CMS, China | Overview on the Stipulations on Property Rights in China’s First Civil Code





CMS, China

Overview on the Stipulations on Property Rights in China’s First Civil Code


Dear Sir or Madam,

Our last newsletter National People's Congress Adopts China’s First Civil Code has highlighted some key aspects of the new PRC Civil Code which will be effective on 1 January 2021. In this newsletter, we focus on the newly stipulated and materially revised provisions on property rights, the second part of the PRC Civil Code, that may affect your business and daily life in China. In the following, you will find an analysis and comments based on detailed comparisons of the provisions of the PRC Civil Code and the currently effective relevant laws, regulations and judicial interpretations.

Kind regards,
CMS, China

The Civil Code of the People’s Republic of China (“PRC Civil Code”) which was adopted on 28 May 2020 and will take effect on 1 January 2021 consists of 7 parts and supplementary provisions at the end. Property Rights are stipulated in the second part of the PRC Civil Code and consist of 20 chapters and 257 clauses in total. The Property Rights Part is further divided into 4 sub-parts, i.e., General Provisions, Ownership, Usufruct and Security Interests. Compared to the currently effective PRC Property Law which governs the regime of property rights, except for the newly added Right of Habitation, the Property Rights Part of the PRC Civil Code basically follows the structure of the PRC Property Law with some revisions and supplements. With the taking effect of the PRC Civil Code, the PRC Property Law will cease to be effective on 1 January 2021.

Please find below a comparison of the key provisions of the PRC Civil Code and the relevant, currently-effective laws, regulations and judicial interpretations of the PRC Supreme People’s Court:

Chapter Civil Code Relevant currently-effective Laws, Regulations and Judicial Interpretations of the PRC Supreme People’s Court Analysis and Comments
Part II Property
Rights

Sub-part I General Provisions

Sub-part I General Provisions
Article 205 This Part governs the civil relationships arising from ownership and utilization of properties. / A newly added clause, compared to the PRC Property Law, which defines the objects which shall be governed by the Property Rights Part.
       
Part II Property
Rights

Sub-part I General Provisions

Chapter 2 Creation, Modification, Transfer and Termination of Property Rights
Article 219 An interested party shall not make the obtained real property registration information public or make illegal use of real property registration materials of the right holder. Provisional Regulations on Real Estate Registration

Article 28 Any entity or individual who has access to real estate registration data shall state its purpose of inquiry to the real estate registration authorities and shall not use the obtained real estate registration data for purposes other than stated; without consent of the right holder concerned, no obtained real estate registration data shall be disclosed.
A newly added clause compared to the PRC Property Law. Article 219 follows the content of the Provisional Regulations on Real Estate Registration which expressly imposes restrictions on interested parties who obtained real property registration materials from publishing and illegal use of such information. Violation of such obligation will lead to compensation liability according to Article 32 of the Provisional Regulations on Real Estate Registration. However, the aforementioned regulations are a provisional version. According to the Work Plan on Legislation 2020 issued by the Ministry of Natural Resources dated 04 June 2020, the draft of the PRC Law on Real Estate Registration will be submitted to the State Council for review. It remains to be seen if there will be any corresponding liabilities for breach of such obligations under the future PRC Law on Real Estate Registration.
       
Part II Property
Rights

Sub-part I General Provisions

Chapter 2 Creation, Modification, Transfer and Termination of Property Rights
Article 221 Where the parties enter into an agreement on the sale of a housing property or any other agreement on rights of real property, they may apply to the registration authority for a pre-registration so as to ensure the realization of property rights in the future. Without the consent of the right holder specified in the pre-registration, any disposal of the real property after the pre-registration shall not be valid.

After the pre-registration, where creditor's rights are terminated or an application for registration is not made within 90 days from the date on which registration of real property can be performed, the pre-registration shall become void.
PRC Property Law

Article 20 A party concerned who has concluded a sale and purchase agreement on the housing property or other right of real property may, for the purpose of ensuring realization of future property right, apply to the registration authority for pre-registration pursuant to the agreement. Without the consent of the right holder specified in the pre-registration, any disposal of the real property after the pre-registration shall not be valid.

After the pre-registration, where the creditor's rights are terminated or an application for registration is not made within 3 months from the date on which registration of real property can be performed, the pre-registration shall become void.
Article 221 expand the scope of pre-registration of real property. According to the PRC Property Law, pre-registration is limited to sale and purchase of houses and other real property. After enactment of the PRC Civil Code, pre-registration can be used for all kinds of real property rights transactions. The currently effective Regulations on Real Estate Registration are a provisional version. According to the Work Plan on Legislation 2020 issued by the Ministry of Natural Resources dated 04 June 2020, the draft of the PRC Law on Real Estate Registration will be submitted to the State Council for review. It remains to be seen if there will be any implementing rules promulgated before the enactment of the PRC Civil Code.

Upon pre-registration, a property right arising from the agreement regarding real property is created and can be enforced against third parties.

Also, along with other clauses which have time limits of 3 months, the time limit for exercising the exclusive right to register the ownership of a real property has been changed to 90 days starting from the day when all the pre-conditions for the registration are satisfied.
       
Part II Property
Rights

Sub-part II Ownership

Chapter 4 General Provisions
Article 245 Immovables or movables of organizations and individuals may be requisitioned pursuant to the statutory authorization and procedures stipulated by law for emergency rescue and disaster relief, epidemic prevention and control etc. Such immovable or movable property shall, after the use, be returned to the owners. In case the immovable or movable property owned by an organization or individual is requisitioned or damaged or lost after being requisitioned, corresponding compensation shall be made. PRC Property Law

Article 44 Immovables or movables of entities and individuals may be requisitioned pursuant to statutory authorization and procedures stipulated by law for emergency rescue and disaster relief, etc. Such immovable or movable property shall, after use, be returned to the owners. In case the immovable or movable property owned by an entity or individual is requisitioned or damaged or lost after being requisitioned, corresponding compensation shall be made.
Given the background of the outbreak of COVID-19, epidemic prevention and control is expressly added into the causes for requisition.
       
Part II Property
Rights

Sub-part II Ownership

Chapter 5 State Ownership, Collective Ownership and Private Ownership
Article 248 Uninhabited sea islands shall belong to the State and the State Council shall exercise the ownership of uninhabited sea islands on behalf of the State. / This is a newly added clause. Given the lack of provisions on the ownership of uninhabited sea lands, unauthorized utilizations occurred. Article 248 clarifies the ownership of uninhabited sea lands which improves the administration of such islands from the State side.
       
Part II Property
Rights

Sub-part II Ownership

Chapter 6 Owner’s Partitioned Ownership of Buildings
Article 278 The following matters shall be decided jointly by the owners:

(1) Formulating and amending the rules of procedure for the owners' congress;
   
(2) Formulation and revision of management regulations;
   
(3) Election of the owners' committee or replacement of the members of the owners' committee;
   
(4) Selecting and dismissing the property service enterprise or any other administrator;
   
(5) Using maintenance funds for buildings and auxiliary facilities; and
   
(6) Raising funds for maintaining buildings and auxiliary facilities;
   
(7) Renovation or reconstruction of buildings and auxiliary facilities;
   
(8) Changing the use of common areas or conducting business activities by using the common areas; and
   
(9) Other important matters related to common ownership and joint management rights.

Matters to be jointly decided by the owners shall be voted by the owners whose exclusive parts account for two-thirds or more of the total areas and the number of which accounts for two-thirds or more of the total number of owners. A decision on any matter stipulated in Items (6) through (8) of the preceding paragraph shall require the consent of the voting owners whose exclusive parts accounts for three-fourths or more of the total areas and the number of which accounts for three-fourths or more of the total number of owners. And a decision on any other matter stipulated in the preceding paragraph shall require the consent of the voting owners whose exclusive parts account for half or more of the total areas and the number of which accounts for more than half of the total number of owners.
PRC Property Law

The owners shall jointly decide on the following matters:
     
  (1) Draft and revise the rules for owners' general meetings;
     
  (2) Draft and revise the management rules for the building and auxiliary facilities;
     
  (3) Elect the owners' committee or replace owners' committee members;
     
  (4) Appoint and dismiss estate services enterprises or other managers;
     
  (5) Raise and apply maintenance and repair funds for building and auxiliary facilities;
     
  (6) Modify and redevelop building and auxiliary facilities; and
     
  (7) Any other significant matter relating to co-ownership and co-management rights.

A decision on a matter stipulated in item (5) or (6) of the preceding paragraph shall require the consent of two-thirds or more of the owners, whose ownership of exclusive areas constitute two-thirds or more of the total area of the building. A decision on any other matter stipulated in the preceding paragraph shall require the consent of a simple majority of the owners, whose ownership of exclusive areas constitute more than half of the total area of the building.

Interpretations of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trial of Cases Involving Disputes over Partitioned Ownership of Buildings

Article 14 Where the construction entity or other parties occupy or dispose common parts, change their use functions or use them for business use without consent and the right holder claims for nuisance abatement, restoration, invalidity confirmation or loss compensation, people's courts shall support such claims.

As for using common parts for business use as specified in the preceding paragraph, if the right holder claims that the violator shall put the proceeds with rational cost deducted into the special maintenance fund or use for other purposes the owners jointly decide, People's Courts shall support such claims.

The violator shall bear the burden of proof for the cost and its rationality.
This item “use of maintenance funds” was removed from the “major matters” as stipulated in the PRC Property Law and thus, in the future will be subject to a lower threshold on voting.
   
With reference to the provision of the Interpretations of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trial of Cases Involving Disputes over Partitioned Ownership of Buildings, Article 278 of the PRC Civil Code added “change of the use of common areas or conducting business activities by using common areas” into the matters which shall be subject to the joint approval of the owners.
   
To summarize, for major matters including Items (6) to (8), the approvals of the voting owners whose exclusive parts accounts for 1/2 (2/3 * 3/4) or more of the total areas and the number of which accounts for 1/2 or more of the total number of owners are required.

For matters other than Items (6) to (8) listed in Article 278, the approvals of the voting owners whose exclusive parts accounts for 1/3 (2/3 * 1/2) or more of the total areas and the number of which accounts for 1/3 or more of the total number of owners are required.

According to the Explanation on the Draft of the PRC Civil Code made by the National People’s Congress Standing Committee dated 22 May 2020, such lowered benchmark for voting aims to solve the difficulties to reach an agreement by owners in the course of property management.
       
Part II Property
Rights

Part II Property Rights

Chapter 8 Co-ownership
Article 306 Where a co-owner by shares transfers his share of jointly owned immovable or movable property, he shall notify other co-owner(s) of the transfer conditions in time. Other co-owner(s) shall exercise their right of preemption within a reasonable period.

If more than two other co-owners intend to exercise their right of preemption, they shall determine their respective purchase percentage through consultation. If such consultation fails, they shall exercise their right of preemption in proportion to their respective co-ownership shares at the time of transfer.
Interpretation of the Supreme People's Court on Issues concerning the Application of the Property Law of the People's Republic of China (I)

Article 11 Where there are stipulations agreed by co-owners by shares during the period of preemptive purchase right, such provisions shall be applied. Where there is no stipulation, or the stipulations are not clear, the following provisions shall apply:

(1) Where a period of exercising is specified in the notice on the "same conditions" issued by the transferor to the co-owners by shares, it shall be exercised within such period.
   
(2) Where no period of exercising is specified in such notice or if such period is less than 15 days from the receipt of the notice, the period of exercising shall be 15 days.
   
(3) Where no such notice is sent from the transferor, the period of exercising shall be 15 days from the day when the co-owners by shares know or should have known the final "same conditions". or
   
(4) Where no such notice is sent by the transferor, and the day the co-owners by shares know or should have known the final "same conditions" cannot be confirmed, the period of exercising shall be six months from the date the share of the co-ownership is transferred.
This is a newly added clause. With reference to the relevant judicial interpretation of the Supreme People’s Court, Article 306 of the PRC Civil Code expressly imposes notification obligations on the co-owners by shares and clarifies the provisions on how to exercise preemption rights.
       
Part II Property
Rights

Sub-part II Ownership

Chapter 9 Special Provisions on Obtaining Ownership
Article 322 The ownership of a property arising from processing, attachment or mixing shall be determined according to the agreement where available. Where no agreement exists, or the agreement is unclear, the ownership shall be determined in accordance with the law. Where the law does not provide stipulations, the ownership shall be determined in accordance with the principles of maximizing the utilization of the property and protecting bona fide parties. If one party's fault or the confirmation of the ownership of property has caused damage to the other party, compensation or indemnity shall be made. Opinions of the Supreme People's Court on Several Issues concerning the Implementation of the General Principles of the Civil Law of the People's Republic of China (Trial Implementation)

Article 86 Where a non-property owner adds fixture to the property of any other person that he uses, and the property owner agrees to such adding and reaches agreement on how to deal with the fixture, the agreement shall be followed. If there is no agreement and the parties cannot reach an agreement through negotiation, the property owner may order to dismantle the fixture if it can be dismantled. If the fixture cannot be dismantled, it may be given to the property owner after being converted into money. If dismantle of such fixture results in any loss of the property owner, the non-property owner shall bear compensation liabilities.
This is a newly added clause. With partly reference to the opinions issued by the Supreme People’s Court, Article 322 of the PRC Civil Code clarifies the ownership of attached fixtures where properties are processed, attached or mixed and sets out the handling principle where no law or regulation is applicable.
       
Part II Property
Rights

Sub-part III Usufruct

Chapter 12 Land Use Right of Construction Land
Article 346 Creation of the right to use construction land shall conform to the requirements of conservation of resources and environmental protection and the provisions of laws and administrative regulations on land use and shall not harm existing usufructuary rights. PRC Property Law

Article 136 Newly created rights to use construction land shall not infringe any existing usufructuary rights.
Following the principle of resources conservation and ecological environment protection stated in Article 9 of the PRC Civil Code, such principle is specified for granting a construction land use right. Such granting of construction land use right shall be line with the provisions on the planning purpose of the concerned land plot and shall not infringe the already existing usufructuary rights.

For example, according to the Soil Environmental Quality Risk Control Standard for Soil Contamination of Construction Land, the soil contamination risk screening indexes for residential land and industrial land are different. The land resources authorities cannot grant land use rights in a residential area to an industrial project, especially a heavily polluting one. Granting land use rights shall fit in the planning use of the surrounding area.
       
Part II Property
Rights

Sub-part III Usufruct

Chapter 12 Land Use Right of Construction Land
Article 348 Where use rights of construction land are created in the form of bidding, auction, agreement, etc., the parties shall enter into a written contract for granting of such right.

A contract on granting of construction land use rights shall generally contain the following items:

(1) Names and domiciles of the parties;
   
(2) Boundaries and area, etc. of the land;
   
(3) Space to be occupied by buildings, structures and auxiliary facilities thereof;
   
(4) Purpose of use and planning conditions;
   
(5) Term of the construction land use right;
   
(6) Payments of granting fees and other expenses; and
   
(7) Dispute settlement.
PRC Property Law

Article 138 Where use right of construction land is created in the form of bidding, auction, agreement, etc., the parties shall enter into a written contract for granting of such right.

A contract on granting of construction land use right shall generally contain the following items:


(1) Names and domiciles of the parties;
   
(2) Boundaries and area, etc. of the land;
   
(3) Space to be occupied by buildings, structures and auxiliary facilities thereof;
   
(4) Purpose of use
   
(5) Terms of use;
   
(6) Payments of granting fees and other expenses; and
   
(7) Dispute settlement.
Planning conditions are expressly added in the terms which shall be contained in a construction land use right granting contract.

Although no such requirement was stipulated in the currently effective PRC Property Law, in practice, planning conditions are usually already included in the templates of land use right granting contracts issued by local governments, or at least incorporated in the template as an appendix or as supplementary terms. Planning conditions usually contain indexes like planning use of the land plot, building density, floor area ratio, green area ratio, height limits of buildings, etc. Failure to meet planning conditions will result in breach of the land use right granting contract and various liabilities depending on the seriousness of the breach.
       
Part II Property
Rights

Sub-part III Usufruct

Chapter 12 Land Use Right of Construction Land
Article 359 The term of construction land use right for residential property shall be automatically renewed upon expiry. The payment, reduction of or exemption from the renewal fee shall be handled in accordance with the provisions of laws and administrative regulations.

The term of construction land use right for non-residential property shall be renewed upon expiry pursuant to the provisions of the law. In case there is any agreed stipulation on the ownership of buildings and other real properties on the aforesaid land, such stipulation shall prevail. In the case of no or unclear stipulations, the ownership shall be determined in accordance with the provisions in the laws and administrative regulations.
PRC Property Law

Article 149 The term of construction land use right for residential property shall be automatically renewed upon expiry.

The term of construction land use right for non-residential property shall be renewed upon expiry pursuant to the provisions of the law. In case there is any agreed stipulation on the ownership of buildings and other real properties on the aforesaid land, such stipulation shall prevail. In the case of no or unclear stipulations, the ownership shall be determined in accordance with the provisions in the laws and administrative regulations.
Article 359 for the first time, specifies that a fee shall be paid for such renewal of construction land for residential property unless exempted by laws or regulations. This clause may cause the concern of additional land use right fees having to be paid in the general public.

According to the Reply on How to Properly Deal with Several Cases of Expiry of Land Use Right for Residential Property issued by the Department of Land Resources of the State Council to the Department of Land Resources of Zhejiang Province, upon expiry of the land use right for residential property, no application of renewal is required, and no fees shall be charged by the land resources authorities at the city and county levels. However, the rules set out by this reply are for handling the limited case in Zhejiang Province.

As set out by Article 359, it seems renewal with payment of fee shall be the principle. The detailed implementing rules are still under debate. Given the uniqueness and sensitivity of the private ownership over real property in China, it is expected that such legislation may take longer.

On the other hand, the provisions on non-residential construction land remain unchanged. According to the PRC Law on the Administration of Urban Real Estate, where a land use right holder needs to continue to use the piece of land upon expiry of the term of use stipulated in the land use right granting contract, the land use right holder shall apply for extension no later than one year prior to expiry of the term. Such application shall be approved, unless the land needs to be requisitioned for public interest. Where extension of the term is approved, a new land use right granting contract shall be concluded, and a granting fee for the shall be paid as required.
       
Part II Property
Rights


Sub-part III Usufruct

Chapter 14 Right of Habitation

Article 366 The holder of the right of habitation shall, according to the stipulations of a contract, have the usufruct to possess and use the dwelling house of others so as to meet the needs of living and dwelling.

Article 368 The right of habitation shall be established without compensation, unless otherwise agreed by the parties. Those who establish the right of habitation shall apply to the registration authority for registration of the right of habitation. The right of habitation shall be established upon registration.

Article 369 The right of habitation shall not be transferred or inherited. The dwelling house on which the right of habitation is established shall not be leased except where the parties agree otherwise.

Article 370 The right of habitation shall be terminated upon the expiration of its term or upon the death of the person who has the right of habitation. Upon termination of the right of habitation, deregistration formalities shall be promptly completed.

Article 371 The relevant provisions of this Chapter shall apply mutatis mutandis to the establishment of the right of habitation in the form of wills.
/ Right of habitation is a newly created usufructuary right in the PRC Civil Code. The holder of a right of habitation has the right to occupy and use the dwelling house of others upon registration based on an agreement or a will.

According to the Explanation on the Draft of the PRC Civil Code made by the National People’s Congress Standing Committee, right of habitation is for the purpose of “a stable living and dwelling need (of the right holder”). Further, according to the Explanations on Submission of the Sub-parts of the PRC Civil Code (draft) for Review made by the National People’s Congress Standing Committee on 27 August 2018, right of habitation is for “providing a legal safeguard for public rental housing (available for people who cannot afford buying an apartment nor are qualified for low-incoming housing) and house-for-pension program (selling housing to the government in exchange for pension)”. Given its non-profit purpose, right of habitation is not allowed to be transferred or inherited.
       
Part II Property
Rights

Sub-part IV Security Interests

Chapter 16 General Rules
First paragraph of Article 388

For the establishment of collateral rights, a security contract shall be entered into in accordance with the PRC Civil Code and other related laws. Security contracts include mortgage contracts, pledge contracts and other contracts with function of security. A security contract shall be subordinate to the principal contract. The security contract shall be deemed invalid where the principal contract becomes void, unless otherwise prescribed by the law.
PRC Property Law

First paragraph of Article 172

For the establishment of collateral rights, a security contract shall be entered into in accordance with this law and other related laws. A security contract shall be subordinate to the principal contract. The security contract shall be deemed invalid when the principal contract becomes void, unless otherwise prescribed by the law.
Article 388 of the PRC Civil Code further clarifies the scope of security contracts. Besides the traditional mortgage contracts and pledge contracts, contracts with function of security are also deemed as security contracts. With such definition, for example, a factoring contract, which was newly added in the Contracts Part of the PRC Civil Code as Article 761, is also a kind of security contract. Thus, compared to before, the scope of security contracts is extended.
       
Part II Property
Rights

Sub-part IV Security Interests

Chapter 17 Mortgage Rights
Article 399 The following properties shall not be mortgaged:

(1) land ownership;
   
(2) use rights of residential sites, land set aside for private use, hilly land set aside for private use, and other land owned by collectives, except those that may be mortgaged as prescribed by the law;
   
(3) educational, medical and health and other public welfare non-profit legal persons established with the aim of benefitting the public such as schools, kindergartens, medical institutions, etc.;
   
(4) properties with unclear or controversial ownership or use rights;
   
(5) properties legally confiscated, seized or supervised; and
   
(6) other properties that cannot be mortgaged as prescribed by the law or administrative regulations.


PRC Property Law

Article 184 The following properties shall not be mortgaged:

(1) land ownership;
   
(2) use rights of cultivated land, residential sites, land set aside for private use, hilly land set aside for private use, and other land owned by collectives, except those that may be mortgaged as prescribed by the law;
   
(3) educational, medical and health and other public welfare facilities of institutions and social groups with the aim of benefiting the public such as schools, kindergartens, hospitals, etc.;
   
(4) properties with unclear or controversial ownership or use rights;
   
(5) properties legally confiscated, seized or supervised over; and
   
(6) other properties that cannot be mortgaged as prescribed by law or administrative regulations.
This article applies to mortgages of both movables and immovables.

Compared to Article 184 of the PRC Property Law, use right of cultivated land is no longer included in the list of properties, which cannot be mortgaged, in the PRC Civil Code. In other words, the use right of cultivated land can be mortgaged after the PRC Civil Code comes into effect on 1 January 2021.
       
Part II Property
Rights

Sub-part IV Security Interests

Chapter 17 Mortgage Rights
Article 400 When establishing a mortgage right, the parties concerned shall enter into a written mortgage contract.

A mortgage contract shall generally contain the following items:

(1) the category and amount of the secured claims;
   
(2) the term for the obligor to settle debts;
   
(3) the name, quantity, etc. of the mortgaged property; and
   
(4) the scope of the security.
PRC Property Law

Article 185 When setting a mortgage right, the parties concerned shall enter into a written mortgage contract.

A mortgage contract shall generally contain the following items:

(1) the categories and amounts of the secured claims;
   
(2) the term for the obligor to pay debts;
   
(3) the name, quantity, quality, condition, location, attribution of ownership or use rights of the mortgaged property; and
   
(4) the scope of the security.
This article applies to mortgages of both movables and immovables.

Compared to the stipulation in the PRC Property Law, the terms of a mortgage contract are simplified in the PRC Civil Code. The quality, condition, location, attribution of ownership or use rights of the mortgaged property are no longer expressly required in a mortgage contract anymore.
       
Part II Property
Rights

Sub-part IV Security Interests

Chapter 17 Mortgage Rights
Article 401 If prior to the expiration of the term for paying debts, the mortgagee and the mortgagor agree that the ownership of the mortgaged property will be assigned to the mortgagee when the obligor fails to pay his or her due debts, the mortgagee may only seek preferential payments in respect of the mortgaged property in accordance with the law. PRC Property Law

Article 186 Prior to the expiration of the term for paying debts, the mortgagee and the mortgagor shall not stipulate that the ownership of the mortgaged property shall be assigned to the mortgagee when the obligor fails to pay his due debts.
This article applies to mortgages of both movables and immovables.

Compared to the PRC Property Law, the PRC Civil Code clearly stipulates the legal consequences of reaching an agreement prior to expiration of the term for paying debts between mortgagee and mortgagor on transferring the mortgaged property to the mortgagee, i.e. such agreement is void and payment regarding the mortgaged property made to the mortgagee shall still comply with the sequences stipulated in Article 414 to 416 of the PRC Civil Code.
       
Part II Property
Rights

Sub-part IV Security Interests

Chapter 17 Mortgage Rights
Article 404 Where movables are mortgaged, the parties concerned shall not challenge a buyer who has paid a reasonable price and obtained the mortgaged property in the ordinary course of business. PRC Property Law

Second paragraph of Article 189

With regard to a mortgage as provided for in Article 181 hereof, the parties concerned may not challenge the buyer who has paid a reasonable price and obtained the mortgaged property in the ordinary course of business.

Article 181 An operator of an enterprise, individually owned business or agricultural manufacturing business may, upon the written agreement by the parties concerned, mortgage manufacturing facilities, raw materials, semi-manufactured goods and finished products currently owned or to be owned in future. Where the obligor fails to pay his due debts or any circumstance as agreed by the parties concerned for realizing mortgage rights arises, the mortgagee has the right to seek preferential payments in respect of the movables existing at the time of the realization of mortgage rights.
This article only applies to mortgages of movables.

According to the PRC Property Law, only for equipment, raw materials, semi-products and finished products under a movables floating mortgage, the parties concerned shall not challenge a buyer who has paid a reasonable price and obtained the mortgaged property in the ordinary course of business. However, according to the PRC Civil Code, such stipulation applies to all movables under a movables mortgage. In other words, even in a fixed movables mortgage, a buyer who has paid a reasonable price in the ordinary course of business of the mortgagor can always obtain the ownership of the mortgaged assets.

Provisions on floating mortgage are stipulated in Article 181 of the PRC Property Law and Article 396 of the PRC Civil Code without material changes. In case of a floating mortgage, the value of the mortgaged assets is always floating, and the items of the mortgaged assets are always changing during the mortgage term. The detailed list of the mortgaged assets can only be finally confirmed before realization, e.g. insolvency event, agreed realization event, etc. This is different from a fixed movables mortgage. In a fixed movables mortgage, the list of the mortgaged assets is confirmed at the time of conclusion of the mortgage contract and will not automatically change during the business operation of the mortgagor.

Article 404 of the PRC Civil Code tries to find a balance between the interests of a reasonable buyer during the normal business operation and the mortgagee. We think the stipulation is reasonable under a floating mortgage. But under a fixed mortgage, the mortgagee gets less protection than under the current law. Thus, to protect the interests of the mortgagees in a fixed movables mortgage, we suggest that the movables mortgage agreement shall stipulate that when the total net value of the mortgaged assets is reduced, the mortgagor is obliged to replace them by assets of equivalent value and to duly register the replacement with the competent authorities.
       
Part II Property
Rights

Sub-part IV Security Interests

Chapter 17 Mortgage Rights
Article 405 Where a mortgaged property has been leased and transferred for possession before the mortgage rights are established, the mortgage rights shall not impact the original leasehold relation. PRC Property Law

Article 186 Where a mortgaged property has been leased before a mortgage contract is entered into, the mortgage rights shall not impact the original leasehold relation. Where a mortgaged property is leased after the establishment of mortgage rights, the leasehold relation may not challenge the registered mortgage rights.
This article applies to mortgages of both movables and immovables.

A difference between Article 405 of the PRC Civil Code and Article 190 of the PRC Property Law is the timeline. “Before a mortgage contract is entered into” is changed to “before the mortgage rights are established”. This change makes sense since for establishment of mortgage rights over real estate mere conclusion of the mortgage contract is not sufficient. Mortgage rights only come into existence upon registration.

Another difference to be noticed is that the PRC Civil Code emphasizes an additional condition for application of this article, i.e. the mortgaged assets shall not only be leased but also possession shall be transferred. Thus, mere conclusion of a lease contract no longer seems to be sufficient to claim priority over mortgages, but the lease object must have actually been delivered.
       
Part II Property
Rights

Sub-part IV Security Interests

Chapter 17 Mortgage Rights
Article 406 During the mortgage term, the mortgagor may transfer the mortgaged property. Where it is otherwise agreed by the parties concerned, such agreement shall prevail. If the mortgaged property is transferred, the mortgage rights will not be affected.

If the mortgagor transfers the mortgaged property, it shall promptly notify the mortgagee. If the mortgagee can prove that the transfer of the mortgaged property may damage its mortgage rights, it may request the mortgagor to use the proceeds from the transfer for the early repayment of debts to the mortgagee or be submitted to a competent authority for safekeeping. Any excess of proceeds from a transfer over the amount of secured claims shall be assigned to the mortgagor, whilst any shortfall shall be settled by the obligor.
PRC Property Law

Article 191 Where a mortgagor transfers the mortgaged property during the mortgage term with the consent of the mortgagee, the money generated from the transfer shall be used for the early repayment of debts to the mortgagee or be submitted to a competent authority for safekeeping. Any excess of proceeds from transfer over the amount of the secured claims shall be attributed to the mortgagor, whilst any shortfall shall be settled by the obligor.

A mortgagor may not transfer the mortgaged property during the mortgage term without the mortgagee's consent, unless the mortgage right is terminated due to the transferee's settlement of the debts on behalf of the mortgagor.
This article applies to mortgages of both movables and immovables.

This is one of the most significant changes in term of mortgage rights. According to the PRC Civil Code, unless otherwise agreed by the parties, the transfer of mortgaged assets does not require the consent of the mortgagee anymore and the mortgagor is only obliged to inform the mortgagee in due course. If the mortgagee intends to get the transfer price, it shall bear the burden of proof that the transfer of the mortgaged property may damage its mortgage rights.

To protect the interests of the mortgagee, the PRC Civil Code further expressly stipulates that the mortgage rights will not be affected after the transfer, i.e. the mortgagee is still entitled to enforce the mortgage rights over the mortgaged assets, even they are already transferred to third parties. However, we think such protection is limited in practice. For example, if the number of the mortgaged assets is quite large and many of the assets have been transferred, this will cause difficulties for the mortgagee to enforce the mortgage rights. And if the transferee fails to maintain the mortgaged assets in good status and the value of the mortgaged assets is reduced, the mortgagee may not be able to hold the transferee liable for the damages and loss, since the transferee is not the party of the mortgage contract.

Thus, when concluding mortgage contracts, the mortgagee shall consider whether to stipulate that the mortgagor can only transfer the mortgaged assets with consent of the mortgagee. If no, some additional clauses shall be stipulated to protect the interests of the mortgagee in case of transfer, e.g. the mortgagor shall be held liable for the failure of the transferee in keeping the mortgaged assets in good status.
       
Part II Property
Rights

Sub-part IV Security Interests

Chapter 17 Mortgage Rights
Article 415 Where both a mortgage right and a pledge right are established on a property, the payment sequence of the proceeds from the auction or sale of the property shall be determined in accordance with the time of registration and delivery.




Article 416 Where the claim secured by a mortgage on movable property is the purchase price of the mortgaged property and the mortgage registration formalities are completed within 10 days after the delivery of the subject matter, the mortgagee shall have priority over other holders of security interest of the purchaser of the mortgaged property in receiving payment, except for the lienor.
Judicial Interpretation of the Supreme People's Court on Certain Issues Regarding the Application of the PRC Security Law

Article 191 Where a legally registered mortgage and a pledge coexist on the same property, the mortgagee shall have priority over the pledgee for payment.

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This article only applies to mortgages of movables.

It is expected that the PRC will establish a unified movables mortgage and pledge registration system in the near future. Thus, the sequence of the mortgage and pledge rights can be easily ascertained.



This article only applies to mortgages of movables.

It is currently common practice that a borrower borrows money to purchase goods and at the same time mortgages the goods in favor of the lender as a security for the purchase price. This new article grants the lender a priority in receiving the proceeds from enforcement of the mortgage, so as to encourage financing in this regard.
       
Part II Property
Rights

Sub-part IV Security Interests

Chapter 18 Pledge Rights
Article 428 If prior to the expiration of the term for paying debts, the pledgee and the pledgor agree that the ownership of the pledged property will be assigned to the pledgee when the obligor fails to pay his or her due debts, it may only seek preferential payments in respect of the pledged property in accordance with the law. PRC Property Law

Article 191 Prior to the expiration of the term for paying debts, the pledgee and the pledgor may not stipulate that the ownership of pledged properties shall be attributed to the pledgee when the obligor fails to pay due debts.

Similar to Article 401 of the PRC Civil Code, if the parties reach an agreement prior to expiration of the term for paying debts on transferring the pledged property to the pledgee, such agreement is void and payment regarding the pledged property made to the pledgee shall still comply with the sequences stipulated in Article 414 and 415 of the PRC Civil Code.
       

Conclusion

The property rights system is very important for the daily life of individuals and for business operation of enterprises. It plays an important role in terms of ownership of real estate, realization of creditor’s rights and promotion of transactions. The amendments to the property rights part in the PRC Civil Code partially only repeat existing laws and regulations, partially changes some specific wording of existing laws and regulations, but partially also introduce material changes to provisions. It remains to be seen how this part of the PRC Civil Code will be implemented and enforced in practice. In our series on the new PRC Civil Code, next CMS, China will issue a newsletter regarding Chapter III, Contracts to provide a comprehensive analysis on the contracts part of the PRC Civil Code.

In case you have questions or for further information, please contact the authors of this newsletter:

Ulrike Glueck Dr Ulrike Glueck
Managing Partner
Head of Corporate Practice
Area Group
CMS, China

T +86 21 6289 6363
E ulrike.glueck@cmslegal.cn
CMS, China Sarah Wang
Senior Associate
CMS, China

T + 86 21 6289 6363

E sarah.wang@cmslegal.cn

CMS Angela Chen
Junior Associate
CMS, China


T +86 21 6289 6363
E angela.chen@cmslegal.cn
   

 


This information is provided for general information purposes only and does not constitute legal or professional advice. Copyright by CMS, China.

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“CMS, China” should be understood to mean the representative offices in Mainland China of CMS Cameron McKenna Nabarro Olswang LLP, CMS Francis Lefebvre Avocats and CMS Hasche Sigle, working together. CMS, China is a member of CMS Legal Services EEIG, a European Economic Interest Grouping that coordinates an organisation of independent member firms. CMS Legal Services EEIG provides no client services. Such services are solely provided by the member firms in their respective jurisdictions.

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