairness and justice. For instance, the owner may transfer the risk of price increase to the contractor by adopting the fixed lump-sum price contract, or the contractor may agree to indemnify the owner only to the extent of the total contract price. Generally, risk allocation arrangements are valid and recognised by the courts, provided they are not in violation of the mandatory provisions of PRC laws and administrative regulations.

Furthermore, a project owner may require a contractor to take out and maintain project-related insurance (such as contractor’s all risks and third-party liability insurance) in favour of the owner.

The owner and contractor generally specify a duration for work, including milestone and completion dates in the contract, and manage the work progress through the following contractual arrangements:

• the contractor is required to make and update the work schedule, report in a timely manner any risks of extension of work duration, take all actions necessary to keep to the agreed schedule and pay the delay damages;
• the owner has the right to terminate the contract in case of severe delay of the schedule; and
• the circumstances under which the owner must agree to extend the duration of the contract must be specified.

Monetary compensation may be claimed by an owner in accordance with the contract or by law, if certain milestone and completion dates are not achieved. 

In practice, the following forms of security are generally requested by the owner:

• a performance bond, in the form of a bank guarantee or third-party guarantee, which is issued to the owner by the guarantor for the purpose of securing the performance of the contract by the contractor; 
• a payment guarantee in the form of a bank guarantee or third-party guarantee, which is issued to the subcontractors, suppliers or construction workers by the guarantor, for the purpose of securing the payment obligations of the contractor under the relevant contract(s); and
• retention money is an amount retained from each progress payment, which is generally released to the contractor after the contractor has fully performed its contract obligations, usually after the expiry of the defect liability period.

The contractor for construction work has the right of contractor’s lien over the construction in the event of non-payment by the owner, which is senior to a mortgage or other debts. Such contractor’s lien is valid for up to 18 months, commencing from the date the construction payment becomes due. The contractor’s lien may be removed if the overdue payments are made in full by the owner by voluntary payment or offset against the negotiated sale price (between owner and contractor) of the construction, or the proceeds from the auction of the construction, ordered by a competent court.

The PRC laws explicitly stipulate that no construction shall be delivered for use unless it passes completion acceptance. The owner must organise the geological survey contractor (勘察), designer, contractor and jianli (监理) (professional supervision engineer mainly responsible for the supervision and management of the construction quality and schedule) to attend the completion acceptance inspection; and, after completion acceptance is passed, the owner must go through specific completion acceptance filing formalities at the relevant government authorities, and obtain the Completion Verification and Acceptance Filing Certificate for the Construction Project (建设工程竣工验收备案证书), which may be replaced by an electronic notice from HUDA declaring that the completion acceptance has been passed, for certain small-scale non-residential construction works in some localities.

In addition, in the case of a residential housing project, the PRC laws also require the Residential Housing Quality Warranty and Residential Housing Use Manual to be provided by the real estate developer when delivering such housing, and certain localities, such as Shanghai, Shandong province and Tianjin, further require a certificate of delivery and occupancy issued by the local HUDA, to be obtained by the real estate developer before occupation of the newly built residential housing.

PRC companies are subject to payment of VAT for the sale of real estate, and the seller is the obliged taxpayer. The taxes payable are equal to the sale price multiplied by the applicable tax rate. Two methods are applied to calculate the sale price: 

• under the simplified method, the sale price includes all the costs received by the seller plus the out-of-price expenses; and
• under the general method, the sale price equals the balance of the total amount of the costs received by the seller and the out-of-price expenses after deduction of the expenses incurred during the sale of the real estate.

For a general taxpayer, if the seller acquires the real estate before 30 April 2016, it may choose the simplified method (at an applicable rate of 5%) or the general method (at an applicable rate of 9%). If the real estate is acquired after 1 May 2016, only the general method may be applied (at an applicable rate of 9%).

For a small-scale taxpayer (ie, whose VAT-taxable sales are no more than CNY5 million per year), the simplified method at an applicable rate of 5% will be applied. If VAT-taxable sales are no more than CNY100,000 per month, such taxpayer is exempt from the payment of VAT.

An equity deal is often chosen by companies over an asset deal as a way to mitigate tax liabilities. However, the State Administration of Taxation has issued certain official replies on a case-by-case basis to collect land appreciation tax from the seller in equity transfer transactions where the main asset of the target company acquired was the real estate. As a result, there might be potential exposure to land appreciation tax liability in similar equity deals.

Property tax and urban land use tax are the main municipal taxes paid on the occupation and usage of real estate:

• for property tax, the applicable rate is 1.2% if it is calculated based on the residual value of the real estate (ie, the original price of the real estate reduced by 10% to 30%), and 12% if the tax is calculated based on the rental income from the real estate; and
• the applicable rate of urban land use tax varies from CNY0.6 per square metre to CNY30 per square metre, depending on where the real estate is located.

In the case of an offshore entity holding an onshore project company, which, in turn, holds real estate in the PRC, such offshore entity is subject to:

• withholding income tax at an applicable rate of 10% on any dividends received from the onshore project company; and
• withholding income tax at an applicable rate of 10% on the net income generated from the transfer of equity in such onshore project company, if under each circumstance such offshore entity has no establishment in the PRC or such income has no actual connection with such establishment, unless otherwise provided in a more preferential bilateral tax treaty.

In the case of an offshore entity directly holding real estate in the PRC, which existed before July 2006, such foreign investor, if it has no establishment in the PRC or the income generated in the PRC has no actual connection with such establishment, is subject to:

• withholding income tax on the net income generated from the transfer of the real estate at a rate of 10%; and
• withholding income tax at a rate of 10% on the rental proceeds generated by the real estate.

According to the PRC Enterprise Income Tax Law, real estate held by a company is typically treated as fixed assets, which may be depreciated, and the relevant depreciation amounts are allowed to be deducted from taxable income. The land use right held by companies is usually treated as a non-tangible asset, which may be amortised, and the relevant amortised amount may be deducted from taxable income.