Supreme People's Court, Several Issues Concerning the Application of Law to Trial of Disputes over Commodity Premises Sales and Purchase Contracts Interpretation

(Promulgated by the Supreme People's Court on April 28 2003 and effective as of June 1 2003.)

The Interpretation is formulated in accordance with the relevant laws such as the PRC Civil Law General Principles, PRC Contract Law, PRC Administration of Urban Real Property Lawand the PRC Security Law, in order to try dispute cases involving commodity premises sales and purchase contracts in an accurate and timely manner.

Article 1: The term "commodity premises sales and purchase contracts" as used in the Interpretation shall refer to the contract involving the price paid by the buyer in sales by real property developers to the public (hereafter, the seller) of housing not yet built or completed housing, where ownership of the premises is transferred to the buyer.

Article 2: Commodity premises pre-sale contracts concluded with a buyer by a seller who has not yet obtained a commodity premises pre-sale permit shall be invalid, although in cases where a commodity premises pre-sale permit is obtained before a prosecution is brought the contract may be recognized as valid.

Article 3: Commodity premises sales advertisements and promotional materials are invitations for offer. Nevertheless, if the representations and undertakings made by a seller regarding premises and related facilities within the commodity premises development zone are specific and definite, and have a significant impact on the conclusion of the commodity premises sales and purchase contract and the price of the premises, such representations and undertakings shall be regarded as offers. Even if such representations and undertakings are not included in the commodity premises sales and purchase contract, they shall be regarded as part of the contract and any party violating them shall be liable for breach of contract.

Article 4: Where a seller accepts a deposit from a buyer through subscription, placing of an order or advance reservation, etc. as a guarantee that a commodity premises sales and purchase contract will be concluded, if one party is unable to conclude the commodity premises sales and purchase contract this shall be dealt with in accordance with the law on deposits. Where the commodity premises sales and purchase contract cannot be concluded due to a fault that cannot be assigned to either side, the seller shall return the deposit to the buyer.

Article 5: Where subscription, order or advance reservation agreements for commodity premises contain the main points of the commodity premises sales and purchase contracts stipulated in Article 16 of the Administration of Sale of Commodity Premises Procedures and the seller has accepted the sales price in accordance with the agreement, then the agreement shall be regarded as a commodity premises sales and purchase contract.

Article 6: Requests that a commodity premises pre-sale contract be recognized as invalid because it has not been registered in accordance with the law and administrative regulations shall not be upheld.

If the parties concerned have agreed that registration shall be a condition of validity of a commodity premises pre-sale contract then this shall be recognized, except where one party has already fulfilled their main obligations and the other party has accepted these.

Article 7: Where a demolisher has concluded an agreement through transfer of ownership with those being displaced to resettle them as compensation, and it has been clearly agreed that the demolisher has designated premises with specific location and usage for this resettlement of those being displaced as compensation, yet sells those premises to a third party, and those being displaced request priority over the resettlement premises, then this shall be upheld.

If those being displaced request that the resettlement compensation agreement be rescinded then this shall be dealt with in accordance with Article 8 hereof.

Article 8: If any of the following circumstances renders it impossible to realize the purposes of a commodity premises sales and purchase contract, the buyer who is unable to obtain the premises can request that the contract be rescinded and that the sale price already paid be returned with interest and compensation for losses. They may also request that the seller be liable for damages not exceeding the sale price paid:

(1) the seller fails to inform the buyer that the premises has been mortgaged to a third party after the commodity premises sales and purchase contract has been concluded; or

(2) the seller sells the premises to a third party after the commodity premises sales and purchase contract has been concluded.

Article 9: If any of the following circumstances occurs when a seller concludes a commodity premises sales and purchase contract, so rendering the contract invalid, revoked or rescinded, the buyer may request the return of the sales price already paid plus interest and damages. They may also request that the seller be liable for damages not exceeding the sales price paid:

(1) the seller deliberately conceals the fact that it has not obtained a commodity premises pre-sale permit or provides a false commodity premises pre-sale permit;

(2) the seller deliberately conceals the fact that the premises being sold have already been mortgaged; or

(3) the seller deliberately conceals the fact that the premises being sold have already been sold to a third party or allocated as compensation for resettlement.

Article 10: If a buyer requests that a commodity premises sales and purchase contract concluded between the seller and a third party be recognized as invalid because the seller and the third party have colluded in concluding such a contract and the premises have been delivered for the use of the third party, so that the buyer cannot have the premises, then this shall be upheld.

Article 11: Transfer of occupation of premises shall be regarded as delivery for use of those premises except where those involved agree otherwise.

The risk of damage to or destruction of premises shall be borne by the seller before the premises are delivered for use and by the buyer once the premises have been delivered for use. If a buyer who has received written notification from the seller of transfer of use of the premises to the buyer refuses without proper reason to accept the premises, then the risk of damage to or destruction of the premises shall be borne by the buyer from the date of delivery for use stipulated in the written notification, unless the law stipulates otherwise or both parties agree otherwise.

Article 12: If premises cannot be delivered for use because the main structure is of sub-standard quality, or if after it has been delivered for use the main structure is found on inspection to be of sub-standard quality, and the buyer requests that the contract be rescinded and asks for damages, then this shall be upheld.

Article 13: If the quality of premises is such that it seriously affects the use as a normal habitation, and the buyer requests that the contract be rescinded and damages paid, then this shall be upheld.

During the period of maintenance to premises that have been delivered for use and with which there are problems with the quality the seller shall be responsible for the repairs. If the seller refuses to undertake repairs or extends these beyond a reasonable time then the buyer may undertake the repairs themselves or appoint another to do so. The cost of the repairs and other losses caused during the repair period shall be borne by the seller.

Article 14: If the interior or exterior area of premises is not in accordance with the area agreed in the commodity premises sales and purchase contract, and there are provisions on this in the contract, then this shall be dealt with in accordance with those provisions. If there are no such provisions, or if the provisions are unclear, then this shall be dealt with in accordance with the following principles:

(1) if the error in the area is 3% or less yet the price agreed in the contract is in accordance with the facts but the buyer requests that the contract be rescinded, then this shall not be upheld; and

(2) if the error in the area exceeds 3% and the buyer requests that the contract be rescinded and that the purchase price paid be returned with interest, this shall be upheld. If the buyer agrees to continue with the contract and the actual area of the premises is greater than that agreed in the contract, the buyer shall pay for 3% or less of the area in excess of that agreed in the contract and the seller for extra area in excess of 3%, with ownership going to the buyer; if the actual is less than that agreed in the contract, the price of 3% or less of the area in error plus interest shall be returned by the seller to the buyer, while double the price of an error of over 3% shall be paid by the seller to the buyer.

Article 15: If in accordance with Article 94 of the Contract Law one of the parties involved requests that the contract be rescinded because the seller delays delivery of the premises or the buyer delays payment, and the contract has not been fulfilled within a reasonable period of three months after warnings have been given, the request shall be upheld unless the parties involved agree otherwise.

If there are no other provisions in law and the parties do not agree otherwise, the reasonable period after warning has been given in which to exercise the right to rescind the contract is three months. If the other party has not been warned, the right shall be exercised within one year. If this period is exceeded the right shall be extinguished.

Article 16: If a party involved requests a reduction in the liquidated damages because it is too high, this shall be reduced to 30% above losses caused. If a party involved requests that the damages be increased because it is lower than the losses, it shall be set at the amount of loss the breach of contract causes.

Article 17: If the damages for breach of contract or the method for calculating compensation for losses are not stipulated in the commodity premises sales and purchase contract, the damages or the amount of compensation may be decided as follows:

If there is failure on the part of the buyer to pay on time, this shall be calculated in accordance with the amount of the total purchase price not paid on the basis of the interest rate set by the People's Bank of China on outstanding loans to its financial institutions.

If there is failure on the part of the seller to deliver the premises for use on time, this shall be calculated in accordance with the amount of rent that would be paid for a property of the same type in the same locality for the time for which the delivery is delayed, the rent to be as announced by the department in charge or as assessed by a qualified real property assessor.

Article 18: If the buyer is unable, for reasons to do with the seller, to obtain the certificate of ownership of the premises once the following time limits are up, the seller shall be liable for breach of contract unless both parties agree otherwise:

(1) the time limit for registration of ownership of the premises as specified in the commodity premises sales and purchase contract;

(2) 90 days from the date that the premises are delivered for use when the commodity premises sales and purchase contract refers to premises not yet built; or

(3) 90 days from the date that the contract is concluded when the commodity premises sales and purchase contract refers to completed premises.

If the contract does not specify liquidated damages, or losses are difficult to decide, these can be calculated on the basis of the interest rate set by the People's Bank of China on outstanding loans to its financial institutions.

Article 19: If for reasons to do with the seller the time agreed in the commodity premises sales and purchase contract or stipulated in Article 33 of the Administration of Urban Real Property Development and Business Regulations for registration of ownership of the premises is exceeded by one year, and the buyer is unable to register ownership of the premises and requests that the contract be rescinded and damages be awarded, this shall be upheld.

Article 20: If a seller concludes a commodity premises sales and purchase contract with a sole agent that stipulates that the seller will hand over the housing being developed to the agent for sale in the name of the seller, and the premises have not been sold by the time the agency period has expired, they shall be purchased by the agent in accordance with the agent's price stipulated in the contract except where the parties agree otherwise.

Article 21: If a seller itself sells premises that it has agreed shall be sold by a sole agent, and the agent requests compensation from the seller, this shall be upheld except where the two parties agree otherwise.

Article 22: If disputes arise between a buyer and a seller because of the commodities premises sales and purchase contract, the people's court shall notify the sole agent to participate in the litigation. If the seller, the agent and the buyer have a clear agreement on their rights and obligations, the position of each in the litigation shall be decided by that agreement.

Article 23: If it is agreed in the commodity premises sales and purchase contract that the buyer shall pay through secured loan and the commodity premises sales and purchase contract cannot be fulfilled because one of the parties involved is unable to conclude the commodity premises secured loan contract, the other party may request that the contract be rescinded and ask for damages. If it is impossible to determine which of the two parties is responsible for the failure to fulfil the commodity premises sales and purchase contract because of inability to conclude a commodity premises secured loan agreement, a request may be made for the contract to be rescinded and the seller shall return the principal and interest, or the deposit, paid for purchase of the premises to the buyer.

Article 24: If a commodity premises secured loan contract cannot be fulfilled because the commodity premises sales and purchase contract has been recognized as invalid or has been revoked or rescinded, and the parties involved request that the commodity premises secured loan agreement be rescinded, this shall be upheld.

Article 25: If one party to a commodity premises sales and purchase contract where payment is by secured loan requests that the commodity premises sales and purchase contract be recognized as invalid or be revoked or rescinded, and the guarantor has the independent right to bring a suit as a third party and does so, this shall be tried together with the dispute over the commodity premises secured loan contract. If such a suit is not brought, only the dispute over the commodity premises sales and purchase contract shall be tried. If the guarantor brings a separate suit over disputes over the commodity premises secured loan contract, this may be tried together with the dispute over the commodity premises sales and purchase contract.

If after a commodity premises sales and purchase contract is recognized as invalid or is revoked or rescinded the commodity premises secured loan contract is also rescinded, the seller shall return the purchase loan and the principal and interest paid for the premises to the guarantor and the buyer respectively.

Article 26: If the buyer fails to repay the loan in accordance with the commodity premise secured loan contract and fails to register a mortgage on the premises with the guarantor, and the guarantor sues the buyer for the buyer's rights and interests under the commodity premises sales and purchase contract, the seller shall be notified to attend the lawsuit. If the guarantor sues the seller at the same time and the seller has provided security for the commodity premises secured loan contract, it shall be treated as co-defendant.

Article 27: If the buyer fails to repay the loan in accordance with the provisions of the commodity premises secured loan agreement but has already obtained the certificate of ownership of the premises and has registered a mortgage on the premises with the guarantor, and the mortgagor requests that the buyer repay the loan or render up paramount rights to the mortgaged premises, the seller shall not be retrospectively prosecuted as a party except where the seller has provided security thereon.

Article 28: This Interpretation shall be effective as of June 1 2003.

This Interpretation shall apply to cases involving disputes over commodity premises sales and purchase contracts concluded after the implementation of thePRC Administration of Urban Real Property Law that are still in their first or second hearings after these Interpretation is promulgated and become effective.

This Interpretation shall not apply to cases involving disputes over commodity premises sales and purchase contracts concluded after the implementation of the PRC Administration of Urban Real Property Law that have already been heard before the implementation of this Interpretation and where a party involved has requested a retrial, or a retrial has been decided on in accordance with the judicial supervision procedures.

The then current laws and regulations and the Supreme People's Court, Several Issues Concerning Trial of Cases Involving Real Property Development Arising Prior to the Implementation of the Administration of Real Property Law Reply shall apply to commodity premises sales that occurred before the implementation of the PRC Administration of Urban Real Property Law.