Conditions limiting the mortgaging of reserve land to secure financing

At present, the financing channels available to local governments are relatively limited, while the pressures on them to construct infrastructure are only increasing. Therefore reserve land, as a proprietary resource of local governments, is being used as a major means of providing security for the financing of local governments. However, the laws of China place strict restrictions on such usage.

Although the Security Law specifies that land use rights may be mortgaged, this is conditioned on the mortgagee having lawfully secured the land use rights, and having the land use rights certificate.

However, the above-mentioned method does not comply with such relevant laws and regulations of China as the Law on the Administration of Land, i.e. allocation or grant, making the question of whether they can be mortgaged difficult to justify in law.

Recognising this issue, the relevant authorities issued the Administrative Measures for Reserve Land, which specify that a land use rights certificate can be obtained for reserve land. However, mortgage registration is unavailable to mortgagees that are not financial institutions so that their lawful rights and interests are not protected.

Restrictive provisions

Pursuant to the current Administrative Measures for Reserve Land and the Notice on Strengthening the Administration of Land Reserves and Financing of the Ministry of Land and Resources, loans secured by mortgages of reserve land are subject to the following restrictions:

1. Title to reserve land that is to be mortgaged is required to be clear, and a lawful land use rights certificate needs to have been secured for it. In numerous projects at present, certain of the lots that local governments provide as security are still undeveloped land, or a land use rights certificate has not been secured, making them unsuitable as the basis for security.
2. The loans may only be used for land reserve matters, e.g. compensation for the mortgaged land, preliminary development, etc., but may not be used for urban construction or other projects unrelated to land reserve affairs. In the author’s experience, certain local governments have used such loans for urban construction unrelated to the land reserve.
3. Mortgagees are restricted to financial institutions. In normal circumstances, mortgagees that are not financial institutions, such as investors in BT (build-transfer) projects, find themselves in the impossibility of carrying out mortgage registration.
4. The maximum mortgage term is five years. When a land reserve mortgages reserve land as security for a loan, the loan term may not exceed five years; accordingly, the term of the mortgage of reserve land likewise may not exceed five years.
5. The matter secured by the reserve land is restricted. A land reserve may mortgage reserve land as security only for its own debts, and may not use the same in any manner to provide security for a third party. However, in fact, certain land reserves have mortgaged reserve land to provide security to third parties for the debts of the local governments.
6. Restrictions on mortgagors. A land reserve that uses reserve land to secure financing is required to be a land reserve on the list of land reserves of the land authority. Furthermore, the land reserve may proceed with the loan financing secured by a mortgage of reserve land only after review of the size of the financing by the people’s government at the same level, the reporting of the same step-by-step up the hierarchy to the provincial-level finance authority and the issuance to it of a lawful annual financing size control card by the provincial-level finance authority.
7. Limit on mortgage amount. First, where a mortgage is to be created over reserve land, its value is determined based on the appraised market value minus the land grant earnings payable to the government, and for the mortgage procedure, matters are to be carried out with reference to the procedure for the mortgage of allocated land use rights. Second, the land reserve is required to carry out its financing based on the amount determined by the provincial-level finance authority, and confirmed on the financing control card; accordingly the amount of the security provided in the form of the mortgage of reserve land may not exceed the amount determined on the control card.

If the competent local land authority is able to carry out the mortgage registration procedures for the investor, the author is of the opinion that one cannot fully arrive at the conclusion that such mortgage security and the mortgage security contract are invalid. The main reason therefor lies in the fact that all the regulations on the mortgage of reserve land at present are ministerial-level rules, regulations and regulatory documents of the Ministry of Land and Resources, the effectiveness ranking of which is relatively low, meaning that breaching the provisions of such documents does not necessarily result in invalidation of the contract or mortgage.

Pursuant to the current principles of China for the announcement of immovable property registration, so long as registration of a mortgage by the land authority has been lawfully secured, it is difficult to conclude that the mortgage registration is invalid on the basis of ministerial-level rules, regulations and regulatory documents. However, in the author’s experience, when soliciting investors and investment, local governments will undertake that they can mortgage reserve land to provide security for investors, but subsequently, when carrying out the registration procedures, the local land authority is unable to carry out registration as requested by the local government.

Careful analysis

Accordingly, the author would recommend that the investor carry out a careful analysis of a security plan involving the mortgage of reserve land provided by a local government, request that the competent local land authority issue an official document undertaking that it can carry out the procedures for registration of a mortgage of reserve land, and set the carrying out of mortgage registration as a condition precedent for substantive investment, so as to protect his or her lawful rights and interests to the greatest extent possible.