Li bought commercial premises from a developer for RMB 6 million, paid in full by transfer and took lawful possession, with a management agreement under which the developer let the premises on Li’s behalf. The developer then, in concert with a lending company, mortgaged the premises without Li’s knowledge.

Issue

Whether a mortgage created by collusion between the seller and a lender, to the prejudice of a buyer already in possession, is effective against the buyer.

Outcome

The firm argued that the mortgage was a collusive arrangement contrary to good faith and to Article 154 of the Civil Code, and that the lender, as a professional institution, had failed to inspect premises visibly occupied by another. The court set the mortgage aside as against the buyer.