Compliance in acquisition and restructuring of real estate intermediary firms

In a bid to access the capital markets, certain well-known real estate intermediary firms, such as Qfang.com and 5i5j.com, have taken the lead in dipping into the arena through acquisitions/restructurings. They see acquisitions/restructurings as important means for access to capital markets for their obvious speed, convenience and efficiency. From the cases of Qfang.com and 5i5j.com, which our law firm handled, it is evident that real estate intermediary firms are characterized by such industry features as numerous outlets, large personnel turnover, multi-headed industry regulations, etc. Against a rapid change in the landscape and continuous tightening in industry regulations, if a real estate intermediary firm wants to gain access to the capital markets through an acquisition/restructuring, a common issue that cannot be ignored is whether its operations are compliant.

Common compliance issues

A majority of compliance issues that real estate intermediary firms face is the operations of their outlets. Among the more common issues are the following:

Site selection. Certain outlets only consider such commercial factors as location, foot traffic, etc, when selecting sites, while ignoring such issues of legality as to whether a real estate certificate has been secured for the property in question, whether the purpose thereof is commercial, whether the written consent of the original lessor has been secured for the sublease, etc. This results in the lease of real estate, the title to which, or purpose of which, is defective and, in the course of operations, facing such possibilities as being unable to secure a business licence or receiving fines from the administrative authority for the unlawful use of the real estate.

Fitting out. As fitting out work at an outlet is deemed to be construction work, if, depending on the area being fitted out and the height of the building, such works reach the prescribed threshold, fire safety design review and final fire safety acceptance need to be carried out with the fire safety authority of the public security authority. Failing this, the fire safety authority will order rectification and assess administrative penalties.

Opening for business. Certain outlets have had the administration for industry and commerce refuse to carry out the procedures for a business licence due to their leasing of defective real estate, subleasing real estate for which the written consent of the original lessor was not secured or other such reason, thus constituting operating without a licence.

Operations. For a variety of reasons, certain outlets have been ordered by such administrative authorities as the administration for industry and commerce, urban administration authority, housing and construction authority, premises administration authority, etc. to rectify the matter and assessed administrative penalties for such violations of laws or regulations as posting housing resources in an unlawful manner, affixing advertisements in an unlawful manner, failing to post fee items and price information in a prominent location on their premises, unfair competition, indiscriminate charging of fees, reaching price agreements with other intermediaries, etc.

Recordal. Although laws and regulations do not specify recordal of a real estate brokerage as a precondition for commencing operations, the overwhelming majority of competent local real estate trading authorities still require real estate brokerages and their (sub-)branches to carry out prompt recordal, failing which their qualifications for online signing in real estate transactions will be affected. Certain real estate intermediary firms and their (sub-)branches have been unable to carry out prompt recordal for such reasons as an insufficient number of brokers, failure to secure a business licence, etc., having an adverse impact on the normal operation of their real estate trading business.

Compliance tips

In light of the defects commonly seen in the compliant operations of real estate intermediary firms and the successful Qfang.com and 5i5j.com cases, the authors would recommend that such firms take the following measures to ensure compliance:

Firstly, establish and improve a procedure for the opening of outlets and a system for approving the commencement of operations, to obviate outlet opening compliance risks from the very outset. When the opening of an outlet involves such issues as selection of the site, fitting out, securing of a business licence, etc., the real estate intermediary firm should establish a sound internal outlet opening approval system, incorporate the compliance requirements in respect of site selection and fitting out as preconditions for outlet opening approval, and specify that operations can only begin after the business licence has been secured, thereby obviating the compliance risks at the outlet opening stage from the very outset.

Secondly, formulate management procedures for the acts of outlets and incorporate compliant operation as one of the indicators for evaluating the performances of outlets so as to ensure the compliance of their various business acts. As the business acts of an outlet involve multiple competent authorities and the laws, regulations and prior approvals involved are not all identical, we would recommend that a real estate intermediary firm break up the management of the specific business acts of its outlets into categories, dividing them, for example, into: (1) matters that an outlet must carry out, e.g., leasing of lawful real estate, securing a business licence, carrying out the recordal of a brokerage and fire safety recordal, posting of prices, wearing of work permits by employees, etc.; (2) acts that an outlet may engage in only after securing the prior approval of the competent administrative authority, e.g., erecting outdoor advertising signs, posting advertisements, etc.; and (3) acts that the industry association and laws and regulations prohibit an outlet from engaging in. A real estate intermediary firm may combine the foregoing categories of matters, internal approval procedures and outlet performance evaluations to achieve orderly management and effective performance of the various acts of its outlets.

Thirdly, improve the personnel management system and ensure the compliance of the practice acts of its employees. Notwithstanding the fact that laws and regulations and the industry association have relatively detailed provisions governing the practice acts of employees, in practice, many employees fail to provide services to the parties to a real estate transaction in strict accordance with the performance codes. We would recommend that a real estate intermediary firm establish a set of sound codes of conduct and management systems for its employees and, by combining the practice acts and performance evaluations of employees, procure compliant practice and strict implementation of the company’s rules and regulations by them.

Zhou Tao is a partner and Yuan Yueyun is a salary partner at Grandway Law Offices