Crackdown on converted Shanghai apartments highlights legal risks for buyers

The controversy over the Chinese government’s crackdown on converted residential projects in Shanghai shows no sign of abating with the developers locked in complicated disputes with buyers.

The projects are developed on plots acquired as commercial or office land and have become a popular product in the country’s biggest cities where residential land supply is disproportionately low and homes built on such land are subject to purchase restrictions.

For too long local governments have been tolerant of such practises as they facilitated the sale of commercial or office land that generated tax revenues for the city. But under unprecedented pressure to rein in property speculation and soaring home prices, the tacit consent is beginning to fray.

Since January sales of these so-called alternative projects in Shanghai have been banned. Authorities in the city’s Minhang and Jiading districts went a step further in February, giving developers 15 days notice to tear down partitions and remove plumbing and gas pipes in the apartments to restore the office contours.

Beijing and Shanghai clamp down on selling apartments built on commercial land

However, the problem is that many of the apartments have been sold. Some buyers even paid extra money for decorating and have moved in. Of the 27 projects in Minhang that are under order to dismantle residential fittings, 15 have been sold. So far, only a project from Greenland Holdings has offered a concrete compensation plan: those who give up their ownership can recover their full payment, while those who accept the reconstruction can receive compensation for their investment in decoration.

The offer has failed to pacify owners. Of the 300 owners in the Greenland project who have either moved in or are in the decoration phase, most have refused to give up their ownership and declined the developer’s compensation plan, citing the time they have put into the investment, according to Chinese media reports. Greenland officials couldn’t be reached for comment.

Experts said the case underlined the legal and financial risks inherent in such converted apartments, whose transactions account for about one third of the entire market in Beijing and Shanghai.

Bao Hua, a lawyer with Anli Partners and chairman of the property law committee under the Beijing Lawyers Association, told the South China Morning Post that developers can usually pass the city planners’ “acceptance check” of finished work at that stage because the buildings still resemble an office. Then they “decorate” the buildings with extra lofts, partitions and install plumbing and gas pipes. Undermanned supervision means this additional work is difficult to keep track of.

When everything is going smoothly developers and buyers co-exist in the “grey areas”, but when regulations tighten, such as in the Shanghai case, buyers may find it difficult to blame developers and retrieve all their losses because the purchase contracts they signed may have violated government regulations in the first place, Bao said.

“For some features that developers promised would be added to the units, such as lofts, the buyers might not have known they cannot be installed in ‘offices’. But for other features, such as gas pipes, buyers can’t say they didn’t know these can’t be for ‘office’ use. In these cases buyers accepted the developers’ violations from the very beginning,” Bao said.

He said past experience showed that buyers usually can’t receive full compensation in these cases.

The risk also threatens developers as they might have to accept the return of the unit, or provide partial financial compensation to minimise reputational damage even if legally they don’t assume all responsibility. A report by consultancy CRIC said the Shanghai developers expected to be hit hard in these cases included Greenland, Longfor Properties and Henderson Land Development. Sales of these types of units accounted for 92 per cent of Longfor Properties’ total Shanghai sales in 2016.