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In the context of an increasingly dynamic economy, the use of assets to secure financial obligations, particularly through the mortgaging of land use rights, has become a common practice in Vietnam. Additionally, real estate valuation is an indispensable step in determining the actual value of the collateral, playing a crucial role in the appraisal and credit approval process.
However, this process is not merely an administrative procedure but is closely linked to legal regulations. This article will analyze the legal perspective on mortgaging land use rights and the real estate valuation process, shedding light on the legal aspects that the parties involved must grasp to ensure transparency, fairness, and legality in transactions.
Legal Framework for Mortgaging Land Use Rights
According to Article 115 of the 2015 Civil Code No. 91/2015/QH13 (the “2015 Civil Code“) and Clause 20, Article 3 of the 2024 Land Law No. 31/2024/QH15 (the “2024 Land Law“), land use rights are considered a special type of asset in the form of property rights.
Land use rights are intangible, cannot be touched or seen, but they exist in reality and have value, which can be used in transactions such as exchange, transfer, or mortgage. Land use rights are recognized by the Land Use Rights Certificate, the Certificate of House Ownership, and the Certificate of Other Assets Attached to the Land.
Article 317 of the 2015 Civil Code also stipulates that a mortgage is a transaction where one party uses its property to secure the performance of obligations without transferring the property to the other party. The mortgaged property remains with the mortgagor, and the transfer of ownership does not occur unless the parties agree to hand the property over to a third party during the transaction.
Although not explicitly defined in legal terms, mortgaging land use rights can be understood as a form of securing civil obligations, in which the mortgagor uses their land use rights to secure financial obligations, typically debt repayment.
This is a common method for accessing capital from credit institutions such as banks. However, the process of mortgaging land use rights must comply with current legal regulations to ensure legality and protect the rights of the parties involved.
For instance, the mortgagor retains the right to continue using the land during the mortgage period without transferring land use rights to the mortgagee, provided they comply with the terms agreed upon by both parties.
Clause 1, Article 45 of the 2024 Land Law outlines the conditions that land users must meet to mortgage land use rights, such as having a Land Use Rights Certificate, ensuring the land is not in dispute, and within the land use term. These are legal requirements, and for a loan transaction to occur, the mortgagor must also comply with the internal regulations of the lending bank regarding land use rights as collateral.
Each commercial bank has its own regulations regarding collateral appraisal and the credit limits it will offer to mortgagors. Some banks may lend up to 85% of the collateral’s value, while others may provide only up to 70%, or include different terms to ensure the recovery of both principal and interest.
Challenges in Mortgaging Land Use Rights and Asset Handling
In the credit operations of most commercial banks in Vietnam, real estate has long been a prevalent form of collateral, often accounting for more than 70% of the collateral structure at banks, according to the Vietnam Association of Realtors (VARS).
In many banks, this ratio is even as high as 80-90% of total outstanding loans. As a result, real estate is often the most commonly foreclosed asset when borrowers fail to repay their debts. Loan defaults may arise from various reasons, particularly during difficult economic times post-COVID-19 pandemic and global geopolitical tensions.
When this happens, banks announce the properties to be liquidated to recover debts. Many of these mortgaged properties include land use rights for real estate projects or resort villas, worth tens of billions of VND. However, it is worth noting that banks may not always be able to recover the full loan amount issued.
In early June 2024, BIDV Binh Tan announced the sale of multiple land lots in Dong Nai, Ba Ria-Vung Tau, and Ho Chi Minh City, with starting prices from a few billion VND upwards. Among them, BIDV reported two land lots in Ho Chi Minh City with starting prices of 6 billion VND and 11 billion VND, which had been put up for auction 11 times previously but remained unsold. Agibank Saigon branch auctioned off the Vietnam-Russia Resort at Ben Dam, Con Dao to settle a debt of over 370 billion VND.
Because banks are not allowed to “hold on” to real estate as individuals or regular organizations might, hoping for property values to increase over time, they are forced to liquidate these mortgaged assets. Failing to do so could increase bad debt ratios, reduce available cash reserves for new loans, raise operational costs, lower profits, and introduce other risks, such as failing to meet the withdrawal needs of depositors.
According to Clause 8, Article 3 of Circular 11/2021/TT-NHNN, bad debt refers to on-balance-sheet bad debt, including debts in groups 3, 4, and 5. Bad debt is defined as debt that becomes difficult to collect when the borrower cannot make payments on time as agreed in the credit contract. Specifically, if a debt is overdue by more than 90 days, it is classified as bad debt.
Despite the challenges, banks must liquidate real estate even though they may not fully recover the principal loan amount, let alone interest. Nevertheless, despite attractive discount rates and lower starting prices in subsequent auctions, foreclosed properties remain difficult to sell due to a sluggish real estate market nationwide.
Another objective reason contributing to the difficulty of liquidating real estate is that the value of the mortgaged land use rights at the time of liquidation may be significantly lower than when they were appraised during the loan agreement and collateral signing.
Apart from uncontrollable fluctuations in real estate market prices, this issue may stem from the appraisal and valuation process, which lacks oversight and regulation, leading to discrepancies in the valuation of land use rights at different points in time.
Issues in Real Estate Valuation Procedures in Vietnam
Appraising collateral is a crucial step in the credit approval process for bank customers. This appraisal process requires rigor, objectivity, and strict adherence to legal regulations to ensure the safety of the credit system, avoiding bad debts or difficulties in liquidating assets to recover loans.
However, in practice, there are still cases where commercial banks conduct appraisals incompletely, lacking transparency and failing to follow procedures, leading to significant damage to the bank and other individuals and organizations involved in legal disputes, while also creating potential risks for the entire credit system.
Specifically, in many cases, bank staff often perform a superficial review of documents without conducting an actual on-site inspection of the real estate. This may be due to various reasons, such as the property being in a remote location, making an actual inspection time-consuming and costly compared to the estimated value, or due to internal corruption when dealing with customers with ill intent.
As a result, the bank may not obtain accurate information about the property, such as who is living on or using the land, whether the land is in dispute with other parties (e.g., the owner’s siblings or neighboring landowners), or whether the land has been secretly mortgaged without informing other stakeholders, such as co-owners.
When disputes arise, the bank faces the risk of being unable to handle the collateral, especially in cases where the mortgagor fails to repay the debt, and the property is already in dispute with those currently living on or using the land.
Furthermore, some mortgagors engage in illegal activities, such as forging land use certificates or forging the signatures of co-owners on the certificate, or conspiring with third parties to inflate the value of the collateral in order to secure larger loans.
Such actions not only violate the law but also put the bank in a precarious position. When the collateral is foreclosed, its recovered value is often much lower than the original loan amount, and in some cases, the property cannot be liquidated at all due to forged documentation.
These issues call for a more stringent, transparent appraisal process and tighter oversight mechanisms. Enhancing the skills and ethical standards of credit officers, along with ensuring transparency in the collateral appraisal process, is essential to safeguarding the credit system and protecting the rights of all involved parties.
ASL Law is a leading full-service and independent Vietnamese law firm made up of experienced and talented lawyers. ASL Law is ranked as the top tier Law Firm in Vietnam by Legal500, Asia Law, WTR, and Asia Business Law Journal. Based in both Hanoi and Ho Chi Minh City in Vietnam, the firm’s main purpose is to provide the most practical, efficient and lawful advice to its domestic and international clients. If we can be of assistance, please email to [email protected].
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