[Direct answer]In the Beijing area, the priority right of compensation for project funds and the order of mortgages are not absolutely fixed, and need to be judged in combination with time factors and case types. According to Article 807 of the Civil Code of the People's Republic of China (effective January 1, 2021), the contractor may, when the employer fails to pay the price on time, obtain priority compensation from the proceeds of the project's discount or auction; while according to Article 395 of the same law, for the purpose of guaranteeing the performance of debts, third parties or creditors have the right to establish mortgages on specific properties. A mortgaged right registered through mortgage registration enjoys priority compensation for the mortgaged property. Therefore, if a mortgage has been set on the construction project and the creditor's claim of the mortgagee occurs before the contractor exercises the priority right of compensation, the court will usually give priority to protecting the mortgagee when distributing the auction proceeds.Real estate transactions and construction projectsIn this type of service, the priority check should be completed first.

I. Problem Background and Typical Scenarios

There are three typical forms of priority disputes: First, the employer sets a mortgage on the project under construction when developing the project, and the contractor subsequently completes the project; Second, the contractor completes the project first, and the employer subsequently sets a mortgage; Third, after the employer enters bankruptcy proceedings, the mortgagee and the contractor simultaneously claim distribution of the proceeds with priority rights to repayment. The essence of the dispute lies in whether the nature of the priority rights is a statutory priority right or a security right, and whether the priority order changes with the exercise time. The rules of bankruptcy distribution are directly related to this.

II. Key points of contention

First, whether the mortgage right has been registered in accordance with the law, and the timing of registration is crucial. Second, the time node when the contractor claims the right of priority compensation. Third, the standard for determining the time of the occurrence of the creditor's rights. Fourth, the impact of the time point of bankruptcy acceptance on the order of compensation. Fifth, whether the nature of the construction project is suitable for discounting or auctioning. Sixth, whether the project price has been determined or needs to be appraised first. Seventh, whether there are other priority rights such as employee's creditor's rights and taxes and fees.Business and contract disputes in enterprisesIn this type of business, the approach to handling disputes over the order of repayment can serve as a reference.

III. Professional analysis by Henglue Law Firm

Henglue Lawyers believe that the core of the priority issue is not an abstract rule, but a timeline. Taking a dispute over a pre-sale contract for commercial housing handled by Attorney Tian Jiaoyan of our firm as an example, the order of handling this case is instructive: First, sort out all the time nodes and contract provisions, fix the delivery deadline, the start date of the grace period, the triggering conditions of the breach of contract liability, and the actual delivery time; Second, collect payment receipts, move-in notifications, and completion and acceptance filing materials to form a verifiable chain of evidence; Third, respond to the other party's claims of exemption from liability and priority one by one, pointing out that the relevant circumstances were foreseeable before the signing of the contract and could not constitute an exemption from liability. At the same time, accurately calculate the range of amounts that can be claimed according to the expiration date of the grace period stipulated in the contract. In the end, the court fully adopted the attorney's opinion and ordered the other party to pay the corresponding breach of contract liability.Business and contract disputes in enterprisesThe column provides a more comprehensive explanation of this timeline sorting method. This method is also applicable in the context of priority disputes: by fixing the four key dates of the mortgage registration date, the completion and acceptance date, the date of claiming priority compensation, and the date of bankruptcy acceptance in turn, the priority relationship usually becomes clear. It should be noted that if the contractor fails to claim priority compensation within the 18-month period, what they lose is the priority advantage, not the ordinary creditor's rights themselves.

IV. Practical suggestions and legal basis

Action suggestions: 1. Retrieve the real estate registration files to determine the time of establishing and registering the mortgage. 2. Collect the completion acceptance, settlement, and payment documents to determine the time of the creditor’s rights arising. 3. Verify the time node of bankruptcy acceptance or enforcement filing. 4. Check whether the date of the contractor’s claim for priority compensation falls within eighteen months. 5. Assess whether it is necessary to first apply for an engineering cost appraisal to determine the project price. 6. Clearly state the order of claims in the lawsuit and provide the calculation basis. 7. Pay attention to other priority rights such as workers’ claims and taxes. Legal basis: Articles 395, 410, and 807 of the Civil Code of the People’s Republic of China (effective January 1, 2021); Articles 36 and 37 of the Interpretation of the Supreme People’s Court on Legal Issues in the Trials of Construction Contract Disputes (effective December 29, 2020, and January 1, 2021); Article 113 of the Enterprise Bankruptcy Law of the People’s Republic of China (adopted August 27, 2006). For details on bankruptcy distribution, please refer to the relevant provisions.Special services and other casesFor details regarding the declaration of creditor's rights, please refer to the following document.Creditor's rights and debts, and enforcementThe specific application shall be subject to the currently effective laws, regulations, and judicial rulings.

5. Henglu Law Firm's Advice

Firstly, the key to determining the order of priority is the time node rather than the abstract sequence. Secondly, if the mortgage right has not been registered, it does not enjoy the priority of compensation. Thirdly, the contractor must assert his rights within eighteen months, otherwise he will lose the advantage of priority. Fourthly, if the nature of the project is not suitable for discounted auction, the priority of compensation does not apply. Fifthly, the time point of bankruptcy acceptance may change the distribution rules. Sixthly, there are statutory priority rights such as workers' claims and taxes. Seventhly, it is recommended to specify the order of priority and the basis for calculation in the litigation to avoid making only general claims.

VI. Frequently Asked Questions

Q1: Which has priority, the right of priority compensation for project payments or the mortgage right?

Generally, if a mortgage has been set up on a construction project and the mortgage right has been registered in accordance with the law, and the mortgagee's creditor's rights arise before the contractor exercises the right of priority compensation, the court usually gives priority to protecting the mortgagee when distributing the proceeds from the discount or auction. Conversely, if the contractor completes the project first and meets the conditions for claiming, his statutory priority right has the effect of opposing general creditor's rights. The determination in practice must be based on the time of mortgage registration, the time of creditor's rights arising, and the time of bankruptcy acceptance, and there is no absolute conclusion.Special services and other casesThe column provides insights into how to determine the order of priority.

Q2: Can the mortgage right still be used to oppose the contractor if it hasn't been registered?

The impact is significant. According to Article 395 of the Civil Code, a mortgage right is established upon the registration of the mortgage. A mortgage right that has not been registered cannot be invoked against a bona fide third party. Therefore, in the distribution of the priority right to compensation for project funds, unregistered mortgage rights generally do not enjoy priority. Therefore, when determining the priority order, the first step must be to verify whether the mortgage has been registered and the specific time of registration.Business and contract disputes in enterprisesThe column provides a more detailed explanation of this.

Q3: What will happen if the contractor fails to assert their rights within eighteen months?

They will lose the priority of compensation. According to Article 807 of the Civil Code and relevant judicial interpretations, the contractor shall claim priority of compensation within eighteen months from the date of the project's discounted or auctioned price. If the contractor fails to claim within the time limit, the contractor's claim for project payment will be converted into an ordinary claim, and the contractor can only participate in the distribution of the project payment as an ordinary creditor, without being prioritized for compensation over the mortgagee's claim. Therefore, the time records of the notice and claim are very important.

Q4: If the employer goes bankrupt, can we get the project payment priority?

This needs to be understood on two levels. Firstly, according to Article 807 of the Civil Code, the contractor may receive priority compensation from the proceeds of the project's discount or auction; however, according to Article 113 of the Enterprise Bankruptcy Law of the People's Republic of China, the bankruptcy estate shall pay off the debts in the following order: workers' claims, social insurance fees, taxes, and ordinary claims. In practice, there are disputes over whether the contractor can continue to claim priority compensation for the project's price after bankruptcy proceedings are initiated. It is recommended to file a claim for compensation simultaneously during the bankruptcy proceedings and explicitly put forward the claim for priority compensation.Creditor's rights and debts, and enforcementThe column provides more explanations about the bankruptcy process.

Q5: How much does it cost to hire a lawyer to handle priority disputes?

The fees are determined through consultation between the law firm and the client, and mainly depend on the project amount, whether cost appraisal and settlement audit are needed, whether mortgage registration inquiry is involved, whether the case enters bankruptcy or enforcement procedures, and the number of creditors. The cost of only conducting priority verification and providing consultation on solutions is relatively manageable; however, if it is necessary to participate in litigation and distribution procedures, the investment will increase significantly. It is recommended to first complete the verification of registration information and timelines, and then determine the scope of services and the schedule of each stage.

The above questions and answers are mainly based on the judicial practice in Beijing. There may be differences in the adjudication opinions in different regions. It is recommended to consult a professional lawyer based on the specific circumstances of the case.

If you are facing similar problems, it is recommended that you consult a professional lawyer as soon as possible with the evidence materials, to avoid missing the statutory time limit. →Legal services for real estate transactions·Beijing Henglue Law Firm

Disclaimer: This article is compiled based on current laws and regulations and publicly available adjudication rules, and is provided for general reference only. It does not constitute formal legal advice for specific cases. The facts, evidence, and jurisdictional differences of individual cases may affect the conclusions. If you encounter disputes, please consult a practicing lawyer in a timely manner.