Real estate finance law in China

Yes. Subject to foreign exchange regulations, security can be granted to a foreign lender.

In the People’s Republic of China (“PRC”), lenders can take a mortgage over land use rights, construction-in-progress and/or buildings on the land, but not over the ownership of the land. In the PRC, land is owned by the state in urban areas or by collective groups of people in rural areas.

There is no distinction in PRC law: mortgages over land use rights automatically cover buildings attached to the land concerned, and mortgages over buildings on the land automatically cover the land use rights of such land.

However, an existing mortgage of land use rights does not cover any new buildings constructed on such land afterwards.

Yes. In the PRC, mortgage of land use rights and buildings becomes effective upon registration. The PRC real estate registration authority will issue a mortgage certificate, i.e. the Real Estate Third Party Rights Certificate, with the value of the secured indebtedness shown on such certificate. Currently in general the cost of each mortgage registration of residential real estate is CNY 80 and of each mortgage registration of non-residential real estate is CNY 550. A mortgage cannot be transferred separately from the underlying indebtedness and transfer of the mortgage requires an amendment of the registration.

Yes. Second ranking mortgages on the same real estate can be taken. The registration is effected the same way as for the first ranking mortgage security. Priority is determined by the sequence of the registrations unless otherwise agreed by relevant parties.

Yes. Under PRC law, transfer of the mortgaged real estate requires only timely notification to the mortgagee unless otherwise agreed by the parties. If a mortgagee can prove that such a transfer may impair the mortgage right, it may request the mortgagor to pay off the debts to the mortgagee in advance with the proceeds derived from such transfer, or to deposit such proceeds with a third party for safekeeping. It is usual in commercial transactions for a lender to agree with the owner contractually on prior written consent of the lender on such a transfer.

Employee wages/compensations, taxes, social security payments and liquidation/insolvency expenses in liquidation/insolvency proceedings take priority over security rights of creditors.

Yes.

Yes. Rent receivables may be pledged in favour of a lender. Such pledge becomes effective upon registration with the Credit Reference Centre of the People’s Bank of China.

Yes. It is possible for a lender to take a pledge over bank accounts of the borrower. It is not unusual for lenders to contractually restrict rights to withdraw funds in accounts until the scheduled interest and capital repayments are made.

Mortgages over land use rights and any buildings attached to the land must be registered with the local real estate registration authority. The real estate mortgage contract in general shall become effective as of the date of signing and the mortgage shall become effective as of the mortgage registration date. The parties shall, within 30 days of the signing of a real estate mortgage contract, register the mortgage at the local real estate registration authority where the real estate is located.

Without registration, the real estate mortgage is invalid.

To establish a real estate mortgage, the parties to the mortgage shall sign a written mortgage contract. A real estate mortgage contract shall include the following items:

• name and domicile of mortgagor and mortgagee
• type and amount of the underlying indebtedness
• location, name, condition, building area, land area and boundaries (four boundaries/adjacent properties) of the mortgaged real estate
• value of the mortgaged real estate
• person in possession of the mortgaged real estate, method of possession and management, responsibilities of possession and management, and liability for accidental damage or loss
• term/period for the debtor to perform the debt obligations
• conditions for extinguishment of the mortgage right
• liability for breach of contract
• dispute resolution method
• time and place of conclusion of the mortgage contract
• other matters agreed upon by both parties.

There are no additional costs beyond registration fees.

Under any of the following circumstances, the security shall be additionally registered with the PRC foreign exchange authority:

• lender and borrower are both overseas entities and the security provider is a PRC entity, or
• lender is a PRC financial institution, borrower is a PRC non-financial institution and pledgor is an overseas entity.

Yes.

The new lender and the trustee shall enter into a new security trust agreement. No new security needs to be signed if the new and the previous lenders assign the mortgage as between themselves. However, the lenders commonly require the mortgagor to confirm that the change to the lenders has no effect on the existing security.

Subject to consent of the landlord, the tenant may sublease the leased property. In the case of a sublease, the leasing contract between the tenant and the landlord remains valid; and if the sublessee causes damage to the leased property, the tenant shall compensate for the losses. Where the tenant subleases the leased property without consent of the landlord, the tenant may terminate the lease.

The mortgagor and the lender may agree on enforcement of the mortgage, e.g. offset, auction or selling off the security. If no agreement is made or reached, the lender could apply to PRC courts for enforcement.

If the agreement has a foreign element, a foreign jurisdiction (either a court or arbitral tribunal) can be chosen to settle disputes. An agreement is considered as having a foreign element if:

• one or more of the parties are foreigners or stateless
• normal place of residence of one or more parties is located outside the territory of the PRC
• subject matter is located outside the territory of the PRC
• legal fact that gives rise to, changes or extinguishes the civil relationship occurs outside the territory of the PRC, or
• other circumstances constitute a foreign-related civil relationship.

The PRC Civil Procedure Law authorises recognition and enforcement of foreign judgements based on either a treaty obligation or a finding of reciprocity. Up till now, China has not yet acceded to the Hague Convention on the Recognition and Enforcement of Foreign Judgements in Civil and Commercial Matters (the “Hague Convention”).

Since the PRC is a contracting state to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958) (the “New York Convention”), a foreign arbitral award issued in another contracting state of the New York Convention shall be acknowledged and enforced in the PRC.

In general, PRC courts recognise and enforce the foreign arbitration awards as long as this aligns with existing treaties, e.g. the New York Convention, or is based on the principles of reciprocity. The PRC Civil Procedure Law authorises recognition and enforcement of foreign judgements based on either a treaty obligation or a finding of reciprocity. Up till now, China has not yet acceded to the Hague Convention. Given the above, the choice of foreign court to resolve disputes is not recommended in a China-related transaction.

In addition, it should be noted that for certain subject matters, PRC law is applied mandatorily, e.g. disputes related to property rights of real estate or a pledge of rights where such assets are located in the PRC. Under PRC law, disputes related to property rights (e.g. mortgage rights) of real estate in the PRC are exclusively within the jurisdiction of PRC courts if the parties concerned choose court to resolve disputes. However, parties to the dispute may choose foreign arbitration to resolve the disputes within the exclusive jurisdiction of PRC courts.

The mortgagor and the lender may agree on enforcement of the mortgage, e.g. offset, auction or selling of the security. Where the agreement is detrimental to the interests of other creditors, the other creditors may request the PRC court to rescind the agreement. It is not possible for a secured party to appoint receivers/liquidators. Security can be enforced directly without recourse to the courts and private sales of security are possible if the mortgagor and the lender agree so. Private sales include offset, auction or selling off the security.

The mortgagor is responsible for maintenance and insurance of the real estate after default until sale since the mortgagor usually takes possession of the property.

The mortgagor and the lender may contractually agree that the lender obtains good title to the real estate by offsetting the debt.

Foreign lenders should consider PRC foreign exchange controls, restrictions on land ownership and the complexity of enforcing security in cross-border transactions.

Assuming real estate is held in a locally incorporated single purpose vehicle to provide an alternative to enforcement of the mortgage over real estate:

Yes.

Yes. Share pledges usually rank in the order of creation (provided they are properly registered).

Share pledge registration procedures vary depending on the company type:

• shares of publicly-listed company are registered with the China Securities Depository and Clearing Corporation Limited (“CSDC”)
• shares of limited liability companies and unlisted joint-stock companies are registered with the local counterpart of the State Administration for Market Regulation (“AMR”).

Under any of the following circumstances, the security shall be additionally registered with the PRC foreign exchange authority:

• lender and borrower are both overseas entities and pledgor is a PRC entity, or
• lender is a PRC financial institution, borrower is a PRC non-financial institution and pledgor is an overseas entity.

Share pledges are created at the time of registration with AMR and failure to register a share pledge renders it invalid. If the share pledge is not registered with the foreign exchange authority (if required), the lender cannot receive any cross-border payment of proceeds from enforcement of the pledge.

To provide valid security, the parties shall conclude a pledge contract in writing to create pledge rights. A pledge contract shall, in general, include the following terms:

• type and amount of the secured debt
• term for performance of debt obligations by the debtor
• description, quantity and other information on pledged property
• guaranteed property
• time and method of delivery of pledged property.

Such pledge contracts need to be registered with AMR or CSDC to be effective. If required, registration with the foreign exchange authority shall also be made. The cost of registering a share pledge with CSDC is generally 0.01% to 0.1% of the total par value of the pledged shares. AMR and the foreign exchange authority do not usually require a registration fee for a share pledge.

No. A share pledge does not require the transfer of ownership of the shares to the lender under PRC law.

The pledgor and the lender may agree on enforcement of the pledge, e.g. offset, auction or selling off the shares. Where the agreement is detrimental to the interests of other creditors, the other creditors may request the PRC court to rescind the agreement. It is not possible for a secured party to appoint receivers/liquidators. Security can be enforced directly without recourse to the courts, and private sales of security are possible if the mortgagor and the lender agree so. Private sales include offset, auction or selling off the security.

Legally, loans from shareholders are not subordinated. However, it is possible to achieve this by contractual agreement. It is not customary for such loans to be waived or written off contractually as part of enforcement of a share pledge, should a default occur.

Legal issues that would be likely to impact upon the valuation and the security of income from an investment perspective.

Commercial and retail leases in the PRC (e.g. offices) are usually 3–5 years, while industrial leases are usually 5–10 years.

All terms are up to the statutory maximum of 20 years under PRC law. Any term exceeding 20 years is invalid for the excess period. There is no minimum length for leases; parties may agree on short-term leases (e.g. months or weeks).

What are the statutory controls and obligations regarding renewal/termination of leases, e.g. does a tenant have automatic right to renewal or can they apply to the courts for a new lease? Does some form of notice have to be served to terminate a lease to avoid renewal?

Tenants in the PRC do not have automatic right to renew leases. Tenants must renegotiate terms upon expiration unless otherwise contracted. Unless it is contractually agreed that the lease will renew automatically without the objection of either party, a party does not have to serve a notice of objection to avoid renewal.

Under any of the following circumstances, if the leased property cannot be used due to reasons not attributable to the tenant, the tenant may terminate the lease:

• leased property is lawfully sealed or seized by judicial or administrative authorities
• there is a dispute over the ownership of the leased property
• leased property violates mandatory provisions of laws or administrative regulations regarding usage conditions.

If the leased property is partially or completely damaged or lost due to reasons not attributable to the tenant, the tenant may request a reduction in rent or refuse to pay rent; if the partial or complete damage or loss of the leased property makes it impossible to achieve the purpose of the lease contract, the tenant may terminate the contract.

If the leased property endangers the safety or health of the tenant, even if the tenant was aware of the substandard quality of the leased property when entering into the lease, the tenant may still terminate the lease at any time.

In addition, tenants may terminate the lease early in case of a landlord’s material breach.

Notably, in practice, leases often include contractual break clauses with notice requirements.

No. If the landlord wishes to end the lease early where there is no tenant breach, it requires a contractual right to do so. There are no rent controls for property.

Rent is typically paid either quarterly or monthly in advance, but can be in arrears – it depends on what is commercially agreed between the parties.

To be determined commercially between the parties, but typically for leases in the PRC, rent is reviewed every 1-5 years.

As agreed between the parties, but typically upwards or downwards based on market rent. Rents linked to a tenant’s turnover are sometimes encountered in retail leases.

There is no mandatory rent control for property.

The landlord is typically responsible for maintenance and repair, unless otherwise agreed. The tenant may request the landlord to repair the leased property within a reasonable period of time when the leased property is in need of repair. If the landlord fails to fulfil the maintenance obligation, the tenant may carry out the maintenance on its own, and the maintenance cost shall be borne by the landlord. Where the maintenance affects the tenant’s use of the leased property, the rent shall be reduced or the lease term shall be extended correspondingly.

However, where the leased property needs maintenance due to the fault of the tenant, the landlord shall not bear the obligation of maintenance as specified in the preceding paragraph.

In addition, tenants should keep due care of the leased property, and shall bear compensation liability if the leased property is damaged or lost due to improper care.

See directly above.

The landlord is generally responsible for structural repairs, unless otherwise agreed.

It is usual but not mandatory for the landlord to insure the premises. The sharing of insurance premiums usually depends on what is commercially agreed between the parties.

Yes. In the PRC, landlords are subject to VAT on the leasing of real estate. VAT, as an indirect tax levied on landlords, will effectively be shifted to tenants. The VAT rate for general taxpayers is 9%.

Landlords renting out real estate acquired before 30 April 2016 may choose to be subject to the simplified taxation method and calculate VAT payable at the lower levy rate of 5%.

However, the new VAT Law to be effective from 1 January 2026 no longer provides for application of the simplified taxation method in this instance. Further clarification regarding the VAT treatment of leasing real estate acquired before 30 April 2016 may be provided by detailed implementation rules yet to be issued.

Apart from VAT and associated minor surcharge taxes, real estate tax shall be paid by the landlord for real estate leased out, calculated on the rental income from the property multiplied by the annualised tax rate of 12%.

Taxes are usually the responsibility of the landlord, but it is possible that the cost of real estate tax is already included in the rent charged and is therefore shifted to the tenant.

In addition, both the landlord and the tenant need to pay 0.1% stamp duty for the rental.

This is dependent on what is commercially agreed between the parties. The tenant will usually pay utilities (e.g. water or electricity fees) for the premises.

Where the landlord manages the property (which is usual where the premises form part of a multi-let building or estate), it will provide the services which usually include security, heating, lighting, repair/replacement of external and common areas and equipment. All such costs are usually recovered by way of charge of property management fees.

No. PRC court rulings are only for reference and do not constitute binding laws and regulations.

Appraisals must be prepared by a qualified real estate appraisal institution registered in the PRC.

An RICS report is not usually accepted or recognised in the PRC.

An environmental consultant may be appointed to undertake a range of different investigations and reports.

If the lender takes ownership of the land use right through enforcement, it may become liable for past environmental contamination contained within the land, unless otherwise agreed with the mortgagor.

Where there are present breaches of environmental law, it is assumed that whoever caused the pollution to the land should be liable, and when such responsible person cannot be identified, the owner of the land use right, including a mortgagee which is in possession of the land, would be liable.