Is an unregistered mortgage agreement valid?

At a high school reunion party in Beijing, Jack met up with an old friend Alex, who was a scientist. Alex had always been very good at his studies and graduated with a PhD from MIT. After a night of casual chatting, Jack got to know that Alex was currently working on a new kind of aeroplane fuel that would burn twice as good as kerosene but at a price less than half of that of kerosene.

However, Alex needed more capital for his company for research and development, and Jack decided to invest a million Yuan on Alex’s project, even though he didn’t have enough money at that time. He borrowed the money from another friend, Derek and Jack mortgaged his house, specifying that he had to repay the money 2 years later, with a 3% interest per annum.

Two years later, Alex’s fuel turned out to be not as efficient as thought, and Jack lost all the 1 million invested. It was time to pay up the money to Derek, and Alex had no money at that time.

“Where is the money?” Derek asked.

“Lost it all in an investment. Got conned by a scientist. The investment was supposed to make me twice the original sum of money I borrowed.” Jack replied with a sigh.

“Well too bad,” replied Derek, “Borrowed money from someone else needs to be repaid with interest, or I will have to sell your house and get the money.”

“Jokes on you Derek, you did not register the mortgage agreement. Adios!”

Is an unregistered mortgage contract useless?

Law In A Minute

Derek cannot sell Jack’s house to recover his 2 million.
When a mortgage contract is signed, it must be registered at the department of real estate administration where the real estate is located within 30 days.

As Derek did not follow the steps as mentioned, the mortgage is invalid. However, this does not mean that the loan is invalid. Derek may still sue Jack for the 2 million at the people’s court. Derek cannot sell Jack’s house to recover his 2 million.

When a mortgage contract is signed, it must be registered at the department of real estate administration where the real estate is located within 30 days.

As Derek did not follow the steps as mentioned, the mortgage is invalid. However, this does not mean that the loan is invalid. Derek may still sue Jack for the 2 million at the people’s court.

Legal Basis

Property Law of the People’s Republic of China – Article 187

As for the mortgage of a property, as prescribed in Item (1), (2) or (3) of Paragraph 1 of Article 180 of this Law or a building under construction as prescribed in Item (5), mortgage registration shall be made. The right to mortgage shall be established as of the date of registration.
Article 15

A contract concluded by the parties concerned on the creation, change, transfer or elimination of the real right of a property shall become effective upon the conclusion of the contract, except it is otherwise prescribed by any law; and whether the real right has been registered does not affect the validity of the contract.

Measures on the Administration of Mortgage of Urban Real Estate

Article 30

The parties to a mortgage shall make the registration of real estate mortgage at the department of real estate administration of the place where the real estate is located within 30 days from the day on which the real estate contract is signed.

Edgar Choi is author of “Commercial Law in a Minute” and host of a legal-advice account “Law in a minute” on WeChat

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