By Song Ruiqiu and Lou Xiaohan King & Wood Mallesons’ Finance & Capital Markets group.
Middle Huaihai Road in Shanghai is home to a stately piece of architecture a well-known foreign owned Shanghai Redleaf International Women & Children’s Hospital (“Redleaf”). Incorporated on 9 December 2011, Redleaf had been operating from Middle Huaihai Road for over four years. As a hospital with high-end positioning, excellent medical staff, luxurious facilities, and quality services, Redleaf had attracted clients from all over the world. However, on 31 August 2017, Redleaf made a sudden announcement that it would be relocating its services to a different location at the request of the government. The move that followed, happened almost overnight and, no doubt, brought with it significant consequences for the hospital, and its staff and patients.
Although there are some missing details, from what we understand, the relocation happened for the following two reasons:
- As a response to the “Notice on Total Termination of Paid Services Provided by the Military Forces and the Armed Police” from the Central Military Commission.
- The construction of Redleaf was deemed illegal
The case provides a cautionary tale for investors and operators of medical facilities in China. In our view, the distressing relocation could have been avoided through comprehensive due diligence and compliance with local regulations. In this article, we provide a brief analysis and key lessons for companies operating in the health sector in China.
Redleaf was situated on military owned land, and we believe Redleaf’s lease may have lacked government approval. Since 2012, the State has allowed the military to lease unused land subject to approval. The approval process is governed by the “Regulation on the Management of the Military Owned Real Estate Lease”. A “Military Owned Real Estate Lease License” must be obtained and displayed in an obvious place on the property. The tenant must register and file the lease agreement and licence at a local government real estate administrative department within 30 days of obtaining the license. An agreement will be void without approval from relevant authorities. We speculate that the awkward situation that Redleaf was confronted with may be the result of not following the correct procedure.
The following situations give rise to an ‘illegal construction’ in China:
- Anything built outside the scope of a “Permit for a Planned Construction Project” is an illegal construction. According to the “Law of the People’s Republic of China on Urban and Rural Planning”, if a construction does not comply with the provisions of a permit:
- if rectification can be made so that the construction complies with the permit:
- rectification within a specified time may be ordered; and
- a fine of between 5 and 10% of the construction project cost by the department in charge of urban and rural planning.
- if rectification is not possible, demolition within a specified time period may be ordered.
- if demolition is not possible, the construction or its income shall be confiscated, and a fine of up to 10% of the construction project cost could be given.
- Provision of unapproved services. This could result in an order to terminate operations, confiscation of related income and medicine by the health administrative department and a fine of up to RMB10,000.
In either of these two situations, an operator may be required to terminate operations and leave the premises.
The government’s regulation of medical facilities is not limited to land leases and construction. There are strict requirements around planning, registered capital, staff allocation, design and so on. For instance, in terms of planning, the “Guiding Principles of Medical Institutions Planning” (2016) removed restrictions on the number and location of private medical institutions, provided that they comply with a region’s urban planning. But in practice, if a region is saturated with a certain type of medical facility, local government may exercise their discretion to prevent its further development. Foreign-invested medical facilities must meet additional conditions. For example, in terms of industrial policy, foreign-invested medical facilities are classed as restricted industries. As a result, their establishment and reinvestment must be approved by authorities and is subject to many restrictions.
In addition, government supervision of medical institutions has become increasingly stringent. Areas such as fire safety, environment, and business premises are the focus of regular inspections. Laws and regulations such as the “Administrative Regulations on Medical Institutions” permit the Health and Family Planning Commission and other authorities to order rectification, hand out fines and even revoke a facility’s Practicing License resulting in irreparable loss to investors.
Fortunately, by negotiating with authorities, Redleaf was able to survive a transition period in designated locations, undergo multiple relocations in less than a year, and continue to provide medical services. But initial non-compliance issues meant that Redleaf suffered unnecessary loss arising from issues such as treatment disruption, two relocations and having to split its original layout. This could have been avoided with due diligence. Investors and operators of medical facilities in China should not neglect the risks and high costs associated with non-compliance in the establishment process. In order to avoid unnecessary loss and to ensure continuous operation, investors should seek legal guidance. It is vital to conduct comprehensive due diligence around land, regulations and operation, to avoid unnecessary risks.
 A Letter to All Clients of Redleaf International Women & Children’s Hospital, available at: http://www.redleafhospital.com/index/news/type/1,369.
 According to a Letter of Notice from Xuhui District Health and Family Planning Commission
 Shanghai’s Redleaf Hospital Forced to Relocate After Military Terminates Land Agreement, available at: http://shanghaiist.com/2017/09/05/redleaf-hospital.php
 Regulation on the Management of the PLA Real Estate, issued by the Central Military Commission, and took effect on June 26, 2000.
 Notice on the Enhancement of Leasing Management of Vacant Military Owned Real Estate (Houyingzi No. 1285), published by the Ministry of Construction, State Administration for Industry and Commerce, and PLA General Logistics Department on December 30, 2004.
 According to the “Regulation on the Management of the Military Owned Real Estate Lease”
 according to the “Reply of the Ministry of Health to the Application of Law in the Special Rectification Work of Illegal Blood Collecting, Plasma Collecting and Illegal Medical Practice”,