If the construction payment is in arrears, can the construction party auction off the shops that have been sold?

——Also on the value ranking of consumers' right to survival, statutory priority, and mortgage rights

 

I.  Problem Statement

Article 807 of the "Civil Code" reaffirms that contractors have priority in receiving payment from the discounted or auctioned price of the project. In actual execution, if the owner fails to pay the construction payment on time, but the completed property has been sold to the buyer, can the contractor still request the court to enforce the auction? Are the conditions for excluding enforcement the same for shop and residential buyers?

 

II. Legal Analysis

The above issues involve whether an outsider who purchases shops or residences can be considered a consumer, thereby excluding the execution of monetary claims that enjoy priority in construction project payments. The essence of this issue is how to prioritize the value of multiple conflicting but legal rights on the same subject matter. That is, which should be given priority: the contractor's priority in project payment, the buyer's expectation of property rights, or the mortgage right?

 

(I) What are the legal interests reflected behind each right?

 

01、 The priority of construction project payment reflects the priority of the right to survival of migrant workers, etc.

 

Article 807 of the "Civil Code" stipulates: "If the client fails to pay the price as agreed, the contractor may urge the client to pay the price within a reasonable period. If the client fails to pay within the time limit, the contractor may, except where it is not appropriate to discount or auction the construction project according to its nature, agree with the client to discount the project, or may request the people's court to auction the project in accordance with the law. The price of the construction project shall have priority in receiving compensation from the discounted price or the auctioned price of the project." Accordingly, the contractor's priority in project payment is a statutory priority. The legislative purpose of setting the statutory priority of project payment is to protect the labor remuneration and material costs of migrant workers who invest labor during the construction process, highlighting the value orientation that the right to survival of migrant workers is higher than the economic interests of other creditors. For this reason, Article 36 of the "Interpretation of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trial of Construction Project Construction Contract Dispute Cases (I)" further stipulates: "The contractor's priority in receiving payment for construction projects enjoyed in accordance with Article 807 of the Civil Code shall be superior to mortgage rights and other claims." This establishes the statutory priority status of the construction project contractor's right to receive payment for the project, which excludes or precedes mortgage rights and other claims.

 

02、 The consumer buyer's expectation of property rights reflects the priority of the consumer's right to residence and survival

 

The consumer buyer's expectation of property rights was first determined in Article 2 of the "Reply of the Supreme People's Court on Issues Concerning the Priority of Construction Project Payment" (Fa Shi [2002] No. 16, now invalid): "After the consumer pays all or most of the purchase price of the commercial house, the contractor's priority in receiving payment for the commercial house shall not be used to counter the buyer." This right protects the right to residence and survival of the commercial house buyer as a consumer, which is more direct and urgent compared to the economic interests of the contractor's project payment that indirectly covers the labor value of migrant workers, so it has a higher priority.

 

03、 The security right reflects the basic civil law system in which property rights are superior to creditor's rights

 

Article 386 of the "Civil Code" stipulates: "If the security right holder fails to perform the due debt or the circumstances agreed upon by the parties for the realization of the security right occur, he shall have the right to priority in receiving compensation from the secured property in accordance with the law, unless otherwise provided by law." The security system is a very important legal system in China. The law gives security right holders a more priority protection status than creditors because security rights play an important role in ensuring the realization of creditor's rights, maintaining transaction order, and promoting financing. The priority of security rights highlights the value protection of transaction order and security.

 

(II) Double Among Buyers The impact of the definition of the special identity of "consumer" on value ranking

 

After analyzing the different legal interests reflected behind the above three rights, there is still a question: how to define the scope of "consumer's right to survival" among many buyers? Can purchasers of non-residential properties such as shops and office buildings also exclude the enforcement of security rights and statutory priority based on the priority of "consumer's right to survival" for properties that have not yet been transferred and are still registered under the developer's name? To answer this question, we must correctly understand the application of the following laws.

 

"Provisions of the Supreme People's Court on Several Issues Concerning the Handling of Execution Objections and Reconsideration Cases by People's Courts" ( 2020 Revision ， hereinafter referred to as the "Provisions on Execution Objections and Reconsideration")

Article 27 stipulates: " If the applicant for enforcement legally enjoys the right to priority compensation such as security rights against an outsider to the execution target, the people's court shall not support the execution objection raised by the outsider, unless otherwise provided by laws and judicial interpretations." This establishes the basic legal status that the right to priority compensation such as security rights is in principle priority.

 

Provisions on Objections to and Reconsideration of Enforcement Article 28 stipulates the constituent elements for a general buyer other than a commercial house consumer to raise an objection to the real estate registered under the name of the person being executed and request exclusion from execution ：

(1) A legally valid written sales contract has been signed before the people's court seals it up;

(2) The real estate has been legally occupied before the people's court seals it up;

(3) All the price has been paid, or part of the price has been paid in accordance with the contract, and the remaining price has been delivered for execution in accordance with the requirements of the people's court;

(4) Failure to complete the transfer registration is not due to the buyer's own reasons.

 

Article 29 of the "Provisions on Execution Objections and Reconsideration" stipulates the commercial house buyer raises an objection to the commercial house registered under the name of the real estate development enterprise being executed The constituent elements for excluding execution are:

(1) A legally valid written sales contract has been signed before the people's court seals it up;

(II) The purchased commercial house is used for residence and the buyer has no other houses for residence under his/her name;

(III) The paid price exceeds 50% of the total price agreed in the contract.

 

And 《National Courts Civil and Commercial Trial Work Conference Minutes》 (Fa [2019] No. 254, hereinafter referred to as the "Nine People's Conference Minutes") Articles 125, 126 and 127 provide a detailed interpretation of The applicable rules of Articles 27, 28 and 29 of the 《Provisions on Objections to Enforcement and Reconsideration》 It specifically emphasizes that supporting the consumer's home buyer to exclude the compulsory execution of security interests and other priority rights is "an exceptional provision made to protect the consumer's right to survival in response to the non-standard phenomenon of pre-sale of commercial housing in practice, and the conditions must be strictly grasped to avoid expanding the scope, so as not to shake the basic principle that mortgage rights have priority." It also pointed out that "consumers" must meet the constituent elements stipulated in Article 29 of the 《Provisions of the Supreme People's Court on Several Issues Concerning the Handling of Cases of Enforcement Objections and Reconsideration by People's Courts》 in order to enjoy the right to exclude enforcement.

 

It can be seen from the above judicial interpretation that the state has legally limited that only residential buyers are "consumers" who enjoy priority, and the expectation of property rights of non-residential buyers for real estate that has not yet been transferred cannot take precedence over security interests and other priority rights of compensation.

 

(III) Value Ranking Summary

 

As mentioned earlier, 《The Supreme People's Court's Reply on Questions Concerning the Priority of Payment for Construction Projects》 (Interpretation of Laws [2002] No. 16, now invalid) Article 2 of which establishes that the rights of commercial housing buyers who have paid all or most of the payment take precedence over the contractor's priority right to payment for construction projects; 《Interpretation of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trial of Construction Project Construction Contract Dispute Cases (I)》 Article 36 establishes that the priority of construction project price is superior to mortgage rights and other creditor's rights. 《Civil Code》 The chapter on guarantee system also establishes the status of guarantee property rights over general creditor's rights. Articles 27, 28 and 29 of the 《Provisions on Objections to Enforcement and Reconsideration》 and 《 Nine People's Conference Minutes 》Article 125、126、127 Article It also distinguishes that the expectation of consumer buyers' property rights can exclude the execution of security interests and other priority rights of compensation, while the expectation of property rights of general real estate buyers can only exclude the execution of general monetary claims after meeting the statutory constituent elements.

 

Therefore ， After sorting out, the priority order of the above different rights should be:

Consumer buyer's expectation of property rights > contractor's priority right to payment for construction projects > security interests > general real estate buyer's expectation of property rights > general monetary claims.

 

III. Judicial Adjudication Rules

 

Because the provisions on the value priority order of different rights are scattered in many laws and judicial interpretations in China, coupled with the high degree of generalization of legal language, there are different adjudication rules in the understanding and application of the law. This article only compiles the adjudication cases that are the same as the above conclusions for everyone.

 

Adjudication Rule 1: To counter the execution of a mortgage registered earlier, it must comply with Article 29 of the 《Provisions on Objections to Enforcement and Reconsideration》 "Consumer", that is, residential home buyer.

In the retrial ruling No. 1131 of the Supreme People's Court in (2021), the Supreme People's Court held that: In the case where the original trial court has found and determined that the Nanchong Branch of Hengfeng Bank enjoys the mortgage right to the execution target, Wu Shuang must meet the provisions of Article 27 of the 《Provisions on Objections to Enforcement and Reconsideration》 if he wants to exclude the priority right of compensation of the mortgage right enjoyed by the Nanchong Branch of Hengfeng Bank on the house involved in the case. Therefore, if the rights enjoyed by Wu Shuang as an outsider on the house involved in the case are to counter the priority status of the mortgaged right that has been registered, they must comply with the provisions of Article 29 of the 《Provisions on Objections to Enforcement and Reconsideration》.

 

Adjudication Rule 2: The shop is a non-residential house, and the home buyer is not a commercial home consumer, and if it is not transferred, it cannot counter the execution of the mortgagee set on the house.

In the civil judgment No. 1132 of the Supreme People's Court in (2020), the Supreme People's Court held that: The real estate involved in the case is a shop, and it is not a commercial home consumer who buys the house involved in the case for the purpose of residence, but a buyer of a general house sales contract, and the rights it enjoys on the house cannot counter the mortgage right set on the house, and it is not enough to exclude the compulsory execution of the executing court.

In the civil ruling No. 5738 of the Supreme People's Court in (2020), the Supreme People's Court clearly pointed out that: Article 29 of the Provisions on Enforcement Objections clarifies that the function of commercial housing is for "residence", and the purpose of the provision is to solve the basic living needs of "housing for all", while the shop involved in the case is used for leasing to obtain income, and the home buyer is not the "home buyer consumer" stipulated above.

 

Adjudication Rule 3: Shop buyers cannot exclude the compulsory execution of the priority right of the project price on the shop.

In the civil ruling No. 33 of the Supreme People's Court in (2021), the Supreme People's Court held that, because the house involved in the case purchased by Wang Xiaoyan belongs to a shop and has been leased to others, it is not a residential house for residence, and does not meet the provisions of Article 29 of the 《Provisions on Enforcement Objections and Reconsideration》 and the 《Reply of the Executive Office of the Supreme People's Court on How to Understand the Provisions on the Priority Protection of Consumer Rights in the Reply of the Supreme People's Court on Questions Concerning the Priority of Payment for Construction Projects》, Therefore, Wang Xiaoyan does not belong to the consumer who can counter the priority right of payment for construction projects as stipulated in the judicial interpretation.

(2019) Gui Min Zhong 898-904 In 7 series of cases, the Guangxi High Court pointed out: The purchase of a shop is for production and operation, rather than a commercial house directly used for living needs, and does not belong to the consumer who purchases a commercial house directly for living needs as stipulated in Article 2 of the "Reply on the Priority of Payment for Project Price" and Article 29 of the "Provisions on Enforcement Objections and Reconsideration", and is not sufficient to exclude the claim of compulsory execution of the project price on the shop involved in the case.

 

IV. Conclusion

 

In summary, the issue mentioned at the beginning of this article needs to be distinguished according to the situation. That is, if the owner fails to pay the project payment overdue, the contractor's request for the court to forcibly auction the sold property may be stopped by an outsider. If the sold property is a commercial house for residential use, the contractor cannot continue to enforce it when the conditions of signing a house purchase contract before the seizure, paying 50% or more of the house purchase price, and the buyer has no other houses for residential use under his name are met at the same time. If it is a non-residential property such as a shop or office building, it cannot be excluded from execution even if it meets the conditions of signing a house purchase contract before the court seizure, paying the full amount or paying the balance to the executing court, legally occupying it, and not transferring the ownership due to non-buyer reasons.