REALWorld Law

What sort of security is typically created or entered into by an investor who is borrowing to acquire or develop real estate?

According to the Foreign Exchange Administration Rules on Cross-border Security promulgated by the PRC State Administration of Foreign Exchange (SAFE) on 12 May 2014, the provision of security or a guarantee by a PRC entity for an overseas lender no longer requires SAFE’s prior approval, but must be registered with SAFE or its local counterparts within 15 working days after the execution of the relevant security or guarantee documents. There are no restrictions on granting security over real estate to foreign lenders, except that such onshore real estate mortgage for offshore debt should also comply with the restrictions on use of proceeds as provided in the aforesaid SAFE rule, which include that (i) the debt proceeds can only be used within the debtor’s ordinary scope of business and not for speculative purposes, and (ii) absent the SAFE approval, the debt proceeds must not be remitted into China, but in practice, foreign lenders may encounter practical difficulty registering the mortgage with the local real estate registration centres.

One point worth noting is that as of today SAFE is still not processing the conversion of any offshore currency loans advanced by overseas lender to a real estate foreign-invested entities (FIEs). This means that all funding of real estate FIEs must be by way of equity or onshore financing.

Last modified 13 Mar 2025

What sort of security is typically created or entered into by an investor who is borrowing to acquire or develop real estate?

When handling mortgage registration, a notary public will charge mortgage registration fees which are usually borne by both parties in equal shares.

Last modified 13 Mar 2025

What sort of security is typically created or entered into by an investor who is borrowing to acquire or develop real estate?

PRC company law does not apply financial assistance rules or corporate benefit rules. However, it does prohibit director fraud etc.

Last modified 13 Mar 2025

What sort of security is typically created or entered into by an investor who is borrowing to acquire or develop real estate?

SAFE will not process any conversion of foreign currency for the purpose of repayments being made to a foreign lender under a security document or loan agreement unless and until the underlying security document or loan agreement had been registered with SAFE or the relevant application has been approved by SAFE.

Last modified 13 Mar 2025

What sort of security is typically created or entered into by an investor who is borrowing to acquire or develop real estate?

The priority of mortgages can be changed with the agreement of the mortgagee and mortgagor, and the corresponding mortgage registration should be updated to reflect the change. Such change, however, does not have an adverse impact on the other mortgagees (if any) unless written consent is obtained from them.

If the same property is mortgaged to two or more mortgagees, their claims will be prioritized in light of the sequence of registration. Accordingly, a newly created mortgage will not be able to affect the priority of the existing mortgage, unless the existing mortgage has not yet been registered or consent is obtained from its holder.

Last modified 13 Mar 2025

What sort of security is typically created or entered into by an investor who is borrowing to acquire or develop real estate?

PRC courts will recognize clauses making foreign law apply where the agreement contains a foreign element. However, as the State Administration of Foreign Exchange (SAFE) will not process any foreign offshore currency loans for real estate foreign-invested entities (FIEs), it is anticipated that security documents will not often have a foreign element.

Last modified 13 Mar 2025

What sort of security is typically created or entered into by an investor who is borrowing to acquire or develop real estate?

Unperfected security interests will not be enforceable against bona fide third party purchasers or against the insolvency administrator.

Last modified 13 Mar 2025

What sort of security is typically created or entered into by an investor who is borrowing to acquire or develop real estate?

PRC environmental laws have generally adopted a polluter pays approach to liability. A holder of security over land will not be responsible for soil pollution or contamination of the building if it did not cause the pollution or contamination.

Last modified 13 Mar 2025

What sort of security is typically created or entered into by an investor who is borrowing to acquire or develop real estate?

When the borrower is in default, the lender can enforce the mortgage only if the borrower agrees. The lender can then be paid off by converting the value of the mortgaged property into money, or by proceeds acquired through an auction or sale of the mortgaged property.

If the lender and borrower fail to reach an agreement, the lender must file a lawsuit in the People’s Court to seek a court judgment and an execution order in order to obtain foreclosure and take possession of the property.

Last modified 13 Mar 2025

What sort of security is typically created or entered into by an investor who is borrowing to acquire or develop real estate?

Under the PRC Enterprise Bankruptcy Law, arrangements with creditors may be implemented.

Last modified 13 Mar 2025

What sort of security is typically created or entered into by an investor who is borrowing to acquire or develop real estate?

Generally, the onset of a borrower's insolvency does not affect security interests although administration creates a moratorium which prevents creditors from enforcing their security without the consent of the administrator or an order of the court in the case of a company going into administration.

Security can be set aside in certain circumstances including where it constitutes a preference or a transaction at an undervalue. Generally, for this to happen, a court order is required and the security must have been created within a certain time period (which varies depending on the circumstances) before the commencement of the insolvency process. 

Last modified 13 Mar 2025

What sort of security is typically created or entered into by an investor who is borrowing to acquire or develop real estate?

With respect to a real estate asset, if a mortgage over it is not registered, such mortgage is not effective under PRC laws, in which case the relevant creditors do not enjoy priority over the proceeds from such real estate asset.

For registered mortgages, if the same property is mortgaged to multiple creditors, their claims in the property are prioritized in light of the sequence of registration.

Last modified 13 Mar 2025