Applying the law to acquisitions of immovable property

Article 106 of the Property Law provides the legal basis for the application of the system for bona fide acquisitions of immovable property. It stipulates that the criteria applicable to the recognition of a bona fide acquisition of movable assets must apply. In the Interpretations of the Supreme People’s Court of Several Issues Concerning the Application of the Property Law of the People’s Republic of China (1), published on 2 February 2016, the Supreme People’s Court (SPC) fully considers the particulars of the method of publication of the rights in rem in immovable property and covers such issues as the factors to be referenced and assessed in determining the acquirer’s “good faith”, allocation of the burden of proof, determining the point in time of good faith, etc.

Q: How is the subjective good faith of an immovable property acquirer determined?

A: Under article 15 of the interpretations, if the acquirer at the time of acquisition was not aware that the transferor did not have the right to dispose of the same and was not himself/herself grossly negligent, he/she should be deemed to have acted in good faith.

The determination by the acquirer of whether the transferor had the disposal right is based on the state and details indicated in the property announcement. Under the Property Law, the basic method of publication of the rights in rem in immovable property is immovable property registration. The state and details of the rights recorded have general credibility and should be presumed to be true and correct; accordingly, the acquirer’s reasonable reliance on the immovable property register is subject to the protection of law. Even if the details recorded in the register are completely at odds with the actual state of the rights, as long as the acquirer carried out the transaction based on the register, he/she should be presumed to have acted in good faith and his/her rights should be recognized and protected.

Q: Who bears the burden of proving the subjective “good faith” or “bad faith” of the immovable property acquirer?

A: Given that registration is presumably correct, under normal circumstances, as long as the acquirer made the transaction based on the register, he/she should be presumed to have acted in good faith. Accordingly, in a legal action involving a dispute over title to immovable property, as long as the acquirer relied on the property announcement, he/she is not required to first provide evidence in support of his own subjective “good faith”, regardless of whether he/she is the plaintiff or defendant in the case.

There are instances of inconsistencies between the actual state and the indicated rights in rem due to registration errors. If the other party in the legal action or the true rights holder claims that the transferor did not have the disposal right, and the acquirer acted in “bad faith”, such party bears the burden of proving that the acquirer was well aware, or ought to have been aware, that the transferor did not have such right.

For the contents of the adduced evidence, reference may be made to five circumstances that affect the “presumption of good faith” of the acquirer in article 16 of the interpretations: (1) the registration of a valid objection exists in the register; (2) the consent of the preliminary registration rights holder was not secured during the period of preliminary announcement of the registration; (3) there is a notation in the register that a judicial authority or administrative authority has ruled or decided in accordance with the law to place under seal or otherwise restrict the rights in the immovable property; (4) the acquirer was aware that the entity holding the rights as recorded in the register was erroneous; or (5) the acquirer was aware that a third party enjoyed the rights in rem in the immovable property in accordance with the law. Where the true rights holder adduces evidence to show the existence of any of the above-mentioned circumstances, the court should find that the acquirer was aware that the transferor did not have the right to dispose of the immovable property.

Q: What point in time prevails when adjudging the acquirer’s good faith?

A: Article 106 of the Property Law requires the acquirer to be acting in good faith at the time the immovable property is acquired. However, in practice, there has consistently been two viewpoints explaining the phrase “at the time he/she acquires the immovable property”, one being “acting in good faith at the time of entry into the contract” and the other being “acting in good faith at the time of registration of the transfer of the immovable property”. This difference of opinion has also directly resulted in a lack of consistency in judicial rulings.

Article 18 of the interpretations states that “the time at which registration of the transfer of the rights in rem in the immovable property is completed” is the point in time to be used to be adjudged. It means that the acquirer must remain in the state of being in good faith, that is, not being aware nor being in a position to be aware of the fact that the transferor does not have the disposal right, until registration of the transfer of the rights in rem in the immovable property is completed in accordance with the law, and only then does the system of bona fide acquisition apply.

Q: Can bona fide acquisition apply in a situation where the contract is invalid?

A: Notwithstanding the fact that validity of the contract is not a precondition to application of the system of bona fide acquisition, where the transaction violates a mandatory provision of a law or public order/good customs, the validity of the contract is fundamentally denied and cannot give rise to the legal effect of a change in the rights in rem.

Where a bona fide acquirer has secured registration based on an invalid contract, he/she has to return the property and there is no further need to consider whether the acquirer acted in good faith. Likewise, when a contract is rescinded for a statutory reason, such as deceit, coercion or taking advantage of the other party’s plight by the acquirer, it too is null and void.

Accordingly, article 21 of the interpretations states that where a transfer contract is found to be invalid due to its violating article 52 of the Contract Law, or where it is rescinded and becomes null and void due to deceit, coercion or taking advantage of the other party’s plight by the acquirer, the application of bona fide acquisition is obviated.

Gao Ping and Cheng Bing are partners at AnJie Law Firm