Nature and risks of urban renewal project co-operation contracts

By Fan Yongqiang, Chen & Co Law Firm

Urban renewal co-operation contracts in mainland China are made between parties that wish to make joint investments to obtain development and operation rights for projects to redevelop areas of cities and towns.

樊永强, Fan Yongqiang, Partner, Chen & Co Law Firm
Fan Yongqiang
Chen & Co Law Firm

Parties make their agreed investments and work together to get projects initiated in applications for approval, determination of the subject of the implementation, the execution of land grant contracts and planning for distribution of income.

According to the Interpretation of the Supreme People’s Court on the Relevant Legal Issues Concerning the Trial of Dispute Cases Involving State-owned Land Use Rights, co-operative real estate development contracts refer to agreements under which parties co-operate in real estate development primarily by way of providing land use rights and capital, sharing the expenses, profits and risks. The interpretation explicitly listed the sharing of expenses, profits and risks as a legal requirement for co-operative real estate development contracts. As such, co-operation contracts, being a type of a co-operative real estate development contract, shall comply with such requirements.

If under a co-operation contract, a party only provides land or capital for the project and enjoys a fixed or guaranteed return, but neither participates in its operation and management nor bears any operating risks or losses, courts will re-determine the nature of such contracts based on its actual content. For example, in the case of Tangshan ZhengjiazhuangVillage Committee v Tangshan Zhongtian Property Development (2016), the Supreme People’s Court determined the co-operation contract in question to be a land use right grant contract in nature.

Principal Risks

Unspecified terms. Urban renewal projects are often lengthy and complex, so drafting of co-operation contracts should strive to be detailed and comprehensive. This includes setting up requirements for different stages and a resolution mechanism for unpredictable events to avoid unspecified terms giving rise to disputes. For instance, during the co-operation for an urban renewal project, indicators for the target land may fall short of the urban renewal requirements, and a vast amount of money might be needed to buy sufficient qualified land. However, without any budget allocated for this expenditure or any clear determination of who will pay for it, a dispute could arise that leaves the entire project in deadlock.

Therefore, there must be adequate communication on all relevant issues in advance. Project scope, co-operation mode, investment ratio, construction scale, scheduling, planning conditions, financing plans, division in management, method of distribution, liability for breach of contract, dispute resolution and other such matters should be made explicit. In addition, adjustment mechanisms should be in place for timely co-ordination in response to new developments and formulation of supplemental agreements.

Joint and several liability. It is not uncommon for a party to be found jointly and severally liable for the debts of a project due to improper management, or that a party’s own debt problems lead to the seizure, freezing or enforcement of project assets or assets of other parties, causing the project to be put on hold indefinitely.

Therefore, necessary preventive measures should be taken in co-operative urban renewal projects. Co-operation via a project company is a preferrable option, as its independent operation provides vital risk isolation with the parties, avoids any confusion in personnel, finance, assets and financial accounts, and prevents the project from being used for external financing or guarantee.

Breach of contract. A number of reasons may lead to failure in fulfilling obligations, such as passive default due to financial difficulties or voluntary default out of self-interest. Tempted by greater interests, certain land resource holders may, despite having entered into co-operation contracts, sign and actually fulfill contracts with third parties, thereby causing irreparable damage to the other parties.

Therefore, liability for breach of contract should be refined in co-operation contracts, namely, parties should establish different liabilities catering to each default situation and pre-determine specific liquidated damages sufficient to cover actual losses for scenarios that may not be easily provable. A keen eye needs to be kept on any significant changes in other parties, such as key personnel changes, financial difficulties, or involvement in major lawsuits. In the event of any hindrance to co-operation, measures should be taken as soon as possible, including cutting one’s losses if called for.

Third-party reasons. The inability to fulfill the co-operation contract because of factors not attributable to any party, such as the government aborting the project or cancellation of the renewal plan, or a third-party claim or complaint over the project land, may be written off as a change of situation without any party held accountable for breach of contract. A party may nevertheless be held partially liable, such as if a third-party claim arises from failure to truthfully disclose defects in the ownership of the land and causes the project to stall.

Parties under co-operation contracts should properly perform due diligence beforehand and anticipate any risk from third parties. Different risks should be tackled correspondingly with explicit methods and paths of remedy. Any emerging risks should be resolved effectively and promptly, while for irreconcilable ones, correct remedial measures should be taken to prevent further loss due to improper rectification.

Fan Yongqiang is a partner at Chen & Co Law Firm

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