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Land Use Rights & Employment Contracts In China

By Ron Cai, Resident Partner
[Sept. 2001]

I. Land Use Rights

A. Sources of Land Use Rights Law

1. Law of the People's Republic of China on Land Management.

2. Provisional Regulations of the People's Republic of China Concerning the Grant and Assignment of the Right to Use State Land in Urban Areas.

3. Law of the People's Republic of China on Administration of Urban Real Estate.

4. Local Land Use rules.

In China, local rules vary from place to place. In practice, they can be more important than the national laws.

B. Methods to Acquire Land Use Rights

1. Grant of the right to use land.

2. Assignment of the right to use land.

3. Lease of the right to use land.

4. Allocated land use rights.

C. Background Introduction

1. Ownership of land

Land is a state asset in China. The State Council represents the State to exercise ownership over state-owned land. In accordance with the principle of separating the ownership of land from the right to use land, China implements a system concerning the grant and assignment of the right to use land in urban areas.

2. Subject

Except where the law provides otherwise, any company, enterprise, other organization or individual in or outside China may acquire the right to use, develop, utilize and engage in business relating to land.

D. Grant of the Right to Use Land

1. Definition

The term "grant of the right to use land" refers to the act by which the State grants the right to use land for a certain number of years to a land user and the land user pays to the State a fee for the grant of the right to use land.

2. Parties

Municipal and county governments shall be responsible for the grant of the right to use land. Contracts of grant of the right to use land must be entered into by and between the land administration bureau of the municipal or county government and the land user.

3. Term

The maximum term of grants of the right to use land shall be determined in light of the land's purpose, from forty years to seventy years. Upon the expiry of the term of the right to use land, the land user may apply for extension of the term. A new contract should be entered into if an extension is needed.

4. Manner

The right to use land may be granted in the following three manners:

1) By agreement;

2) by invitation of tenders; and

3) by auction.

5. Rights and Duties

1) After execution of the contract for the grant of land use right, land users must pay in full the fee for the grant of the right to use land within 60 days. If a land user fails to make full payment within such time limit, the grantor has the right to rescind the contract and may claim liquidated damages.

2) The grantor should provide the right to use the granted land in accordance with the contract. If it fails to provide such right, the land user has the right to rescind the contract and may claim liquidated damages.

3) A land user should carry out registration procedures in accordance with regulations, and obtain a land use certificate to evidence the right to use land.

4) In case of a land user failing to develop or utilize the land in accordance with the schedule and conditions specified in the contract, the land administration department of the municipal or county government should correct such situation and may impose penalty.

5) A land user who has acquired the right to use land may assign, lease, mortgage such right or utilize such right in other economic activities within the time limit for such use. Such user's lawful rights and interests are protected by law.

6. Important Issues

1) Nature of the Land for Granting

There are two categories: State-owned land and collective-owned land. Foreign investors can only obtain the right to use State-owned land. Collective-owned land must first be transferred to the State before it can be granted to foreign investors.

2) Contracting Party

The grantor must be the land administration department of the municipal or county government.

3) Status of the Land

Typically and ideally, the land should be leveled and connected to basic public facilities. There should be no collateral rights or other third party rights to the land.

4) Measurement of the Lot

The measurement method should be reasonable and indicated in the contract.

5) Fees

All the fees for the land grant, requisitions, public facilities, etc, should be clearly listed in this clause. Foreign investors should try to negotiate to pay the fees after the establishment of the foreign investment enterprise.

6) Uses and Purposes

If foreign investors want to use the land for purposes not stipulated in the land use right certificate, they must apply and receive approval from the local land administration bureau. Non-compliance may cause a penalty, including recovery of the land use right without compensation.

7) Construction

Foreign investors should add conditions for liability exemption in this clause to maintain flexibility in the construction schedule and to reduce and/or avoid penalties for delays.

8) Assignment, Leases and Mortgage

Foreign investors should ensure that they are given the power to assign, lease, and mortgage the land use right during the land grant term.

9) Dispute Resolution

Foreign investors may settle their disputes with the Land Administration Bureau through arbitration by the China International Economic and Trade Arbitration Committee in Beijing, Shanghai or Shenzhen or through arbitration by any local arbitration commission, as well as litigation by the People's Courts.

10) Standard Form Contract

There is no national standard land use contracts. However, many local land administration bureaus have prepared their own standard contracts. These local models vary from city to city. In some big cities, even different districts and areas, such as urban area and suburban area, trading zone and development zone, may have different standard contracts. The difficulties of the negotiation of the local standard form contract are also diverse in different places.

11) Additional Documentations

Often times, the local land administration bureau attaches additional documents to the land granting contracts. These documentations include:

a) Land use terms and conditions;

b) agreement on removal and relocation of current building owners and tenants;

c) agreement on connection to pertinent public facilities; and

d) agreement on leveling and basic construction (public facilities).

These documents are supplements to the provisions listed in the principal contract. Foreign investors should carefully examine the additional documents to prevent taking on unnecessary obligations.

12) Land Use Terms and Conditions

Different land use terms apply different standards. Foreign investors may negotiate with the land administration bureau on which land use terms to be adopted.

13) Environmental Due Diligence Studies

If there is any suspicion about the environmental conditions of the land, or if the land grant involves a large amount of investment, foreign investors would be well advised to conduct environmental survey to establish baseline for the environmental contamination.

E. Assignment of the right to use land

1. Definition

The term "assignment of the right to use land" refers to the act by which a party who has already obtained grant of state-owned land use right passes on the right to use land to another party.

2. Manners

1) By sale;

2) by exchange; and

3) by gift.

3. Rights and Obligations

1) When the right to use land is assigned, the rights and obligations specified in the contract for the grant of the land use right and the registration documents shall pass along with such right.

2) The structures on and other attachments to the land are assigned along with such right.

4. Time Limit

The time limit of the assigned land use right is the remaining period of the term specified in the contract for the grant of the land use right after deduction of the period for which the original land user has used the land.

5. Important Issues

1) An assignee should ensure that the assignor has the granting right. If not, the right is not assignable and the "assignor" should return the land to the Land Administration Bureau and then it can be granted to foreign investors by Land Administration Bureau.

2) Foreign investors should ensure there is no collateral rights or other third party rights to the land. They should inquire and check the records of the Land Administration Bureau.

3) Foreign investors should, if appropriate, conduct environmental due diligence and attach the report to the contract for the record.

4) Each change and revision of the original contract which requires written consent from the Land Administration Bureau should be made new records at the Land Administration Bureau.

II Employment Contracts

A. Sources of Employment Law

1. Labor Law.

2. Administration of Labor in Foreign Investment Enterprises (FIEs) Provisions.

3. Local rules.

B. Two types of Labor Contracts

1. Individual Labor Contract

1) Mandatory Content

a) Term of the contract;

b) job duties;

c) labor protection and labor conditions;

d) compensation;

e) labor discipline;

f) conditions for terminating the contract; and

g) liabilities for breach of contracts.

2) Form

The contract must be in writing.

3) Language

It may be signed in a Chinese and a foreign language version, but in case of discrepancies, the Chinese version controls. Only the Chinese version can be registered.

4) Date

It becomes effective on the agreed date. If there is no agreement upon effective date, it will become effective on the date of execution.

5) Term

The term of a labor contract may be fixed, open-ended (i.e., at will) or set according to a certain amount of work to be fulfilled.

6) Probationary Period

This is not mandatory. Employers may require a probationary period. The term of the probationary period varies in correspondence with the term of the contract, but the maximum probationary period shall not exceed six months. During this period, either employers or employees may terminate the contract.

2. Collective Labor Contract

1) It is not a mandatory requirement for foreign investment enterprises to sign such contracts.

2) Collective contracts do not replace individual contracts, but provide a framework that must be observed in the individual contracts.

C. Terminating Contracts

1. An Employer May Terminate A Labor Contract Immediately If:

1) it is proved that, during the probationary period, the employee has failed to meet employment requirements;

2) an employee has seriously violated labor discipline or the employer's rules and regulations;

3) an employee has committed serious dereliction of duties or misconduct that results in significant loss to the employer; and

4) an employee has been accused of a criminal offence.

2. An Employer May Terminate a Labor Contract in Written Notice to a Worker in Advance of Thirty Days If :

1) after undergoing a period of medical treatment, an employee with an illness or non-work-related injury is unable to perform his/her original work duties and is also unable to perform another job arranged by the employer unit;

2) an employee is not competent to perform the job and remains unqualified even after training or moved to another post;

3) a labor contract can no longer be implemented due to major changes of circumstances which were relied on as the basis for concluding the labor contract and an agreement to amend the labor contract cannot be reached by both parties through consultation.

3. An Employer Shall Not Rescind a Labor Contract If :

1) an employee suffers from an occupational disease or a work-related injury and has been confirmed as being totally or partially unable to work;

2) an employee suffers from an illness or injury for which medical treatment within a stipulated period is allowed;

3) a female employee is pregnant, on maternity leave or within the stipulated period for nursing.

4. Employers may indicate in the contracts certain circumstances under which they can terminate the contract as long as they don't violate the statutory provisions.

D. Important Issues

1. Sourcing Employees

Both national and local labor regulations stipulate that employers have the freedom to source their employees. Thus in a joint venture with an existing Chinese company, the foreign investors may establish recruiting criteria to eliminate unqualified personnel who are recommended by Chinese party to the joint venture company.

2. Protection of Trade Secrets

Foreign investors may incorporate detailed clauses, such as confidentiality and non-competition clauses, into the employment contract. When drafting these clauses, employers should be aware of the requirements of the laws and regulations for information to be classified as trade secrets. They may also ask future employees to sign a legal document stipulating that they will not divulge their former employers' trade secrets in order to show that they have no intention to infringe upon another company's trade secrets. In addition, they may also establish an internal system to protect their trade secrets, from document filing to key employees dismissal procedures.

3. The Clauses on the Position, Job Duties and Responsibilities of Employees

The clauses should be flexible enough for the employers to change without breaching the contract. The clauses should allow employers to retain the patents and copyrights of employees' innovations.

4. Compensation

This clause should clearly indicate whether employers or employees pay income taxes. Employer may consider paying additional benefits to their employees to maintain a higher employee retention rate.

5. Covenant not to Compete

Employers can have their employees agree not to compete during the term of the contract without paying them compensation. However, when the contract expires, employers will have to compensate their employees for them to refrain from competition.

6. Liability for Breach of Contract

Employers may stipulate early termination penalties in the contract to prevent employees from terminating their contract early.

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