3 February 2021
Introduction
The question of whether or not security interests can be transferred automatically along with the transfer of the principal claims has always been a key point in transactions involving non-performing assets. A top priority now for many domestic and overseas investor is whether the mortgages on real estate will be transferred automatically along with the principal claims.
Contract Law, Property Law and other relevant judicial interpretations provide an important legal basis for the automatic transfer of security interests; however, the Administrative Measures for the Mortgage of Urban Real Estate (in Chinese, 城市房地产抵押管理办法) (the “Urban Real Estate Measures”) and the Detailed Rules for the Implementation of the Interim Regulations on Real Estate Registration (in Chinese, 不动产登记暂行条例实施细则) (the “Real Estate Registration Regulations”) require registration for the transfer of mortgages. The Provisions of the Supreme People's Court on Several Issues concerning the Application of Law in the Trial of Cases Involving the Assets Generated from the Acquisition, Management, or Disposal of Non-Performing Loans of State-owned Banks by Financial Asset Management Companies (in Chinese, 最高人民法院关于审理涉及金融资产管理公司收购、管理、处置国有银行不良贷款形成的资产的案件适用法律若干问题的规定) (Fa Shi [2001] No. 12) (the “Provisions on Non-Performing Loans”) were promulgated by the Supreme People’s Court on November 4, 2001. According to these provisions, a more specific rule was formed regarding the past transactions of non-performing loans. A financial asset management company was entitled to the real estate mortgages after acquiring the claims originally owned by a state-owned bank. As for the transfer of other types of non-performing loans, it remains to be seen whether real estate mortgages can be transferred automatically along with the principal claims. Meanwhile, certain lower level courts hold that the transferee of the principal claims shall only acquire the mortgages on real estate after completing registration for the change of a mortgage . In this context, many domestic and overseas investors are worried about the transfer of the mortgages on real estate, and we have received inquiries from investors.
The Minutes of the National Court’s Civil and Commercial Trial Work Conference (the “Jiu Min Minutes”), the Civil Code and other relevant judicial interpretations promulgated in recent years have endorsed the principle of the automatic transfer of mortgages on real estate along with the principal claims. On the occasion of the official implementation of the Civil Code, this article aims to put forward our understanding and views on the transfer of mortgages on real estate based on our legal research, case studies and practice analysis .
I. Disputes over the transfer of mortgages on real estate in past transactions
In the basic theories of civil law, security interests shall be subordinated to principal claims, which are specifically embodied in the subordinate nature of the creation, transfer and extinction of the security interests, i.e. the security interests are conditional on the existence of the principal claims, transferred along with the principal claims and extinguished due to the extinction of the principal claim .Mortgages on real estate are the most typical and common type of security interest contemplated under financing transactions, and in theory, the mortgages on real estate shall be transferred along with the transfer of the principal claims; otherwise, it will go against the protection of the principal claims or the facilitation of transactions, and it also contradicts the legislative intent of the relevant basic civil laws.
a) Confusion due to a conflict of laws and regulations
Prior to the promulgation of the Jiu Min Minutes and the Civil Code, numerous laws and judicial interpretations provided that the security interests shall be transferred along with the transfer of the principal claims, where registrations are not required for the transfer of security interests. For example, Article 81 of the Contract Law provides that where the creditor assigns its rights, the assignee shall acquire the accessory rights related to the claims, except for the accessory rights exclusively belonging to the creditor; Article 192 of the Property Law provides that the mortgages may not be separated from the principal claims to be transferred, or to be used to secure other claims, and if the principal claims are transferred, the mortgages shall be transferred together, unless otherwise provided for by law or agreed upon by the parties; Article 72 of the Interpretation of the Supreme People's Court on Several Issues concerning the Application of the Security Law of the People's Republic of China (in Chinese, 最高人民法院关于适用〈中华人民共和国担保法〉若干问题的解释) provides that if the principal claims are divided or partially transferred, each creditor may enforce the mortgages to the extent of its share in the claims.
However, according to Article 37 of the Urban Real Estate Measures, when the mortgages are transferred, a mortgage transfer contract shall be entered into, and registrations for the change of mortgages shall be completed; according to Article 69 of the Real Estate Registration Regulations released by the Ministry of Natural Resources, where the mortgages are transferred due to the transfer of the principal claims, the parties concerned may apply for registration of the mortgage transfer, with the real estate ownership certificate, the real estate registration certificate, the agreement on the transfer of the secured principal claims, the materials proving that the debtor has been notified by the creditor and any other relevant materials as supporting documents. The aforementioned regulations have successively posed specific requirements for the registration of mortgage transfers, which, to a certain extent, have heightened the worries of investors regarding the transfer of real estate mortgages.
According to Article 9 of the Provisions on Non-Performing Loans, a financial asset management company is entitled to the mortgages after acquiring the secured claims, and the original mortgage registrations shall remain effective. Although the Provisions on Non-Performing Loans has been abolished, it provided solid legal grounds for the automatic transfer of mortgages on real estate when a financial asset management company acquired the claims from a state-owned bank in the previous transactions. Whereas, in terms of other types of non-performing loans such as loans provided by banks, trust companies and other non-financial enterprises, it was controversial whether the mortgages on real estate may be transferred automatically when the lenders transferred the non-performing loans to investors directly.
b) Difficulties in completing registration for the transfer of mortgages
As the Urban Real Estate Measures and the Real Estate Registration Regulations specifically require registrations for the transfer of real estate mortgages, in order to seek protection to the fullest extent, certain domestic and overseas investors have considered registering such transfers pursuant to the aforesaid regulations upon acquiring the principal claims.
However, in practice, it is rather difficult to complete registration for the transfer of mortgages on real estate following the transfer of non-performing loans. One of the reasons is that most real estate registration authorities require mortgagors to cooperate in completing the registrations. However, once loans have become non-performing, the relevant mortgagors are less likely to cooperate in completing the registrations for mortgages transfer solely for the benefit of the creditor.
In order to better demonstrate the requirements for registration for the transfer of mortgages on real estate, we consulted with several real estate registration centers in regions where non-performing assets are actively traded, including Beijing, Shanghai, Zhejiang Province, Jiangsu Province, Chongqing and Guangdong Province, and the requirements raised by the relevant real estate registration centers are as follows:
No.
Location of
Registration Centers
Registration Requirements
1
Haidian District in Beijing
The mortgagor, the original creditor and the transferee of the claims are required to be present at the registration center to complete the registration together.
2
Jing'an District in Shanghai
3
Hangzhou, Zhejiang Province
4
Nanjing, Jiangsu Province
5
Nanjing, Jiangsu Province
6
Guangzhou,
Guangdong Province
It is impossible to complete the registration for the transfer of mortgages on real estate directly.
The original mortgage registration should be cancelled first, and then the mortgagor and the transferee of the claims should complete a new registration for mortgages.
6
Shenzhen,
Guangdong Province
The original creditor and the transferee of the claims should be present at the registration center to complete the registration together, provided that the documents signed by the mortgagor acknowledging the receipt of the notice of mortgages transfer is submitted.
It appears that the Urban Real Estate Measures and the Real Estate Registration Regulations only took into account the registrations for mortgage transfers when claims are transferred under normal circumstances but failed to take into full account the protection for the transferee of non-performing loans. Once the loans have become non-performing, it is difficult for the creditor to obtain friendly cooperation from the debtors (including the mortgagor), and very few mortgagors are willing to cooperate in completing the registration for mortgage transfers solely for the benefit of the creditor, which makes it difficult for the transferee of the claims to go through the registration procedures in non-performing loans transactions.
II. Attitudes of the courts towards the transfer of real estate mortgages in legal practice
In legal practice, most of the courts including the Supreme People’s Court hold that mortgages on real estate are accessory rights which shall be transferred along with the principal claims; however, some lower level courts hold that mortgages on real estate can only be transferred upon the completion of registration for mortgage transfer.
The Supreme People’s Court rendered a civil ruling ([2019] Zui Gao Fa Min Shen No. 5925) on 20 November 2019, explicitly stating that where the principal claims are transferred, the relevant mortgages shall be transferred together unless otherwise provided for by the law or agreed upon by the parties; to the extent that the mortgagor alleges that after the claims had been transferred, the transferee shall not be entitled to the priority of repayment with regard to the mortgaged property without completing registration for the mortgage transfer, such allegations shall be groundless. In addition to this case, the Supreme People’s Court has also applied the principle that mortgages on real estate shall be transferred along with the principal claims in several other cases as follows:
No.
Case No.
Date of Judgment
Conclusion
1
[2019] Zui Gao Fa Min Zhong No. 459
June 27, 2019
Mortgages are accessory rights and shall be transferred along with the transfer of principal claims, which is in compliance with laws.
2
[2019] Zui Gao Fa Min Shen No. 1235
April 28, 2019
The transferee of principal claims obtained the existing mortgages on the strength of explicit regulations under the laws rather than a new mortgage contemplated under a new mortgage contract, thus the existing mortgage shall not be void due to an absence of registration for the mortgage transfer.
3
[2018] Zui Gao Fa Min Zhong No. 131
May 30, 2018
Mortgages shall be transferred along with the transfer of principal claims.
4
[2015] Min Shen No.2040
September 28, 2015
The transferee of principal claims obtained the existing mortgages on the strength of explicit regulations under the laws rather than a new mortgage contemplated under a new mortgage contract, thus the existing mortgage shall not be void due to the absence of registrations for the mortgage transfer.
5
[2014] Min Shen No.1725
27 November 2014
The principle that mortgages shall be transferred along with the transfer of principal claims is provided under the Contract Law, which also aligns with the Provisions on Non-Performing Loans and Property Law.
Meanwhile, we became aware that some lower level courts take the view that the registration of the change of mortgages must be completed after the transfer of the principal claims, otherwise the relevant mortgages on real estate cannot be vested in the transferee of the principal claims. For example, the People’s Court of Changqing District in Jinan City rendered a civil judgment ((2016) Lu 0113 Min Chu No. 12) on 12 May 2016, stating that the registration of the change of mortgages shall be completed after the transfer of the principal claims, otherwise mortgages will not be transferred to the transferee of the principal claims. Further, in a civil judgment ([2017] Xiang 11 Min Zhong No. 2785) rendered by the Intermediate People’s Court of Yongzhou City in Hunan Province on 13 December 2017, it held that after the transfer of the principal claims, if the transfer of the mortgages on buildings has not been registered, the change of mortgages shall not take place and the transferee of the principal claims shall have no priority of repayment with regard to the mortgaged buildings.
III. The Jiu Min Minutes, Civil Code and other relevant judicial interpretations enhanced certainty for the automatic transfer of mortgages on real estate along with the principal claims
According to Article 62 of the Jiu Min Minutes published by the Supreme People’s Court on 8 November 2019, mortgages are rights subordinate to the principal contract, and in light of the principle of “subordinating right attaching to the principal right”, if the principal claims are transferred, the mortgages securing such claims shall be transferred concurrently, unless otherwise provided for by the law or agreed upon by the parties concerned; if the transferee enforces the mortgages against the mortgagor, and the mortgagor makes a defense that the transferee is not a party to the mortgage contract or that the registration of the change of mortgages has not been completed, the courts shall not uphold such a defense. When answering questions raised by reporters regarding the Jiu Min Minutes, the person in charge of the Second Civil Division of the Supreme People’s Court emphasized that a specific provision has been accommodated in the Jiu Min Minutes on whether failure to complete the registration of the change of mortgages may derogate the transfer of the mortgages.
According to Article 407 and Article 547 of the Civil Code which came into effect on 1 January, 2021, where the principal claims are transferred, the mortgages securing the claims shall be transferred concurrently, unless otherwise provided for by the law or agreed upon by the parties concerned; when the creditor transfers its claims, the transferee shall acquire the accessory rights related to the claims, except for the accessory rights exclusively belonging to the creditor; the acquisition of accessory rights by the transferee shall not be affected due to an absence of the registrations for the transfer or failure in shifting possession. In addition, Article 39 of the Interpretation of the Supreme People’s Court on the Application of the Security System of the Civil Code of the People’s Republic of China stipulates that where the principal claims are divided among creditors or partially transferred, and each creditor alleges to enforce its respective security interests to the extent of its share in the claims, such allegations shall be sustained by the court pursuant to law, unless otherwise provided for by the law or agreed upon by the parties.
In light of the above, the Jiu Min Minutes, the Civil Code and other relevant judicial interpretations have provided a solid basis and effective protection for the automatic transfer of mortgages along with the principal claims, which will significantly dispel the concerns of domestic and overseas investors about the transfer of mortgages on real estate.
IV. Conclusion
The Civil Code, the Contract Law, the Property Law, the Jiu Min Minutes and other relevant judicial interpretations, during each applicable period of time, have provided a solid legal basis for the automatic transfer of mortgages on real estate along with the transfer of the principal claims, even though the registration of the transfer of mortgages on real estate is still required under certain departmental rules and regulations, and some lower level courts have taken the view that the registration of the change of mortgages must be completed after the transfer of the principal claims. In the interim, most courts including the Supreme People’s Court hold that mortgages on real estate are subordinate to the principal claims and shall be transferred along with the principal claims. Therefore, we tend to believe that once a creditor transfers its principal claims, the relevant mortgages on real estate shall be transferred automatically along with the principal claims, no matter whether the transferee of the principal claims has completed the registration for the mortgage transfer, provided that the relevant creditor and mortgagor have not reached an agreement to restrict the transfer of the mortgage.
We believe that with the implementation of the Civil Code, the principle that mortgages shall be transferred along with the principal claims will become more definite and widely applicable, which will further boost the market of non-performing assets.
For further information, please contact:
Catherine Miao, Partner, Jun He
miaoqh@junhe.com
1. Pursuant to the Decision of the Supreme People's Court on the Abolition of Certain Judicial Interpretations and Related Normative Documents (Fa Shi [2020] No. 16) adopted by the Judicial Committee of the Supreme People's Court on December 23, 2020, the Regulations on Non-Performing Loans shall be abolished on January 1, 2021.
2. For example, such views were shared in the Civil Judgment ((2016) Lu 0113 Min Chu No. 12) made by the People's Court of Changqing District, Jinan on May 12, 2016 and the Civil Judgment ((2017) Xiang 11 Min Zhong No. 2785) made by the Intermediate People's Court of Yongzhou, Hunan Province on December 13, 2017.
3. The relevant analysis and discussion in this article are based on the assumption that the mortgagor and the creditor have not reached an agreement to restrict transfer of the security interests.
4. Wang Liming, ed. Civil Law, Renmin University Press, 2010.
5. Pursuant to the Decision of the Supreme People's Court on the Abolition of Certain Judicial Interpretations and Related Normative Documents (Fa Shi [2020] No. 16) adopted by the Judicial Committee of the Supreme People's Court on December 23, 2020, the Interpretation of the Supreme People's Court on Several Issues concerning the Application of the Security Law of the People's Republic of China shall be abolished on January 1, 2021.
