º¬Ðß²ÝÉçÇø

Mortgaging projects under construction is a common credit enhancement measure, yet it currently lacks a precise legal definition. Generally, it refers to a debtor or third party mortgaging an under-construction building to a creditor.

When creditors accept such projects as collateral, they must ensure that the elements of the mortgage comply with regulations, all necessary permits and licences are in place, and the mortgage contract is complete and comprehensive.

Legal basis

Article 395(1) of the Civil Code provides the legal basis for mortgaging projects under construction.

The Ministry of Housing and Urban-Rural Development¡¯s Measures on the Administration of Mortgage of Urban Real Estate also address mortgages of project under construction, specifying: ¡°Such mortgage refers to the act of a mortgagor obtaining a loan for the continued construction of a project by mortgaging the legally acquired land use rights and the invested assets of the construction project to the lending bank without transferring possession.¡±

In practice, real estate registration agencies often impose restrictions on the mortgagor, the usage of principal debt, and the mortgage, based on article 3 of the measures.

Mortgage elements

The Civil Code, as superior law to the measures, imposes relatively lenient restrictions on the elements of those mortgages. The measures, as departmental regulations formulated by the Ministry of Housing and Urban-Rural Development, should not set norms that diminish the rights of citizens, legal persons or other organisations, nor increase their obligations without the basis of laws or administrative regulations, decisions, or orders of the State Council.

Article 3(5) of the above-mentioned measures should be understood as regulating specific types of construction projects, but should not exclude other types of mortgages on projects under construction, refuse to register these mortgages, or deny their legality.

Mortgagor

Previous judicial cases ¨C such as Huarong International Trust v Mingzhou Construction & Development (2016) ¨C have not denied the legality of a construction project owner mortgaging for another¡¯s debt. Specifically, in Zhejiang Daxinjia Real Estate v Jiaxing Urban and Rural Planning and Construction Management Committee (2015), Nanhu District People¡¯s Court of Jiaxing city, in Zhejiang province, held that the Property Law does not limit the debt secured by a mortgage of a project under construction to the mortgagor¡¯s own debt, implying that this kind of mortgage can secure any lawful debt.

Principal debt

The Supreme People¡¯s Court, in Shanghai Fangxin Real Estate Development v East China Three Gorges Economic Development, et al (2002), stated: ¡°Current laws and judicial interpretations do not restrict the usage of pre-sale house mortgages.¡±

Additionally, in Dong v Huaihua Yingtai Construction Investment and Haurong Huan branch (2021), the appellant claimed a mortgage did not meet conditions for a project under construction mortgage, arguing that the principal debt of the mortgaged house was not used for the project¡¯s subsequent construction, and that the mortgagee was a trust company rather than a lending bank. However, the Supreme People¡¯s Court did not support this claim.

Mortgagee

The Supreme People¡¯s Court, in its Reply on Issues concerning Whether the Measures on the Administration of Mortgage of Urban Real Estate on Mortgage of a Project under Construction Conflicts with Superordinate Law, clarified: ¡°Projects under construction fall within the scope of property that can be mortgaged under the Guarantee Law. The law does not impose restrictive provisions on the scope of mortgagees for mortgages on projects under construction. Article 3(5) of the measures is a special provision for lending banks as mortgagees without restricting other entities from becoming mortgagees of such construction projects.¡±

Additionally, the Notice on Several Issues Concerning the Registration of Real Estate Mortgage Rights in the Business Operations of Financial Asset Management Companies and Other Institutions, issued by the China Banking Regulatory Commission and Ministry of Land and Resources, also allows financial asset management companies to apply for real estate mortgage registration as creditors.

Permits and licences

According to the Implementation Rules for the Interim Regulations on Real Estate Registration (2024 Amendment), the measures (2021 Amendment), and the TD/T 1095-2024 Real Estate Registration Procedures, projects under construction must have obtained the land use rights, construction project planning permits, construction land planning permits and construction permits (if required) for mortgage registration.

Unless the parties have a special agreement, the absence of relevant permits and licences does not affect the validity of the mortgage contract. However, completeness of those certificates affects the administrative review of the mortgage registration by the real estate registration authority, as referenced in Peng v Guiyang City Commercial Bank, Guizhou Longli Dadi Real Estate Development (2008) in the Supreme People¡¯s Court.

Mortgage contract

According to the TD/T 1095-2024 Real Estate Registration Procedures, the mortgage contract clearly states the mortgagee, amount or type of guaranteed principal debts, scope of the guarantee, debt performance period, and the mortgaged real estate.

For registration of a maximum mortgage, it is necessary to specify the maximum debt amount and period for determining the debt. Article 28 of the measures (2021 Amendment) stipulates that the mortgage contract for a project under construction includes the numbers of the State-owned Land Use Right Certificate, Construction Land Planning Permit and Construction Project Planning Permit, as well as the amount of land use rights transfer fees paid or to be paid, the amount of funds invested in the project, construction progress and completion date, and completed work volume and project quantity.

If the mortgage contract does not specify the content required by laws and regulations, the mortgage registration cannot be processed and, even if registered, there is a risk of the mortgage registration being revoked, as referenced in Jiamusi Real Estate Registration Centre v Yu (2024).

Sima Yayun?is a senior partner and Zheng Xin is an associate at?DOCVIT Law Firm. Associate Guan Xinran also contributed to the article.