Skipping bids and listing: how non-compliance affects property service providers

By Li Jing and Li Jumei, Grandway Law Offices
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A regular issue found with real-estate management companies that are considering listing relates to the engagement of property service providers by residential property construction companies without a due bidding process. Such non-compliance can have an impact on their listing prospects.

Laws and regulations

Under article 3 of China’s Bidding Law, competitive bids must be sought for “the survey, design, construction and supervision of the project and the procurement of important equipment and materials related to the project construction”. Notably, the provision does not mandate bidding for property services.

李静__Li_Jing__Grandway-S
Li Jing
Salary Partner
Grandway Law Offices

Article 24 of the Regulations on Management, meanwhile, stipulates that construction companies are encouraged to engage property service providers through bidding “according to the principle of separating real estate development from property management. Residential property construction entities shall engage property service providers via bidding. Where there are fewer than three bidders or if the residential scale is limited, the property service provider may be directly engaged via an agreement with the administrative approval of local real estate authorities on the district and county level.”

Additionally, construction companies in the same property management area “shall engage qualified property management companies via bidding”, according to article 3 of the Interim Measures for Bid-Inviting and Bidding Management of Preliminary Real Estate Management.

李居镁__Li_Jumei__Grandway-S
Li Jumei
Salary Partner
Grandway Law Offices

This adds that: “Where there are fewer than three bidders or if the residential scale is limited, a qualified property management company may be engaged via an agreement” with approval from real estate authorities at the district and county level.

Finally, article 56 of the Regulations on Real Estate Management spells out the penalty for violating these regulations. “If a residential construction entity fails to engage property service providers via bidding or, without due approval, engages a property service provider via an agreement, it will be ordered to make corrections within a timeframe by the county-or-above-level real estate authority under local administration, receive a warning and be subject to a fine of less than RMB100,000 (USD16,000)”.

It is, therefore, the construction company and not the property service provider that is liable for administrative penalties for violating the regulations.

Case analysis

Listing of property management companies (including on National Equities Exchange and Quotations, or NEEQ ). The prospectuses of Poly Property, Kyin Development and Jinmao Property may shed some light on how to resolve the above-mentioned non-compliance caused by skipping the bidding. The following are some of their justifications:

First, some property service projects were finalised before the Regulations on Real Estate Management and the interim measures came into effect, which makes them consistent with the legal provisions at the time.

Second, since the implementation of the regulations and the interim measures, it has been the construction entity deemed responsible for bidding for preliminary property service providers. Under current laws and regulations, the latter are not subject to such administrative penalties.

Third, whether the failure to go through the bidding process affects the validity of the preliminary property service contract entered into between the construction entity and the property service provider depends on the actual situation.

Fourth, the property service provider has continuously provided property services agreed upon under the preliminary property service contract. The property owner has raised no objection to the contract terms, and the services are being dutifully carried out without any disputes.

Fifth, even if the validity of the contract is affected, the effect on the overall business of the property service provider is likely to be modest, as the value, scale of the real estate involved and income contribution from such preliminary property service contracts are generally on the small side.

Judicial litigation. As for whether preliminary property service contracts that violate the regulations by skipping the bidding procedures are valid, judging from the relevant court precedents, judicial opinions centre on the following:

While preliminary property service contracts should be preceded by bidding under the regulations, these are of an administrative nature and do not determine validity. Therefore, the absence of bidding does not necessarily mean that the contract entered into between the construction company and the property service provider will be invalidated.

On the other hand, if the scale of property service is small, the provider may be directly selected via an agreement under the regulations.

Since the regulations are administrative provisions, courts generally hold that preliminary property service contracts entered into without bidding, while violating the regulations, continue to be valid.

In conclusion

If a property service provider finds its listing prospects troubled by non-compliance in signing the preliminary property service contract for residential property projects without the due bidding process, it can explore solutions from the following angles: the time of entering into the contract, the subject responsible for the non-compliance not being the property management company, favourable odds for the continuous performance of the property service contract, and the relatively small amount, property scale and income contribution of such non-compliant contracts.

Li Jing and Li Jumei are salary partners at Grandway Law Offices

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