Shenzhen’s ‘Floating House’ – My New Example of Administrative Uncertainty in China

2010-01-19

I'm always looking for good illustrations of legal cases to use in discussions with clients and in the classroom. A picture is worth a thousand words, you know.

Here's a good one from Shenzhen:

A luxury villa floating on the sea and built at a cost of almost 100 million yuan ($15 million) may be demolished because its developer did not obtain the correct building permit.

However, the owner, Guo Kuizhang, a successful businessman in the commercial real estate development industry, said the villa is legal as he produced documents during a press briefing yesterday.

"We have the approval from the oceanic administration of Guangdong to develop a high-end oceanic entertainment project," Guo said. "Because it's new and there were no related laws, the administration allowed us to take it on as a pilot in 2008." (China Daily)

This covers a lot of scenarios and is illustrative of several items:

1. Federalism – one of the most important topics in China law. Note that the floating house guy apparently went to one agency for approval and may be shut down by another part of the government. This is common and sometimes difficult to avoid.

2. No applicable law – the developer says that the law didn't cover what he wanted to do, so he obtained what he could from the government and moved ahead with the project.

I see this a lot with new technology. It's painful from a lawyer's perspective, when you essentially have to tell a client "Sorry, the law doesn't really cover this, and of course the government will not formally comment on the matter at this time." Clients have a tendency to get pissed off at their lawyers when they can't give them a straight answer on a regulatory matter. Ultimately it comes down to how much risk the client wishes to assume.

Of course, if something bad happens later on, it's the lawyer who gets blamed for it anyway. (Budding lawyers out there: make sure your risk analysis is in writing and your client acknowledges your conclusions – in writing!)

3. National treatment – Foreign investors are not the only ones who have trouble with legal uncertainty and government approvals. The situation here involved a domestic property developer who (I assume) had enough juice to get a preliminary approval document from some part of the government. The document was worthless (of course), but the fact that he got it in the first place says something. A foreign company probably wouldn't have gotten even that far.

I wish I could say that I had some perfect advice for foreign investors hoping to avoid these situations. I don't, and I would caution skepticism if any lawyer or consultant claims to know all the answers either.

My only suggestion is to be careful and perform as thorough a due diligence investigation as possible (given resources and time) prior to jumping in on a deal that involves this sort of uncertainty.

Additionally, if you ever get any sort of "approval" from a government authority, investigate the shit out of it, particularly if it has been issued by local authorities.

No magic bullets. Do your homework, be aware of what could happen if things go bad, and know your company's tolerance for risk.

That picture of the floating house is going to look great on a Powerpoint slide, eh?

Tags: China Law