GC Roundtable: Real Estate
Real estate has long been a target of scrutiny from Chinese regulators. Especially in the post-pandemic era, Chinese regulators are paying great attention to this “grey rhino” sector that is prone to systemic risks. How are real estate GCs and their teams supporting business compliance amid these frequent regulatory changes? In the post-pandemic era, real estate companies in China are also considering optimizing their operation models, even creating new business lines. What role are GCs playing in this decision-making process?
ALB: Property market regulatory policies underwent frequent changes last year. Which changes had the most significant impact on your company? How did you lead your team to ensure regulatory compliance at your company in the face of the frequent policy changes?
Yang Xiaolan, general counsel, Logan Group: As far as policymaking is concerned, the buzzwords this year are the “three red lines” and “dual concentration of land leases”, and they impose more strict operating cash flow requirements on companies. The regulators now ask the companies to rely more on their own funds and operating income to acquire land, rather than pass the risk on to banks.
“Dual concentration of land leases” changed the traditional mode of land supply. Firstly, it requires that the companies have greater capital pooling capacity during the initial intensive bidding process. Secondly, intensive bidding means centralized sales and delivery of properties, which again reduces developers’ profits through competition at the sales stage.
Furthermore, the government has clamped down on consumer loans this year and it is working to revise the Anti-Money Laundering Law, which will definitely affect spending on housing properties. The regulations make it more difficult for many clients to buy properties with leverage, and an amendment to the Anti-Money Laundering Law will give property developers and rental and sales companies additional obligations to prevent money laundering activities.
In terms of organizational structure, Logan has set up risk control and legal affairs units under the risk management and control development. On the one hand, we study new policies once they are introduced, and interpret certain parts of the policies related to our business operations. On the other hand, the legal affairs unit discusses the new policies with the strategic planning team.
Dong Liang, assistant president and general manager of the legal affairs department, Ronshine Group: First of all, the promulgation of the Civil Code set a new topic for legal practitioners to study, and we spared no effort in training our people. Secondly, the “three red lines” imposed on real estate companies require all fast-growing developers to improve their capabilities. Thirdly, the “dual concentration” policy – that is, concentration of land lease notification and concentration of land leasing – raises new funding requirements.
In order to ensure compliance at the company in the face of constantly evolving regulation, we need to, first and foremost, organize employees to study the new policies; the most important thing is to get a clear understanding of the general guidelines adopted by the central government regulators, gain insights into the policies, and in particular predict the future criteria for policy enforcement.
“’Compliance in the future tense’ is an important concept in recent years. We need to put ourselves in the central government’s position, and theorize about the possible countermeasures the central government may take, and thoroughly assess the company’s policies accordingly.”
- Dong Liang, Ronshine Group
“Compliance in the future tense” is an important concept in recent years. We need to put ourselves in the central government’s position, and theorize about the possible countermeasures the central government may take, and thoroughly assess the company’s policies accordingly. Such assessment is based, in part, on an understanding of the regulations, and on our past experience as well.
Wang Yiqun, general counsel, Yango Group: Counsel of property developers were confronted with unprecedented challenges in the past year: at the legislative level, it goes without saying that the Civil Code and related judicial interpretations had a major impact on every legal practitioner. We need to study the new regulations, while paying attention to practical-level changes; at the policy level, various types of restrictive policies have been introduced by local governments in quick succession, but enterprises still need to survive and develop, and all non-standard and innovative businesses require new studies and investigations.
“Counsel had never needed inhouse and external courses to keep themselves up to date as much as they did this year. Without solid professional expertise, they cannot deal with legal work in the new environment.”
- Wang Yiqun, Yango Group
Therefore, counsel had never needed in-house and external courses to keep themselves up to date as much as they did this year. Without solid professional expertise, they cannot deal with legal work in the new environment, as past experience does not exist for most new business models; even in the case of traditional business models, risk control operations may deviate, after a relevant law is revised.
That is why we carefully selected the items of training, and also designed related exams, the results of which are linked to the counsel’s performance appraisal, encouraging them to study the latest changes, and enhance their skills. In addition, counsel at the headquarters has stepped up efforts to sort out various types of rules, guidelines and templates to guide related practices at lower levels. As regards high-priority and difficult issues, specialists across the business lines are brought together to form task forces, as well as leveraging the strengths of outside attorneys. Where necessary, we consult other legal practitioners to ensure the professionalism of our legal opinions – that is, they meet the needs of business models in the new environment, as well as the needs of risk control operations.
ALB: Tightening regulations and COVID-19 have prompted real estate companies to rethink and improve their existing business models, and open up new business lines. As a general counsel, how do you get involved in the decision-making process and support these ventures?
Yang Xiaolan: The entire real estate industry is considering whether new business models should be added, and Logan has also done some exploratory work. For example, we set up a new fresh food division last year, and acquired related new businesses in Nanning.
“As regards new business models, the legal and risk control department is involved in strategic decision-making by putting forward specific risk control-related suggestions. We also help set up a risk control model covering related policies, workflow and systems.”
- Yang Xiaolan, Logan Group
Firstly, as regards new business models, the legal and risk control department is involved in strategic decision-making by putting forward specific risk control-related suggestions regarding the new business lines from three perspectives: i) policy compliance, ii) market risk exposure, and iii) operation of the new businesses, management and profit model, informing the management in decision-making.
Secondly, if a new business line has already been determined by the management, we help the new business division get a clear understanding of the risks associated with the business, and set up a risk control model covering related policies, workflow and systems. The legal department helps them create standard templates for procurement and tender contracts; builds on legal affair management capacity for the new business division – for example, by adding external lawyers experienced in the new business as the group’s panel lawyers, and by recruiting risk control and counsel familiar with the new business.
Dong Liang: In fact, the real estate industry realized several years ago that the market was no longer increasing, and if we keep on doing the traditional business, at the end of the day we will have to accept a steadily shrinking market. Many companies have started to look for other growth drivers. For example, Evergrande branched out into carmaking, and some more traditional companies tried to make breakthroughs in property-related areas, and Ronshine too – for example, our property management business will go public this year.
Speaking of the requirements on general counsels and the legal team, firstly, we invest heavily in research on novel core businesses – for example, Ronshine has carried out frequent collaborations with small- and medium-sized regional real estate companies, and the legal team has dedicated a great deal of energy to these projects. For example, the bilateral shareholder partnership model was adopted for some of these projects – where the investment is proportionally excessive, the legal team needed to make sure that the money invested can be recovered, and studies were conducted to find out whether the unequal agreements on the shareholders’ rights and obligations can stand the test of the contract law and the company law, and even the judicial process.
Legal work is not purely about risk control, we also need to get involved in management decision-making. When the company plans to enter a new business, we need not only to assist in investigation into the pioneering nature of the business, but also examine as to whether it has the practical foundation. If a business lacks practical foundation, we would advise caution, so as to fulfil our role as the “gatekeeper”.
Wang Yiqun: Yango Group takes opinions from the legal department very seriously, and we take part in decision-making on investment decisions and specific business models alike. As in-house counsel, it is absolutely necessary to fully understand the company’s strategies, because our job is to “manage risks” rather than “avoid risks”. Only if we thoroughly understand the company’s strategies, we can effectively gauge the company’s risk appetite, and adjust risk management methods accordingly.
In the face of severe challenges, before issuing opinions on new business models or new business lines, I always ask my team to understand how the new business works and related laws, and assess the legal risks involved based on “bottom-line thinking” – that is, what issues may occur, whether the business and legal team will be capable of handling these issues, the likelihood of the worst-case scenario occurring, and if the company can accept the outcome. This requires the in-house counsel to work very effectively in predicting and handling the potential issues.
As members of the company, in-house counsel have unshirkable responsibility for the company’s survival and development. First of all, wherever possible, we should remove restraints that get in the way of the company’s growth; but we also need to apply the brakes on critical matters that must be avoided, and make sure that the decision is fully justified and convincing to the business teams involved.
ALB: How have you used new technologies and operational tools to better equip the legal team in the past year?
Yang Xiaolan: Logan’s cloud digital IT systems are currently being created and developed. Two systems involve the risk control and legal team: one is the risk pre-control system, which focuses on the management and control of business risk; and the other is the case management system, and information stored in the system is shared by all the in-house counsel of Logan – it also performs regular analysis of cases within the company through big data collected by the legal team. Items analyzed include what the most common types of cases are, and which subsidiaries are involved…Furthermore, the system is also capable of comparing similar cases to assess the courts’ preferences in handling similar cases.
The development of internal risk control and legal affairs tools involves collaborative efforts in terms of: i) communicating specific needs, including the exact purposes for which a system is to be developed, and the management and control process envisioned by the legal team; and ii) setting key time points in the risk control system, which also requires the in-house counsel to contribute their thoughts and suggestions.
We also use some external tools such as Wolters Kluwer’s China Law & Reference database.
Dong Liang: Operating tools have indeed brought many innovations and provided more management and control methods, including new management models based on electronic seals, and new ways of working enabled with online communications. But I always believe that technology only gives us more management tools, and we need to also adapt our mindset to the new era.
Risk management and control tools are what interest me most at the moment. We see some insurance companies are using these tools to preview risk exposure of insurance policies online and we also hope to leverage the same technology to detect which internal contract or event caused a risk in real-time.
Wang Yiqun: our internal legal system has been constantly optimized. Most standard texts can be edited online, and the initiator only needs to import related texts, and fill in the blanks (revisions are not allowed for items that are not pre-set) in the legal affairs backend system, and the system displays the revisions automatically, substantially reducing the legal review process, and improving efficiency.
As regards case management system, real-time management has been attained – once a case is reported, the system generates case information automatically, and the seal(s) required for lawsuit documents, setting of the objectives of the lawsuit, approval of the mediation plan and outcome submission are directly linked to the case, so that all information about the case is intuitively displayed, and documents can be easily retrieved.
Besides, we can now file cases for approval in bulk, and have developed query trees. Data in the legal affairs system are the main source of data in the company, so we make sure that the risk control policies are effectively enforced, and data in the legal affairs system are accurate. We also acquire data from the company’s other business systems and modules to issue risk control warnings.
These IT facilities allow the legal team to concentrate on formulating rules and standards, as well as allowing them access to more information, such that they can get a better understanding of how certain businesses work, and made more balanced and accurate judgement.
ALB: What are the areas in which you require most assistance from external lawyers? What are your suggestions as to how external lawyers should continuously improve real estate-related services?
Yang Xiaolan: External lawyers can be generally divided into transaction lawyers and dispute lawyers. Real estate companies mainly hired the latter in the early years, but we have used more and more transaction lawyers in recent years, for matters such as mergers and acquisitions, asset management, labour and employment etc. This means that we have gradually broadened the range of external legal services that we engage.
Logan selects external lawyers based on the expertise, rather than the size of the law firm. In my opinion, the size of the law firm only reflects management quality, but the lawyers’ competence lies in their professionalism, work attitude and their dedication to the profession. For example, in the litigation space, we are increasingly convinced that the professionalism of a lawyer (e.g. skills related to case retrieval, deduction based on similar cases, and understanding of legal and factual matters) is more important than resources. As regards transaction lawyers, some of the lawyers that we worked with would propose suggestions regarding the existing transaction and sales models, and that is something that exceeds our expectations.
Dong Liang: For us, highly qualified external lawyers have always been in high demand, but the definition of “highly qualified” has changed – and is changing – with the times. I have to admit that the value offered by our long-term partners has indeed declined – especially when it comes to traditional businesses, the prices we offer have been falling, and so have been the value of their service.
On the other hand, there are many new businesses that we are eager to explore. For example, centralized land auctions nowadays not only consider property prices, but also the prices of self-operated property management services, which is conventionally monetized through a transfer of the project company, and now can also be done by converting it into a financial product. Typically speaking, the sales target for the self-operated property management business is about 70 percent of all the properties sold, but it can be sold for a higher price if it is sold as a financial product such as a mutual fund or a real estate investment trust (REITS). We cannot wait to find a partner that is capable of doing this. If a law firm can provide us with solutions that can bring us to the forefront of the industry, we will be willing to pay substantial premiums.
Wang Yiqun: We need external lawyers mainly from three aspects. First, to process routine cases or conduct due diligence services – these tasks do not require highly specialized expertise, but the massive workload involved requires exceptional responsiveness. Second, for some major legal issues, the legal team requires professional opinions issued by external lawyers. Third, for some important lawsuits, we’ll seek for the help of litigation experts.
As such, we’re very clear about what kind of lawyers we need for certain work. On the other hand, attorneys should also have a clear strategy for themselves.
ALB: What are the focuses for your team in the next 12 months? What’s your strategy for the team in the future?
Yang Xiaolan: Firstly, the company is about to wrap up business operations for the first half of the year. As Logan’s legal team, we still need to make all-out efforts to ensure the fulfilment of the annual business targets. Logan strives for balanced development – that is, our products should sell well, and profitability must also be attained. This requires the team to continuously collaborate with the business teams to jointly achieve the earnings targets.
My job is to further improve the team structure, and enhance staff management and average productivity.
Dong Liang: Ronshine’s legal team has already taken shape and is comprised of legal practitioners specializing in judicial matters, engineering, finance, litigation and offshore financing. We will stick to some of our existing practices in terms of benchmarking against leading market players, and maintaining close communications with the China Real Estate Association and property market regulators –policymaking authorities, in particular – to communicate our needs to the policymakers, so as to retain Ronshine’s leading position on understanding the latest market policies and accessing industry information.
Some types of talent will be highly sought-after in the future. First, general counsel equipped with financial savvy and “internet thinking”, especial GC for the property management arm of a real estate company.
Second, we want our in-house counsel to become more versatile. For example, an M&A counsel must be able to conduct M&A deals, and be adequately financially savvy to take fundamental financing issues into account during the M&A process, as well as being capable of effectively planning tax and litigation matters. The more versatile an in-house counsel is, the higher value s/he offers.
Wang Yiqun: Our team spent three years establishing an internal legal affairs management system, and a risk control system framework.
However, due to the substantial changes in the laws and policies, we will work with the IT department to review business processes one-by-one. We will strive to complete the establishment of the risk control system within the next one to two years.
Furthermore, as regards internal management, we plan to finish prioritizing the assessment system of the in-house counsel’s work performance. The assessment results will be linked to the performance of chief regional GCs, and to the bonus pools of regional legal teams. The changes will make it easier for other departments and executives to understand the real input and value of the legal teams.
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