Balancing the interests of debt and debt relationships

——Practical Exploration on the Agreement of "Housing as Payment" in Construction Engineering Contracts

In recent years, due to various factors such as the epidemic and the regulation of the real estate industry, many real estate companies have encountered financial problems that have affected project payment. In this situation, it is not uncommon for developers to choose to use houses as construction funds to offset construction companies in order to eliminate debts. Due to the funding issues and debt repayment of construction enterprises involving multiple parties, there are various theoretical opinions in the academic community, and there are also many differences in recognition and discretion in practice. Therefore, exploring the applicable rules of housing mortgage agreements, balancing the interests of all parties involved in construction contracts, and balancing the sustainable development of the construction market have become a major outstanding issue that needs to be addressed urgently. In response to the above situation, this article starts with the current focus issues of housing mortgage agreements, explores the representative views of the academic community on the legal issues related to housing mortgage agreements, and combines the perspectives of legislation, justice, and the parties involved in the agreement to sort out the inherent judicial logic of various housing mortgage disputes.

【 Key words 】 Using property as collateral to offset debts and housing as collateral for construction project settlement

1、 Definition of Housing Payment Agreement

The so-called "housing for payment" agreement mainly refers to the agreement between the developer and the construction party that if the developer fails to fulfill the due debt, the developer will use the house at a certain price to offset the project payment that needs to be paid. Although this agreement was not mutually agreed upon, in fact, it is often the developer who, in order to alleviate financial pressure, relies on their strong position to choose the "housing as payment" method as the settlement method for project payments. As a relatively weak party, the construction party reluctantly considers the issue of fund withdrawal and will compromise to ensure the stable and sustainable development of the enterprise.

2、 Determination of the Validity of the Agreement for Housing Payment

Regarding the issue of the effectiveness of the mortgage agreement, it will be classified and discussed based on whether the performance period has expired or not. The key to both lies in the value of the house at the time of making the agreement to offset the house and the amount of the project payment. Specifically, for agreements signed after the expiration of the performance period, the value of the house to be offset and the amount of the project payment are relatively determined. Before the expiration of the performance period, it is agreed to offset the payment with a house. At this time, the construction party's project is still in progress, and the amount of the offset payment cannot be determined. The house may also face the risk of not being able to be fulfilled due to the lack of actual construction. In addition, in the real estate market, there are significant variables in the value of the offset house, and the impact of time on the price cannot be estimated. If the effectiveness of the debt offset agreement before the expiration of the repayment period is directly recognized, It may lead to a significant imbalance in the interests of both parties.

（1） The effectiveness of the housing payment agreement after the expiration of the performance period

In the case of an agreement to offset the project price with a house after the expiration of the performance period, if subjective malice and damage to the interests of third parties can be ruled out, resulting in the invalidity of the contract, the effectiveness of the agreement to offset the project price with a house can generally be affirmed. If the contracting party fails to deliver the house, they may require the other party to fulfill the agreement of offsetting the debt with property in accordance with the agreement, and offset the project payment by discounting, auctioning, or selling the house. However, at this time, they cannot directly claim ownership of the mortgaged house; If the mortgaged house has been delivered, the ownership of the mortgaged house can be directly enjoyed through the agreement to offset the debt with property. In addition, if the value of the house is insufficient to offset the project payment, the other party still has the right to demand payment of the remaining part of the project payment. This phenomenon, also known as the theory of vicarious satisfaction in academia, is a product of consensual satisfaction, resulting in a substitute performance of the contract.

（2） The validity of the housing payment agreement before the expiration of the performance period

There are three different views in the theoretical community on the agreement to offset debts with property reached before the expiration of the performance period: one view is that, under the spirit of the relevant provisions of the Property Law, the effectiveness of the agreement is directly denied based on the prohibition of liquid or liquid pledge, which inherits the spirit of the Security Law. Another view is that the parties should be allowed to sign a mortgage agreement, but its nature should be recognized as a transfer guarantee, and the effectiveness of the mortgage agreement should be determined based on its provisions. There is also a viewpoint that the parties sign a debt in rem before the expiration of the performance period, which in nature defines it as a transfer guarantee. Early signing means that the debtor has given up the interest of the term and paid off in advance. This viewpoint is too strong and does not conform to the true intentions of the parties, so it is generally not adopted.

There are also differences in practice regarding the effectiveness of using houses as collateral for debts: the first viewpoint holds that the agreement to use houses as collateral for debts is invalid. According to the retrial of the construction contract dispute case between Nanjing Aolin Real Estate and Suqian Aolin Real Estate (2018) No. 6153, The Supreme Court believes that Article 44 of the "Nine Minutes of the People's Republic of China" [Article 44 of the "Minutes of the National Civil and Commercial Trial Work Conference of the Supreme People's Court" Document No. 254 of 2019] applies to agreements reached after the expiration of the debt performance period, and Article 45 does not provide for the effectiveness of the agreement. Therefore, it advocates that the agreement on housing as collateral is valid and has no legal basis.

Another viewpoint, namely the theory of transfer of ownership contract, is that the nature of such agreements is understood as a guarantee for project payments. This theory believes that the legal mortgage agreement is not directly invalid, but rather that the transfer of ownership agreement in accordance with the provisions of the transfer of ownership clause in the mortgage agreement. In combination with Article 401 of the Civil Code, the transfer of ownership clause is not directly invalid, but can be prioritized for repayment of the mortgaged property, that is, the transfer of ownership clause into liquidation type guarantee, The construction party can apply for priority compensation for the auction and sale price of the house according to the agreement on housing offset.

The author believes that according to the spirit of the Supreme People's Court's Guiding Opinions on Several Issues Concerning the Trial of Civil and Commercial Contract Disputes under the Current Situation [Guiding Opinions on Several Issues Concerning the Trial of Civil and Commercial Contract Disputes under the Current Situation Document No. 40 of 2009], courts usually do not easily deny the validity of contracts. Therefore, it cannot be unilaterally denied that the agreement to offset the debt with a house formed before the expiration of the debt repayment period, nor can it be simply affirmed that the agreement to offset the debt with a house formed before the expiration of the debt repayment period should be analyzed specifically for each case based on the specific situation.

3、 Recognition of the nature of the mortgage agreement reached after the debt has reached its maturity

The nature of the mortgage agreement determines whether the agreement is established and effective when the mortgaged property has not yet been delivered or registered.

The article "How to determine the effectiveness of an agreement to offset debts with property after the expiration of the debt repayment period but without fulfilling the transfer of property rights procedures" published in the "Civil Trial Guidance and Reference - Guiding Cases" [Civil Trial Guidance and Reference - Guiding Cases, 2014 Issue 02] believes that the agreement to offset debts with property will soon be recognized as a practical contract, and the agreement to offset debts with property reached between the parties, The effectiveness of settlement only occurs after the parties have actually fulfilled the procedures for property transfer.

On the contrary, in the case of the construction contract dispute between Tongzhou Construction Group Co., Ltd. and Inner Mongolia Xinghua Real Estate Co., Ltd., which was released by the Supreme Court in 2017 [Supreme People's Court Gazette, Issue 9, 2017], it clearly stated that the housing mortgage agreement is a promissory contract and does not require delivery. As long as both parties reach a consensus, it will take effect.

The author believes that generally speaking, based on the principle of private law autonomy, for agreements reached between the two parties in the case of genuine agreement, the effectiveness of the agreement should not be easily negated, and flow guarantee clauses should not be arbitrarily applied to combat the parties' autonomous transactions, provided that they do not violate the mandatory provisions of laws and administrative regulations. Article 44 of the Nine Minutes of the People's Republic of China and Article 215 of the Civil Code of the People's Republic of China, as well as Article 215 of the Civil Code of the People's Republic of China. The Chinese Legal Publishing House, 2022 edition of the Civil Code of the People's Republic of China also clarifies the judgment rules that a mortgage agreement is a promissory contract and does not require the registration of property rights transfer, That is, both parties shall settle and confirm the amount of the debt, and thus reach an agreement to offset the debt with a house. At this point, the debate over the feasibility and practicality of using things to offset debts has come to an end.

4、 Failure to fulfill the project payment request right under the "housing as payment" agreement

Does the achievement of the new "housing for payment" agreement mean the extinction of the old right to claim project funds? Can the contractor continue to claim the project payment after failing to fulfill the agreement of "housing as payment"?

If the claim of 'no right to claim' is that the mortgaged property has been received by the creditor, even if the transfer procedures have not been completed, it should be deemed that it has fulfilled the 'house for payment' agreement, and the old right to claim project funds should be extinguished. In the second instance civil judgment No. 197 of the Supreme People's Court of China (2020), the Supreme Court held that the parties did not clearly agree that the ownership of the mortgaged property must be transferred to the debtor or a designated third party in order to have the effect of offsetting the project payment; Therefore, even if the ownership has not been fully transferred, but all the houses have actually been controlled by the creditor, it should be deemed that the debtor has actually fulfilled the debt obligation, and the creditor can no longer claim this part of the project payment.

The "right theory" holds that even if the creditor receives the mortgaged property, without actually handling the transfer procedures, the creditor can still claim the project payment based on the original contract. The retrial ruling of the Supreme People's Court No. 2381 (2020) states that the disputed property in the case has not been registered for transfer, meaning that the creditor's rights have not been actually fulfilled. Therefore, it is still possible to claim the project payment.

The current laws in mainland China have relatively vague provisions on the use of property as collateral for debts. There are two articles in the "Civil Code" of Taiwan, 2010 edition, which address this issue. From the perspective of legal theory, Article 319 of the "Civil Code" in Taiwan, China, stipulates that vicarious payment refers to the substitution of payment methods to eliminate the original rights and obligations between creditors and debtors, which corresponds to the "no right theory" mentioned earlier. Article 320 corresponds to the repayment of new debts. New debt repayment, also known as new debt offsetting, indirect repayment, or new repayment of old debt, German Law [German Civil Code, Peking University Press, 2017 edition]

Zhejiang Liqun Law Firm

Zhou Yanyang

It is referred to as the "payment of satisfaction" on 17855827390, which is a contract that assumes a new debt due to the satisfaction of an old debt, and extinguishes the old debt when the new debt is actually fulfilled. According to this provision, both new and old debt agreements are valid, meaning that when the new debt cannot be fulfilled, claims can still be made on the old debt. After the debt performance period expires, the parties reach an agreement to "offset the payment with a house", which may constitute a new debt repayment, corresponding to the "right to claim".

However, in the above-mentioned Supreme Court case, what are the criteria for the Supreme Court to determine whether the creditor claims breach of contract liability based on the actual performance required by the original contract or the commercial housing purchase and sale contract if the developer fails to fully perform after reaching the "house as collateral" agreement? This can lead to the concept of "modification of debt" in the civil law theory of Taiwan, which is easily confused in practice.

The original intention of new debt repayment is to fulfill according to the contract, which refers to the payment behavior of fulfilling the debt content according to the original intention of the debt. The legal effect is that the new debt coexists with the old debt. If the new debt or one of the old debts is repaid, both will be extinguished at the same time. It is a consensus reached between creditors and debtors to add an optional method of repayment. The modification of a debt is different from that of a debt. Generally, the modification of a debt requires the parties to have a clear agreement to eliminate the old debt, and the creditor can only demand actual performance from the house purchase and sale contract.

In summary, it can be seen that the "housing as payment" agreement reached after the expiration of the debt performance period may be used to settle the new debt or to modify the debt. The specific nature of the agreement depends on the expression of the parties involved. How should the two be distinguished in practice? The author believes that analysis can be conducted from the following aspects:

It is necessary to fully explore the intentions expressed by both parties when entering into a contract. If the parties explicitly agree to extinguish the original debt in the "housing for payment" agreement, it is deemed that the "housing for payment" agreement is a modification of the debt; On the contrary, it belongs to new debt repayment. When it is not possible to explore the true intentions of both parties when signing the contract through contract interpretation, based on the protection of the interests of the vulnerable construction party, the most favorable interpretation should be made for the construction party, and it should be recognized as a new debt repayment. In addition, the author believes that in actual performance, the new debt should have priority over the old debt. Only when the new debt cannot be fulfilled, the purpose of the new debt settlement agreement cannot be achieved, or there are other situations that render the new debt settlement agreement invalid and should be revoked, can the performance of the old debt be returned. If creditors are given the right to choose between new and old debts, it will leave the debt content that the debtor should fulfill in an unpredictable state, which does not meet the stability requirements of the transaction and is not conducive to balancing the interests of creditors and debtors.

5、 Risk prevention of mortgage agreements

In the practical application process, the author proposes the following suggestions:

（1） The agreement signed after the completion of the project payment performance period is not controversial, and it is generally considered that the "house payment" agreement is valid. However, the determination of the validity of the agreement signed before the expiration of the project payment performance period is highly controversial. Therefore, the construction party should try its best to avoid signing a "house payment" agreement with the developer in the contract or when the project is not yet completed.

（2） Both parties need to sign a formal "Commercial Housing Purchase and Sale Contract", specifying whether the five certificates of the proposed mortgaged property are complete, especially the pre-sale permit; Secondly, the corresponding "Payment Agreement", "Construction Contract" or "Supply Contract" should be clearly agreed upon and signed in a timely manner to clarify the total amount of engineering or material payments, the amount already paid, the number of housing units to be used, the room number, area, unit price, and the room price (including taxes and fees).

（3） The construction party needs to pay attention to collecting and retaining evidence in daily life, including property fee payment invoices, broadband opening fee invoices, etc., to prove that they have actually occupied and resided.

（4） Finally, before cooperating with the developer, the actual construction party should entrust a lawyer to investigate the developer's ability to fulfill responsibilities, credit, etc. At the same time, before the signing of the "Loan Agreement", an investigation should be conducted on the proposed property to determine whether there are mortgage rights and other rights burdens on the property, and to specify the risk bearing when the property cannot be transferred in the agreement, And do not agree to eliminate the original debt relationship in the agreement when signing.

（5） The construction party should actively advocate for the right to receive compensation for the construction project price and the issue of the compensation period to avoid falling into extremely unfavorable situations.

Conclusion

In the current situation of high real estate market heat, the handling of housing related issues needs to be more cautious. At present, both the theoretical and practical fields hold a recognized attitude towards the housing mortgage model. However, there are still many problems that arise in the practical application of this model. The main reason is that the parties to the agreement do not have sufficient understanding of such agreements, and therefore the signing is relatively arbitrary. Both parties have not agreed on the prerequisites for signing such agreements, nor have they made any requirements for whether the property is in a saleable or transferable state, resulting in many invalid agreements. In this regard, the author believes that the most fundamental way to solve the issues related to the "housing for debt" agreement is to explore the true intentions of both parties, which can effectively avoid the potential unfairness of the agreement and balance the interests of all parties.