The Supreme People’s Court (SPC) has updated guidance on protecting commodity housing buyers with its Reply on Commodity Housing Consumer Protection (Reply), effective since 20 April.
Previously, the Minutes of the National Working Conference on the Trial of Civil and Commercial Cases clarified that the court can “draw reference from” the Provisions of the Supreme People’s Court on Several Issues Concerning the Handling of Enforcement Opposition and Reconsideration Cases in trials.
This gives priority to commodity housing consumers’ right to claim delivery or refund (buyer’s priority) over the project contractor’s priority of claim (contractor’s priority), mortgagee’s rights and other creditors’ rights.
The updated reply is now a set of provisions enforceable as a judicial interpretation made according to the issue over “order of priorities in risk resolution of property developers”, raised by Henan High People’s Court.
It can now be directly cited and applied in civil and commercial trials, enforcements and bankruptcy procedures. Hence, it is expected to have a significant impact on the debt rescheduling and restructuring of property developers.
According to the reply, the following four conditions should all be met to grant the buyer’s priority.
Defining homebuyer. A homebuyer is a natural person who purchases and uses commodity housing for living purposes. The core purpose of buyer’s priority is to safeguard citizens’ rights to living, while legal persons and unincorporated organisations are evidently not covered.
‘Living needs’ limited to residential. The reply does not provide a comprehensive definition of “living needs”, but according to past judgments and opinions from the SPC on understanding and applying judicial interpretations, assessment of residential needs should presumably be based on a comprehensive analysis of multiple factors. This includes: number of family members; number of housing units registered under their names in the same city or county-level administrative area; and planned use of the purchased commodity housing.
It cannot be simplified to a single factor such as the number of owned houses in the same area and the planned purpose of the property.
Neither should homebuyer’s priority be excluded simply because they already own other properties in the same area, if the per capita living space of the family is smaller – or not excessively larger – than the local area’s per capita living space, or the property is purchased for commuting or work purposes.
Additionally, for homebuyers purchasing properties planned for commercial or mixed use due to real estate regulation policies (such as purchase restrictions) and cost savings (e.g. living in purchased retail property), their living needs should also be considered.
However, the right holder is not entitled to claim buyer’s priority in accordance with the reply if the housing purchase contract is signed and performed to establish assignment as security, designate the property as a repossessed asset, or commit mortgage fraud.
Lawful and valid purchase. According to article 29 of the Provisions on Opposition and Reconsideration, the buyer should sign a lawful and valid purchase contract in writing. This may be a standard-form purchase contract published by the competent authority, or another legal instrument containing elements set forth in article 16 of the Measures for Administration of Commodity Housing Sales.
In addition, the legal instrument should be effective in accordance with the law. For example, in the case of housing pre-sale, the permit should have been obtained for the purchased property in accordance with the law.
Purchase price paid in full. The homebuyer may pay the full amount either after signing the contract or before the end of the first-instance court debate after filing a lawsuit.
In contrast to previous judicial interpretations and policies, one of the conditions for the homebuyer to counter the contractor’s priority and mortgagee rights is having paid more than 50% of the contract price, or close to 50%, and made up the remaining amount.
The reply stipulates that eligible homebuyers may have priority to claim a refund if the property cannot be delivered, and is confirmed as undeliverable.
Property development projects can present complex obstacles to delivery. These may be: physical, such as damage or loss to a construction in progress due to external forces; legal, such as lack of administrative licensing and registration of final acceptance; or financial, such as project suspension due to liquidity disruptions of the company or contractor.
But some projects may become deliverable several years after suspension due to market recovery, successful debt restructuring, or completion of bankruptcy proceedings. As a result, determining undeliverability can be a challenge.
The author suggests that to balance the interests of all right holders, homebuyers should be encouraged to actively choose between delivery and refund in future applications of the reply. This would provide greater certainty for the resolution of any real estate difficulties.
When purchasing new commodity housing with a residential mortgage, the homebuyer is the principal debtor, and the bank registers a caution on the undelivered property.
When the property is ready for delivery, the bank has the right to make a collateral registration. If the purchase price is refunded to the homebuyer in full, the bank has the right to claim the outstanding mortgage payments.
This may result in the bank having a higher priority than the contractor’s priority. However, the reply does not clarify whether the interest on purchase price should be given priority when the homebuyer claims a refund.
The author suggests that in future applications of the reply, the downpayment from the homebuyer should be distinguished from the mortgage loan, and only the downpayment should be prioritised. Accrued interest, on the other hand, should not be given priority, following the judicial interpretation on the contractor’s priority.
Wang Zhenxiang is a partner at Jingtian & Gongcheng
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