Zhang Yao: The application of the rules for the transfer of mortgaged property

Article 406 of the Civil Code makes a substantial amendment to article 191 of the original Property Law, which no longer takes the consent of the mortgagee as a precondition for the transfer of the mortgaged property, allows the mortgagor to transfer the mortgaged property freely, and at the same time adopts the recovery and force rules to protect the mortgagee. What changes will this rule bring to the regime for the transfer of mortgaged property? What hermeneutic controversies exist? In this regard, Zhang Yao, assistant professor of the Law School of the University of International Business and Economics, made an in-depth discussion and analysis on the interpretation and application of article 406 of the Civil Code in the article "Application of the Rules for the Transfer of Mortgaged Property", which provided a valuable reference for the correct handling of mortgage property transfer cases in the era of the Civil Code.

1. Interpretation of the validity of the agreement prohibiting the transfer of mortgaged property

According to article 406 of the Civil Code, during the mortgage period, the mortgagor may freely transfer the mortgaged property, but the parties may restrict the transfer of the mortgaged property by agreement. If the parties have agreed to prohibit or restrict the transfer of mortgaged property, and the mortgagor transfers the mortgaged property without authorization in violation of the agreement, what kind of effect it produces is quite controversial in terms of interpretation. In this regard, article 43 of the Interpretation of the Guarantee System of the Civil Code defines, in principle, the effect of property rights in violation of the agreement by distinguishing whether the agreement has been registered. If the agreement has been registered and the mortgaged property has been delivered or registered, the mortgagee has the right to request that the property right not take effect, otherwise it will not be supported;

(1) The validity of the contract for the transfer of mortgaged property in violation of the agreement

In the era of adopting the "consent rule", although the primary goal of article 191 of China's Property Law is to reduce the risks in the process of the circulation of mortgaged property and better protect the legitimate interests of mortgagees and buyers, it is not necessary to negate the validity of the contract accordingly. After the reform of the rules of recovery and force, the full use of the property by accelerating the circulation of mortgaged property has become the primary objective of article 406 of the Civil Code. In such a case, if the validity of the contract is denied on the grounds that the mortgagor has violated the special agreement between it and the mortgagee, it is contrary to the realization of this objective.

(2) The effect of the property right in the registration and transfer of the agreement on the prohibition of transfer

If the generalization of the registration of the prohibition on transfer is prohibited, there is no essential difference between article 406 of the Civil Code and article 191 of the original Property Law. Therefore, in the case where article 43 of the Interpretation of the Security System of the Civil Code makes the mortgagee have the right to claim the transfer of the effect of non-occurrence of property rights by means of the registration system, in order to avoid the mortgagee's abuse of registration and the goal pursued by article 406 of the Civil Code of China, it may be possible to interpret the situation where the parties have the right to claim the non-effectiveness of the property rights in conjunction with the provisions of article 406, paragraph 2 of the Civil Code of China. Where the free transfer of mortgaged property is truly likely to harm the right of mortgage, the person with the right of mortgage has the right to claim that the transfer does not have the effect of the property right on the grounds that the agreement on prohibition of transfer has been registered.

(c) Interpretation of the connotation of "non-occurrence of the effect of property rights"

From an objective point of view, the purpose of the prohibition agreement is to ensure the realization of the mortgage right enjoyed by the mortgagee. As long as the mortgagor's disposition of the mortgaged property does not hinder the realization of the mortgage right or does not make the realization of the mortgage right difficult, the transfer of the mortgaged property between the mortgagor and the assignee is valid, and the mortgagee cannot claim that it does not have the effect of the property right.

It can be seen from this that whether from the perspective of preventing the generalization of the registration of the prohibition agreement, or from the interpretation of "no property right effect", even if the prohibition agreement has been registered, the mortgagee cannot all claim that the transfer act does not produce the effect of the property right. This overlaps with the connotation of article 406, paragraph 2, of the Civil Code, but it is not without significance for the mortgagee to agree to prohibit or restrict the transfer of the mortgaged property and to register it. Where such an agreement has been registered, the mortgagee may, in accordance with Article 43 of the Interpretation of the Security System of the Civil Code, cancel the registration of the rights already carried out by the transferee in the register and request it to return the mortgaged property. This is an effect that the mortgagee cannot obtain under article 406, paragraph 2, of the Civil Code.

2. Paragraph 2 of Article 406 of the Civil Code of our people and the right of subrogation in rem

(a) Will subrogation in rem provide excessive protection for mortgagees?

Whether the mortgagee can exercise subrogation in rem against the purchase and sale price depends first and foremost on whether the rule of recourse adopted in article 406, paragraph 1, of the Civil Code provides excessive protection for the mortgagee. Provided that the clause has established the rules of mortgage recovery, the buyer has reasonable expectations that the mortgagee will be able to continue to exercise the mortgage. In this regard, the recourse rule established by article 406, paragraph 1, of the Civil Code of our Country can provide adequate protection for mortgagees of immovable property. However, in the case of commercial housing, since the rights of consumers of commercial housing take precedence over the mortgagee, the recovery rule cannot provide comprehensive protection for the mortgage of immovable property. The ability to recover movable property mortgage rights has also been greatly weakened by the existence of articles 54 and 404 of the Civil Code. Therefore, even if the recovery rule has been adopted to allow the mortgagee to subrogate the proceeds of the transfer in rem, it will not provide excessive protection for the mortgagee.

(2) Can paragraphs 2 and 1 of article 406 of the Civil Code of our country apply at the same time?

The word "may" in article 406, paragraph 2, of the Civil Code seems to indicate that the mortgagee does not have to recover the mortgaged property in order to realize the mortgage right in cases where the mortgagee "can prove that the assignment of the mortgaged property may prejudice the mortgage right". Instead, it may be possible to satisfy its claim from the price derived from the assignment. In such a case, can article 406, paragraphs 2 and 1, of the Civil Code apply at the same time? In this regard, according to paragraph 2 of the article, "the part of the transfer price that exceeds the amount of the claim belongs to the mortgagor, and the insufficient part is paid off by the debtor". This would seem to indicate that the two options are either between the two options, with the mortgagee either giving priority to payment of the mortgaged property in accordance with the rule of recovery or choosing to receive satisfaction from the proceeds of the assignment.

(3) Will the mortgagee choose to abandon the chase rule?

As a rational economic person, the mortgagee will only abandon the recovery rule and resort to article 406, paragraph 2, of the Civil Code only if the recovery power is hindered, or if the reimbursable benefits obtained through the recovery rule are lower than the price obtained from the transfer. Judging from this clause, it is only in the case of "it can be proved that the transfer of the mortgaged property may prejudice the mortgage right", and the mortgage can exercise the right similar to subrogation in rem. Only when the transfer of the mortgaged property is detrimental to the subordinate interests of the mortgagee, or to the value of the mortgaged property, or makes it difficult to realize the mortgage right, etc., can the requirement of "potentially damage to the mortgage right" be satisfied. In the case where the market valuation of the mortgaged property is lower than the amount of the claim it secures, even if the mortgagee wishes to abandon the recovery rule, it is difficult for the mortgagee to invoke article 406, paragraph 2, of the Civil Code to receive priority in the payment of the proceeds of the assignment because the circumstances will not cause harm to the mortgage right.

(4) Whether article 406, paragraph 2 of the Civil Code of china can be interpreted as subrogation in rem

From the perspective of the jurisprudence of subrogation in rem, there are inconsistencies in the formulation of article 390 of the Civil Code or the practice of article 406, paragraph 2, but the rights of the mortgagee provided for in article 406, paragraph 2, are interpreted as subrogation in rem. It is necessary and it can work. Otherwise, if the mortgagor fails to notify the mortgagee in a timely manner, or the mortgagor has consumed the proceeds of the transfer, or if the mortgagor has neither paid off the debt in advance nor deposited it, the mortgagor can only follow the rules of recourse and be reimbursed the mortgaged property in priority or the mortgagor shall bear the liability for compensation. At this time, if the rights enjoyed by the mortgagee under article 406, paragraph 2 of the Civil Code are interpreted as subrogation in rem, it can be interpreted as a pledge of creditor's rights, etc., allowing the mortgagee to directly receive the price from the transferee from the transferee, and enabling the mortgagee to some extent to get rid of the fate of waiting for "timely notice by the mortgagor".

3. The right of the assignee to be removed and article 524 of the Civil Code of our country

(1) Whether the assignee has the right to perform on its behalf

After article 406 of the Civil Code was changed to the rule of recovery and force, unless there is a special agreement between the parties, the mortgagor does not need the consent of the mortgagee to transfer the mortgaged property. When the debtor fails to perform its obligations, the mortgagee can realize its rights through the recovery rule. At this time, the transferee of the mortgaged property may lose the mortgaged property due to the realization of the mortgage right, and its status is in an unstable state. Thus, the assignee is, of course, a third party who "has a legitimate interest in the performance of the obligation" under article 524, paragraph 1, of the Civil Code and is entitled to perform on behalf of the creditor.

(2) Does the performance of the obligation on behalf of the assignee belong to the right of removal?

The assignee can indeed achieve the effect of removing the burden on the mortgaged property by performing on its behalf, but there is an essential difference between it and the right of expulsion in extraterritorial law. On the one hand, performance on behalf of the assignee is usually limited to situations where the market appraisal price of the mortgaged property is higher than the total amount of the claim secured by the transferee, whereas the application of the right of expulsion is the opposite. On the other hand, the so-called removal means that without the intention of the mortgagee, the transferee evaluates the value of the mortgaged property on its own, and the mortgagee receives the valuation amount and the mortgage right is extinguished, which is also different from the structure of the transferee performing on behalf of the mortgagee.

(3) The path to extinction of mortgage rights other than performance on behalf of others

As mentioned above, the performance system is usually limited to the situation where the market appraisal price of the mortgaged property is higher than the total amount of the claim it secures, and in the case where the market valuation of the mortgaged property is lower than the total amount of the claim it secures, if the assignee wants to achieve the effect of eliminating the burden on the mortgaged property, it can only directly deliver the transfer price equivalent to the market valuation to the mortgagee through an agreement with the mortgagee and the mortgagor, so that the mortgagee abandons the recovery of the mortgaged property, thereby eliminating the mortgage right existing on the mortgaged property. However, the application of this path is also extremely limited. It can be seen that although the primary objective of article 406 of the Civil Code has been changed to accelerate the circulation of mortgaged property in order to exert the utility of the property, its rule framework does not focus on helping the transferee to get rid of the unstable transferee status. Where the market valuation of the mortgaged property is lower than the total amount of the claims it secures, the Civil Code does not provide for systems such as settlement of the price or requests for extinction of the mortgage, but more rather to the autonomy of the will between the parties.

IV. Conclusion

Article 406 of the Civil Code adopts the rule of recourse, which does help to accelerate the circulation of mortgaged property and give full play to the utility of the property, but the structure of the rule does not place emphasis on the assignee, but from the perspective of respecting the autonomy of intention, it is no longer imposed on the free circulation of mortgaged property, as long as the mortgage right is not damaged, whether to allow the free circulation of mortgaged property is entirely left to the parties. On the one hand, the mortgagee may, by registering the prohibition agreement, give it the right to claim that the assignment of the mortgaged property does not produce the effect of the property right; on the other hand, the assignee can extinguish the mortgage right by performing on behalf of the debtor when the debtor fails to perform the obligation.

(This article is edited by Zhang Jingyuan.) This article has not been reviewed by the original author. This article is the "original logo" work of China Civil and Commercial Law Network. Articles that have not been officially published on the WeChat public account of the "China Civil and Commercial Law Network" shall not be reproduced. ）

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This article is excerpted from Zhang Yao: "Application of the Rules for the Transfer of Mortgaged Property", in Politics and Law, No. 8, 2021.

【About author】Zhang Yao, Assistant Professor, Law School of the University of International Business and Economics, authorized scholar of China Civil and Commercial Law Network.