The Ballad of Rich and His Quest for Change

Meet Rich, scion of a billionaire, whose life is an endless loop of nocturnal extravagance. He’s the proud owner of a real estate empire with over 20 apartments dotting the vast expanse of China. Rich’s days begin when most folks are wrapping them up—at the crack of 4 PM. His morning routine is a high society’s rebellion: afternoon tea for breakfast, a virtual conquest in League of Legends, the puff of a fine cigar, and the thrill of digital retail therapy.

As the sun dips and the city lights flicker on, Rich makes his grand entrance into the night. Shanghai’s glittering nightclubs roll out the red carpet for their champagne-washing regular. The scent of his lavishness precedes him; even the bouncers’ noses are attuned to his aroma of affluence. Whether it’s TAXX, OWNER CIRCLE, MYST, FIRSTX, or SPACE, Rich paints the town red, one Dom Pérignon-soaked evening at a time.

But alas, as the bubbly bubbles fizzled out, so did Rich’s zest for his nightly escapades. The repetitive tunes, the all-too-familiar faces, and the unchanging ambiance left Rich yearning for something more, something worth making his tycoon father beam with pride.

In a burst of entrepreneurial spirit, Rich set out to conquer the fashion world with the finest menswear boutique Shanghai has ever seen. Yet, fashion is a fickle friend, and without experience, Rich’s sartorial venture flopped—spectacularly.

Cash-strapped but not defeated, Rich was struck by a bolt of inspiration—why not borrow some dough from his buddy, aptly named Cash? After all, what are friends for if not for the occasional financial bailout?

Cash, remembering the good old clubbing days and eyeing Rich’s Chengdu apartment, decides to play banker, lending Rich a cool 2 million Yuan. They shook on a deal: If Rich couldn’t repay, Cash would inherit the 3 million Yuan pad.

Can Cash take the apartment if Rich does not pay up?

Law In A Minute

Determining whether Cash can enforce the agreement that allows him to take ownership of Rich’s apartment if the debt isn’t repaid is a nuanced matter. On one hand, the agreement could be seen as non-enforceable because it was made before the debt was due and the apartment wasn’t transferred or properly registered; it doesn’t clearly fit the definition of a sales or debt repayment contract. Cash might be able to sue for the unpaid loan, yet he may not have the right to claim the property itself. On the other hand, the agreement could be considered invalid from the start, as it was made under false pretenses, more akin to a mortgage which is only valid with proper registration. In this view, Cash could push for the mortgage to be registered but not for immediate ownership transfer.

If Rich transfers ownership to Cash at the outset with a stipulation that it would be returned upon repayment, the situation becomes partly valid and partly invalid. The intent behind the transfer is not genuine, which could render it invalid, yet the aspect of the agreement that serves as a guarantee is valid. Even if the transfer is registered, it wouldn’t ensure that Cash gains ownership. The registration would rather establish a guarantee, potentially allowing Cash to receive priority compensation through an auction of the property.

Should Rich and Cash have reached their agreement only after Rich failed to pay back the money, the contract could still stand as valid. In the absence of specific legal provisions, contracts not expressly prohibited by law are typically considered established and effective upon agreement. As this arrangement doesn’t fall under a named contract, it would be governed by general contract rules and treated in a manner similar to a sales contract. Conversely, it could be argued that the agreement doesn’t take effect until the property transfer occurs, fitting the definition of a practical contract, which necessitates the transfer for the contract to be activated.

Legal Basis

Civil Code

Article 146

A civil legal act carried out by an actor and a counterparty with false expressions of intent is invalid.

The validity of a civil legal act concealed by false expressions of intent shall be handled in accordance with relevant legal provisions.

Article 502.1

A contract that is legally established becomes effective from the time it is created, except when there are other provisions in the law or other agreements made by the parties involved.

Summary of the Ninth Meeting Promulgated by the Supreme People’s Court

Article 44.1

When parties reach an agreement to offset debts with property after the debt performance deadline has expired, and the property has not yet been delivered to the creditor, if the creditor requests delivery from the debtor, the people’s court should carefully examine whether the agreement to offset debts with property is made in bad faith or intended to harm the lawful rights and interests of third parties, in order to prevent fraudulent litigation. Upon review, if there are no such circumstances and no other reasons for invalidity, the people’s court should support the request in accordance with the law.

Article 71

When a debtor or a third party enters into a contract with a creditor, agreeing to formally transfer property to the creditor’s name, with the understanding that the property will be returned to the debtor or the third party once the debtor settles the debt at maturity, the people’s court should determine the contract as valid if the debtor fails to repay the debt at maturity and the creditor is entitled to auction, sell, or discount the property to satisfy the debt.

However, if the contract stipulates that the property becomes the ownership of the creditor if the debtor fails to settle the debt at maturity, the people’s court should rule this specific provision as invalid, but this does not affect the validity of the other parts of the contract.

If the parties, according to the contract provisions, have completed the public transfer of property rights to the creditor’s name, and the debtor fails to settle the debt at maturity, the people’s court should not support the creditor’s request to confirm ownership of the property. However, if the creditor requests that the property be auctioned, sold, or discounted according to the legal provisions regarding security property rights to preferentially satisfy its debt claim, the people’s court should support this in accordance with the law. Similarly, if the debtor requests the property to be auctioned, sold, or discounted to repay the debt owed under the contract because they failed to settle at maturity, the people’s court should also legally support this.