The Counselor of Embassy in China (Smyth) to the Secretary of State

No. 1094

Sir: I have the honor to refer to the Shanghai Consulate General’s despatch no. 80 of January 30, 1946 enclosing a “Memorandum of Conversation Concerning Consular Title Deeds in Shanghai”, together with copies of the “Certificate of Other Rights” and new “Certificate of Ownership”. In that connection, there is forwarded herewith a memorandum prepared by Mr. R. T. Bryan, Jr. upon the legal aspects of this matter.

The Department’s instructions or suggestions would be appreciated.

Respectfully yours,

For the Chargé d’Affaires ad interim,
Robert L. Smyth
[Page 1319]

Memorandum by Mr. Robert T. Bryan, Jr., the Special Assistant to the Embassy in China, to the Counselor of Embassy (Smyth)

The Land Law of China reverts back to primordial antiquity when the mythical emperors, Yue and Suen, are alleged to have occupied the Imperial Throne. During that period the jurisprudence governing land was summarized in one terse maxim, “Every inch of land is the property of the Emperor”. This epitomization of the ancient law is the fundamental and axiomatic foundation of all Chinese law and psychology relating to real estate. It has been brought forward into modern Chinese law by the statement that “All land within the territory of the Republic of China belongs to the Chinese people as a whole.”15

Predicated upon this ancient aphorism, the people were not permitted to own land but could only lease it from the Emperor, paying as rent a certain percentage of the produce of the soil. Gradually there were evolved two forms of deeds, namely White Deeds and Red Deeds, which were in truth and in fact merely perpetual leases. White Deeds were unofficial transfers from private party to private party which had not been officially approved by the Government. When a White Deed was stamped with a red stamp by the appropriate government official, it became a duly authenticated Red Deed approved by the government. Later a new type of deed was issued known as a Fangtan, which in recent years has been altered to a document designated a Tu Ti Cheng. The Chinese Government now proposes to change the Tu Ti Cheng to a “Certificate of Ownership”.

With the advent of extraterritoriality and the impingement of occidental ideas upon the ancient civilization and traditions of China, it was only natural that the Chinese Government considered that no greater rights, with reference to real estate, should be granted to aliens than to Chinese. Since Chinese deeds were in reality perpetual leases, only perpetual leases could be granted to foreigners.

Upon the inditing of the Land Regulations of the International Settlement at Shanghai, a new form of perpetual lease, or consular title deed, was evolved. This perpetual lease was issued by the Chinese Government through the medium of the Consulate concerned. Briefly, the procedure was for the foreigner to purchase the land together with documents of title from the owner and to present such documents of title to his Consulate. The Consulate in turn forwarded the documents to the Chinese Land Office which, in due course, if the [Page 1320] documents were found to be genuine, issued a perpetual lease upon a form supplied by the Consulate. This perpetual lease provided that the holder held the property in perpetuity provided he paid the ground rent to the Chinese Government, which generally amounted to approximately 1500 cash per year. It has been held by some of the former extraterritorial courts that such titles as evidenced by consular title deeds are indefeasible except upon proof by due process of law of fraud or undue influence.

In the early days of the International Settlement, lawyers evolved the idea, although there was no support for such idea in the Land Regulations, that Chinese were not permitted to own land in the Settlement. From this idea sprang the system of Chinese registering land in the names of foreigners. The registered owners, although they might not be the actual or beneficial owners, were considered to hold the naked legal title. The actual or beneficial owners were given declarations of trust by the registered owners stating that the property was held in trust by them for the actual owners. This became a profitable and thriving business for lawyers and real estate companies and is a practice which has been greatly resented by the Chinese Government as an abuse of extrality.

Article IV of the new Sino-American Treaty, signed in 1943, inter alia, provides: First, that existing titles to property in China possessed by nationals (including corporations) or by the Government of the United States of America shall be indefeasible and shall not be questioned except upon proof established through due process of law or [of] fraud or of other fraudulent or dishonest practices. And second, if the Chinese Government desires to replace perpetual leases by new deeds of ownership, it must do so without cost to the owner.

As to the first point, the word “possess” must be emphasized. Interested parties contend that registered owners, even if they are not the real owners, possess the legal title. This is based on the Anglo-Saxon equitable theory that a naked trustee is the legal owner. Predicated upon this theory, they submit that all Consular title deeds registered in the names of foreigners are entitled to the benefits granted by the new treaties made with China in 1943. If this view is accepted it will be tantamount to throwing the cloak of American and British treaty rights over Chinese. This it seems was not the intention of the High Contracting Parties.

A more reasonable construction is that the word “possess” must be construed in accordance with the lex loci rei sitae—this in accordance with decisions of former extraterritorial courts which have held in several cases that land disputes must be determined in accordance with local or Chinese law. Strength and color is added to this construction when we consider Article I of the new treaty signed in [Page 1321] 1943 by the United States and China, which, inter alia, provides: “Nationals of the United States of America in such territory shall be subject to the jurisdiction of the Government of the Republic of China in accordance with the principles of international law and practice,” According to Chinese law, there are no trusts except what may be designated as foundations. Foundations may be loosely described as eleemosynary corporations which have been endowed by some individual or group of individuals. They must be registered as corporations. Ordinary trustees are regarded only as agents representing principals. Registered owners who are not also the actual owners are, according to Chinese law, only agents. The protagonists of this construction consider, and rightly so, that only persons who are both registered owners and actual owners are entitled to the benefits of the new treaties which were signed in 1943.

As to the second point, the treaty is clear as it states in effect that if the Chinese Government wishes to replace, with new deeds of ownership, existing perpetual leases, it must do so without cost to the owner and that the new deeds must fully protect the holders of perpetual leases without diminution of their prior rights and interests including the right of alienation. The “Certificate of Other Rights” which the Chinese Government proposes to issue and which has been mentioned in despatches and cables is not only not satisfactory but also does not comply with the provisions of the treaty. From the treaty it is clear that the Chinese Government should issue to Americans the same deeds as it issues to Chinese. The Land Office contemplates revoking all Tu Ti Cheng’s which it regards as temporary and proposes issuing new “Certificates of Ownership”. If the Chinese Government decides to replace consular title deeds with new deeds, it should issue the proposed new “Certificate of Ownership” to the holders of consular title deeds. If it wishes, however, to validate perpetual leases by stamping them or by the issuance of a general edict, such procedure would appear not to impinge upon the treaty.

It can be seen from the memorandum of the conversation between Messrs. Josselyn, Bryan and T. K. Ho, which has already been forwarded to you, that the Chinese Government will agree to issue the same deeds to Americans as it proposes to issue to Chinese or to validate consular title deeds by stamping or general edict; provided the United States Government admits the second construction above mentioned of the word “possess” is correct.

Prior to leaving Shanghai, I discussed with P. R. Josselyn, American Consul General at Shanghai, the detailed procedure for handling this matter. It was suggested that the procedure might be broadly laid down as follows: First, the Shanghai Consulate General should circularize all holders of American consular title deeds requesting them [Page 1322] to bring their title deeds to the Consulate. Second, registered owners who are also the real owners should be required to make an affidavit stating that they are the actual owners as well as the registered owners. Third, if the Shanghai Consulate General is satisfied with the truth of the affidavit, it should give the owner a statement or certificate to the effect that he is the actual owner. Fourth, the owner should then take his consular title deed together with his statement or certificate, issued by the Shanghai Consulate General, to the Chinese Land Office for the issuance of a new deed or stamping without charge. Fifth, registered owners who are not beneficial owners should have their duplicate copy of the deed in the Consulate files marked cancelled. Sixth, beneficial owners who are not citizens of the United States should apply direct to the Chinese Land Office for the issuance of new deeds.

If this procedure is adopted, the treaties will be observed, and the Chinese will be satisfied.

  1. Article VII of the Land Law. [Footnote in the original.]