Risk Prevention in the Agent Construction Model for Real Estate in China

Since 2022, the real estate industry in China has entered into a period of deep adjustment. With frequent closures, liquidations and bankruptcies, the “trend of stopping repayment of house loans” by property owners continues. It has become the primary goal of relevant government departments and real estate enterprises to ensure the delivery of buildings, people’s livelihoods and stability, as well as to resolve related risks in a safe and orderly manner.

Against this background, an increasing number of financial institutions are facing a dilemma: they find it difficult to withdraw from the real estate projects they have invested in and have to consider the project development issues. However, their lack of real estate development experience means they need professional agent construction enterprises to provide a series of services such as project agent construction, brand renewal, supply chain restructuring, etc. The agent construction model is therefore on the upswing. At present, the entities engaged in the agent construction business include real estate agent construction companies specially established by well-known real estate enterprises, as well as experienced construction enterprises, project management enterprises, and supervision enterprises.

China’s agent construction system officially originated from the Decision of the State Council on Reforming the Investment System (GF 2004 No 20) issued by the State Council. According to the Decision, agent construction refers to the government-invested project model in which a professional project management entity is selected (though a bidding process or other means) to be responsible for construction and implementation; to strictly control the project investment, quality, and construction duration; and to hand over the project to the end-user after completion acceptance (hereinafter “government agent construction”). Government agent construction is mainly applicable to non-operating projects or public welfare projects invested in by the government.

Non-government-invested projects can be entrusted to a company for the entire process of project management, which is generally referred to as “commercial agent construction”.

For government agent construction, the investing unit is the client and the construction agent is the trustee. Meanwhile, there will be an end-user, who will be the receiver, user, manager, and property owner after the completion of the project. In practice, the competent investment departments of local governments often issue corresponding regulations on the administration of the agent construction of government-invested projects, authorising the construction agent to exercise the relevant powers and take the relevant responsibilities of the construction unit, such as going through the construction procedures in the name of the construction agent, conducting bidding directly as the employer, and signing the construction contract directly with the contractor.

For commercial agent construction, only the construction unit and the construction agent are involved in general, and the construction unit is the end-user.

The entrusted agent construction contract is an unnamed contract in civil law. The power of the agent originates from the power of attorney of the client. If there is a dispute between the parties regarding the legal relationship, there are different opinions as to whether the relevant contract obligations under the entrusted agent construction relationship can be handled with reference to the relevant provisions of the entrustment contract. The authors tend to agree with the view in the Guangdong Higher People’s Court’s Reply to Difficult Problems in the Trial of Contract Disputes in Construction Projects: for non-operating government-invested projects, if entrusted agent construction is enforced according to the law and the construction agent, as the legal person responsible for the project construction, is fully responsible for the organisation and management of project construction, bidding and project payment obligations, it can be regarded as the employer. The contractor cannot claim that the client should assume liability in accordance with the provisions of the entrustment contract. Other entrusted agent construction projects shall be handled in accordance with the provisions of the relevant entrustment contract.

For more standard government agent construction projects, the construction agent can be responsible for the payment obligations of the construction project funds, and the owner does not assume the payment obligations. If the owner participates in the construction contract relationship between the agent and the construction unit by way of agreement or actual behaviour, but the degree of participation is low, the court may identify the owner and the agent as jointly and severally liable for the payment of the project funds. Relevant jurisprudence also supports the above-mentioned view. This risk should be highly valued by the owners of the government agent construction projects.

The agent needs to provide professional agent construction services, so its ability to fulfil the contract directly affects whether the management objectives such as quality, construction duration and cost of the agent construction project can be achieved. Compared with the agent’s own projects, entrusted agent construction projects can obtain relatively little internal support from the agent group. The management team and staff are usually appointed or recruited locally, not to mention that some core leaders of the project management team may change immediately after winning the bid, which risks the stability of the team and the actual ability to perform the contract. In this regard, it is suggested that the client, when selecting the agent, selects an agent construction enterprise with rich agent construction experience and a certain reputation in the market, and comprehensively consider the performance of the agent construction project, the staffing of the management team and the agent construction scheme.

The larger the scope of the owner’s authorisation, the stronger the control of the agent over the project, and therefore the greater the risk of the owner losing control. Therefore, the establishment of the owner’s control right is indispensable. The agent will, in general, need to be entitled to decide on the selection of project suppliers and the arrangement of management personnel, and will only require the client’s approval on important matters. Therefore, in practice, the agent or some of its employees may collude with suppliers to seek illegal benefits in the bidding and procurement process by using the authority granted by the client. In this regard, the client should retain a certain degree of supervision over the project, either by appointing its own personnel or by employing supervision units or whole-process follow-up audits.

For the real estate industry, the failure of some government construction projects to complete budget demonstrations and approvals before the commencement of construction, or the failure to complete relevant construction procedures, may lead to the risk of capital chain rupture of the client. For commercial agent construction projects, the risk of capital chain rupture of some local real estate enterprises with limited capital strength, high financing costs and strict capital recovery terms is also relatively high.

In order to avoid the risk of the Client’s capital chain rupture, the agent may:

If there is a wide difference in the understanding of the nature of the development between the two parties, various problems will arise in their subsequent co-operation, thus there is a risk that the client will excessively interfere with the decisions of the agent and affect the normal progress of the project. Therefore, the agent may:

At present, most agent construction enterprises are professional agent construction enterprises established by real estate enterprises with certain brand influence and rich development experience, so they usually have demanding standards for their products. As the provider of construction funds, the client may require the agent to lower the original product standard or change the original marketing plan, so as to control costs or collect outstanding sales as soon as possible. For ordinary homebuyers, their knowledge of a real estate project depends to a large extent on the brand influence and marketing publicity of the agent. Therefore, if the product standard of the agent construction project is lowered or there are quality problems in the project due to the client, or the project is suspended due to capital chain rupture, the agent’s brand will suffer.

In order to prevent the brand from being damaged, the agent may:

As a new model of real estate development, project agent construction is characterised by is asset-lightness, high yields, low risks and weak cyclicity. At present, the agent construction model in China’s real estate market has great market potential. Agent construction enterprises and clients (especially financial institutions that invest in real estate) can find excellent co-operation opportunities in most cases, but both should pay attention to prevent the above-mentioned common risks.