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Drafting Contract for loan of property

Contract for the loan of property means an agreement between parties whereby a lender delivers property to a borrower. When the loan falls due, the borrower must repay the lender property of the same type in accordance with the correct quantity and quality, and must pay interest if so agreed or so provided by law. The civil code 2015 does not require property loan contracts to be written, so there are unavoidable  troubles after the loan such as: deviation in interest calculation, damage of the property, the violation of breaching oral contract…In order to mitigate these risks, the parties should clearly write the contents of the contract.

Here are some suggestions on the contents of the contract for loan of property:

  • The information of parties: the lender, the borrower and the guarantor (if any)
  • The information of the property: money, objects, valuable papers…
  • Rights and obligations of parties: Some notes in Obligations
    • The lenders:  Deliver the property to the borrower in full, strictly in accordance with the quality and quantity, and at the time and place, agreed; Compensate the borrower for any damage where the lender knows that the property is not of the agreed quality but fails to notify the borrower, unless the borrower accepts the property with knowledge that the property is not of the agreed quality; Do not demand the borrower to return the property prior to the due date (except in the case of contract without fixed term)
    • The borrowers: Where the property lent is a sum of money, the borrower must repay the lender the loan in full when due. If the property is an object, the borrower must deliver to the lender an object of the same type, quantity and quality, unless otherwise agreed; Where a borrower is not able to deliver an object, it may, with the consent of the lender, repay the value of the borrowed object, in cash, as at the time and place of delivery; If a borrower fails to repay, in whole or in part, a loan with interest, the borrower must pay:
      • Interest on the principal as agreed in proportion to the overdue loan term and interest at the rate regulated by The civil Code in case of late payment;
      • Overdue interest on the principal equals one hundred and fifty (150) per cent of the interest rate in proportion to the late payment period, unless otherwise agreed.
  • Interest rate (If any):
    • The rate of interest for a loan shall be as agreed by the parties.The rate of interest for a loan agreed by the parties may not exceed 20% per year, unless otherwise prescribed by law. If the agreed interest exceeds the maximum interest prescribed in this Clause, the agreed interest shall become invalid.
    • Where parties agree that interest will be payable but fail to specify the interest rate, or where there is a dispute as to the interest rate, the interest rate for the duration of the loan shall equal 50% of the maximum interest (20%) at the repayment time.
  • Term of the contract:
    • Contracts without fixed term:
      • With respect to a contract for an interest-free loan without a fixed term, the lender may reclaim the property, and the borrower may repay the debt, at any time provided that each party gives reasonable prior notice to the other party, unless otherwise agreed.
      • With respect to a contract for a loan with interest without a fixed term, the lender may reclaim the property at any time, subject to giving reasonable prior notice to the borrower, and shall be paid interest until the time when the property is returned. The borrower may also return the property at any time, subject to giving reasonable prior notice to the lender, in which case the borrower shall pay interest only up to the date on which repayment is made.
    • Contracts with fixed term:
      • With respect to a contract for a fixed term interest-free loan, the borrower may return the property at any time, subject to giving reasonable prior notice to the lender. The lender may reclaim the property prior to the due date, subject to the consent of the borrower.
      • With respect to a contract for a fixed term loan with interest, the borrower may return the property prior to the due date, but must pay interest for the entire term, unless otherwise agreed or otherwise prescribed by law.
  • Use of borrowed property: Parties may agree that borrowed property may only be used for the agreed purpose of the loan. The lender may check the use of the property and may demand its early return if, despite warning, the borrower continues to use the property contrary to the agreed purpose.
  • Other terms agreed by parties but not agaisnt the law.

Notes:

  • For loan assets which are common property (spouses, siblings, etc.), the lenders must be approved by the co-owners or only lend the part of the property under their ownership.
  • The law does not require the contract of property to be notarized, however, if there is a requirement by either party, the contract is notarized.
  • If the contract has guarantor, the parties should clearly specify information security assets or guarantor, property value;…
  • Upon delivery, payment or property, the payment documents and other evidences of receiving property must be retained for avoiding future legal problems.
  • Avoid entering into a loan agreement to hide the performance of another contract (home purchase, deposit, etc.) as legal consequences of this are worrying and unpredictable.

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