Land Research | Can the property expectation right of a non-consumer homebuyer be sufficient to exclude the enforcement application of a mortgagee?

Authors: Chen Xia, Pan Hongjing

Case Source Supreme People's Court Bulletin Case of June 2023

Case Number: (2022) Supreme People's Court Min Zong 34

On January 31, 2013, Yingtai Company and the Huaihua Branch of the Construction Bank signed a "Commodity Housing Sales Contract", agreeing to sell the property developed by Yingtai Company to the Huaihua Branch of the Construction Bank. On March 29, 2013, the storefront was delivered to the Huaihua Branch of the Construction Bank. After the signing of the contract, the Huaihua Branch of the Construction Bank paid the purchase price to Yingtai Company. On May 23, 2013, Huarong Hunan Branch and Yingtai Company signed a "Mortgage Agreement", agreeing to use Yingtai Company's construction projects, including the property involved in the case, as mortgage for Huarong Hunan Branch's debt, and completed the mortgage registration on May 27, 2013. Later, Huarong Hunan Branch applied for forced execution based on the civil ruling (2014) Xiang Gao Fa Min Er Chu Zi Di 32-1. The Huaihua Branch of the Construction Bank, as a third party, filed an objection to execution as a third party. The first-instance court rejected the objection request, and the Huaihua Branch of the Construction Bank filed a lawsuit for objection to execution as a third party.

In the end, the case was not supported by the Huaihua Branch of the Construction Bank in both the first and second instances.

The main point of dispute in this case is whether the civil rights enjoyed by the Huaihua Branch of the Construction Bank over the property involved in the case are sufficient to exclude the forced execution applied for by Huarong Hunan Branch.

After ascertaining the facts, the court conducts a substantive review of the rights of both parties based on the nature of the rights of both parties, the time of acquisition of rights, whether there was any fault in the acquisition of rights, and how to reduce or prevent the recurrence of risks, compares the priority of the rights of both parties, and then makes a corresponding judgment.

First, from the perspective of the nature of the rights, the Huaihua Branch of the Construction Bank enjoys the expectant property right over the property involved in the case, while Huarong Hunan Branch enjoys the mortgage right, both of which are superior to general claims. Based on the sales contract, the Huaihua Branch of the Construction Bank paid most of the purchase price and actually occupied the purchased property, thus obtaining the expectant property right to own the house in the future. This right is different from general claims. Although this right is not yet ownership in the sense of the Civil Code, this right arising from possession should also be protected by the possession system, so the expectant property right has a right basis superior to the protection of general claims. Huarong Hunan Branch enjoys a mortgage right over the property involved in the case, and has priority in repayment from the mortgaged property, and its effect is also superior to general claims.

Secondly, from the perspective of the time of acquisition of rights, the time of the mortgage right is earlier than the expectant property right. As for the property involved in the case, based on the evidence submitted by the Construction Bank and Yingtai Company, the Huaihua Branch of the Construction Bank obtained the expectant property right in November 2013. According to the time of mortgage registration of the construction project shown by the Huaihua Municipal Housing Management Bureau, Huarong South China Branch obtained the mortgage right in May 2013, so the time of the mortgage right is significantly earlier than the expectant property right.

Thirdly, from the perspective of whether there was any fault in the acquisition of rights, the existing evidence cannot prove that Huarong Hunan Branch had any fault in the mortgage process, while the Huaihua Branch of the Construction Bank did not fulfill its due due diligence obligation in the purchase of the house, and there was a certain fault. From the "Commercial Acquisition and Restructuring Business Legal Due Diligence Report" and the "Verification Result of Huaihua Municipal Housing Management Bureau Online Signing Information System" issued by Huarong Hunan Branch, it cannot be determined that it had any fault, while the Huaihua Branch of the Construction Bank, as a professional financial institution, should have a higher internal control risk prevention ability and should have a higher due diligence obligation. Although the sales contract stipulates that the obligation to handle advance registration is on the seller's side, the Huaihua Branch of the Construction Bank should also take measures to urge Yingtai Company. However, in fact, the Construction Bank did not urge Yingtai Company to fulfill the obligation of advance registration, but instead paid most of the purchase price to Yingtai Company under this circumstance. This is obviously a disregard for its own rights, which gives Yingtai Company an opportunity to "sell first, mortgage later", resulting in the current situation of conflict between the prior buyer and the subsequent mortgagee. In this regard, the Huaihua Branch of the Construction Bank has a certain fault.

Finally, from the perspective of reducing or preventing the recurrence of risks, the risk responsibility of the parties to the transaction should be fairly allocated. In practice, developers lacking integrity often take advantage of information asymmetry and adopt illegal operations such as "one house, two sales" and "sell first, mortgage later", harming the interests of prior homebuyers and leading to a large number of rights conflicts, which not only consumes judicial resources but also affects social stability. In order to minimize or prevent such risks, in addition to holding the dishonest developers accountable in accordance with the law and regulations, financial institutions should also conduct comprehensive and strict examinations in the process of accepting mortgages. If the mortgagee fails to exercise due diligence and leads to a conflict of rights, it should bear the corresponding adverse consequences and bear the corresponding risks. Homebuyers such as financial institutions should also have a higher due diligence obligation, comprehensively examine the qualifications and credit of developers, and maintain their rights through legal means such as online signing and filing, advance registration, and suspension of payment during the signing and payment process, so as to prevent developers from engaging in illegal operations. As mentioned earlier, the Huaihua Branch of the Construction Bank, as a homebuyer, neither urged Yingtai Company to handle advance registration nor suspended payment, which gave the developer an opportunity to "sell first, mortgage later". For this, the Huaihua Branch of the Construction Bank should bear the corresponding adverse consequences.

Although Article 28 of the "Regulations on Objection to Execution and Review" stipulates that in the execution procedure, the buyer's expectant property right is sufficient to exclude forced execution when certain conditions are met, the provisions cannot be mechanically applied. Generally speaking, the court can refer to the application of the "Regulations on Objection to Execution and Review" to examine whether the expectant property right of a general buyer is sufficient to exclude forced execution. However, when there is a major dispute in theory and practice, and there are no other legal provisions, whether the third party has the right to exclude forced execution should return to the essence of the lawsuit for objection to execution, conduct a substantive review, and strive to conform to the value orientation of fairness and justice. Specifically, it is necessary to examine whether the real estate buyer has an expectant property right, and also to examine whether the effect of the expectant property right is superior to the rights of the applicant for execution.

First, before examining the priority of the general buyer's property right expectancy and mortgage right, it is necessary to clarify what kind of property right expectancy is protected by law. Article 28 of the "Regulations on Execution Objections and Reconsideration" stipulates the conditions for the protected general buyer's property right expectancy. This means that the buyer not only needs to sign a real estate sales contract with the seller and pay a certain amount of money, but also has a certain external publicity effect, including but not limited to the possession and use of property rights, and also needs to be free from fault for not handling the transfer registration.

Secondly, it is necessary to compare the mortgage right and the property right expectancy. By analyzing the time sequence of the rights' generation, whether the acquisition of rights is faultless, and the allocation of risk and responsibility, it can be judged whether the general buyer's property right expectancy is sufficient to exclude forced execution. In terms of time sequence, the node of the generation of the property right expectancy can be judged based on the time of obtaining a certain external publicity effect, specifically including the contract signing time, payment time, and actual possession time, etc. The generation of the mortgage right can be confirmed mainly based on the mortgage registration time of the real estate registration department. In terms of whether the acquisition of rights is faultless, on the one hand, the good faith acquisition system can be used to judge whether the mortgagee has acquired the mortgage right without fault. Specifically, whether the mortgagee has conducted a prudent due diligence investigation on the mortgaged property, including the ownership status of the mortgaged house, whether there is co-ownership, sale, disputes, etc., that may hinder the realization of the mortgage right in the future. In terms of risk responsibility allocation, it is necessary to compare whether the right holder has fulfilled the corresponding prudent duty of care and fairly allocated the responsibility.

As in this case, the rights of the Construction Bank Huaihua Branch were generated later than the mortgage right of Hunan Huarong Company, and the mortgagee legally obtained the mortgage right after fulfilling its prudent duty of care. However, the Construction Bank Huaihua Branch, based on its identity as a financial institution, bears a higher risk responsibility than the mortgagee. However, it neglected to fulfill its higher duty of prudence and did not urge the seller to handle the relevant procedures, and there was a certain fault, and should bear the corresponding adverse consequences, that is, its rights are not enough to exclude forced execution. For example, in case (2021) Supreme People's Court Min Zhong No. 534, the buyer Dong's rights were generated earlier, and the mortgagee Hunan Huarong Branch had fault, so the buyer's rights were sufficient to exclude the forced execution applied for by the mortgagee.

Article 312, Paragraph 1, of the Interpretation of the Supreme People's Court on the Application of the Civil Procedure Law of the People's Republic of China stipulates that for lawsuits filed by third parties against execution, the people's court shall, after trial, handle them according to the following circumstances:

(1) If the third party enjoys civil rights sufficient to exclude forced execution with respect to the subject matter of execution, the court shall rule that the subject matter of execution shall not be executed;

(2) If the third party does not enjoy civil rights sufficient to exclude forced execution with respect to the subject matter of execution, the court shall rule to dismiss the lawsuit.

Article 28 of the "Several Provisions of the Supreme People's Court on Issues Concerning the Handling of Execution Objections and Reconsideration Cases by the People's Courts" stipulates that in the execution of monetary claims, if a buyer raises an objection to real estate registered under the name of the person subject to execution, and meets the following circumstances and his/her rights can exclude execution, the people's court shall support it:

(1) A legally valid written sales contract has been signed before the people's court's seizure;

(2) The real estate has been legally possessed before the people's court's seizure;

(3) All the payment has been made, or part of the payment has been made in accordance with the contract and the remaining payment has been delivered for execution as required by the people's court;

(4) The transfer registration has not been handled due to reasons not attributable to the buyer.