Risk assessment of land grant fee reduction and exemption clauses

Foreign investors involved in mergers and acquisitions (M&A) in China may find a land grant fee reduction and exemption clause existing in the investment agreement between a target company and the local government. This article analyses the behavioural nature and legal risks of such clauses.

Reduction and exemption

When a target company was embarked upon, the local government often agreed to set a land grant fee reduction and exemption clause in the investment agreement with the target company, for the sake of attracting business, urban redevelopment, restructuring of state-owned enterprises (SOEs) or other matters. Such a reduction and exemption clause was usually expressed in two ways:

In the first case, wording in such a clause was explicit and accurate with words like “reduction and exemption”, or their synonyms. In the second case, such a clause expressed its land grant fee reduction and exemption intention in an implicit way. For instance, in the investment agreement the target company and the local government first reached an agreement on the peak price for the land use right acquisition by the target company, and then the parties made an arrangement that if the target company’s cost for acquiring the land use right actually exceeded the agreed peak price, the local government would make a compensation to the target company in cash equal to the balance between the actual cost and the agreed peak price.

Zhang Jingping is a partner at Concord & Partners