Protecting rights of lessees when lease, mortgage rights conflict

In the financing market, security provided in the form of a mortgage is one of the financing security methods most trusted by banks and capital contributors. If the debtor fails to discharge its debt on schedule, the mortgagee may secure repayment of its claim on a priority basis by realising its mortgage rights. If the mortgage property is additionally leased out, realisation of the mortgage rights will necessarily have a certain impact on the lease rights. Although Chinese laws contain specific provisions on the method for resolving a conflict between lease rights and mortgage rights, in practice each party wishes to go beyond the law to secure greater benefits.

Application of the principle of sale/purchase not undermining lease. If the mortgaged property is leased out before the creation of the mortgage, the acquirer of the mortgaged property is obliged to continue performing the original lease contract after the mortgagee realises its mortgage rights. If the acquirer of the mortgaged property unilaterally amends or terminates the lease contract, the lessee may institute a legal action in a court demanding that the acquirer continue to perform the contract.

If the lessee asserts its lease rights at the time of realisation of the mortgage rights, the mortgagee may question the motivation for, and the genuineness of, such an assertion. In this respect, the mortgagee may be required to provide the lease contract and the evidence showing that the creation of the lease rights occurred earlier than the creation of the mortgage rights.

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胡光 Martin Hu

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周成成 Efar Zhou

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