Effectiveness of the mortgage contract of paying off debts with real estate

With the deepening of reform and opening up and the rapid development of commodity economy, the use of entities, houses and other mortgages to guarantee the performance of debts among citizens, legal persons and citizens and legal persons has gradually increased, and the resulting disputes have also increased in a positive proportion. If the debtor fails to repay the debt within the agreed time limit, the creditor may negotiate with the mortgagor to convert the mortgaged property into money or be repaid with the proceeds from auction or sale of the mortgaged property; If the agreement fails, the mortgagee may bring a lawsuit to the people’s court. Of course, in real life, many debtors borrow money because of the urgent need for funds. In this case, borrowers often accept unfair conditions in order to obtain loans, set mortgages or pledges in kind whose value exceeds the number of loans, and directly agree on the liquid terms of paying debts in kind, which is easy to cause unfair results.

A poultry farm borrowed money from Xu for business needs. Both parties agreed that the monthly interest rate was 25 ‰, 350000 yuan would be returned in the second half of 2013, and the principal and interest of the balance would be paid off in the second half of 2014; If it cannot be repaid on time, the poultry farm will use six restaurants in the city and the land in front of the house to pay off the debt. After the loan expired, the poultry farm failed to return the principal and interest. Xu filed a lawsuit to the court and asked the poultry farm to handle the transfer procedures of six houses and land.

Article 40 of China’s security law stipulates: “when entering into a mortgage contract, the mortgagee and the mortgagor shall not agree in the contract that when the debt expires and the mortgagee is not paid off, the ownership of the mortgaged property shall be transferred to the creditor.” This article is a prohibition on liquid contract. The so-called liquid contract refers to that when the mortgage right is established, when both parties in the mortgage contract decide that the main creditor’s right has reached the repayment period but has not been repaid, the ownership of the mortgaged property is transferred to the creditor. China’s “guarantee law” takes an invalid position on liquid contract. Article 57 of the interpretation of the Supreme People’s Court on Several Issues concerning the application of the guarantee law of the people’s Republic of China (hereinafter referred to as the interpretation of the Guarantee Law) stipulates that, “The parties agree in the mortgage contract that if the mortgagee is not paid off at the expiration of the debt performance period, the content of the ownership transfer of the mortgaged property to the creditor is invalid. The invalidity of this content does not affect the effectiveness of other parts of the mortgage contract.”. In other words, some provisions of the mortgage contract are invalid, not the whole mortgage. The mortgagor still has to bear the guarantee liability based on the value of the collateral. The mortgagee can still discount, auction and sell the collateral according to legal procedures, and get priority compensation from the sale price.

The contract has come into effect. When the debtor fails to perform its obligations, the creditor will auction, discount and sell the property, and receive priority compensation from its price. The mortgage contract belongs to the right creation contract, which aims to set the mortgage, but the essence of the mortgage contract is still the essence of the contract. Its establishment, effectiveness and invalidity are adjusted by the contract law. The mortgage contract is the reason for the establishment of the mortgage right. There is no agreement on the establishment of the mortgage right in the mortgage contract, and the mortgage right does not come to the plateau, but the mortgage contract cannot directly establish the mortgage right. The establishment of the mortgage right needs to go through the establishment procedures, that is, registration and publicity. Registration is the establishment of mortgage. If the mortgagor mortgages the house to the creditor, it has the effect against the third party if it is registered and publicized. Only by confirming that the mortgage contract is valid and in line with the principle of real right publicity, will the credibility of mortgage registration not be shaken.

In this case, the plaintiff and the defendant agreed to offset the debt with real estate when signing the loan contract. According to the principle of legal property right, it violated the provisions prohibited by the liquid contract. Even if the plaintiff and the defendant completed the mortgage registration procedures to establish the mortgage, the court could not directly ask the defendant to go through the real estate transfer procedures according to the contents agreed by the plaintiff and the defendant, but could only confirm that the liquid contract was invalid.

To sum up, when the poultry farm borrows from Mr. Xu for business needs, it is agreed that if the debt cannot be repaid on time, the poultry farm uses six restaurants in the city and the land in front of the house to offset the debt, which is a liquid contract. According to Article 40 of the guarantee law, it should be deemed invalid, and both parties have not handled mortgage registration administratively, It shall be confirmed as an invalid mortgage contract. Xu can exercise his rights according to the loan contract.

In addition, it is agreed in the debt contract that if the borrower fails to repay the loan at maturity, the lender shall dispose of the collateral by itself, or although the parties have not signed the flow charge clause in the mortgage contract, the mortgagee and the mortgagor shall enter into a deferred repayment contract before the creditor’s rights have been paid off, It is agreed in the extension contract that if the mortgagor fails to pay off the debts within the extension period, the mortgaged property shall be owned by the mortgagee or handed over to the mortgagee for operation, or the debtor and the creditor sell the real estate in the contract, but the possession of the real estate is not transferred, the debtor still occupies the real estate, and the creditor shall pay the price of the real estate to the debtor, It is stipulated in the contract that the debtor shall perform his debts within a certain period of time to redeem the real estate.

Paying debts in kind refers to the behavior that the debtor and the creditor agree to convert the property owned by the debtor or a third party agreed by the third party into the creditor to pay off the debt. According to the different time set by the parties, the payment of debt in kind can be divided into two situations: first, the debt is not in the repayment period, and both parties agree to pay the debt in kind to eliminate the debt; Second, the debt has reached the settlement period, and the two sides agreed to offset the debt with goods to eliminate the debt. This case belongs to the first case. The parties reached an agreement on paying off the debt in kind before the expiration of the debt repayment period, which has the purpose of guaranteeing the realization of the creditor’s rights. In this case, compared with the provisions of the property law and the security law, although the parties do not directly agree to establish a legal relationship of guarantee, there is consideration for debt repayment, and it is not a direct agreement on ownership, the analysis of the legal phenomenon should not only look at the appearance, but should look at its essence.

The repayment of debt by goods between the parties before the expiration of the debt repayment period is in line with the basic characteristics of liquid quality, In essence, it is to guarantee the realization of creditor’s rights. Although there is an agreement on consideration, because both parties have not made it clear that the subject matter of debt repayment will be liquidated when the debt is not performed, nor that the debtor can redeem the subject matter of debt repayment after the debt is paid off, Article 186 of the property law stipulates: “the mortgagee shall not agree with the mortgagor that the mortgaged property shall belong to the creditor’s rights when the debtor fails to perform the due debt before the expiration of the debt performance period.” The contract terms agreed by the mortgagor and the mortgagee in advance that when the debt repayment period expires and the mortgagee is not repaid, the ownership of the mortgaged property will be transferred to the mortgagee, which is called “flow charge clause”, “liquid charge clause” or “collateral compensation clause” in law.

The purpose of prohibiting liquid mortgage by law is to prevent the debtor from using the high-priced collateral as the guarantee of a small amount of creditor’s rights because he is in a hurry to borrow. When the repayment period comes, he will lose the ownership of the collateral because he cannot repay the debt. Because when the debtor makes a mortgage loan, it is often in a time of urgency and embarrassment, and the creditor often takes advantage of this opportunity to force the debtor to enter into a flow charge clause to guarantee a small amount of creditor’s rights with a very large amount of collateral, hoping that the debtor will not be able to pay off the debts and obtain the ownership of the collateral when due. In this case, The interests of the debtor will suffer great losses, which also violates the principle of fairness and compensation for equal value stipulated in the civil law. Therefore, it is still liquid in nature, and the agreement shall be deemed invalid.