New regulations on mortgage transfer highlight autonomy of will

Compiled from: Legal Club
 
One of the major changes in the Civil Code regarding the mortgage system is the increased freedom in transferring mortgaged assets, with fewer statutory restrictions. However, it is important to note the exception clause, i.e., unless otherwise agreed by the parties. With fewer statutory restrictions, restrictions can still be imposed through agreements.

 
 

If the parties have agreed on a clause prohibiting or restricting the transfer of the mortgaged property, and the mortgagor transfers it in violation of the agreement, is the contract for the transfer of the mortgaged property valid? Does the delivery act or the registration of property rights change produce the effect of a change in property rights? What should be noted in future mortgage legal acts?
 
 
Relevant legal provisions
Article 406 of the Civil Code Disposal of Mortgaged Property
 
During the mortgage period, the mortgagor may transfer the mortgaged property. If the parties have otherwise agreed, such agreement shall prevail. If the mortgaged property is transferred, the mortgage right shall 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 impair the mortgage right, it may request the mortgagor to use the proceeds from the transfer to repay the debt to the mortgagee in advance or to deposit them. The portion of the transfer proceeds exceeding the amount of the claim shall belong to the mortgagor, and any shortfall shall be paid by the debtor.
 
Article 43 of the Supreme People's Court's Interpretation on the Application of the Civil Code of the People's Republic of China Concerning the Guarantee System
 
If the parties agree to prohibit or restrict the transfer of the mortgaged property but have not registered the agreement, and the mortgagor transfers the mortgaged property in violation of the agreement, and the mortgagee requests confirmation that the transfer contract is invalid, the people's court shall not support it; if the mortgaged property has been delivered or registered, and the mortgagee requests confirmation that the transfer does not have the effect of property rights, the people's court shall not support it, except where the mortgagee has evidence proving that the transferee knew; if the mortgagee requests that the mortgagor bear liability for breach of contract, the people's court shall support it in accordance with the law.
 
If the parties agree to prohibit or restrict the transfer of the mortgaged property and have registered the agreement, and the mortgagor transfers the mortgaged property in violation of the agreement, and the mortgagee requests confirmation that the transfer contract is invalid, the people's court shall not support it; if the mortgaged property has been delivered or registered, and the mortgagee claims that the transfer does not have the effect of property rights, the people's court shall support it, except where the mortgage is extinguished because the transferee replaces the debtor in discharging the debt.
 
 
What if the parties have not "otherwise agreed"?
1. The freedom to transfer the mortgaged property will be greatly enhanced. The mortgagor can transfer the mortgaged property and obtain the transfer price without obtaining the creditor's consent in advance. This greatly improves the liquidity of the mortgaged property, which is conducive to enhancing social economic vitality. At the same time, the mortgage is not affected, and the mortgaged property still serves as security for the creditor's claim.
 
2. To balance the interests of the creditor, the law also provides that under special circumstances, the mortgagee may request early satisfaction or deposit of the transfer price, but must prove that the transfer of the mortgaged property may harm the mortgage. In practice, it is not easy for the mortgagee to prove this, because the mortgage is a form of security over property, and generally, it has little to do with who the owner is. Of course, if the attributes or characteristics of the owner affect the value of the mortgaged property, the mortgagee may request early repayment or deposit.
 
 
If the parties agree to prohibit or restrict the transfer of the mortgaged property 呢？
Whether to register the "agreement prohibiting or restricting the mortgaging of property" for public notice will become a key factor affecting the validity of changes in property rights, but regardless of whether it is registered, it does not affect the validity of the transfer contract.

 
 

According to civil law theory, public notice registration has always been a key factor in determining whether a counterparty is acting in good faith. After public notice registration, it is presumed that the counterparty has been informed of the registration information, meaning they are aware of it and thus are not a good-faith counterparty, which can produce a right of opposition in property law. Since the "agreement prohibiting or restricting the mortgaging of property" has been publicly registered, the transferee is subjectively deemed to know or should have known. Therefore, even if the mortgaged property has been delivered or registered for transfer, the mortgagee can assert that no property rights effect has occurred, meaning the property rights of the mortgaged property still belong to the mortgagor. This aligns with the judicial interpretation of the security system: "If the mortgaged property has been delivered or registered, and the mortgagee claims that the transfer does not have property rights effect, the people's court shall support it."
 
As for the validity of the transfer contract, since determining whether a contract is valid must strictly follow the provisions of Section 3, Chapter 6 of the Civil Code, even if the "agreement prohibiting or restricting the mortgaging of property" has been publicly registered, it cannot constitute a ground for contract invalidity. Additionally, the Civil Code has clarified that a contract involving unauthorized disposition should be valid. Based on the logic of "inferring the lesser from the greater," the transfer contract is also valid. Thus, the transferee can claim liability for breach of contract from the transferor based on the transfer contract.