Chapter XVI Interests Obtained from Mortgage

Section 1 General Interest Obtained from Mortgage

Article 179 Where a debtor or a third party, for guaranteeing the payment of debts, mortgages property to a creditor instead of transferring of the possession of such property, if the debtor defaults or the conditions for enforcement of the interest, as agreed upon by the parties concerned, arise, the creditor shall have priority in having his claim paid with the property.

The debtor or the third party specified in the preceding paragraph is the mortgagor, the creditor specified there is the mortgagee, and the property used as security is mortgaged property.

Article 180 The following property which the debtor or the third party is entitled to dispose of may be mortgaged:

(1) buildings and other attachments on the ground;

(2) the right to the use of land for construction;

(3) the contractual management right to barren land, etc. obtained through bidding, auction, open consultation or other means;

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

(5) buildings, vessels and aircraft under construction;

(6) means of transportation; and

(7) other property that is not prohibited from being mortgaged by laws or administrative regulations.

A mortgagor may mortgage all the property specified in the preceding paragraph at the same time.

Article 181 Subject to written agreement between the parties, enterprises, self-employed industrial and commercial households and agricultural producers and distributors may mortgage their existing and anticipated production equipment, raw and semi-finished materials, semi-finished products and finished products, and if the debtor defaults or the conditions for enforcement of the interest, as agreed upon by the parties concerned, arise, the creditor shall have priority in having his claim paid with the movables.

Article 182 Where a building is mortgaged, the right to the use of the land for construction within the area occupied by the building shall be mortgaged along with the building. Where the right to the use of the land for construction is mortgaged, the buildings on the land shall be mortgaged along with that right.

If the mortgagor fails to comply with what is provided for in the preceding paragraph, the property not mortgaged shall be deemed to be mortgaged along with what is mortgaged.

Article 183 The right to the use of the land for construction enjoyed by a town (township) or village enterprise may not be mortgaged separately. Where workshops and other buildings of a town (township) or village enterprise are mortgaged, the right to the use of the land for construction within the area occupied by the workshops or other buildings shall be mortgaged along with the workshops and other buildings.

Article 184 The following property may not be mortgaged:

(1) land ownership;

(2) the right to the use of the land owned by the collective, such as cultivated land, house sites, private plots and private hills, except where otherwise provided for by law;

(3) educational facilities, medical and health facilities and other public welfare facilities of undertakings for public welfare, such as schools, kindergartens and hospitals and public organizations;

(4) property the ownership or right to the use of which is indefinite or controversial;

(5) property sealed up, distrained or placed under custody in accordance with law; and

(6) other property which may not be mortgaged as prescribed by laws and administrative regulations.

Article 185 To create a mortgage interest, the parties concerned shall conclude a mortgage contract in written form.

A mortgage contract generally includes the following particulars:

(1) the kind and amount of claims secured;

(2) the time limit for the debtor to repay the debt;

(3) the name, quantity, quality, conditions, location or attribution of the ownership or the right to the use, of the mortgaged property; and

(4) the scope of security interest.

Article 186 Before maturity of the debts, the mortgagee may not enter into an agreement with the mortgagor that the mortgaged property shall come under the ownership of the creditor when the debtor defaults.

Article 187 Where the property specified in Subparagraphs (1), (2) and (3), or the buildings under construction specified in Subparagraph (5), under the first paragraph of Article 180 of this Law are mortgaged, such mortgage shall be registered. The mortgage interest is created as of the date of registration.

Article 188 Where the property specified in Subparagraphs (4), (5) and (6), or the vessels and aircraft under construction specified in Subparagraph (5), under the first paragraph of Article 180 of this Law are mortgaged, the mortgage interest is created at the time when the mortgage contract becomes valid; if the mortgage interest is not registered, it shall not be used against a bona fide third party.

Article 189 Where an enterprise, a self-employed industrial or commercial household, or an agricultural producer or distributor mortgages movable property specified in Article 181 of this Law, it shall register with the administration department for industry and commerce at the place where the domicile of the mortgagor is located. The mortgage interest shall be created at the time when the mortgage contract becomes valid; if such interest is not registered, it shall not be used against a bona fide third party.

Where a mortgage is made in accordance with the provisions of Article 181 of this Law, it shall not be used against the buyer who has paid reasonable price and obtained the mortgaged property in the ordinary course of business operations.

Article 190 If a mortgagor leases the mortgaged property before the mortgage contract is concluded, the previously established leasing relation shall not be affected. If a mortgagor leases the mortgaged property after the creation of the mortgage interest, the leasing relation may not be used against the registered mortgage interest.

Article 191 If a mortgagor transfers the mortgaged property with the consent of the mortgagee during the period of mortgage, the proceeds which the mortgagor obtains from the transfer of the mortgaged property shall in advance be used to settle the claim secured by the mortgagee or be deposited with a third party. If the proceeds obtained from the transfer exceed the secured claim, the balance shall go to the mortgagor; if the proceeds is insufficient to cover the claim, the uncovered part shall be paid by the debtor.

The mortgagor may not transfer the mortgaged property without the consent of the mortgagee during the period of mortgage, unless the transferee pays off the debts for the mortgagor and thus the mortgage interest extinguishes.

Article 192 The mortgage interest may not be separated from the claim to be transferred independently, or to be used to secure another claim. If the claim is transferred, the interest of mortgage shall be transferred along with it, unless otherwise provided for by law or agreed upon by the parties.

Article 193 Where a mortgagor acts in such a way as to cause depreciation of the mortgaged property, the mortgagee shall have the right to demand that the mortgagor cease and desist from such act. Where the value of the mortgaged property depreciates, the mortgagee shall have the right to demand that the mortgagor restore the original value of the mortgaged property or provide security corresponding to the amount of the value reduced. Where a mortgagor fails to restore the original value of the mortgaged property or provide corresponding security, the mortgagee shall have the right to demand the debtor to settle the claim in advance.

Article 194 A mortgagee may waive his mortgage interest or his place in the order of mortgage interest. A mortgagee and a mortgagor may, upon agreement, change the place in the order of the mortgage interest, the amount of secured claims, etc., provided that such a change, without the written consent of other mortgagees, shall not have an adverse effect on other mortgagees.

Where a debtor uses his own property for mortgage, if a mortgagee waives his mortgage interest or his place in the order of the mortgage interest or makes changes in respect of his mortgage interest, other guarantors shall be exempted from the suretyship to the extent that the mortgagee forfeits his rights and interests in terms of the priority in being paid off, unless the said guarantors are still committed to the suretyship.

Article 195 Where the debtor defaults or the conditions for enforcement of the mortgage interest thereof, as agreed upon by the parties concerned, arise, the mortgagee may enter into an agreement with the mortgagor that he be given the priority in being paid with the money into which the mortgaged property is converted or the proceeds obtained from auction or sale of the property. If such agreement undermines the interests of other creditors, they may apply to the people’s court for cancellation of the agreement within one year from the date they come to know or should have known the cause for cancellation.

If the mortgagee and mortgagor fail to reach an agreement on the means of enforcing the mortgage interest, the mortgagee may apply to the people’s court for auction or sale of the mortgaged property.

The mortgaged property shall be converted into money or be sold off by referring to its market price.

Article 196 Where a mortgage interest is created in accordance with the provisions of Article 181 of this Law, the mortgaged property shall be established when one of the following circumstances arises:

(1) The debts are not paid when they fall due;

(2) The mortgagor is declared bankrupt or is dissolved;

(3) The conditions for enforcement of the mortgage interest, as agreed upon by the parties concerned, arise; or

(4) Other circumstances arise which may seriously affect the enforcement of the claim.

Article 197 If the mortgaged property is seized by a people’s court according to law because the debtor defaults or the conditions for enforcement of the interest, as agreed upon by the parties concerned, arise, the mortgagee shall, from the date of the seizure, have the right to collect the natural or statutory fruits accrued from the mortgaged property, except where the mortgagee fails to notify the person who is obliged to pay the statutory fruits.

The fruits mentioned in the preceding paragraph shall first be used to pay off the expenses for collecting such fruits.

Article 198 If the proceeds obtained from conversion into money or from auction or sale of mortgaged property exceed the amount of a claim, the balance shall go to the mortgagor; and if the proceeds are insufficient to cover the claim, the uncovered part shall be paid by the debtor.

Article 199 Where a piece of property is mortgaged to two or more creditors, the proceeds from auction or sale of the mortgaged property shall be used for liquidation according to the following provisions:

(1) Where the mortgage interest is registered, the liquidation shall be made in the order of the registration of the mortgage interest; if the order of registration is the same, liquidation of the claims shall be made on a pro rata basis;

(2) The claim secured by a registered mortgage interest shall be satisfied prior to the unregistered ones; and

(3) Liquidation of unregistered mortgage interests shall be made on a pro rata basis in respect of the claims.

Article 200 After the right to the use of land for construction is mortgaged, the buildings erected thereafter are not mortgaged property. Where the said land use right is used to satisfy the mortgage interest, the newly-erected buildings on the land shall be disposed of together with the land use right; however, the mortgagee shall have no priority in having his claim paid with the proceeds from the said buildings.

Article 201 Where the right to land contractual management is mortgaged, as specified in Subparagraph (3) under the first paragraph of Article 180 of this Law, or the right to the use of land for construction within the area occupied by the workshops and other buildings of a town (township) or village enterprise is mortgaged along with the workshops or other buildings, as specified in Article 183 of this Law, the nature of ownership and the purpose of use of the land may not be altered without going through the statutory procedure after the enforcement of the mortgage interests thereon.

Article 202 The mortgagee shall exercise his mortgage interest within the limitation provided for action of the principal claim; if he fails to do so, the people’s court shall not provide protection in this respect .

Section 2 Maximum Mortgage Interest

Article 203 Where a debtor or a third party provides security for the debts to be incurred consecutively within a given period of time, if the debtor defaults or the conditions for enforcement of the mortgage interest, as agreed upon by the parties concerned, arise, the mortgagee shall have the priority in having his claims paid with the security to the extent of the maximum amount of the claims.

A claim that exists before the creation of the maximum mortgage interest may, with consent of the parties, be included in the claims secured by the maximum amount of mortgage.

Article 204 Where, before the claims secured by the maximum amount of mortgage are established, part of the claims is transferred, the maximum amount of the mortgage interest may not be transferred along, unless otherwise agreed upon by the parties.

Article 205 Before the claims secured by the maximum amount of mortgage are established, the mortgagee and the mortgagor may alter the term, scope and maximum amount of the claims through agreement, provided that such alteration shall not have any adverse effect on the other mortgagees.

Article 206 The claim of the mortgagee is established under one of the following circumstances:

(1) The agreed term for establishment of the claim expires;

(2) In the absence of a definitely agreed term for establishing the claim or the term agreed upon is indefinite, the mortgagee or the mortgagor requests establishment of the claim after the lapse of two years calculated from the date of creation of the maximum mortgage interest;

(3) No new claim is likely to be created;

(4) The mortgaged property is sealed up or distrained;

(5) The debtor or the mortgagor is declared bankrupt or is dissolved; or

(6) Other circumstances provided by law under which a claim is established.

Article 207 The maximum mortgage interest shall be governed by the provisions of Section 1 of this Chapter on general interests acquired through mortgage, apart from the provisions of this Section.