GROWTH AND INNONVATION OF LAND TRUST SYSTEM IN CHINA
Yu Chaoyin
TABLE OF CONTENTS
I. INTRODUCTION
II. THE BACKGROUND OF THE EMERGENCE OF LAND TRUST IN CHINA
A. The Contemporary Land System in China
B. The Emergence of Land Trust
III. THE STATUS QUO OF LAND TRUST IN CHINA
A. Land Trust of Shaoxing Model
B. Land Trust of Yiyang Model
C. Land Trust of Zhongxin Model
IV. LEGAL ANALYSIS OF LAND TRUST IN CHINA
A. The Purpose of the Land Trust
B. Trust or in the Name of Trust?
C. Legal Analysis of Land Trust in China
V. LAND TRUST IN AMERICA
A. The Illinois Land Trust
B. Land Conservation Land Trust
C. Community Land Trust
D. Lessons from the American Land Trust
VI. MEASURES TO IMPROVE THE CHINESE LAND TURST
A. Change the Status of Peasants in the Land Trust
B. Organizational Innovation in Land Trust
C. Governmental Support to the Land Trust
VII. CONCLUSION
From the beginning of the 21st Century, various forms of land trusts began to appear in some areas of China as the result of rural land reform. Land trust models all have defects which result in peasants contributing their rights to land contractual management but not benefitting fully from the increased agricultural production that ensues. They are not precisely settlors under existing land trust models so they are not able to exercise many control rights normally available to trust settlors. Nor are they exactly the beneficiaries so they do not get the full economic benefit from the rights they contribute. The key challenge for Chinese land trust is that trustee cannot easily negotiate with individual peasants and the land trust models cannot easily negotiate with individual peasants. Unit trust or similar models may be an avenue to avoid the transaction cost difficulties, an approach that does indeed seem promising.
I. INTRODUCTION
From the beginning of the 21st Century, land trust emerged in the circulation of farmland in various regions of China, in the course of which various models of land trusts came into being. The Chinese land trust has been a hot topic in the academic circle with increasing attention given to them. The purpose of this paper is to find some methods to improve the Chinese land trust by analysis of their mechanism with that of American land trust. Chapter II of the paper introduces the background of the emergence of Chinese land trust, in which it generalizes the land system of China. Chapter III represents the three typical models of land trust that operate in various parts of China. Chapter IV tries a legal analysis of the land trust from the standpoints of settlor, trustee and beneficiary of the land trust, points out the shortcomings and unreasonableness in the operation in the land trust. Chapter V analyzes the general operation of three kinds of land trust in America and tries to find out their general characteristics. Chapter VI discusses how to improve the operation of Chinese land trust.
II. THE BACKGROUND OF THE EMERGENCE OF LAND TRUST IN CHINA
A. The Contemporary Land System in China
The Constitution of the People’s Republic of China provides that China adopts the public ownership of land system in which the urban land belongs to the state and rural land belongs to the peasants collective entity, such as the village, peasants group or peasants cooperation. The provision is reaffirmed in several other acts, including the Land Administration Law of the People’s Republic of China and the Property Law of the People’s Republic of China (hereinafter referred to as the Property Law).
Under Chinese contemporary rural land institution, the ownership of land belongs to the rural economic collective organization (the RECO). Before the Chinese rural land reform in which the household contract responsibility system was established in 1980s, peasants worked as RECO members on the land and shared the yields of land. In fact, peasants were recognized as the owners of land in political sense, but they were not vested any right on land by legislation before the enactment of the Law on the Contracting of Rural Land of the People’s Republic of China (hereinafter referred to as the Rural Land Contracting Law) in 2002. The law creates a new type of right for the peasants, the right to land contractual management (LCM), which was reconfirmed by the Property Law which was enacted in 2007. Under the Rural Land Contracting Law, the right to LCM could be transferred by subletting, leasing, exchanging, transferring or other means permitted by the relative law. Under the Property Law, the right holders can enjoy the rights to possess, use and take benefit from the land.
B. The Emergence of Land Trust
With the deepening of economic reform and sustaining development, increasing Chinese peasants left the land to work and live in the urban area. At the same time, the importance of land to peasants decreases while the gap between the income of peasant worker and the value of output of land becomes larger and larger. The intention of peasants to work on the land decreases and increasing land have been left barren for a long period in some regions of China, which stimulated various circulations of right to LCM, such as subletting, leasing, exchanging and transferring. This paper mainly focuses on a new form of transfer of right to LCM, land trust, which started to emerge in China from the beginning of the 21st Century.
III. THE STATUS QUO OF LAND TRUST IN CHINA
From the beginning of the 21st Century, various kinds of land trust began to appear in some areas of China, which could be classified as the Shaoxing Model, Yiyang Model and Zhongxin Model.
A. Land Trust of Shaoxing Model
Shaoxing, a city in Zhejiang province, located in the east part of China, was said to be the first one to use trust mechanism to facilitate the transfer of right to the contracted management land. In 2001, Shaoxing adopted trust mechanism in the transfer of right to LCM creatively. The process includes the following stages. Firstly, the peasants who would like to transfer their rights to LCM lease the rights to the village economic co-operative. Then the co-operative trusts the leased lands to the trust agents of the town after rearrangement and optimization of the lands. In the third step of the process, the trust agent of the town organizes the leaser, the co-operatives and leasees, some individuals who are good at agricultural management to sign a land lease, under which the leasees engage in agricultural activities on the leased lands, such as planting crops or vegetables, and pay the rent at the end of each year. In this model, the legal relationships involved are complicated. The lease of right to LCM binds the peasants and the village economic co-operative in the first stage. The trust contract signed between the village economic co-operative and trust agent enumerates the rights and duties of parties for the second step of the process. The last contract made between the village economic co-operative and big leasees accomplishes the whole process and make up the main body of the program.
B. Land Trust of Yiyang Model
The land trust of Yiyang Model, sometimes called Caowei Model, came into being in 2010 in Yiyang, a city in Hu’nan Province, which is located in the central part of China. The peasants who intend to transfer their rights to LCM conclude a trust agreement with the Land Trust Corporation which was established by the local government. The Land Trust Corporation leases the trusted lands to the large leasees for agricultural purposes and at the beginning of each year collects the rents which will be distributed to peasants transferring the right to LCM as beneficiary. In this type of land trust, the legal relationship seems much simpler compared to the Shaoxing Model. The first-tier legal relationship, trust relationship exists between the peasants transferring the right to LCM and the trust corporation, in which the trust corporation would take over the rights on the lands and would be responsible for the management of land and income distribution to the peasant. The second-tier legal relationship adjusts the lease between trust corporation and leasees.
C. Land Trust of Zhongxin Model
Zhongxin Model land trust has a professional trust corporation playing the role of trustee. The establishment of this type of land trust involves the following procedure. Firstly, sublet agreement of right to LCM is concluded between the village committee and the peasants who will transfer their rights to LCM. Secondly, the village committee makes an Agreement of Entrusting Management of Land with the borough government. Thirdly, being the settlor and beneficiary of the trust, the borough government makes a trust agreement with the CITIC Trust Co., Ltd. (CITIC Trust). Finally, the CITIC Trust leases the trusted lands to another company or entity to manage and cultivate the lands.
Besides the CITIC Trust, many other professional trust companies participate in land trust practice, including the Beijing International Trust Co.,Ltd., COFCO Trust Co., Ltd. and China Jianyin Investment (JIC) Trust Co., Ltd. Every trust company designs a special structure for its land trust. For example, the Beijing Trust devise a double co-operatives mode, in which the peasants form themselves into a land co-operative by transferring their rights to LCM to the co-operative as shares, and land co-operative trust the right to LCM to Beijing Trust which in turn leases the land to a professional co-operative to manage and cultivate. In this mode of trust, the land co-operative creates the trust as settlor and receives the benefits as beneficiary.
IV. LEGAL ANALYSIS OF LAND TRUST IN CHINA
A. The Purpose of the Land Trust
The purpose of Chinese land trust used in China is different from that of land trusts in common law countries. Use, the forerunner of modern trust, performed some tricks as a modern trust does to serve the purpose of evasion of feudal incidents, acquiring a power of free disposition and making secret conveyancing of land possible. The trust concept was employed in strict settlement of land for the achievement of aim of dynasticism and maintenance of association between male lines during the 17th Century to 19th Century. During the 18th and 19th Century, trusts were used to avert the danger that the heir’s spend thrift conduct that would cause breaking up family assets. By the 1950s, trusts had been shifted to avoid the heavy burden of tax.
The purpose of Chinese land trust is to facilitate the circulation of right to LCM, which is necessary to achieve the goal of agriculture modernization. Under contemporary land institution, every family cultivates a small piece of land. Fragmentary management and cultivation on the lands blockades the adoption of new technology and the intensive management in agriculture, which will delay the accomplishment of modernization of agriculture in China. Intensive management needs the centralization of lands.
B. Trust or in the Name of Trust?
Land trust can play some positive roles in Chinese rural development. The rural economic organizations own the ownership of rural land which could not be sold or transferred. But under the Rural Land Contracting Law, the right to LCM could be transferred. According to provisions of the Trust Law of the People’s Republic of China (hereinafter referred to as the Trust Law), property rights could be trust property. The right to LCM could be trust property and the establishment of rural land trust is feasible and reasonable. Generally speaking, Chinese legislation has provided the legal foundation and economic basis for the establishment of land trust. The land trusts can protect the interests of peasants, accelerate the accomplishment of modernization of agriculture and enhance the social security function of lands.
Legal foundation and economic basis are the prerequisites for the operation of land trust. But they do not guarantee the land trust will proceed under trust conception and trust law. Some critical research pointed out that some land trusts in China were not trust at all. The Shaoxing Model and Yiyang Model were just the circulation of farmland in the name of trust. Even in the Zhongxin Model, a professional trust company acted as the trustee, the land trust did not meet the requirement of the relative law. In this model of trust, the borough government made a trust contract with the CITIC Trust as grantor. In fact, the borough government did not own the right to LCM and was just entrusted to manage the right to LCM. The trust property should be legible property rights owned by the settlor. The trust established between the borough government and the CITIC Trust did not have qualified trust property.
Trust or in the name of trust, it is a critical question. Trust conception has never been so close to the rural area of China and the practice of trust is a significant opportunity to disseminate the trust conception. But only the correct trust conception and principles could make trust survive in the long-standing rural land reform. So, the legal analysis of land trust in China is necessary.
C. Legal Analysis of Land Trust in China
1. Settlor. — Except the Yiyang Model, the peasants who transfer their rights to LCM could not take the status of settlor in the trust. The reason is obvious, because the trustee hesitates to conclude the contract with individual peasants due to the high cost of negotiation. At the same time, peasants have so little knowledge of trust that they do not know what settlor in the trust means to them.
The rights of peasants on the farmlands changed dramatically in the year of 2016. From the 1980s, the ownership of farmland belongs to the RECO and member peasants enjoy the right to LCM. In order to facilitate the circulation of farmland, the two ‘General Offices’ issued the Opinions on Improving the Measures for Dividing into Ownership, Contracting Right and Management Right in Rural Land (hereinafter referred to as the Opinions). According to the Opinions, the right to LCM is divided into contracting right and the management right. In the age of ‘two rights division’, the trust property is the right to LCM, while in the age of ‘three rights division’ the trust property changes to management right. The right to LCM or land management right is possessed by peasants.
The most unreasonable part in Chinese land trust is that trust property originates from the peasants’ rights to LCM, but the peasants are neither the settlor nor the beneficiary of the land trust. In the Shaoxing Model, the village economic co-operative made a trust contract with trust agent of the town as the settlor, but in the Zhongxin Model the borough government played the role of settlor in the farmland trust. A few problems have emerged in the settlor arrangement in the Chinese farmland trust from the point of view of theory and practice.
First of all, the interests of peasants decrease because of the agent cost. It is obvious that the RECO and the borough government act as the agents of peasants transferring their rights to LCM to the trust. In the view of agent cost theory, the agent has different interests from its principal and is not always acting in principal’s best interest. It is impossible for the village economic co-operative and government to have identical interests with peasants in every situation. In the Zhongxin Model, the peasants only received the rents under the contract signed between them and the village committee. But the borough government, being the settlor and beneficiary of the trust, could enjoy extra interests after distributing the rents to the peasants. It is similar to the village committee which acted as the settlor in the land trust, since it could make use of its status to damage the interests of peasants. The interests of peasants are not fully protected under the contemporary arrangements of settlor in the land trust.
Secondly, the settlor in the land trust is not fully legally qualified. Under the Trust Law the settlor must use its own property or property right to set trust. If the RECO or the borough government takes the position of settlor of the trust, they have to possess the right to LCM to be transferred to the land trust. Under current Chinese land institution, the RECO possesses the ownership of the land and the right to LCM belongs to peasants. The borough government is not vested any right to the rural land. Neither the RECO nor the borough government possesses the right to LCM. Can the RECO and the borough government be assignee of the right to LCM? Under the Measures for the Administration of Circulation of Rural Land Contracted Management Right, the assignee of the right to LCM should possess the capacity of agricultural management. In the Zhongxin Model, the borough government, being the assignee of the right to LCM, have not the capacity to conduct any agricultural management. Under the Contract Law of the People’s Republic of China, any contract which violates the compulsory provisions of laws and regulations should be null and void. The trust property is the right to LCM or the land management right, the village committee, the town government and the borough government are not qualified to be the assignee of the rights. If the peasants make a claim to restore the right on the land after the RECO or the government concluded the trust contract with the trust company, the trustee could not deny peasant’s assertion because the sublet contract between the village committee and the borough government is null and void.
Thirdly, the peasants transferring their rights to LCM will lose the chance to control the trust if they cannot take the status of settlor in the land trust. Different from the Anglo-American trust law, trust law in civil law countries, such as Japan, South Korea, and China, settlor of the trust enjoys some statutory rights. Under the Trust Law, the settlor has the right to know, the right to adjust the way of management of trust property, the right to recession, the right to dismiss trustee, the right to change beneficiary and distribution of benefits. Maintaining the rights of settlor in trusts in China lies in three aspects: First, being the provider of trust property, the loss of control of trust property and supervision to trustee does not accord with eastern culture tradition. Second, it is necessary to vest some rights to settlor in order to protect the interest of unborn and disabled beneficiaries. Third, the credit system is not perfect in contemporary China, and settlor can exercise the rights to prevent the abuse of trust property by trustee. The rights of settlor in trusts represent a balance between the settlor and the trustee, which provides the settlor with a self-help mechanism against the trustee. The trust property is the peasants’ rights to LCM or land management rights, if the peasants cannot take the position of settlor, they will lose one chance to maintain their rights and interests in the land trust.
Lastly, the fact that the RECO or the government (including the government-sponsored entity) takes the status of settlor of land trust diminishes the opportunity to disseminate trust conception. With the accumulation of wealth of the Chinese people, the need of trust will expand with the dissemination of the trust conception among the civil society. The land trust provides a good opportunity for the peasants to get in touch with trust. But the current land trust mechanism excludes the peasants from structure of the trust. Now the RECO or the government takes the peasants to be the settlor, and it will lead to the miss of a good opportunity to disseminate the trust conception. If the peasants take the position of settlor of trust, they will get the opportunity to get familiar with the function and operation of trust and trust will find its way of development into the civil life of the Chinese people. If governments participate in the land trust in the position of settlor, malposition of the roles of government is eventually inevitable, which will produce some negative consequences.
2. Trustee. — The appointment of trustee is very important since the trustee not only has the power to decide the beneficial entitlement but also is responsible for the trust administration. Certain qualification and capacity are required for the trustee to manage the trust according to the function and purpose of trust.
The trustee in every model of Chinese land trust has its unique function. A trust agent in the Shaoxing Model, acting as a trustee in the trust, has two main functions: The first one is to facilitate the circulation of right to LCM, since the transferee need not negotiate with numerous peasant transferors. Second, the government-sponsored background of the trust agent makes the operation of the land trust more easily and smoothly for the higher creditworthiness due to the governmental background. The trustee in the Zhongxin Model, CITIC Trust, does not have the capacity to cultivate and manage the farmland actually and it just sublets the land to another agricultural company. Being a financial company, CITIC Trust can make use of its financing capacity by issuing collective fund trust plans to raise fund to support the operation and the management of land. The CITIC Trust designs a complicated structural trust to ensure the operation of the land trust. There exist several academic concerns about the trustee in Chinese land trust.
The first one is whether trust companies or trust agents which act as trustees in the land trust should meet some legal requirements. Under the Notice of the General Office of the State Council on Issues concerning the Enforcement of Trust Law of the People’s Republic of China, no legal entities or individuals could take up trust business in any form without the approval of the People’s Bank of China or the Chinese Security Regulatory Commission before the promulgation of regulations of trust institutions. Under the Measures for the Administration of Trust Companies, any institution or individual is prohibited from carrying out trust business and using ‘trust company’ in its name unless they are permitted by the China Banking Regulatory Commission (CBRC).
In the Yiyang Model, the local government established the trust company which acted as the trustee in the land trust. One predicament for trust company in land trust is that trust company appears in the name of the company, which violets the mandatory provision of the Measures for the Administration of Trust Companies. For the establishment of trust company has not got the approval from the CBRC, which leaves the establishment and operation of trust company seemingly illegal. One point of view defending the trust company in the Yiyang Model points out that the trust company regulated under the Regulation of Administration of Trust Company belongs to financial institution and should obtain a financial permission certificate before its establishment. But the trust companies established by local governments just acted as trustees in land trust and it did not do any financial business. Then for a trust company in land trust it was not necessary to get the approval from the CBRC.
According to the common practice of most countries, the establishment of a venture must has laws or regulations as its legal foundation. In another word, the establishment of a trust agent or trust company for land trust needs relative legislature recognition. As the trust company in the Yiyang Model is concerned, it is impossible for the trust company to be established under the Measures for the Administration of Trust Companies because the rigid requirements are set for the trust company which mainly takes up financial business. The best way out is to make separate regulations for the trust company for the land trust.
Secondly, the roles played by the trustee are significant to the operation of land trust, so the trustee possesses the required capacity provided by relative laws is very significant. There are various rural land-use controls in many countries of the world. In China, there is a strict control on the usages of land, by which the cultivated land is protected specially and rigidly. The cultivated land cannot be used for non-agricultural purpose without the approval from the land administration department of the government. In the transfer of right to LCM or the management right to the land, the transferor and transferee should abide by the control of land usages. To achieve the goal of the control of the land usages, the Rural Land Contracting Law provides the transferee of the right to the rural land should possess the agricultural operation capacity.
In the Shaoxing Model, the village economic co-operative trusted the right to LCM to the trust agent of towns which took the role of trustee in the trust. But the trust agent was just a circulation service center established by the town government and it did not have the agricultural operation capacity. So the trust agent is not qualified for the transferee of right to LCM. It is the same to the trustee in the Zhongxin Model. The CITIC Trust is a professional financial trust company established under the Measures for the Administration of Trust Companies and is fully qualified for the trust business. But the CITIC Trust does not possess the capacity to perform agricultural operation and is not suitable to be the trustee in the land trust under the Rural Land Contracting Law. Some scholar points out that the CITIC Trust playing the role of trustee in the land trust will consequently make the land trust null and void. While the opposite view emphasizes that the requirement of agricultural operation capacity for the professional trust company will hinder its participation and innovation in the farmland trust in China. The provision in the Rural Land Contracting Law makes it clear that the transferee should possess the agricultural operation capacity and should be modified to meet the circulation of farmland.
The purpose of land trust is to facilitate the circulation of land. The transfer of right to LCM from settlor to trustee is different from the common transfer of right to land in which the transferee should cultivate and manage. The trustee need not cultivate and manage the land personally. The trustee could entrust the management and cultivation to others. Whether the transferee possesses the agricultural operation capacity is not critical. The most important is to make the trustee guarantee the agricultural use of the land. To facilitate the operation of the land trust, it should provide some exceptions to the provision in the Rural Land Contracting Law that the transferee should possess the agricultural operation capacity.
The third point is related to the trustee’s duty in the land trust. From the perspective of the duty of trustee, the express trust can be divided into active trust and passive trust. Active trust is the one in which the trustee has active duty to perform, such as caring the land, paying the tax, etc., while in the passive trust the trustee just holds the legal title of the land without other active duty to perform. No passive land trust can be created in some states of America.
The Trust Law provides that the trustee should handle the trust business personally, but he can entrust an agent to handle the business on his behalf if the trust instrument provides otherwise or he has to do so. From the provision we can conclude that the Trust Law does not acknowledge passive trust. In all the models of land trust in China, none of the trustees takes up the management or the cultivation of the lands. The trustee’s main job is to sublet or lease the land to other managers. The main function of the trustee is to facilitate the circulation of right to LCM and has no other active duty to perform. One view holds that Chinese land trust practice obviously violates the original intention of trust institution. Generally speaking, the trustee must act personally since the settlor chooses the trustee for his particular personality, morality or belief. If the trustee delegates the administration of trust business to someone else, different value and belief would appear what the settlor would not have wished for.
According to the distinction of active trust and passive trust, could Chinese land trust be called passive trust? Although the trustees in land trust entrust the management and cultivation of lands to others, they are not as passive as the trustee of the passive trust. Besides holding the right to the land, they will conclude the agreement with others to manage and cultivate the land and take the responsibility to supervise the management and cultivation of the land.
It is not necessary for the trustee to manage all the trust business personally because no company can do all the work in the modern society. The main function of trust is to maintain and protect the interests of beneficiary by the trustee’s management of trust property. In land trust we should focus on what trustee mechanism could maintain the interests of peasants better. In the Yiyang Model the trustee is a government-sponsored entity which will not involve in the interest division of the land trust while the CITIC Trust in the Zhongxin Model has to make profits for its management since it is a business trust company. But the CITIC Trust has much greater capacity to raise fund to support the development of land trust than the trust company in the Yiyang Model. Therefore, some further empirical research should be conducted to demonstrate the advantages and disadvantages of every trustee mechanism.
Last but not the least, the trust agents in the Shaoxing Model and the trust corporation in the Yiyang Model were organized and established by the local government. The government-sponsored entities were not a real market player, for they would enforce the intention of governments which sometimes contradicted with that of peasants. It would lead to the interference of public authority in the circulation of rights to farmland and confusion of the market and the government. Furthermore, not being the real market player in the market, the participation of governments or government-sponsored entities in the land trust will deprive other market players’ opportunities to be trustees in the land trust, which in turn causes inefficiency and monopoly in the land trust since the involvement of governments.
Being the center of the trust mechanism, the government-sponsored trustee has neither the agricultural operation capacity and experience nor the common knowledge of trust, although it brings convenience to the circulation of right to LCM. Its existence does no good to the fostering of the sound notion of trust in China, especially in the rural area. In other words, if the main role of the trustee is to facilitate the circulation of farmland, the trust mechanism is not necessary to adopt, since other institutions also could fulfill the goal of facilitating the circulation of land.
3. Beneficiary. — The trust is created for the interests of the beneficiary. The beneficiary must be sufficiently identifiable in the creation of the trust, since the beneficiary is someone to enforce the trust and ensure that the trustee properly performs his equitable duties. The beneficiaries have always been considered to be the hapless and helpless young members of the family and are given rights in equity with the purpose to protect the beneficiaries against any sort of loss that could be caused by the trustee. Although the peasants are not as hapless as the young member of a family, they still belong to the vulnerable group in the land trust.
The Chinese land trust seemingly accords with the certainty of object of trust which needs the sufficient certainty of the identity of beneficiaries. But the comprehensive analysis of the beneficiaries of the Chinese land trust will reveal the true predicament that exists in the trust. The trust beneficiary principle just emphasizes the importance of the sufficient certainty of the beneficiaries, but Chinese land trust provides us an opportunity to assess the reasonableness to be a beneficiary.
First of all, the proceeds gotten by the peasants transferring the right to LCM were too low to be reasonable. In Yiyang City, the peasants can only get 300 RMB more or less for per 0.0667 hectares, just one third of the average value of the output of the land.
Secondly, in the Zhongxin Model and Shaoxing Model the peasants transferring their rights to LCM do not possess the status of beneficiary of the land trust, which results in the insufficiency in the protection of interests of peasants. The loss of status means the loss of interests. Under the Trust Law, the beneficiary can enjoy and exercise the aforesaid four statutory rights of settlor. In some Chinese land trust models, such as the Zhongxin Model and Shaoxing Model, the beneficiaries are the borough government and the RECO respectively who are actually the agents of peasants. In this arrangement, peasants have neither the statues of settlor nor the status of beneficiary and are excluded from the protection mechanism afforded by the trust law. If their interests are infringed by the trustee, what the peasants could do is to assert their rights against the co-operative or village committee, which concluded the contract with them as the other party.
Thirdly, if peasants are not the beneficiaries of the land trust, the trustee has no fiduciary duty to them. The Trust Law provides that the trustee has the duty to maintain the best interests of the beneficiary. In the Shaoxing Model and Zhongxin Model, the peasants transferring the rights to LCM are neither settlor nor beneficiary of the trust, which implies the peasants have no control upon the administration of the trustee nor does the trustee have the duty to maintain the best interests of the peasants for they are not the beneficiaries of the trust. On the other hand, the co-operative, the beneficiary in the Shaoxing Model and borough government, the beneficiary in the Zhongxin Model, have the chance to have their best interests maintained by the trustee in the perspective of the Trust Law. The question here is whether the borough government or the RECO as beneficiary in the trust can guarantee the fulfillment of the best interests of the peasants transferring the rights to LCM. The critical point is whether the peasants and the co-operative or borough governments have the totally identical interests. The answer is obviously no. The intentions and the purposes of co-operative or the borough government are not to maintain and maximize the best interests of the peasants transferring the right to LCM. The co-operative or the borough government has their own interest in the land trust. In the Shaoxing Model, in the circulation of right to LCM by trust in a town named Keping, the peasants received the rent of 189,000 RMB in total, while the village committee received 170,000 RMB in total by subletting the lands to the contractor. In the Zhongxin Model, what the peasants could receive was only the rent negotiated in the contract between the peasants and the village committee, while the borough government, the beneficiary in the land trust, could get extra benefit and remnant benefit of the trust when the trust reached the expiration date after the rents, also called basic interest, were paid to the peasants. The two examples illustrate the beneficiaries in the land trusts, do not transfer all the benefits they get from the trustee to the peasants, they obtain and maintain some benefits for themselves.
V. LAND TRUST IN AMERICA
In America there are three types of land trust. One is the Illinois Land Trust, a modified form of conventional trust agreement that is usually used by real estate investors. The second one is a tool to preserve lands generally through conservation easement, and the third one is a mechanism to afford low price homes to low-income-households. The following will probe into the mechanism and functions of the three kinds of trusts, by which to find out some useful experience and lessons for the perfection of the Chinese land trust. In order to differentiate these three kinds of land trust, the paper will name these three kinds of trust as the Illinois Land Trust, Land Conservation (LC) Land Trust, and Community Land Trust (CLT) respectively.
A. The Illinois Land Trust
Massachusetts business trust, or real estate trust is said to be the original inspiration of the Illinois land trust. Illinois was the first state to recognize and develop the land trust. In 1921, land trust was first held to be valid in Kerr v. Kotz and then was used by real estate owners in Illinois for more and more purposes. The primary function of land trust is to facilitate the transfer and financing of relatively high value real estate. The Illinois land trust enables the owner of real estate to convert real property interest into personal property, by which the owner of real property could eliminate many burdens while holding the property. Early in 1963, the Florida legislature sanctioned the use of land trust with the purpose to facilitate the development of real estate. Up till now there are eight states in America that have made statutes to recognize the Illinois land trust.
In the land trust arrangement, the trustee holds both legal and equitable title while the beneficiary reserves all the powers and control of the real estate in the trust. Deed in trust and trust agreement are two basic documents in the land trust. Deed in trust is a recorded document in which a corporation trustee is generally named and vested broad powers as if it were the owner of the total estate. The beneficiaries who are not named in the deed of the trust are disclosed in the non-recorded trust agreement and they possess the ‘full and exclusive management and control of the handling of the trust property’. Being a modified form of the conventional trust, land trust differs from traditional trust by which the trustee just holds the property titles and the beneficiary reserves all active managerial and administrative powers. Some comments pointed out that the land trust circumvented the Statute of Use by permitting the instrument to declare the beneficiary interests to be personal property.
B. Land Conservation Land Trust
Land Trust Alliance defines LC Land Trust as a nonprofit organization that conserves land by acquiring land or conservation easement, managing or stewarding land or conservation easement as its full or part mission. LC Land Trust is the most successful and exciting force of land conservation in America and perhaps the most effective component in the environment movement. By the end of 2015, 56 million acres of lands are conserved by local, state and national LC Land Trusts. With the increase of lands in the control, the LC Land Trusts organizations have turned into a powerful economic and political force with millions of acres of lands in control.
LC Land Trust protects various types of land by acquiring land, conservation easement, management agreements or other interests in the lands for certain public benefits. Conservation easement is the most dominant and common method adopted by LC Land Trust to preserve private land in America and it usually contains perpetual and permanent restrictions on the development and use of the lands. Easement is a less-than-fee interest on the land which could be defined as positive easement and negative easement. The owner of a positive easement could make some active use of the land while the owner of the negative easement has the right to prevent the owner of the land from taking up certain use of the land. The restrictions on the development and use of land are recorded and will prevent land owners and their successor from prohibited development and use of land. Since the eligible donated easement must be perpetual, the restriction on the development and use of land become perpetual, too. The LC Land Trusts are responsible for enforcing the restriction on the land contained in the easement agreements by monitoring and visiting the land on a regular basis.
The main reason that conservation easements appeal to landowners is that the landowner still retains private ownership of the land and continues to possess and reside on the land while giving up some specific rights to develop, subdivide, etc. The success of LC Land Trusts by conservation easements has been aided by various federal and state tax incentive to encourage conservation easement donations. But during the development of LC Land Trust, tax incentive was abused by some grantor land owners with the cooperation of grantee LC Land Trust for their common interest and income tax benefits. The responsible approach to avoid tax abuse is that the legislature should increase the tax incentive only if the conservation land trust has the capacity to screen and manage the additional easement and to prevent abuse and exploitation.
C. Community Land Trust
From the sociological perspective, the CLT is a kind of land reform. The CLT originated from the tradition of social justice and fairness. According to the definition of National Community Land Trust, ‘CLTs are typically nonprofit organizations, governed by a board of CLT residents, community residents and public representatives, that provide lasting community assets and permanently affordable housing opportunities for families and communities.’ Community ownership and operation of land is the basic notion of the CLT and its approach to real property and citizen governance offers an unusual form of community development. There are more than 240 CLTs and 5,000 CLT homes in US and CLTs have been accepted to deliver affordable homes.
The CLT is a model of dual ownership. It offers a shared-equity home ownership in which the ownerships of land and house are held separately. The community land trust owns the land while the home buyer holds the ownership of the house. The home owner can benefit from the lower-price affordability by purchasing home without buying the land beneath it.
Ground lease is a contractual approach that CLTs exercise the regulation and control. The CLTs lease the lands to the house owner by a 99-year-term ground lease which usually contains the formula that restricts the house owner’s resale price and gives the CLT the priority to purchase the house. The ninety-nine years’ CLT ground leases are renewed with each subsequent home buyer and renewed at the end of the lease term when the ground lease transferred to the assumed heirs and beneficiaries, which makes the ground lease a flexible and effective instrument. The ground lease requires that the home owner must reside in the home and subletting is not allowed without the prior permission from the CLT. The ground lease also invests rights to the CLT to force repairs if the home becomes hazardous and takes some measures to deal with the defaults of home owner on mortgages.
The developments of CLTs are diverse due to the particular community and circumstances. For example, the Chicago CLT does not own land and has no land to lease, and it mainly relies upon the property law to achieve the same goal as the traditional CLT through the deed restriction. But the CLTs have common social commitment that is to prevent the displacement of low-income residents. By retaining the permanent ownership of land and removing the land from the market as a commodity, the CLT could participate in the planning, the development and future use of the land for the community.
Many CLTs offer a down payment which is one percent of the affordable price of the home to the homeowners. But some problems remain unsolved for the low-income household. Physical maintenance of property, home safety and financial accessibility are three essential elements for the sustainable homeownership. The low-income households are more likely to experience the unstable income and insufficient financial and social support to maintain the homeownership. Pitfalls of homeownership are hard to cope with.
D. Lessons from the American Land Trust
Just like what Maitland has said, trust is an institute of great elasticity which is as elastic as contract. Elasticity makes trust the most innovative institute in the perspective of institutional innovation. It could be used in both civil and commercial areas for private or charitable purposes by managing, transferring or investing almost all types of properties from real estate to personal property.
1. The Elasticity of Land Trust. — The land trust in America has developed into various forms for different purposes. The Illinois land trust takes the form of a traditional trust to achieve a private goal and the LC Land Trust and the CLT adopt new mechanism to accomplish non-profit charitable purpose. The Illinois land trust helps the owner transfer the real estate into personal interest, while the LC Land Trust protects or preserves the land for ecological purpose by acquiring land or land right, and the CLT typically ensures the long-term access to affordable house on the acquired land by dual ownership of land and home. The Chicago CLT even abandons the traditional own-and-lease land model and just manages and oversees the deeds restrictions that limit the resale prices of the homes. In one word, every type of land trust has its own way and unique tool to achieve a special purpose, so that the system innovation could meet the requirement of practice.
2. The Organizational Feature of Land Trust. — The organizational feature is becoming the dominant trend in the development of various land trusts. More and more academic literature use an organization to define land trust, no matter whether the land trust is for private or not-profitable charitable purpose. Even for the traditional trust, the practice in some states treats trust like an organization. In Alaska, Hawaii, Idaho, Michigan, Missouri, Nebraska and Ohio, the law requires the trustee to register a living trust. A statute in Colorado encourages the settlor to transfer the title of real estate to the trust itself instead of the trustee. For the land trust, its organization characteristic is much more obvious. A CLT is rather an organization holding the land for the community than a trust in legal sense. A CLT is a legal entity which holds the land for all humankind and protects the legitimate use-rights of its residents. The CLT is a volunteer-running, non-profit and community-based organization, with community-controlled and community-owned, open democratic structure, non-profit, permanent affordability and long-term stewardship as its four key features as an organization. Most CLTs are membership organizations which are open to the CLT homeowners and any adult in the geographic region of the CLT. Organizational feature of the LC Land Trust is as obvious as that of the CLT. According to the definition of Land Trust Alliance, land trust is the non-profit organization with the mission of acquiring land or easements on land to conserve various land resource.
3. The Legislative and Governmental Support. — In the development of various land trust, the recognition and support from the legislation and government play significant roles. Illinois, Florida and the other eight states have made statutes to regulate the use and development of the Illinois land trust. Various federal and state tax incentives encourage many people to transfer lands or some rights on the land to the conservation land trust which is a significant apparatus to conserve and protect the environment. In some CLTs, governmental support and public donation provide some basis for the management and operation of CLTs. For example, the Dudley Neighbors, Inc. (DNI) CLT bought a parcel of land from the city for just 1 USD. Durable affordability, subsidy retention and equitable taxation are three most favorable policies to the growth of shared homeownership. All these policies are closely related to tax. By analyzing various forms of land trust in America, we can find out some useful practices and lessons for the development of Chinese land trusts.
VI. MEASURES TO IMPROVE THE CHINESE LAND TURST
From the perspective of institution change theory, the emergence and use of land trust in transferring the rights to the rural land is the outcome of induced institution change. Contrary to the imposed institutional change which is prompted by government orders or laws, the induced institutional change includes the emergence of new institutional arrangement caused by individual or collective voluntary action for profitable purposes or the modification and replacement of the old institutional arrangements. In some Chinese land trusts, various levels of governments are involved in the land trust arrangement and play an important role in it. Chinese land trust is induced institutional change rather than imposed institutional change because the governments have not taken the form of orders, regulations or laws to enforce the land trust they innovate with the participation of peasants and other entities.
The occurrence of induced institutional changes has to depend on the profitable opportunities which arise from the institutional disequilibrium such as changes in institutional choices set, technology, relative factors, product prices and other institutional arrangements. The induced institutional change must make full use of the profitable changes and draw lessons from other nations’ legislative experiences in order to improve the new institutional arrangement. As far as the Chinese land trust is concerned, some innovative institutional arrangement has to be prompted in some aspects.
A. Change the Status of Peasants in the Land Trust
By a trust, one can enjoy greater rights, powers and privileges in property ownership without being subject to the liabilities and duties of ownership. In another word, trust is a legal tool to maximize the interests on property. In the Shaoxing Model and Zhongxin Model, the peasants are neither the settlor nor the beneficiary of the land trust and they lose the opportunity to maximize their rights to LCM. Their rights and interests cannot be asserted under the trust law or trust contract which is more advantageous to them.
As analyzed in the former parts, the interests of peasants transferring the right to LCM have not been completely maximized by the trust mechanism. In traditional trust, the settlor is the law-maker who makes the law from which the trustee must not deviate. Settlors have options to control the trust and realize his intentions by trust instrument or contract. Without the status of settlor, the peasants have no opportunity to maximize their rights and interests on the lands under the trust law.
As for the beneficiary of the land trust, only the peasants should take the status of beneficiaries although the Trust Law has no compulsory provision about who should be the beneficiary. Other bodies rather than peasants, like the village committee, local government, taking the status of beneficiary, will eventually take away certain interest from the peasants. If the peasants take the position of beneficiary, it could reduce the agent cost and division of benefits between the peasants and the agents, such as the village committee, the collective economic corporation, or the local government. Furthermore, a peasant-beneficiary structure can help peasants control the management of trustee, the principle in Saunders v. Vautier provides that all beneficiaries under the trust can collectively direct the trustees’ action of dealing with the property if they act together to do so.
If the peasants get the status of settlor and beneficiary, the land trust would be peasants friendly for it is more convenient to maintain and realize the interests of peasant to the land under the Trust Law. In Japan, the relative laws provide that the peasants transferring or circulating farmland that participates in the land trust should be settlors and beneficiaries of the land trust, which illustrates the differences between general trust and land trust and indicates the protective policy of the law towards peasants.
At the same time, the difficulty for the peasants to stand as settlors and beneficiaries is obvious. The trustee (or transferee) hesitates to negotiate and make contract with every individual peasant for the expensive negotiation cost, which leads to the disadvantageous position of peasants in the circulation of right to LCM. On the other hand, the lack of knowledge of law, especially the strange transplanted trust law, brings another negative effect to the peasants in the creation of land trust.
Perhaps the collective trust is a way out of the dilemma. In the UK, there is an investment mechanism called unit trust in which the fund is divided into unit for the investor to buy and the fund manager is responsible for the investment of the fund. The correspondence of unit trust in America is called mutual fund. Why could Chinese land trust adopt the unit-trust-like mechanism? In China, multi-settlors trust also appears in securities investment fund and fund trust whose operation is similar to unit trust or mutual fund.
Multi-settlors feature is what Chinese land trust could make reference to. Like investors in the unit trust handing their money to the management of professionals in the trust, peasants transferring their rights to the contractual management land would like to benefit from joining the land trust. In the Yiyang Model, the peasants make a trust contract with the trust corporation directly and received benefit and interests as beneficiaries. In the Zhongxin Model and Shaoxing Model, the settlor’s structure could be improved by unit-trust-like standard trust contract drafted by the trustee of the land trust. Peasants’ rights to LCM transferred to the trustee are just like the money of investors used to buy unit or trust certificate in the unit trust or mutual fund. The village economic co-operative or the local government could provide a platform for the peasants and trustee to facilitate the formation of the land trust. The interests and rights of peasants are maintained and protected in the land trust mechanism. Only by doing so, could the idea about what the trust being for and who the trust being for be spread in Chinese civil society properly.
B. Organizational Innovation in Land Trust
Land trusts are not-for-profit firms which have charters allowing them to take up special land management activities. Traditional trust, including commercial and donative trust, is not treated as the legal person. But in the modern trust law, there is the trend that the common law and statutory increasingly treat traditional trust as the legal person for certain purpose. In the commercial area, business trust is a special trust which gets legal entity. Business trust was firstly used from the 19th Century in Massachusetts to avoid the prohibition that the corporation could not own real property. A business trust is a kind of commercial trust which possesses separate legal entity and is created under the state’s business trust law. Business trust could be created for almost any commercial purposes that various commercial trusts respond. Business trust has developed into corporation-like legal existence which can sue, be sued, be a debtor, or incur liability for its activities.
Land trust, especially the LC Land Trust, has increasingly tended to take the form of organization and is governed as an organization. LC Land Trusts are run by a board of directors which have the average size of fifteen in the 1990s. The classic CLT board contains three types of representatives: one third representing the interests of people living in the community, one third representing the interests of people living in the surrounding community and one third representing the public interests. The long experience of the CLTs in America has demonstrated that the tripartite structure is successful.
From the experience of business trust and land trust, multi-settlors trust ordinarily takes the form of organization. In China, only one form of commercial trust, security investment fund, takes the form of organization. The fund should be registered with its name and some other elements such as fund manager and fund custodian.
Land trust in China can take the form of non-profit organization to fulfill its purposes with some advantages. Firstly, land trust is more easily acceptable to the peasants for its legal existence rather than the strange conception of fiduciary relationship. Most Chinese peasants are not familiar with the concept and mechanism of trust. Just like South Korea whose trust law containing provisions for family trust and charitable purposes while trust is mainly used for financial purposes, trust has been rarely used in the civil area, not mentioning the relatively undeveloped rural area.
Secondly, the land trust in organization form is beneficial to the participation of peasants in the management of trust and maintenance of the interests. The land trust can take the American CLT-like board governance by which the peasants, the village committee or the collective economic cooperation and the local government could participate in the board as directors. With the participation of the peasants in the frame of board, the rights and interests of the peasants could be maintained in the governance mechanism. It is more convenient and practical for the peasants to assert and fulfill their rights and interests in a board mechanism than in an individual peasant’s name of settlor or beneficiary.
Thirdly, the land trust in the form of organization could minimize the transaction cost. Several decades ago, Coase discovered that the relative price, negotiation and conclusion of contracts mean costs in the price mechanism. The former costs could be reduced within the firm realm. If a land trust established with the governance of board including peasants, village committee or the RECO and local government, the costs incurred in concluding contracts between the former parties could be reduced. The reduction of costs is important for maximizing the interests of the peasants.
C. Governmental Support to the Land Trust
The prevalence of land trust in America demonstrates the importance of governmental support, especially in the form of tax incentive. In 1964, the Internal Revenue Code (IRC) first provides that people who conveyed conservation easement perpetually to the US are entitled to tax deduction. From then on, the Congress amended the IRC several times to adapt to the development of CLTs. At the same time, some states in America have made tax incentives to stimulate the donation of conservation easements.
The main purpose of the Chinese land trust is to facilitate the circulation of farmland with the goal to realize the agriculture modernization. From the perspective of economics, the peasants transferring their rights to management of lands to trustee make a positive externality which benefits the nation’s scale management and agriculture modernization. In this sense, the government should take some measures to make up the contributions the peasants have made.
Because the Chinese government has abolished agriculture tax in 2006, tax incentive is no longer a useful measure to be taken by the government. Perhaps fiscal subsidy is the most suitable support from the government to spread the use of land trust. The subsidies could be distributed according to the size of farmland transferred to the land trust. The subsidies not only could increase the income of the peasants but also accelerate the spread of the land trust to fulfill the goal of agriculture modernization of China.
VII. CONCLUSION
The origin of trust is closely related to the land which is the main trust property. In some sense, trust originated from the flexible use of land and extended to chattels, such as bonds and securities. The practice of land trust builds out the infrastructure of the trust law which formulates the powers of trustee and rights of beneficiary. The main reason that trust has not been fostered well in civil law countries is the absence of practice of trust with land as its trust property. The land trust in China just begins its practice more than a decade ago. Although some types of land trust in China are not true trust in strictly legal sense, Chinese land trust at least opens a window to disseminate trust conception which is unfamiliar to most people in China.
Now China is facing a good opportunity to extend the conception and practice of land trust. New legislative activities provide more reasonable legal foundation for the land trust. The Opinion has divided the right to LCM into contracting right and management right, in which the former persistently belongs to the peasants and the latter can be circulated in various forms. The division of the right to LCM provides more reasonable legal base for the creation and operation of land trust. The transfer of management right to land does not influence the peasants’ status as the owner of contracting right to land. In addition, the development of rural area provides the social basis for the adoption of land trust. The young generation of peasants would rather find a job in the urban area than stay on the land to take up the tedious agricultural work. It will lead to the increasing needs of entrusted management of lands. By land trust the peasants can keep the contracting right to the land while transferring the management right to the trustee and receive some interests from the trustee. At the same time, the theoretical research and empirical study of Chinese land trust have provided comprehensive institutional preparation. The flexibility of trust could cater to most practical needs of peasants.
The land trust is inactive without the participation of peasants. It is the peasants’ interests and rights that should be protected and maximized. Without the participation of peasants in the land trust as settlors and beneficiaries, the system discovery function of land trust will diminish. Only with the game between the interest-related bodies could the land trust find the proper and long-standing interest arrangement. Based on the analysis of the Chinese land trust, the Yiyang Model land trust is the most reasonable model in China. Being the owner of right to LCM, the peasants take the status of settler and beneficiary of the trust, which makes the structure and operation of the land trust more sustainable in the agricultural context. But the existence and development of land trust in China depends on more factors than the only legal structure of land trust.
The practice of Chinese land trust has attracted a lot of concerns from both academic and practical circles. But China has not seen large-scale adoption of land trust throughout the whole country for some limitations. Institution innovations and governmental support are two crucial elements for the outspread of land trust in Chinese rural areas. It is more convenient for the people to accept trust conception if the land trust takes the form of organization. At the same time, the governmental support could also accelerate the outspread of the use of the new instrument.
