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.

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.