According to the above-mentioned provisions of the Property Law, the author's team understands that there is no prohibition on the provision of mortgage guarantees for third-party debts for the right to use state-owned construction land and construction projects under construction (i.e. buildings under construction), and the right to use state-owned construction land and construction in progress can provide collateral guarantees for third-party debts.

2. Restrictive Provisions

(1) At present, some areas are only allowed to provide guarantee for the development loan of the construction project under construction when going through registration, mainly in accordance with the Measures for the Administration of Urban Real Estate Mortgages promulgated by the Ministry of Construction in 2001, in which the definition of a mortgage for a construction in progress (Paragraph 5 of Article 3) is: "Mortgage for construction in progress" as used in these Measures refers to the right to the use of the land legally obtained by the mortgagor together with the input assets of the project under construction in order to obtain funds for the continuation of the construction of the project under construction. The act of pledging to the lending bank as a guarantee for the repayment of the loan without transferring possession. According to this definition, construction in progress is a guarantee provided to the bank for a loan for the construction of a construction work in progress, that is, it limits the debtor and the creditor entity and the main contract (loan) guaranteed.

The author's team noted that in 2012, the Supreme People's Court mentioned in its Answer to the <城市房地产抵押管理办法>Question of Whether the Mortgage Provisions on Construction in Progress Conflict with the Higher Law that "construction in progress falls within the scope of property that can be mortgaged under the Guarantee Law." Article 3.5 of the Measures for the Administration of Urban Real Estate Mortgages on mortgages for construction-in-progress is a special provision for lending banks when they are mortgagees, but they do not restrict entities other than lending banks from becoming mortgagees of construction-in-progress projects. Although the answer clarifies that the mortgagee of construction in progress is not limited to banks, it clarifies that paragraph 5 of Article 3 of the Measures for the Administration of Urban Real Estate Mortgages is a special provision for lending banks as mortgagees.

Referring to the spirit of the judicial answer, the author's team believes that the law does not contain restrictive provisions on the main claim and the scope of the debtor secured by mortgages for construction in progress, and the definition of the Measures for the Administration of Urban Real Estate Mortgages should correspondingly be understood as a special provision for the development of loans for construction projects under construction, and cannot be used as a restrictive provision on providing collateral guarantee for third-party debts for construction in progress, otherwise it will conflict with the superior laws "Property Law" and "Guarantee Law".

(2) At present, some regions only allow the right to use state-owned construction land to provide guarantees for loans for the development and construction of the land when registering, mainly based on the local regulations of individual regions, which is not common in practice. For example, Article 16 of the 2000 Measures for Real Estate Mortgages of Shanghai Municipality stipulates that "where a mortgage is created by transferring the right to the use of the land, the main claim secured shall be limited to the loan for the development and construction of the transferred land, and shall not violate the provisions of the State and the municipality on the assignment and transfer of the right to the use of the land and the provisions of the contract for the assignment of the right to the use of the land." "At present, the registration of mortgages for the right to use state-owned construction land in Shanghai strictly implements the requirements of the above regulations, and does not allow the provision of mortgage guarantees for third-party debts.

Referring to the spirit of the Supreme Court's judicial reply on mortgages for construction-in-progress projects, the author's team understands that the restrictive provisions on providing mortgage guarantees for third-party debts for the right to use state-owned construction land in individual regions conflict with the higher laws "Property Law" and "Guarantee Law".

In summary, the author's team believes that the right to use state-owned construction land and the projects under construction can provide collateral for third-party debts in accordance with the law.

02

About mortgage registration workarounds

Based on the restrictive provisions in some regions on the right to use state-owned construction land or the mortgage guarantee of the principal claim of the project under construction, as well as the specific registration requirements of the mortgage registration authority, in practice, in order to handle mortgage registration, trust companies usually adopt alternative methods to meet the requirements of the registration authority, such as signing the main claim contract and mortgage contract required by the registration authority on the basis of signing the main claim contract and mortgage contract stating the true intention of the parties to the transaction.

There are currently no clear legal provisions or judicial interpretations for such workarounds. The following cases and regulations can provide some reference and reference:

1. In the case between Anxin Trust and Kunshan Chungao (Hu Gao Min Wu (Shang) Zhong Zi No. 11) in the final trial of the Shanghai Higher People's Court, Kunshan Chungao used the right to asset income to establish a property right trust and the transfer of priority beneficiary rights to carry out financing, and in order to handle the mortgage registration, the two parties signed a separate Trust Loan Contract as the main contract for mortgage registration. The court of first instance held that the reason why the court signed two contracts for one payment was that the court accepted Kunshan Chungao's statement that the real estate exchange center did not accept the trust contract as the main contract for registration, so it used the loan contract as the main contract and signed the mortgage agreement to register the mortgage, and Anxin Trust did not deny this. Due to the complex structure of the trust contract and the unclear rights and obligations, it is difficult to use it for mortgage registration, so it is understandable that the two parties should sign the Trust Loan Contract to achieve the purpose of mortgage registration. Both parties expected and reached an agreement. Kunshan Chungao requested the court to completely deny the Trust Loan Contract and further deny the existence of the mortgage right, which was inconsistent with the agreement of the parties at that time and was not accepted. The Trust Loan Contract is only a form for the parties to realize the registration of mortgage rights, and the two parties have reached an agreement on this, and the collateral has gone through the corresponding mortgage registration procedures, so the court held that Anxin Trust's claim that the realization of its mortgage rights was not improper and should be supported. The court of second instance also held that the essence of the two contracts signed by the parties in this case for one payment was in the form of a loan contract to protect the control of Anxin Trust over the trust property, and in fact Anxin Trust did not have rights over the so-called loan itself. Taking into account the limitations of mortgage registration by the Real Estate Exchange Center and the agreement of the parties to register the mortgage by signing the Trust Loan Contract, the Court of First Instance held that the trust loan contract was only a superficial form, and its essence was to realize the mortgage registration agreed in the trust contract, and this court upheld it.

2. Article 58 of the Minutes of the National Court Work Conference on Civil and Commercial Adjudication (Fa [2019] No. 254) (hereinafter referred to as the "Minutes of the Nine People") stipulates that the scope of security for immovable property security interests by registration as a method of publicity shall generally be subject to the scope of registration. However, the current registration of real estate security interests in China is not consistent in the system settings and registration rules in different regions, and the people's courts should pay full attention to the differences in system design when hearing cases, and make realistic judgments: First, the registration systems of most provinces, autonomous regions and municipalities do not set up a "scope of guarantee" column, only the expression "amount of the secured principal claim (the maximum amount of the claim)", and can only fill in a fixed number. However, the parties often stipulate in the contract that the scope of security for the security right includes the main claim and its ancillary claims such as interest and liquidated damages, resulting in the inconsistency between the scope of the guarantee agreed in the contract and the registration. Clearly, this inconsistency is due to the prevalence of the region as a result of the setup of the registration system and the rules for registration. It is a realistic and appropriate choice for the people's court to determine the scope of security for the security interest by means of a contractual agreement. Second, the setting and registration rules of the real estate registration systems of some provinces, autonomous regions and municipalities are relatively standardized, and the scope of registration of security interests is consistent with the contractual agreement, which is the norm or common phenomenon in the region, and the people's court shall take the registered scope of security as the basis when hearing cases.

The above-mentioned adjudication rules of the Minutes of the Nine People's Republic of China require the contractual agreement to determine the scope of security of the security interest in the case that the inconsistency between the scope of guarantee agreed in the contract and the registration is caused by the setting of the registration system and the registration rules.

Referring to the determination of mortgage rights by the courts of first instance and second instance in the Anxin Trust and Kunshan Chungao case, as well as the rules on the determination of the scope of guarantee in the Minutes of the Nine People, the author's team believes that the parties are unable to register the mortgage with the real main contract due to the requirements of the registration authority, so they adopt alternative methods, which is understandable. Under the circumstance that the parties have a clear understanding and agreement on the actual main contract and the main claim of the mortgage guarantee, the parties reach an agreement on the mortgage guarantee, and the mortgage right shall be valid after registration.

Three

Action recommendations

1. In operation, the true intention of the parties is clearly agreed in the form of a contract, so as to facilitate the presentation of evidence in the event of a dispute. Especially when the registration authority does not allow the collateral to provide security for the debts of a third party, the main contract required by the registration authority is a loan contract signed between the trust company and the mortgagor, and the trust company does not actually issue a loan to the mortgagor, when the trust company exercises the mortgage right, the mortgagor is likely to claim that the main claim secured by the mortgage does not exist and further request to deny the existence of the mortgage right, and the trust company needs to clarify the true intention of the parties regarding the loan and mortgage through an agreement with the debtor and the mortgagor.

2. In view of the fact that there are no clear legal provisions or judicial interpretations on the alternative operation of mortgage registration, and there is a certain risk of uncertainty in the effect, it is recommended that the trust company clearly disclose the alternative operation method of mortgage registration to investors in the trust document and remind the corresponding risks.

(This article is translated by software translator for reference only.)