Civil Code - Mortgage

(The following clauses are selected from The Civil Code of the People’s Republic of China translated by Steve Lee and Robert Zhang, international lawyers in Shanghai, China, and published by Kindle Unlimited.)

Article 394 Where the obligor or any third party mortgages its property as collateral without surrendering its possession to secure the obligor's payment of its debt, the mortgagee shall be entitled to be paid in priority out of such property in case of the obligor's failure to pay its debt when due or any other event which triggers the exercise of the mortgage right as agreed by the parties.

For the purpose of the preceding paragraph, the obligor or the third party shall be the mortgagor, the obligee shall be the mortgagee, and the property mortgaged as collateral shall be the mortgaged collateral.

Article 395 Any of the following properties which the obligor or any third party is entitled to dispose of may be mortgaged as collateral:

(1)  buildings and other reals attached to land;

(2)  tenancy of land for construction;

(3)  right to use sea waters;

(4)  production facilities, raw materials, and semi-finished or finished products;

(5)  buildings, vessels, and aircraft under construction;

(6)  means of transport; and

(7)  any other properties not prohibited by laws or administrative regulations from being mortgaged as collateral.

A mortgagor may mortgage one or more of the properties listed in the preceding paragraph.

Article 396 Any company, individual business, or agricultural producer or operator may mortgage its existing and future production facilities, raw materials, or semi-finished or finished products as collateral to an obligee, and the obligee shall be entitled to be paid in priority out of the mortgaged collateral in case of the obligor's failure to pay its debt when due or any other event which triggers the exercise of the mortgage right as agreed.

Article 397 Where a building is mortgaged as collateral, the tenancy of the land for construction covered by the building shall be mortgaged as collateral concurrently. Where the tenancy of land for construction is mortgaged as collateral, the buildings on the land shall be mortgaged as collateral concurrently.

In case of the mortgagor's failure to mortgage concurrently in accordance with the preceding paragraph, the unmortgaged property shall be deemed to have been mortgaged as collateral concurrently.

Article 398 The tenancy of land for construction of a township or village enterprise shall not be mortgaged as collateral separately. Where a factory or any other building of a township or village enterprise is mortgaged as collateral, the tenancy of the land for construction covered by the building shall be mortgaged as collateral concurrently.

Article 399 Any of the following properties may not be mortgaged as collateral:

(1)  land ownerships;

(2)  the tenancies of rural residential lands, private plots, private hilly lands, and other collectively-owned lands, except those which may be mortgaged as collateral according to law;

(3)  educational facilities, medical and health facilities, and other public welfare facilities of schools, colleges, kindergartens, medical institutions, and other nonprofit legal entities created for public welfare purposes;

(4)  properties of which the ownerships or rights to use are unclear or in dispute;

(5)  properties that have been sealed up or detained or are under supervision according to law; or

(6)  any other properties that shall not be mortgaged as collateral in accordance with laws and administrative regulations.

Article 400 No mortgage shall be created unless the parties enter into a written mortgage contract.

In general, a mortgage contract shall contain the following

(1)  the type and amount of the secured claim;

(2)  the term for the obligor to pay its debt;

(3)  the name, quantity, and other necessary information of the mortgaged collateral; and

(4)  the coverage of the security.

Article 401 Where the mortgagee reaches an agreement with the mortgagor, before the expiration of the performance period of the debt, that the ownership of the mortgaged collateral shall be vested in the obligee in case of the obligor's failure to pay its debt when due, the mortgagee shall be entitled to be paid in priority only out of the mortgaged collateral according to law.

Article 402 Where any property set forth under Items (1) through (3) or any building under construction set forth under Item (5) of the first paragraph of Article 395 of this Code is mortgaged as collateral, the mortgage shall be registered. Such a mortgage shall be created upon its registration.

Article 403 A mortgage with any personal property as collateral shall be created upon the entry into force of the mortgage contract. Any such mortgage without registration shall not be pleaded as a defense against any bona fide third party.

Article 404 A mortgage with any personal property as collateral shall not be pleaded as a defense against a buyer who has obtained the mortgaged collateral by paying a reasonable price in the ordinary course of business.

Article 405 Where the mortgaged collateral has been leased, and its possession has been surrendered before the creation of the mortgage, the mortgage shall not be affected by the lease.

Article 406 The mortgagor may transfer the mortgaged collateral during the mortgage term unless otherwise agreed by the parties. Any transfer of the mortgaged collateral shall be without prejudice to the mortgage right.

A mortgagor intending to transfer its mortgaged collateral shall promptly notify the mortgagee. Where the mortgagee reasonably believes that the transfer of the mortgaged collateral may cause damage to or loss of the mortgage, it may request the mortgagor to pay off its debt in advance or place the proceeds from the transfer in escrow. The amount of the proceeds from the transfer exceeding the amount of the claim, if any, shall be paid to the mortgagor, and the shortage, if any, shall be covered by the obligor.

Article 407 The mortgage right shall not be transferred separately from its claim or used as a security against any other claim. The mortgage as security against a claim shall be transferred concurrently upon the transfer of the claim unless otherwise specified by law or agreed by the parties.

Article 408 Where the value of the mortgaged collateral may be decreased due to the acts of the mortgagor, the mortgagee may request the mortgagor to cease and desist from such acts. Where the value of the mortgaged collateral is decreased, the mortgagee may request the mortgagor to restore the value of the mortgaged collateral or provide any other security of a value equivalent to the reduced value. Where the mortgagor neither restores the value of the mortgaged collateral nor provides any other security, the mortgagee may request the obligor to pay off its debt in advance.

Article 409 A mortgagee may waive its mortgage right or the preferential rank thereof. The mortgagee and the mortgagor may agree to alter the preferential rank of the mortgage right and the amount of the secured claim; provided, however, that any such alteration without the written consent of any other mortgagee shall not have an adverse impact on any other mortgagee.

Where the mortgagee waives or alters its mortgage right or waives the preferential rank thereof in the obligor's own property mortgaged as collateral, any other sureties shall be exempted from the security liabilities to the extent that the mortgagee loses its priority to be paid unless any other sureties undertake to provide security nevertheless.

Article 410 In case of the obligor's failure to pay its debt when due or any other event which triggers the exercise of the mortgage right as agreed by the parties, the mortgagee may reach an agreement with the mortgagor that the claim shall be satisfied by liquidating the mortgaged collateral or paid in priority out of the proceeds from the sale of the mortgaged collateral by auction or on consignment. Where the agreement damages the interests of any other obligee, the damaged obligee may file a petition with the people's court to revoke the agreement.

Where the mortgagee and the mortgagor fail to reach an agreement on how to exercise the mortgage right, the mortgagee may file a petition with the people's court to sell the mortgaged collateral by auction or on consignment.

Where any mortgaged collateral is liquidated or sold on consignment, reference shall be made to the market price.

Article 411 For a mortgage created in accordance with Article 396 of this Code, the mortgaged collateral shall be determined

(1)  if the obligor fails to pay its debt when due;

(2)  if the mortgagor is declared bankrupt or dissolved; or

(3)  in case of any event which triggers the exercise of the mortgage right as agreed by the parties; or

(4)  in case of any other event which has a material effect on the exercise of the claim.

Article 412 Where the mortgaged collateral is detained by the people's court according to law in case of the obligor's failure to pay its debt when due or any other event which triggers the exercise of the mortgage right as agreed by the parties, the mortgagee shall be entitled to the natural or civil fruits of the mortgaged collateral from the date of the detention unless the mortgagee fails to notify the person who has an obligation to pay off the civil fruits.

The fruits specified in the preceding paragraph shall first be applied to pay the cost for receiving such fruits.

Article 413 Where any mortgaged collateral is liquidated or sold by auction or on consignment, the amount of the proceeds exceeding the amount of the claim, if any, shall be paid to the mortgagor, and the shortage, if any, shall be covered by the obligor.

Article 414 Where the same property is mortgaged as collateral to two or more obligees, the proceeds from the sale of the mortgaged collateral by auction or on consignment shall be applied to pay off the debts:

(1)  in the temporal order of the registration of the mortgages if the mortgages have been registered;

(2)  secured by registered mortgages in preference to those unsecured by registered mortgages; and

(3)  in proportion to their amounts if the mortgages are not registered.

The order of payment of other registrable security interests shall be governed, mutatis mutandis, by the provisions of the preceding paragraph.

Article 415 Where the same property is both mortgaged and pledged as collateral, the proceeds from the sale of the property by auction or on consignment shall be applied for payment of the debts in the temporal order of registration or delivery of the collateral.

Article 416 Where the claim secured by personal property mortgaged as collateral is the price of the collateral and the mortgage is registered within 10 days upon the delivery of the subject matter, the mortgagee shall be paid in priority to any other security interest holder of the buyer of the collateral, except the lien holder.

Article 417 Any building on land for construction constructed after the tenancy of the land for construction is mortgaged as collateral shall not constitute part of the mortgaged collateral. Where the mortgage right over the tenancy of such land for construction is exercised, the buildings on the land constructed after the tenancy is mortgaged shall be disposed of concurrently with the tenancy; provided, however, that the mortgagee shall not be entitled to be paid in priority out of the proceeds from the disposal of such buildings.

Article 418 Where the tenancy of a collectively-owned land is mortgaged as collateral according to law, neither the ownership nor the purpose of the land shall be changed after the mortgage right is exercised unless the change is made in accordance with the applicable legal procedures.

Article 419 A mortgagee shall exercise its mortgage right within the statute of limitations of the claim secured by the mortgage, failing which no relief shall be granted by the people's court to protect the mortgage.

Section 2 Maximum Mortgage

Article 420 Where the obligor or any third party mortgages its property as collateral to secure the obligor's payment of its debt when due which may arise continuously within a certain period of time, the mortgagee shall be entitled to be paid, within the maximum amount of its claims, in priority out of such property, in case of the obligor's failure to pay its debts when due or any other event which triggers the exercise of the mortgage right as agreed by the parties.

The claims arising prior to the creation of such maximum mortgage may, upon the agreement by the parties, be covered by the maximum mortgage.

Article 421 Where any claim is transferred before the claims secured by the maximum mortgage are determined, the maximum mortgage shall not be transferred unless otherwise agreed by the parties.

Article 422 Before the claims secured by the maximum mortgage are determined, the mortgagee and the mortgagor may agree to alter the period to determine the claims secured by the maximum mortgage and their coverage and maximum amount; provided, however, that any such alteration shall not have an adverse effect on any other mortgagee.

Article 423 The claims of the mortgagee shall be determined:

(1)  upon the expiration of the period to determine the claims;

(2)  upon the request of the mortgagee or mortgagor after 2 years from the date of the creation of the maximum mortgage if the period to determine the claims is not expressly agreed upon;

(3)  if no more claims will arise;

(4)  if the mortgagee knows or has reason to know that the mortgaged collateral has been sealed up or detained;

(5)  if the obligor or the mortgagor is declared bankrupt or dissolved; or

(6)  in any other case where the claims shall be determined according to law.

Article 424 In addition to this Section 2, maximum mortgage shall also be governed by the provisions of Section 1 of this Chapter XVII.