In practice, it is not uncommon for a person to receive a land use right transfer through a sale and purchase agreement of residential property, only for the transaction to later be declared null and void for various reasons – for instance, forged signatures, failure to meet conditions for transfer, or internal disputes among family members. However, the buyer may have already completed registration procedures, changed the name on the title, and been issued a Certificate of Land Use Rights. Subsequently, this property may have been mortgaged to a bank as collateral for a loan.
The question arises: If the original sale and purchase transaction is declared invalid, will the subsequent mortgage transaction also be deemed invalid as a consequence?
1. The Independent Nature of the Mortgage Transaction
First and foremost, it is important to distinguish clearly that the sale and purchase of real estate and the mortgage of such real estate to a bank constitute two separate legal relationships. The sale and purchase transaction takes place between the seller and the buyer, whereas the mortgage transaction forms a legal relationship between the asset holder and the bank.Once the buyer has completed the registration procedures and is named on the Certificate of Land Use Rights, any subsequent act of mortgaging the property to a bank is considered an independent transaction.
Provided that the bank accepts the property as collateral under normal conditions and in good faith — with no apparent irregularities — the bank is entitled to presume that the transaction is lawful and valid..
2. The Bank as a Good Faith Third Party
In such cases, the bank is considered as a Good Faith Third Party. The bank is not a party to the problematic transfer transaction; it only acknowledges that the mortgagor possesses all requisite documentation, is named as the lawful holder on the Certificate of Land Use Rights, and that the property is neither under dispute nor subject to seizure, and meets all legal conditions for mortgage.
On that basis, the bank proceeds with standard procedures including valuation, execution of the mortgage contract, notarisation, and registration of the secured transaction in accordance with applicable regulations. These steps reflect the bank’s good faith, due diligence, and adherence to professional and regulatory standards.
Therefore, even if the initial sale and purchase transaction is later declared null and void, the mortgage transaction with the bank should not be invalidated or held against the bank – as the bank had no knowledge of, nor any reasonable means to discover, any defect in the original transaction
3. Market Stability and the Principle of Protecting Third Parties
A fundamental principle in civil and commercial transactions is the protection of transactional stability, especially in relation to good faith third partiesIf a mortgage transaction were to be declared invalid solely because of defects in a prior sale and purchase agreement it would result in the bank losing its secured asset— causing significant financial loss and undermining trust across the entire credit system
Widespread invalidation of transactions not only adversely impacts banks but also generates uncertainty in civil transactions more broadly. No party would willingly accept or engage with property if there were constant risk that a prior transaction’s invalidity could render all subsequent transactions null and void.
4. Requirement to Prove Good Faith and Procedural Compliance
However, in order to be afforded legal protection, the bank must also be able to demonstrate that it has complied with all necessary professional proceduresincluding but not limited to:
- Conducting due diligence and legal verification of the mortgaged property's documentation;
- Confirming that the property is free from disputes or any irregularities;
- Maintaining complete and accurate records of the mortgage transaction
- Establishing that it did not collude with any party, had no knowledge of, and could not reasonably have known about any defects in the original transfer transaction.
If the bank can substantiate these elements, the mortgage transaction shall be considered valid and enforceable, regardless of the legal status of the preceding sale and purchase transaction
Conclusion
In cases where a real estate transfer transaction is declared null and void, but the buyer has already been issued a Certificate of Land Use Rights and subsequently mortgaged the property to a bank, the mortgage transaction with the bank shall remain valid and enforceable,provided that the bank acted as a good faith third party, fully complied with all required procedures, and, had no knowledge of, and could not reasonably have known about, any irregularities or legal violations in the prior transaction
This approach upholds legal certainty, protects bona fide third parties, and ensures the stability and reliability of civil and commercial transactions