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Key points in the 2023 Real Estate Business Law in Vietnam

In the context of a growing economy where the real estate sector plays a crucial role, contributing significantly to a country’s prosperity, a robust legal framework for investors is vital. To meet the market’s demand for a healthy business environment, the Real Estate Business Law is continuously updated and adjusted. The latest amendment to the Real Estate Business Law in 2023 promises to bring new opportunities for businesses, developers, and real estate investors in Vietnam.

The following analysis highlights key points in the 2023 Real Estate Business Law that market participants need to be aware of and adjust their business strategies to adapt to the new legal landscape in the real estate industry.

Tightening Regulations on Deposits Allowed by Developers

The 2014 Real Estate Business Law No. 66/2014/QH13 did not have provisions regarding the acceptance of deposits by developers for products that are real estate developments forming in the future.

Before official information about the content of the new 2023 Real Estate Business Law was released, many real estate businesses and project developers anticipated that regulations related to receiving deposits from customers and investors interested in buying or investing in real estate projects would be relaxed to facilitate rapid project implementation and market development after nearly two years of stagnation.

Contrary to expectations, when the new Law was officially passed, the provisions regarding deposits for residential and future construction projects were tightened compared to the existing regulations.

Firstly, Article 17(4) of the 2023 Real Estate Business Law tightens the responsibility of developers for investors and customers by strictly prohibiting developers from delegating the signing of deposit contracts to other parties.

Accordingly, developers must directly receive deposits, sales proceeds, and property transfers from customers. This provision aims to address situations where individuals suffer losses when buying real estate through intermediaries or real estate businesses, and yet those businesses work with other entities, leading to numerous disputes.

This regulation also contributes to resolving issues related to developers delegating responsibilities to multiple parties, limiting instances of avoiding responsibilities and difficulties in determining the responsible party. It also addresses the lack of trust among the public in government authorities and the real estate market in Vietnam.

Secondly, with the spirit of protecting the rights of buyers, lessees, or investors in real estate projects that are still under development, who are often considered the weaker party, Article 23(5) of the 2023 Real Estate Business Law stipulates that project developers are only allowed to accept a deposit of no more than 5% of the selling price or lease price for residential properties or the floor area of a building within a construction project from customers. This is applicable when the residential property or construction project meets the conditions for commercial operation as per the provisions of this Law.

Additionally, deposit agreements must clearly state the selling price or lease price for residential properties or the floor area of a building within a construction project.

The regulation on limiting deposits to a maximum of 5% aims to develop the real estate market in Vietnam by filtering out developers with genuine capabilities and stable financial resources, which are truly owned by them. This reduces the risk of a systemic collapse originating from real estate market defaults.

Once the 2023 Real Estate Business Law takes effect, developers will not be able to rely solely on customer deposits to develop projects without having a certain financial ratio to cope with risks. Previously, developers could receive up to 30% of the deposit from investors through the term “first payment” defined in Article 57(1) of the 2014 Real Estate Business Law. They could use this money to operate real estate projects and, in some cases, leverage it to borrow additional funds from banks or other credit institutions with high leverage ratios. There were instances where they fully offset the remaining 70% to proceed with the project.

It’s worth noting that the provision in the 2014 Real Estate Business Law created opportunities for businesses to mobilize funds and develop additional projects in the Vietnamese market, while customers faced the heaviest risks. The use of terms like “first payment” in the 2014 Real Estate Business Law regarding deposits allowed businesses and developers to ‘bypass the law’ by applying another law, the Civil Code 2015 No. 91/2015/QH13.

Specifically, since the 2014 Real Estate Business Law only regulates real estate transaction behaviors from the time of signing the real estate business contract and doesn’t regulate behaviors related to transactions that occur before signing the contract, such as deposits, joint ventures, cooperation in investment, and capital contribution contracts, many sellers took advantage of the absence of regulations in the 2014 Civil Code to demand large deposits, sometimes up to 90-95% of the transaction value.

In some cases, this deposit method led to almost fraudulent activities involving the entire assets of individuals, creating numerous negative consequences in society.

Previously, various civil contract forms were not legally prohibited, leading to developers exploiting this legal loophole to raise funds from individuals when projects were not yet eligible.

In many cases of raising funds according to the regulations of the Civil Code 2015 or the 2014 Real Estate Business Law, the projects were entirely operated by funds not owned by the developer. If crises, difficulties, and challenges arose, such as project delays or market freezes due to legal issues, both developers and investors would face difficulties.

Given that the real estate sector accounts for an average of 20% to 25% of Vietnam’s total credit debt, a real estate market crisis could also lead to a crisis for the banking sector, which is the backbone of the entire economy.

With the tighter regulations in the 2023 Real Estate Business Law, including those related to deposits and upfront payments before signing the official contract, parties will be required to comply with the provisions of this Law instead of being able to choose the applicable law as before. Consequently, real estate business practices will become more realistic rather than having many ‘virtual’ aspects as before.

However, by not being able to fully leverage customer deposits—a common method for raising funds today—most real estate businesses in Vietnam will face significant challenges in finding alternative funding sources, leading to a slowdown in the overall economic development.

This could also be a problem for the development of the Vietnamese economy since the real estate market holds a large proportion of the entire economy and is a major driving force for developing countries like Vietnam.

From another perspective, the provision of limiting deposits to a maximum of 5% may partly encourage speculative activities in real estate, as investors now only need to deposit a small amount with expected high returns. This could increase unfavorable speculative behaviors in the real estate market, which the Vietnamese government has been focusing on addressing to remove difficulties and stimulate the real estate market according to Resolution No. 33/NQ-CP in 2023.

Furthermore, the provisions outlined in the 2023 Real Estate Business Law will not entirely prevent developers from finding other ways to secure funds before the project is eligible, such as escrow agreements or priority loans to buy products forming in the future.

Regardless, in practice, most changes in the value of a real estate asset forming in the future do not come from the deposit phase, but rather at the time of handover and payment in the buying, leasing, or investing in residential properties or construction projects forming in the future.

In this regard, the regulation in the 2023 Real Estate Business Law amends Article 21(2) of the 2014 Real Estate Business Law, which stipulates that the seller is only allowed to receive up to 95% of the contract value from the buyer when they have not been granted a land use rights certificate.

Amendments to Payment Regulations in Real Estate Transactions and Future Construction Projects

During the drafting process of the proposed amendments to the 2014 Real Estate Business Law, the drafting committee presented two options concerning payment terms in the sale, lease-purchase of residential properties, and future construction projects:

Option one: “If the buyer or lease-purchaser has not been issued the Certificate of Land Use Rights, Ownership of Residential House, and other assets attached to the land, the seller or lessor is not allowed to collect more than 95% of the contract value. The remaining amount is to be paid when the competent state authority issues the Certificate of Land Use Rights, Ownership of Residential House, and other assets attached to the land to the buyer or lease-purchaser.”

Option two: “If the buyer or lease-purchaser has not been issued the Certificate of Land Use Rights, Ownership of Residential House, and other assets attached to the land, the seller or lessor is not allowed to collect more than 95% of the contract value. The remaining amount of the contract value is transferred to the account opened by the investor at a credit institution for management.

The investor is not allowed to use this amount; the management form, fees, and profits related to this amount are subject to mutual agreement between the investor and the bank.

The investor can only use this amount along with profits (if any) when the competent state authority issues the Certificate of Land Use Rights, Ownership of Residential House, and other assets attached to the land to the buyer or lease-purchaser of the residential property or construction project.”

Both options tighten and fix the provision on paying 95% of the contract value. The difference lies in the management method and the timing of payment of the remaining 5% payment. Upon review, the Standing Committee of the National Assembly chose option one as the official option to be applied due to its consistency with regulations on the timing of property ownership establishment in the draft law and the 2023 amended Housing Law. It also aligns with the completion of financial obligations as per the draft Land Law (amended), ensuring the customer’s obligation fulfillment.

Option two has the limitation that, in addition to the 95% deposit, the investor must deposit the remaining 5% of the contract value to be managed by a credit institution. The investor will not have access to this amount throughout the construction and completion of the project until they receive the certificate. However, option one was approved as the currently applied method. Investors will retain the 5% of the contract value for their use. However, this option also has the limitation that the interests of the investor may not be guaranteed.

In some cases, investors delay the payment of the remaining amount to the developer even when the developer has fulfilled their commitments, and the competent state authority has issued the certificate. This is mainly because they may not need the certificate promptly as they have had guaranteed the real estate will be theirs. This is a bottleneck in the current mechanism.

According to option two, as it is guaranteed and managed by a credit institution, the investor’s interests will be ensured if they fulfill their obligations.

Tightening Regulations on ‘Subdivision and Land Sale’ Practices

The 2023 Real Estate Business Law tightens regulations on areas where the transfer of land use rights or individual construction of residential houses is prohibited.

The term ‘subdivision and land sale’ is not an official legal term but is commonly used in the Vietnamese real estate market to describe practices of dividing land plots according to the provisions of the 2013 Land Law, Document No. 45/2013/QH13.

Widely applied during the 2008-2013 period when the real estate market and the Vietnamese economy experienced a crisis, subdivision and land sale practices, aimed at alleviating economic difficulties, evolved into negative practices characterized by land speculation, resulting in the wasteful use of non-renewable land resources.

Over the years, land speculation has left severe consequences for Vietnamese society, with subdivided projects continuously driving land prices higher.

Instead of focusing on ‘raw assets’ like land plots through maximizing value by subdividing and selling to various investors, real estate business activities under the 2023 Real Estate Business Law concentrate on developing value-added and progressive properties. This involves constructing a single high-value real estate at a location that was previously the focus of subdivision and land sale activities.

Previously, subdivision and land sale practices were restricted in urban areas of type 1 and type 2. However, coinciding with the enactment of the 2023 Real Estate Business Law, the 2023 Housing Law, approved simultaneously, tightened restrictions on these activities. Accordingly, starting from the effective date of the 2023 Housing Law in 2025, subdivision and land sale practices will be strictly prohibited in urban areas of type 1, type 2, and even type 3.

Currently, Vietnam has 902 urban areas, including 2 special urban areas (Ho Chi Minh City and Hanoi), 22 type 1 urban areas (central cities), 35 type 2 urban areas (provincial cities, cities under central authority), 46 type 3 urban areas (district towns), and 94 type 4 urban areas (towns under districts).

The regulations restricting subdivision and land sale practices align with the spirit of developing the Real Estate Business Law and subsequent amendments, focusing on building a transparent, public real estate market with gradual development over the years, rather than concentrating on speculative practices that impact the overall value of the real estate market in the region and nationwide.

ASL LAW is the top tier Real Estate law firm in Vietnam. If you need any advice, please contact us for further information or collaboration.

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