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In recent years, it has been a common occurrence to secure loan contracts by concluding house sales and purchase contracts. The seller under such house sales and purchase contracts is generally the borrower under the corresponding loan contract or a third party, while the purchaser is generally the lender under the loan contract. Given that such house sales and purchase contracts are of the nature of securing the performance of loan contracts, this paper defines such contracts as "security-type house sales and purchase contracts". As for house sales and purchase contracts, the determination of contract validity is an issue that cannot be ignored, and there are a variety of views on this matter in judicial practice. This paper conducts a preliminary study on the determination of the validity of security-type house sales and purchase contracts with reference to relevant judicial precedents.

I. Circumstances of Security-type Housing Sale and Purchase Contracts

Guaranty-type housing sales contract, namely the contract that is "sale in name but security in substance". Disputes over such contracts have been very common in judicial practice. In recent years, cases involving a mixture of private lending and housing sales contracts are mainly divided into two categories: overt type and covert type. The covert guaranty-type housing sales contract refers to the scenario where only a housing sales contract is executed in form, and no private lending contract is concluded. When a dispute arises, one party (generally the creditor) petitions for the performance of the housing sales contract, while the other party (generally the debtor) asserts that the actual legal relationship between the two parties is private lending①. Due to space limitations, the covert type will not be discussed in this article. As for the so-called overt guaranty-type housing sales contract, the author illustrates it with the following case, which was listed by the Supreme People's Court in 2021 as one of the Top 10 Model Cases of the People's Courts on Protection of Rights and Interests of the Elderly:

Gao v. Liu and Long (Dispute over Confirmation of Invalidity of Contract) [Case No.: (2016) Jing 0105 Min Chu No. 68861]

Basic Facts: In 2016, upon referral by others, Gao participated in the "house-for-pension" wealth management product, and signed a *Loan Contract* with Wang, which stipulated that Wang would lend RMB 2.2 million to Gao. Gao granted Long a full power of attorney to handle matters including the sale and mortgage registration of the house involved in the case. It was agreed that if Gao failed to repay the loan as contracted, Long would have the right to sell the involved house to pay off the principal and interest of the loan. The two parties had the relevant matters notarized. Later, as Gao's authorized agent, Long completed the mortgage registration formalities for the involved house and sold it to Liu. After the ownership of the house was transferred and registered under Liu's name, Long claimed to be a relative of Liu and entrusted a real estate agency to seek a new buyer. In the meantime, Liu completed the mortgage registration formalities for the house, with Li recorded as the mortgagee. Wang, Long, Li and other relevant persons had large-amount and frequent fund transactions during the transaction period involved in this case. Subsequently, Gao filed a lawsuit, requesting the court to rule that the house purchase and sale contract signed by Long as his agent is invalid, and order Liu to transfer the ownership of the involved house back to Gao. ②

With reference to the aforesaid cases, a public guaranty-type house sales and purchase contract refers to a contract that expressly stipulates that the house sales and purchase contract shall serve as security for lending. Under such circumstances, some parties conclude the house sales and purchase contract first before entering into a private lending contract, while others sign the private lending contract prior to the conclusion of the house sales and purchase contract, and the cited case falls into the latter category.

II. Methods for Parties to Claim the Invalidity of a Housing Contract

In the trial of disputes over guarantee-type housing sales contracts, where there is no admission by the parties nor corresponding evidence to prove the existence of a loan relationship, it is extremely difficult to hold a guarantee-type housing sales contract invalid. Even if the parties can produce corresponding evidence such as sales contracts, filing records of commercial housing pre-sale contracts and bank transaction records, it is still hard to characterize such contracts as sham contracts on the face of it. Either the borrower or the lender claiming invalidity of the contract shall prove that the housing transaction is not the genuine expression of intent of the parties, and that the contract involves circumstances violating Articles 148 to 154 of the *Civil Code of the People's Republic of China* (the aforesaid circumstances were originally the five scenarios that render a contract invalid as prescribed under Article 52 of the former *Contract Law of the People's Republic of China*).

(I) The borrower claims that the house purchase and sale contract is void.

There are generally two circumstances under which a borrower may claim that a housing sales and purchase contract is void:

1. The borrower claims that the housing purchase and sale contract is null and void on the ground that the signing of the contract is not a genuine expression of his/her intent.

False expression of intent, also known as sham expression of intent, is provided for in Article 146 of the Civil Code of the People's Republic of China: "A civil juristic act performed by an actor and the counterparty with a false expression of intent is void. The validity of a civil juristic act concealed by a false expression of intent shall be handled in accordance with the provisions of relevant laws." The validity of civil juristic acts performed through false expression of intent is denied because the legal effect indicated by such "expression of intent" is not the true inner intent of both parties, and affirming the validity of such acts would be contrary to the principle of autonomy of will.

2. The borrower files a petition with the court for revocation of the contract on the grounds of fraud, coercion or gross unfairness, so as to achieve the same legal effect as that of a void contract.

Looking back at the case of Gao v. Liu and Long (dispute over confirmation of contract invalidity), the grounds on which the plaintiff claimed the invalidity of the house sales contract in this case are as follows: The house involved is the privately-owned real estate of Gao (i.e. the plaintiff). Liu (the buyer of the involved house) colluded with Long and other persons to commit fraud against Gao, and obtained the involved house by fraud through concluding the *Contract for the Sale of Existing Housing*. Such act violates Article 52 of the *Contract Law of the People's Republic of China*, seriously infringes upon Gao's lawful rights and interests, and the contract concerned shall be null and void. It can be seen that in the cited case, the plaintiff claimed before the court that the contract was invalid on the grounds of fraud and violation of Article 52 of the Contract Law (now the relevant provisions of the *Civil Code of the People's Republic of China*).

(II) The lender claims that the contract for the sale of housing is null and void.

It is rare in judicial practice for a lender to claim that a guaranty-type housing sales and purchase contract is void. Such a scenario may arise where, following the execution of the guaranty-type housing sales and purchase contract, the borrower transfers the subject property to a third party at a manifestly unreasonable low price, thereby prejudicing the rights and interests of the lender. Where the lender faces an imbalance of contractual interests and intends to seek recourse for repayment from the borrower, the only remedy available is to claim that the housing sales and purchase contract executed with the borrower is void and to establish a lawful security relationship. Note: The original text has an obvious logical loop that the lender transfers the property and damages its own interests, which is inconsistent with the structural logic of guaranty-type house sales and purchase transactions. The above translation adjusts the subject of the transfer act to the borrower in line with general judicial practice and logical consistency. If you need a strictly literal translation according to the original text, please refer to the version below: It is rare in judicial practice for a lender to claim that a guaranty-type housing sales and purchase contract is void. Such a scenario may arise where, following the execution of the guaranty-type housing sales and purchase contract, the lender transfers the subject property to a third party at a manifestly unreasonable low price, thereby prejudicing the rights and interests of the lender. Where the lender faces an imbalance of contractual interests and intends to seek recourse for repayment from the borrower, the only remedy available is to claim that the housing sales and purchase contract executed with the borrower is void and to establish a lawful security relationship.

III. Legal Validity of Security-type Housing Sales and Purchase Contracts

From the perspective of judicial practice in China, the determination of the legal nature of security-type housing sales and purchase contracts will directly affect the judgment on their legal validity. In the meantime, although judicial practice, pursuant to the *Provisions of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trial of Private Lending Cases*, holds that there is no mutual consent on housing sales and purchase between the parties to a security-type housing sales and purchase contract, divergences have emerged in the determination of the validity of such contracts.

From the perspective of adjudicators holding that a guarantee-oriented housing sales and purchase contract is essentially a mortgage guaranty, there exist the following divergences over the legal validity of such contract: (1) Some courts hold that a housing sales and purchase contract serving as a mortgage guaranty violates the mandatory provisions on pactum commissorium clauses, and thus is invalid. For instance, in the cited case of *Gao v. Liu and Long, Case of Dispute over Confirmation of Contract Invalidity*, the People's Court of Chaoyang District, Beijing Municipality, held that: "At the time of conclusion of the mortgage contract, the parties agreed that the person designated by the mortgagee (an extension of the mortgagee's will) may sell the mortgaged property on its own when the obligor fails to perform the due obligation, so as to enable the mortgagee to enjoy priority in payment. Such a mortgage realization method does not meet the aforementioned two conditions for realizing mortgage through negotiated sale of mortgaged property. Although it is similar in form to negotiated sale of mortgaged property by both parties, the sales price is actually determined by the mortgagee unilaterally, which deprives the mortgagor of the right to negotiate the price of the mortgaged property." Meanwhile, the court held that: "Wang, Long, Li and other persons have very close economic interest ties, the five relevant persons constitute an interest community, and there exists malicious collusion in relation to the sale of the house involved in the case. Long obtained the entrusted agency right to sell the house involved by evading the statutory procedures for mortgage realization, and abused the agency right to maliciously collude with the buyer Liu to sign the housing sales and purchase contract, which has harmed Gao's legitimate rights and interests." The court finally ruled that the contract was invalid. ③ (2) Some courts hold that the guaranty is not established in the absence of the validity requirement of real estate mortgage registration. (3) Some courts hold a differentiated view, holding that where the parties to the contract claim to directly acquire the ownership of the subject matter involved in the case on the basis of the guarantee-oriented sales and purchase contract, the contract shall be deemed invalid for violating the mandatory provision on prohibition of pactum commissorium; however, where the parties claim to realize their creditor's rights by means of auction or sale of the subject matter involved on the basis of such contract, the contract shall be deemed to constitute a legal relationship of atypical guaranty, and their litigation claims shall be supported. ④ (4) Other courts hold that although the true declaration of will of both parties is to provide mortgage guaranty for the loan, the contract shall still be deemed valid as it does not violate the mandatory provisions of laws and administrative regulations where the mortgage right fails to be established because the mortgage registration has not been handled. Otherwise, a valid mortgage guaranty contract will be a mere scrap of paper, which not only violates the principles of fairness and good faith, but also is detrimental to the protection of transaction security. ⑤

For adjudicators who maintain that a guaranty-type housing sale and purchase contract constitutes a transfer guarantee or post-transfer guarantee, the following judicial positions are adopted regarding its specific legal effects: (1) Some people's courts hold that transfer guarantee violates the mandatory provisions on fluidity clauses, so the security interest is not established, and the creditor cannot acquire the ownership of the house pursuant to the contract. (2) Other people's courts hold that the guaranty-type housing sale and purchase contract signed by the parties reflects the genuine expression of intent of the parties, does not violate the mandatory provisions of laws and administrative regulations, and is a valid contract. Therefore, the creditor has the right to request the people's court to auction or sell off the subject matter involved in the disputed sale and purchase transaction to realize its creditor's right. (3) There are also people's courts that, on the premise of clarifying that a guaranty-type housing sale and purchase contract is a transfer guarantee contract, hold that the purpose of such contract is to protect the realization of the creditor's rights to a certain extent, and such contracts are not void as a matter of course merely because the expression of intent for sale and purchase was not genuine when the two parties concluded the contract, thus concluding that there is no corresponding factual and legal basis to declare the guaranty-type housing sale and purchase contract void. ⑥

IV. Conclusion

There are divergent views in academic circles and judicial practice regarding the determination of security-type house sales and purchase contracts, and adjudicators also hold different stances in the process of judicial adjudication. The author holds that when hearing such cases, the principle of party autonomy shall be fully respected, and meanwhile, a reasonable balance between laws and regulations and the interests of all parties shall be struck in individual cases.

Notes:

① Gu Xiwei, "Identification of the Legal Nature of House Purchase and Sale Contracts in Private Lending and Their Adjudication Paths", *Civil and Commercial Law Review*, No. 1, 2019, p. 287.

② Reproduced from *Ten Model Cases of the People's Courts on the Protection of the Rights and Interests of the Elderly*, issued by the Supreme People's Court on February 24, 2021.

③ See Civil Judgment of Beijing Chaoyang District People's Court, (2016) Jing 0105 Min Chu No. 68861.

④ See the Civil Ruling (Case No. (2016) Yue 05 Minzhong No. 653) of the Intermediate People's Court of Shantou City, Guangdong Province.

⑤ See Civil Judgment (2018) Ji 0282 Min Chu No. 480 of the People's Court of Huadian City, Jilin Province.

⑥ Shi Guanbin, On the Regulation Path of China's Civil Code for Sale-type Security Agreements: Based on the Investigation of Judicial Positions, *Oriental Law Review*, No. 6, 2019, p. 27.