When Chinese enterprises invest in Pakistan’s energy and infrastructure sectors, including in power stations, roads or port industrial zones, the first thing they must face and solve is the land issue. The principal legal system governing land in Pakistan is a mixture of national land laws and local ordinances and regulations.
For example, the federal government may have ownership of some land in a province, and the transferring and leasing of that land needs to comply with land regulations of the federal government, while its land registration and tax-related matters are subject to provincial regulations.
Pakistan holds an open attitude towards foreign investors acquiring local land. The only difference between non-resident and Pakistani nationals in the land law regime is that non-resident enterprises’ possession of real estate in Pakistan must be approved by the Ministry of Interior. Subsidiaries set up by foreign investors in Pakistan are regarded as local enterprises, and the approval of the Ministry of the Interior is not required when acquiring land by setting up subsidiaries.
In public-private partnership (PPP) projects with government participation, land can be provided by the government. The government may also take private land for public purposes under the Land Acquisition Act 1894. However, the land requisition procedure and compensation mechanism stipulated in the Land Acquisition Act of 1894 are extremely complex, and include a lengthy objection mechanism. Therefore, in most cases, even PPP projects, the project land is acquired by investors themselves.
It should be noted that according to Pakistani law there is no concept of absolute private land, and the absolute ownership of all land belongs to the government. Private land property rights are only in leasehold, leasing up to a maximum of 99 years.
It is important to note that section 14 of the Transfer of Property Act in Pakistan forbids the rule against perpetuity. Hence, automatic renewal of land leases upon expiry to achieve permanent access to land is not allowed. However, the act also provides an exemption for this rule under section 18, which assists the transfer if it can be shown that the transfer in perpetuity is in the interest of the public and community.
Land rights must be registered. Under the Transfer of Property Act and the Registration Act of Pakistan, a deed of sale is not entitled to transfer without being registered. Legal documents relating to the transfer of land ownership shall be registered with the registrar within four months from the date of signature, otherwise the documents shall be automatically invalid.
There has been a case where a Chinese company signed a land lease agreement and did not register it in time, until the project was already in legal due diligence process at the financing stage. The company had to re-sign the land lease agreement, which required the repeated payment of stamp duty, resulting in an extra payment of more than US$200,000.
The transfer of land ownership shall be conducted in written agreement. In Pakistan, land transactions must be carried out through written, legally binding instruments. The Transfer of Property Act expressly requires that the transfer of ownership be conducted by a formal and legal ownership transfer contract.
Stamp duty of land transfer documents. According to the Stamp Act, stamp duty must be fulfilled on the sale, lease and mortgage of land, and the subject who signs the document without paying the stamp duty is liable. Transaction documents subject to stamp duty include, but are not limited to, memoranda of agreements relating to real property, lease agreements, transfer documents and transfer certificates of title.
Although non-payment of the duty does not affect the validity of the transaction, instruments for which the full stamp duty has not been paid may be impounded, examined and charged with duty and a fine of up to 10 times the duty that ought to have been paid, which may be imposed by way of penalty. At the same time, individuals who sign relevant agreements may also bear corresponding legal liabilities.
Land due diligence
Although Pakistan’s deed registration system requires land transaction documents to be registered, there is no unified national land registration information for enquiry. That is to say, the land purchaser cannot inquire about the land information by informing the land registration department of the location of the plot, but must verify it with the land registration department according to the registration documents provided by the land transferor.
Bearing a long history, the system originated in the British colonial era in 1882, where some land transactions and registration documents were lost, which brought great difficulties to the verification of land registration for investors. In practice, some Chinese investors may have to pay several people who claim ownership of the land at the same time in order to push forward the progress of the project.
In view of this, it is suggested that Chinese investors conduct a comprehensive and thorough due diligence before acquiring land in Pakistan, to ensure clear ownership and avoid future disputes. In land due diligence, not only should investors verify the title of the current owner, but also the historical owners, and whether the previous changes of ownership meet the legal requirements, so as to avoid the sudden emergence of new land claimants after the completion of the transaction, which will hamper the progress of a project.
While conducting the due diligence, it is important to check with local officials (town nazim) on whether the fees involved have been paid, and whether there exists encumbrances, and request them to issue a no-objection certificate that allows the handling of the land.
As for acquiring property from a company incorporated in Pakistan, the acquirer should verify from the Registrar of Companies at Securities & Exchange Commission of Pakistan that the property is not mortgaged, or is not being used as a security against a loan, otherwise it will not be considered as a freehold property.
In recent years, the governments of Punjab and Sindh have been making greater efforts to simplify land administration, and the property registers kept by the provincial revenue offices are gradually being digitized, with success to some extent, making land registration documents more accessible and accurate. However, these reforms remain in their infancy, and the prevailing system is likely to continue for a considerable period of time.