‘Subway plus property’ model highlights land use obstacles

By Wang Jihong and Xie Yi, V&T Law Firm
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The current China land system, especially the Property Law provisions on the grant method for land of a business nature, means the “subway plus property” mode of build-operate-transfer (BOT) concession projects may encounter many legal obstacles.

Wang Jihong Managing Partner V&T Law Firm
Wang Jihong
Managing Partner
V&T Law Firm

Land grant method: The core of the successful “subway plus property” model implemented by the Hong Kong MTR is the promotion of concession rail projects by way of BOT. While granting the MTR Corporation rail line concessions, the government additionally grants the project investor construction land along the subway lines to subsidise the business deficits of the subway projects. In this way, the passenger numbers of the subway increase the value of the property along the lines, and the property along the lines drives the subway’s passenger numbers, allowing the subway operations and property development to complement each other and both derive the best investment returns.

Land of a business nature

However, China’s system requires the granting of land of a business nature by the invitation of bids, auction or listing on a land exchange. The second paragraph of article 137 of the Property Law specifies that land of a business nature – such as for industry, commerce, tourism, amusement and commercially developed residential premises, as well as land the use of which two or more parties have indicated an interest in – shall be granted by way of an open competition, such as by an invitation of bids or auction. If a government fails to adopt one of the above mentioned methods to grant land of a business nature, it will be in violation of the Property Law, giving rise to the legal risk that the grant contract will be found to be invalid.

Restriction on compensating subways with returns on land: in practice, a subway company can make up subway operating deficits with returns on the development of property along a line in one of two ways: (1) the company secures the land use rights and pays the entirety of the grant fee (or pays it later with government permission), with the returns on the development of the land and the increase in value vesting in the company; or (2) the company pays only a part of the grant fee to secure the land use rights and it is exempted from paying the remainder as compensation and, as before, the returns on the development of the land and the increase in value vesting in the company.

This author believes that, under the current land grant system, adoption of the first method does not require special government approval and is not subject to legal impediments, whereas the second method involves the refunding of land grant fees for which, at present, there is an absence of a clear legal basis. The land compensation in the course of subway development in certain cities has been troubled by the above-mentioned legal obstacles.

Land development schedule and combined construction: In the development of property along a line, and subway construction, there is a close connection in aspects such as development schedule, combined construction and bearing of expenses, but at present there are no regulations in this area. Accordingly, when a subway project involves a relevant circumstance – particularly when property is developed by an independent developer, or the subway project company and another developer co-operate in its development – pertinent provisions should be written into the relevant concession agreement or co-operative development agreement to avoid the occurrence of any disputes in the course of development that would affect the schedule. In the absence of laws and regulations, it is recommended that the parties make full use of the principle of “where there is no law expressly forbidding something, it is not a violation of the law”, and clearly spell out each other’s rights and obligations contractually.

Approval plan requirements

Project approval and planning authorities are recommended to put forward in their approval plans and opinions the corresponding co-operation requirements for the development of real property along lines that accompany rail transport projects. For example, from the start of the No. 2 line of the Tianjin subway, the use rights to the land along the line shifted to government invitation of bids, auctioning and listing on a land exchange, however the winner’s land development plan required the approval of the Tianjin Subway Group, in addition to that of the competent government authorities, thereby ensuring that the combined construction of the subway and the real property along the line was realised.

Xie Yi Lawyer V&T Law Firm
Xie Yi
Lawyer
V&T Law Firm

Bundled bid invitation method: This method involves the invitation of bids for two or more projects that are bundled together. There are examples of this practice in concession projects for sports fields and gymnasiums. This author believes this could also be tried in certain subway projects. As the bid invitation documents under this operational model require the bidder to have strong financing capabilities, experience in the construction and operation of subway projects, only truly qualified subway investors will be allowed to both secure the concession with a winning bid and the land use rights for the project for developing land along the line secured by way of an invitation of bids, auction or listing on a land exchange. However, this model is generally only applicable where the lots along the subway line have already been determined at the time of the invitation of bids, and is not applicable in circumstances where the land compensation is given in batches, and at different periods, or where the lots have not been determined.

Model where land is used as a capital contribution: Certain local governments have proposed a model where land would be used as a capital contribution and the government would establish the project company jointly with the winning investor to jointly develop the subway project. Under this model, the government has the relevant land use rights and injects them into the subway company as a capital contribution made in the form of assets. Land use rights in this form do not require an invitation of bids, auction or listing on a land exchange, and ensure that the project company lawfully secures the land use rights. There are many factors to be considered when adopting this operational method, for example the way the government’s equity is to be held, the value of the equity, the capital contribution percentages, the distribution of returns, etc., and they need to dovetail with the subway company’s overall structural design. Consideration must also be given to the factors that will contribute to the future increase in the value of the land when adopting this method.

Wang Jihong is the managing partner at V&T Law Firm and Xie Yi is a partner at the firm

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