On February 23, 2016, the Supreme People’s Court called a press conference to promulgate Interpretation I of the Supreme People’s Court on Issues Concerning the Application of the Property Law of the People’s Republic of China (hereinafter, the “Interpretation”), which primarily contains more specific and refined rules concerning issues such as the registration of real estate property rights, preemptive right of joint owners by shares and bona fide acquisition as a guide to judicial decisions. The Interpretation contains a total of 22 articles, and the main highlights are as follows:
(1) Disputes over real estate property rights and their legal basis are now clearly stipulated as civil actions
Past consensus held that unless otherwise stipulated by law, a real estate property right is not effective if it has not been registered with a real estate registration agency under Article 14 of the Property Law. Therefore, property right disputes involving registration should be resolved by administrative action. To resolve the issue of passing the buck and contradictory rulings among civil and administrative courts as result of the above understanding, Article 1 of the Interpretation provides that actions filed as a result of disputes arising from ownership of real estate property rights, and issues arising from transactions, gifts or pledges which form the basis of real estate property registrations shall fall within the scope of civil lawsuits heard by people’s courts. Article 2 provides that in a real estate declaratory suit, the court will no longer solely rely on the real estate registration records as the only basis and are required to examine the causes, acts or fundamental legal relations to determine the true ownership of the rights.
(2) Effect of advance notice registration
Under Article 20, Paragraph 1 of the Property Law, if real estate is disposed of without the consent of the rights holder named in the advance notice registration, the disposal shall not have effect. However, practical issues arise with respect as to what constitutes ÒdisposalÓ of real estate. Article 4 of the Interpretation contains more specific explanations concerning the “disposing act” under Article 21 of the Property Law. To wit, if “real estate ownership is transferred, or if any other property right such as the usage right, servitude or mortgage right is established” without the consent of the rights holder named in the advance notice registration, no effective property right is created under Article 20, Paragraph 1 of the Property Law.
(3) Restrictions on the effect of ship, aircraft and motor vehicle registration
Disputes over special personal property such as ships, aircraft and motor vehicles have gradually risen over the years, in particular used motor vehicle transactions where it is not uncommon to see inconsistencies between the registration and the actual vehicle. A rights holder who received rights to special property as a result of collateral on motor vehicles, compensation for damages arising from traffic accidents, or bankruptcy of the motor vehicle owner may, pursuant to Article 24 of the Property Law, assert rights as a bona fide third party over a transferee who has in fact transferred the rights to the aforementioned special property but has not completed the ownership transfer registration formalities. As this is inequitable to transferees who have already Òpaid considerationÓ and Òtook possessionÓ, Article 6 of the Interpretation specifically limits the scope of special personal property registration with respect to the above circumstances.
(4) Extent of effective property right changes directly caused by legal documents
Under Article 28 of the Property Law, property right changes directly caused by legal documents issued by a people’s court or an arbitration committee are not preconditioned on the registration or delivery and shall become effective once the legal documents come into effect. Under Article 7 of the Interpretation, judgments, awards or mediation agreements rendered by a people’s court or arbitration committee in cases which alter the original ownership relationships in the division of real property, as well as rulings rendered by a peopleÕs court regarding the completion of a foreclosure auction during an enforcement process, or rulings regarding the payment of debts in kind, shall all be deemed as legal documents rendered by a people’s court or arbitration committee which create, modify or extinguish property rights within the meaning of Article 28 of the Property law.
(5) Judicial protection of the first right of refusal of co-owners by shares
Article 101 of the Property Law sets out the system of first right of refusal for co-owners by shares, but the Property Law is silent regarding the preconditions, execution method and legal effect of such right. In this regard, Articles 9 through 14 of the Interpretation first refine the right of first refusal system by stipulating detailed provisions for issues such as each co-ownerÕs scope of such right of first refusal (Article 9), the determination that equivalent conditions are present (Article 10), the term of exercise (Article 11), exercise restrictions (Article 12), and exercise conflicts (Article 13).
(6) Improvements to the bona fide acquisition system
The bona fide acquisition system is a key section which saw the most number of provisions. Although Article 106 of the Property Law provides for the bona fide acquisition system, there are substantial controversies over its interpretation. To address this issue, Article 15 of the Interpretation specifically defines the “bona fide transferee” under Article 106, Paragraph 1, Subparagraph 1 of the Property Law as those “who was unaware that the transferors have no right to dispose of such property” and “no gross negligence is present.” Article 16 further stipulates the circumstances where a real estate transferee would be deemed as “aware that the transferor has no right of disposal.” Article 17 explains about the circumstances where a real estate transferee would be deemed to be “grossly negligent.” Article 19 interprets the standard for “transfer for a reasonable price” under Article 10, Paragraph 1, Subparagraph 2 of the Property Law by stipulating that “it shall be generally determined based on the specific circumstances such as the nature, quantity and payment method of the property, as well as in reference to factors such as the market price in the trading place at the time of transfer and trade practices. Finally, Article 21 of the Interpretation also provides for the circumstances where a transferee may not assert bona fide acquisition under the rationale that the law does not protect illegal transactions.
The Interpretation came into effect on March 1, 2016.