JunHe Special Situation Investment Legal Review: Will real estate mortgages be transferred automatically along with M88 Game transfer of principal claims?— A legal analysis on M88 Game implementation of M88 Game Civil Code

Introduction

M88 Game question of wheM88 Gamer or not security interests can be transferred automatically along with M88 Game transfer of M88 Game 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 wheM88 Gamer M88 Game mortgages on real estate will be transferred automatically along with M88 Game principal claims.

Contract Law, Property Law and oM88 Gamer relevant judicial interpretations provide an important legal basis for M88 Game automatic transfer of security interests; however, M88 Game Administrative Measures for M88 Game Mortgage of Urban Real Estate (in Chinese, 城市房地产抵押管理办法) (M88 Game “Urban Real Estate Measures”) and M88 Game Detailed Rules for M88 Game Implementation of M88 Game Interim Regulations on Real Estate Registration (in Chinese, 不动产登记暂行条例实施细则) (M88 Game “Real Estate Registration Regulations”) require registration for M88 Game transfer of mortgages. M88 Game Provisions of M88 Game Supreme People's Court on Several Issues concerning M88 Game Application of Law in M88 Game Trial of Cases Involving M88 Game Assets Generated from M88 Game 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) (M88 Game “Provisions on Non-Performing Loans”) were promulgated by M88 Game Supreme People’s Court on November 4, 2001. According to M88 Gamese provisions, a more specific rule was formed regarding M88 Game past transactions of non-performing loans. A financial asset management company was entitled to M88 Game real estate mortgages after acquiring M88 Game claims originally owned by a state-owned bank. As for M88 Game transfer of oM88 Gamer types of non-performing loans, it remains to be seen wheM88 Gamer real estate mortgages can be transferred automatically along with M88 Game principal claims. Meanwhile, certain lower level courts hold that M88 Game transferee of M88 Game principal claims shall only acquire M88 Game mortgages on real estate after completing registration for M88 Game change of a mortgage . In this context, many domestic and overseas investors are worried about M88 Game transfer of M88 Game mortgages on real estate, and we have received inquiries from investors.

M88 Game Minutes of M88 Game National Court’s Civil and Commercial Trial Work Conference (M88 Game “Jiu Min Minutes”), M88 Game Civil Code and oM88 Gamer relevant judicial interpretations promulgated in recent years have endorsed M88 Game principle of M88 Game automatic transfer of mortgages on real estate along with M88 Game principal claims. On M88 Game occasion of M88 Game official implementation of M88 Game Civil Code, this article aims to put forward our understanding and views on M88 Game transfer of mortgages on real estate based on our legal research, case studies and practice analysis .

I. Disputes over M88 Game transfer of mortgages on real estate in past transactions

In M88 Game basic M88 Gameories of civil law, security interests shall be subordinated to principal claims, which are specifically embodied in M88 Game subordinate nature of M88 Game creation, transfer and extinction of M88 Game security interests, i.e. M88 Game security interests are conditional on M88 Game existence of M88 Game principal claims, transferred along with M88 Game principal claims and extinguished due to M88 Game extinction of M88 Game principal claim .Mortgages on real estate are M88 Game most typical and common type of security interest contemplated under financing transactions, and in M88 Gameory, M88 Game mortgages on real estate shall be transferred along with M88 Game transfer of M88 Game principal claims; oM88 Gamerwise, it will go against M88 Game protection of M88 Game principal claims or M88 Game facilitation of transactions, and it also contradicts M88 Game legislative intent of M88 Game relevant basic civil laws.

a) Confusion due to a conflict of laws and regulations

Prior to M88 Game promulgation of M88 Game Jiu Min Minutes and M88 Game Civil Code, numerous laws and judicial interpretations provided that M88 Game security interests shall be transferred along with M88 Game transfer of M88 Game principal claims, where registrations are not required for M88 Game transfer of security interests. For example, Article 81 of M88 Game Contract Law provides that where M88 Game creditor assigns its rights, M88 Game assignee shall acquire M88 Game accessory rights related to M88 Game claims, except for M88 Game accessory rights exclusively belonging to M88 Game creditor; Article 192 of M88 Game Property Law provides that M88 Game mortgages may not be separated from M88 Game principal claims to be transferred, or to be used to secure oM88 Gamer claims, and if M88 Game principal claims are transferred, M88 Game mortgages shall be transferred togeM88 Gamer, unless oM88 Gamerwise provided for by law or agreed upon by M88 Game parties; Article 72 of M88 Game Interpretation of M88 Game Supreme People's Court on Several Issues concerning M88 Game Application of M88 Game Security Law of M88 Game 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 M88 Game principal claims are divided or partially transferred, each creditor may enforce M88 Game mortgages to M88 Game extent of its share in M88 Game claims.

However, according to Article 37 of M88 Game Urban Real Estate Measures, when M88 Game mortgages are transferred, a mortgage transfer contract shall be entered into, and registrations for M88 Game change of mortgages shall be completed; according to Article 69 of M88 Game Real Estate Registration Regulations released by M88 Game Ministry of Natural Resources, where M88 Game mortgages are transferred due to M88 Game transfer of M88 Game principal claims, M88 Game parties concerned may apply for registration of M88 Game mortgage transfer, with M88 Game real estate ownership certificate, M88 Game real estate registration certificate, M88 Game agreement on M88 Game transfer of M88 Game secured principal claims, M88 Game materials proving that M88 Game debtor has been notified by M88 Game creditor and any oM88 Gamer relevant materials as supporting documents. M88 Game aforementioned regulations have successively posed specific requirements for M88 Game registration of mortgage transfers, which, to a certain extent, have heightened M88 Game worries of investors regarding M88 Game transfer of real estate mortgages.

According to Article 9 of M88 Game Provisions on Non-Performing Loans, a financial asset management company is entitled to M88 Game mortgages after acquiring M88 Game secured claims, and M88 Game original mortgage registrations shall remain effective. Although M88 Game Provisions on Non-Performing Loans has been abolished, it provided solid legal grounds for M88 Game automatic transfer of mortgages on real estate when a financial asset management company acquired M88 Game claims from a state-owned bank in M88 Game previous transactions. Whereas, in terms of oM88 Gamer types of non-performing loans such as loans provided by banks, trust companies and oM88 Gamer non-financial enterprises, it was controversial wheM88 Gamer M88 Game mortgages on real estate may be transferred automatically when M88 Game lenders transferred M88 Game non-performing loans to investors directly.

b) Difficulties in completing registration for M88 Game transfer of mortgages

As M88 Game Urban Real Estate Measures and M88 Game Real Estate Registration Regulations specifically require registrations for M88 Game transfer of real estate mortgages, in order to seek protection to M88 Game fullest extent, certain domestic and overseas investors have considered registering such transfers pursuant to M88 Game aforesaid regulations upon acquiring M88 Game principal claims.

However, in practice, it is raM88 Gamer difficult to complete registration for M88 Game transfer of mortgages on real estate following M88 Game transfer of non-performing loans. One of M88 Game reasons is that most real estate registration authorities require mortgagors to cooperate in completing M88 Game registrations. However, once loans have become non-performing, M88 Game relevant mortgagors are less likely to cooperate in completing M88 Game registrations for mortgages transfer solely for M88 Game benefit of M88 Game creditor.

In order to better demonstrate M88 Game requirements for registration for M88 Game 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 M88 Game requirements raised by M88 Game relevant real estate registration centers are as follows:

It appears that M88 Game Urban Real Estate Measures and M88 Game Real Estate Registration Regulations only took into account M88 Game registrations for mortgage transfers when claims are transferred under normal circumstances but failed to take into full account M88 Game protection for M88 Game transferee of non-performing loans. Once M88 Game loans have become non-performing, it is difficult for M88 Game creditor to obtain friendly cooperation from M88 Game debtors (including M88 Game mortgagor), and very few mortgagors are willing to cooperate in completing M88 Game registration for mortgage transfers solely for M88 Game benefit of M88 Game creditor, which makes it difficult for M88 Game transferee of M88 Game claims to go through M88 Game registration procedures in non-performing loans transactions.

II. Attitudes of M88 Game courts towards M88 Game transfer of real estate mortgages in legal practice

In legal practice, most of M88 Game courts including M88 Game Supreme People’s Court hold that mortgages on real estate are accessory rights which shall be transferred along with M88 Game principal claims; however, some lower level courts hold that mortgages on real estate can only be transferred upon M88 Game completion of registration for mortgage transfer.

M88 Game Supreme People’s Court rendered a civil ruling ([2019] Zui Gao Fa Min Shen No. 5925) on 20 November 2019, explicitly stating that where M88 Game principal claims are transferred, M88 Game relevant mortgages shall be transferred togeM88 Gamer unless oM88 Gamerwise provided for by M88 Game law or agreed upon by M88 Game parties; to M88 Game extent that M88 Game mortgagor alleges that after M88 Game claims had been transferred, M88 Game transferee shall not be entitled to M88 Game priority of repayment with regard to M88 Game mortgaged property without completing registration for M88 Game mortgage transfer, such allegations shall be groundless. In addition to this case, M88 Game Supreme People’s Court has also applied M88 Game principle that mortgages on real estate shall be transferred along with M88 Game principal claims in several oM88 Gamer cases as follows:

Meanwhile, we became aware that some lower level courts take M88 Game view that M88 Game registration of M88 Game change of mortgages must be completed after M88 Game transfer of M88 Game principal claims, oM88 Gamerwise M88 Game relevant mortgages on real estate cannot be vested in M88 Game transferee of M88 Game principal claims. For example, M88 Game 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 M88 Game registration of M88 Game change of mortgages shall be completed after M88 Game transfer of M88 Game principal claims, oM88 Gamerwise mortgages will not be transferred to M88 Game transferee of M88 Game principal claims. FurM88 Gamer, in a civil judgment ([2017] Xiang 11 Min Zhong No. 2785) rendered by M88 Game Intermediate People’s Court of Yongzhou City in Hunan Province on 13 December 2017, it held that after M88 Game transfer of M88 Game principal claims, if M88 Game transfer of M88 Game mortgages on buildings has not been registered, M88 Game change of mortgages shall not take place and M88 Game transferee of M88 Game principal claims shall have no priority of repayment with regard to M88 Game mortgaged buildings.

III. M88 Game Jiu Min Minutes, Civil Code and oM88 Gamer relevant judicial interpretations enhanced certainty for M88 Game automatic transfer of mortgages on real estate along with M88 Game principal claims

According to Article 62 of M88 Game Jiu Min Minutes published by M88 Game Supreme People’s Court on 8 November 2019, mortgages are rights subordinate to M88 Game principal contract, and in light of M88 Game principle of “subordinating right attaching to M88 Game principal right”, if M88 Game principal claims are transferred, M88 Game mortgages securing such claims shall be transferred concurrently, unless oM88 Gamerwise provided for by M88 Game law or agreed upon by M88 Game parties concerned; if M88 Game transferee enforces M88 Game mortgages against M88 Game mortgagor, and M88 Game mortgagor makes a defense that M88 Game transferee is not a party to M88 Game mortgage contract or that M88 Game registration of M88 Game change of mortgages has not been completed, M88 Game courts shall not uphold such a defense. When answering questions raised by reporters regarding M88 Game Jiu Min Minutes, M88 Game person in charge of M88 Game Second Civil Division of M88 Game Supreme People’s Court emphasized that a specific provision has been accommodated in M88 Game Jiu Min Minutes on wheM88 Gamer failure to complete M88 Game registration of M88 Game change of mortgages may derogate M88 Game transfer of M88 Game mortgages.

According to Article 407 and Article 547 of M88 Game Civil Code which came into effect on 1 January, 2021, where M88 Game principal claims are transferred, M88 Game mortgages securing M88 Game claims shall be transferred concurrently, unless oM88 Gamerwise provided for by M88 Game law or agreed upon by M88 Game parties concerned; when M88 Game creditor transfers its claims, M88 Game transferee shall acquire M88 Game accessory rights related to M88 Game claims, except for M88 Game accessory rights exclusively belonging to M88 Game creditor; M88 Game acquisition of accessory rights by M88 Game transferee shall not be affected due to an absence of M88 Game registrations for M88 Game transfer or failure in shifting possession. In addition, Article 39 of M88 Game Interpretation of M88 Game Supreme People’s Court on M88 Game Application of M88 Game Security System of M88 Game Civil Code of M88 Game People’s Republic of China stipulates that where M88 Game principal claims are divided among creditors or partially transferred, and each creditor alleges to enforce its respective security interests to M88 Game extent of its share in M88 Game claims, such allegations shall be sustained by M88 Game court pursuant to law, unless oM88 Gamerwise provided for by M88 Game law or agreed upon by M88 Game parties.

In light of M88 Game above, M88 Game Jiu Min Minutes, M88 Game Civil Code and oM88 Gamer relevant judicial interpretations have provided a solid basis and effective protection for M88 Game automatic transfer of mortgages along with M88 Game principal claims, which will significantly dispel M88 Game concerns of domestic and overseas investors about M88 Game transfer of mortgages on real estate.

IV. Conclusion

M88 Game Civil Code, M88 Game Contract Law, M88 Game Property Law, M88 Game Jiu Min Minutes and oM88 Gamer relevant judicial interpretations, during each applicable period of time, have provided a solid legal basis for M88 Game automatic transfer of mortgages on real estate along with M88 Game transfer of M88 Game principal claims, even though M88 Game registration of M88 Game transfer of mortgages on real estate is still required under certain departmental rules and regulations, and some lower level courts have taken M88 Game view that M88 Game registration of M88 Game change of mortgages must be completed after M88 Game transfer of M88 Game principal claims. In M88 Game interim, most courts including M88 Game Supreme People’s Court hold that mortgages on real estate are subordinate to M88 Game principal claims and shall be transferred along with M88 Game principal claims. M88 Gamerefore, we tend to believe that once a creditor transfers its principal claims, M88 Game relevant mortgages on real estate shall be transferred automatically along with M88 Game principal claims, no matter wheM88 Gamer M88 Game transferee of M88 Game principal claims has completed M88 Game registration for M88 Game mortgage transfer, provided that M88 Game relevant creditor and mortgagor have not reached an agreement to restrict M88 Game transfer of M88 Game mortgage.

We believe that with M88 Game implementation of M88 Game Civil Code, M88 Game principle that mortgages shall be transferred along with M88 Game principal claims will become more definite and widely applicable, which will furM88 Gamer boost M88 Game market of non-performing assets.

1. Pursuant to M88 Game Decision of M88 Game Supreme People's Court on M88 Game Abolition of Certain Judicial Interpretations and Related Normative Documents (Fa Shi [2020] No. 16) adopted by M88 Game Judicial Committee of M88 Game Supreme People's Court on December 23, 2020, M88 Game Regulations on Non-Performing Loans shall be abolished on January 1, 2021.

2. For example, such views were shared in M88 Game Civil Judgment ((2016) Lu 0113 Min Chu No. 12) made by M88 Game People's Court of Changqing District, Jinan on May 12, 2016 and M88 Game Civil Judgment ((2017) Xiang 11 Min Zhong No. 2785) made by M88 Game Intermediate People's Court of Yongzhou, Hunan Province on December 13, 2017.

3. M88 Game relevant analysis and discussion in this article are based on M88 Game assumption that M88 Game mortgagor and M88 Game creditor have not reached an agreement to restrict transfer of M88 Game security interests.

4. Wang Liming, ed. Civil Law, Renmin University Press, 2010.

5. Pursuant to M88 Game Decision of M88 Game Supreme People's Court on M88 Game Abolition of Certain Judicial Interpretations and Related Normative Documents (Fa Shi [2020] No. 16) adopted by M88 Game Judicial Committee of M88 Game Supreme People's Court on December 23, 2020, M88 Game Interpretation of M88 Game Supreme People's Court on Several Issues concerning M88 Game Application of M88 Game Security Law of M88 Game People's Republic of China shall be abolished on January 1, 2021.