CHINA Law and Practice Contributed by: Nancy Zhang, Xiaoying Tian, Qian Gu and Liangqian Ying, JunHe
ownership (other than land use rights that can be a valid collateral), land use right to certain collec - tively-owned land such as farmers’ homestead land (other than collectively-owned construc - tion land), educational, medical and other public welfare facilities owned by non-profit schools, nurseries and/or medical institutions, real estate subject to title dispute or without clear title, real estate under attachment, detainment or custody orders. 3.6 Formalities When a Borrower Is in Default When a lender enforces its security over real estate against a defaulting borrower, if the lend - er and the mortgagor have explicitly agreed in the mortgage contract to apply the enforcement notarisation approach, the lender may directly apply to the competent court for enforcement by presenting the duly notarised mortgage con - tract and the enforcement certificate issued by the notary public’s office. If the lender and the mortgagor have not explicitly agreed in the mort - gage contract to apply the enforcement notari - sation approach, the lender may, by agreement with the mortgagor, dispose of the collateral by negotiating a purchase price, by auction or sale of the collateral, and the lender may claim its senior debt against the proceeds from such a negotiated purchase price for auction or sale of the collateral. Failing an agreement between the mortgagor and the mortgagee on the means of disposal of the collateral, the lender may apply to the local court to auction or sell the collateral. In either case, the sale or negotiated purchase price of the collateral shall be based upon mar - ket price. The timeframe required for the aforesaid enforce - ment varies, and typically ranges from six to 12 months.
Lenders tend to be prudent in exercising their foreclosure rights in the current market, except where the borrower is in fundamental breach or becomes insolvent. 3.7 Subordinating Existing Debt to Newly Created Debt An existing mortgage debt may become sub - ordinated to a newly created mortgage debt, the mortgage interest of which has been duly registered, only if the mortgage over such exist - ing debt has not been duly registered. But if the mortgage over the newly created debt has also not been duly registered, the existing debt will rank pari passu with the newly created debt. 3.8 Lenders’ Liability Under Environmental Laws The lender, being the mortgagee of the real estate, will not generally be held liable. However, if the lender becomes the land use right owner in respect of such real estate as a result of fore - closure (or enforcement) of the mortgage, the lender may be held liable for such non-compli - ance if the party that caused the pollution cannot be identified. 3.9 Effects of a Borrower Becoming Insolvent The security interests created by a borrower in favour of a lender will not be made void if the borrower becomes insolvent, and the lender may continue to claim its senior debt against the collateral, although this will be subordinated to the contractor’s lien. In the event of restructuring during the bankruptcy proceedings, the lender will have to temporarily suspend its enforcement of the mortgage (unless damage to the collateral or a situation is likely to decrease the value of the collateral and might endanger the mortgagee’s interests). If the borrower enters into reconcilia -
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