Resolving land use deviations in infrastructure REITs

By Matthew Ching and Gu Mingwei, Jingtian & Gongcheng

Inconsistency between the actual use of land and its approved use as specified in the state-owned land use right certificate is a common issue in infrastructure REITs. Building on experience from the first batch of pilot infrastructure REITs in China and numerous IPOs, this article sums up the generally accepted solutions to this problem.

Matthew Ching
Jingtian & Gongcheng

According to the Land Management Law, any land-using entity or individual must strictly abide by the land use approved under the overall plan for land utilisation. If there is a legitimate need to switch the use, the entity or individual must seek approval from the competent authority of natural resources and the government that ratified the original use.

Inconsistency between the actual land use and the approved use as stated in the state-owned land use right certificate could result in the project company being ordered to return the land and fined by the competent authority of natural resources. Compliance of land use with laws and regulations is one of the basic conditions for launching an infrastructure REIT. Inconsistencies, if not properly resolved, will be catastrophic to the filing of the pilot project.

Some solutions

In the case of Bosera China Merchants Shekou Industrial Zone Close-Ended Infrastructure REIT, the land use stated under the real property ownership certificate is industrial, and the use of any buildings should be industrial, commercial, or as canteens.

However, buildings were leased to IT and cultural and creative companies as R&D offices, or for commercial or other supporting purposes, which deviates from their planned and approved use under the Bosera REIT.

To mitigate risks, China Merchants Shekou Industrial Zone Holdings, the original stakeholder, committed in writing to indemnify the project company for all losses (if any) suffered due to any inconsistency between the actual and approved use according to the state-owned land use right certificate. That commitment would remain valid until the expiration of the land use rights of all plots occupied by the REIT, including any renewal term.

Gu Mingwei
Jingtian & Gongcheng

In another example, in the CICC GLP Logistics Closed-end Infrastructure Securities Investment Fund, the plot occupied by the GLP Tongzhou OME Logistics Park should be used for industrial purposes based on the state-owned land use certificate. The nature of the buildings as recorded on the construction land planning permit should be industrial and ancillary premises. In reality, however, the buildings were used as logistics storage and supporting facilities.

In its official response to the issue, the Tongzhou office of the Beijing Municipal Commission of Planning and Natural Resources pointed out that the project had completed all planning procedures as verified by the Tongzhou office, concluded filing for final acceptance, and obtained all title certificates including the house ownership certificates.

All relevant operating requirements had been considered in the early stage of its construction, and the project is recognised for promoting the healthy and composite development of urban functions and the refinement of inventory space. Therefore, the Tongzhou office agreed to the GLP Tongzhou OME Logistics Park applying as a pilot REIT.

In the IPO of ZJAMP Group, certain buildings and lands of the issuer and its subsidiaries were used differently from their approved uses.

The Department of Natural Resources (DNR) of Zhejiang Province confirmed in its official reply that, according to its findings, the target company or its subsidiaries had not been subject to any penalty by the natural resource authority for violating any land management laws or regulations. Regarding the current issues with the use of land and premises by such companies, Zhejiang DNR would provide timely policy guidance to resolve the inconsistency in a compliant and satisfactory manner.

In addition, ZJAMP Holdings, the controlling shareholder of the target company, and Supply and Marketing Co-operative of Zhejiang Province and Hing Group, the actual controllers, committed that if ZJAMP Group or any of its subsidiaries within the scope of its consolidated statements were subject to any administrative penalty by the competent administrative authority as a result of failure to obtain the land use right/house ownership certificate for the relevant land/house, or any inconsistency between its actual and approved uses, they will bear all corresponding liabilities.

Applying to change use

In the IPO of Guangdong Feinan Resources Recycling, similar discrepancies between actual and planned use of land plagued a subsidiary of the issuer. Accordingly, the subsidiary of Feinan Resources filed for a change of land use.

The Urban and Rural Planning Bureau of Sihui agreed to change the nature of the land from “industrial” to “R-2 residential compatible with commercial and service facilities”. The change of land use received further approval in the official reply from the Sihui People’s Government and Sihui DNR.

Furthermore, given the significant differences between industrial and residential lands with regard to price and term of grant, the subsidiary of Feinan Resources re-entered into the State-owned Construction Land Use Right Grant Contract with Sihui DNR, pledging to settle the difference in land use right grant fee within 30 days from signing the contract.

Matthew Ching is a partner and Gu Mingwei is a paralegal at Jingtian & Gongcheng


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