Whether the mortgagee could realize the mortgage after the expiration of the mortgage registration term?

In order to do business with Company A, Company B mortgaged two properties to A and completed the mortgage registration. A sued B for a dispute and won the case. However, when A applied for the enforcement of two properties, it encountered two problems: the mortgage registration term agreed by both parties and actually registered was about to expire, and it is obviously that the court would seal up the properties after the expiry date; and B was deeply in debt, it had mortgaged two properties to serval other creditors (Company A’s mortgage was the first), and it was involved in a number of enforcement cases. Under such circumstance, is A’s mortgage still valid, and whether A still has priority in getting compensation from the mortgaged property.?

Article 12 of the “Interpretations of the Supreme People’s Court on Several Issues Concerning the Application of the Security Law” stipulates that, the security term agreed upon by the parties or required for registration by the registration authority is not legally binding on the existence of the right over the secured property, in which it clarifies that the mortgage registration term has no effect on the validity of the mortgage right. After the implementation of the “Civil Code”, the above judicial interpretation has become invalid. The “Civil Code” and the new judicial interpretation have not mentioned this issue. However, Article 393 of the “Civil Code” stipulates that the security interest may be extinguished under 4 circumstances: (I)the principal creditor’s rights are extinguished; (II) the security interest has been realized; (III) the creditor waives the security interest; or (IV) any other circumstance occurs under which the security interest will be extinguished as provided for by any law. In view of this, the expiration of the mortgage registration term will not affect the validity of the mortgage right.

Regarding this issue, in view of the recent practice of relevant administrative authorities, they hold the same opinion as stipulated in the previous judicial interpretation. According to the consultation with the administrative authorities in Shanghai and Dalian, when a mortgage right is extinguished, the mortgagor shall handle the mortgage right cancellation procedure, otherwise the mortgage right would still be registered in the system, and the mortgaged property could not be able to be used and transacted normally. In addition, this opinion is also applied in judicial practice. For example, in the case (2021) Jing 04 Min Chu No. 236, the Beijing No. 4 Intermediate People’s Court pointed out that, although the mortgage registration term has expired, it has no effect on the validity of the mortgage right. Therefore, when the mortgage registration term expires, as long as the claim is valid, the mortgage is valid.

Back to the case at the beginning, another question just jumps out of mind, that is, if other courts have seized the properties during the time lag between the expiration of the mortgage registration term and the seizure applied by A, whether A still has the priority right?

According to Article 414 of the “Civil Code”, where the same property is mortgaged to two or more creditors, the proceeds from the auction or sale of the mortgaged property shall be applied to paying debts in accordance with the following provisions: (I)where the mortgage has been registered, the repayment order shall be determined according to the time of registration; (II) The registered mortgage shall have priority over the unregistered ones for compensation; and (III) Where no mortgage is registered, the repayment shall be made on the basis of the proportion of creditor’s rights.

Therefore, after the mortgage registration expires, if the mortgagor does not apply for cancellation, the mortgage registration record will always exist in the system. Since A’s mortgage registration time is earlier than those enforcement actions, A could still have priority even if other courts have seized the properties before A applies for seizure.

In practice, there is another issue deserves attention. A creditor applies for both the exercise of the creditor’s right and the mortgage rights, the two applications are separate. Paragraph 1 of Article 44 of the “Interpretation of the Supreme People’s Court on the Application of the Guarantee System of the Civil Code” (Fa Shi [2020] No. 28) stipulates that, where the creditor brings a lawsuit only against the debtor before the period of limitation of action for the principal creditor’ right expires, but it, after judgment or mediation by the people’s court, fails to apply for compulsory execution against the debtor within the period of limitation for application for execution as prescribed in the Civil Procedure Law, if the creditor claims the exercise of his mortgage right against the mortgagor, the people’s court shall not support such claim. The interpretation holds such opinion because the mortgage right is a real right, which would not be applied with the statute of limitations, but as a subordinate right of the principal creditor’s right, it exists with the existence of the main creditor’s right (see (2020) Hu 01 Min Zai No. 86), so the purpose of this article is to urge the mortgagee to exercise the mortgage right before the expiration of the statute of limitations for the principal claim.