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In civil transactions, particularly loan relationships between individuals, a borrower’s inability to repay a debt when due is relatively common. Instead of extending repayment deadlines or initiating court proceedings for debt recovery, parties often opt for a “compromise” solution: transferring the borrower’s land use rights to the lender as a substitute for monetary repayment.
While this solution may satisfy the immediate economic interests of both parties, it carries significant legal risks due to the overlap and interaction between different contractual relationships.
From a legal structural perspective, such a transaction does not exist independently but is always associated with at least two legal relationships: (i) the loan agreement, which gives rise to the repayment obligation; and (ii) the transfer of land use rights, which serves as the method chosen by the parties to settle that obligation.
This intersection complicates the determination of the transaction’s true nature, particularly when agreements relating to the loan and the offsetting of obligations are not fully or consistently recorded within a unified set of legal documents.
The complexity of this type of transaction increases further in the context of rapidly rising land prices. After a significant period of time, the value of the land use rights may far exceed the original debt amount.
In such circumstances, economic incentives may motivate the transferor to deny the original intention and initiate legal proceedings seeking to have the land use rights transfer contract declared invalid on the grounds that it was established merely to secure the repayment obligation, rather than to fulfill it.
Notably, current civil law does not impose a statute of limitations on claims requesting a declaration that a civil transaction is invalid due to sham arrangements. As a result, disputes may arise even after the transaction has been implemented and remained “stable” for many years.
In this context, correctly identifying the legal nature of a land use rights transfer associated with a loan relationship is crucial, not only for dispute resolution before the courts but also for preventing legal risks from the outset of the transaction.
On this basis, this article analyzes two common types of transactions in practice: (i) transfer of land use rights to fulfill a repayment obligation; and (ii) transfer of land use rights to secure a repayment obligation, thereby clarifying the legal boundary between a lawful transaction and a sham transaction.
Transfer of Land Use Rights to Fulfill a Repayment Obligation
A transfer of land use rights to fulfill a repayment obligation typically arises from a legally established loan agreement. Upon maturity of the debt, if the borrower is unable to repay in cash as initially agreed, the parties may agree to use the borrower’s land use rights as a substitute for full or partial repayment.
For the purpose of this analysis, the concept of transferring land use rights is understood broadly to include both the transfer of land use rights and assets attached to the land.
From a legal standpoint, fulfilling a repayment obligation by transferring land use rights constitutes a method of performance recognized under civil law. A borrower’s repayment obligation arising from a loan contract may be performed through an alternative obligation if accepted by the creditor.
In this case, the obligation to transfer land use rights is agreed upon as a substitute for the monetary repayment obligation, thereby terminating the original loan relationship. This mechanism reflects the principle of freedom of contract and voluntary agreement, which is fundamental to civil law.
From a contractual perspective, such a transfer is a compensated contract with a specific form of consideration. Instead of a conventional monetary payment, the consideration is the value of the outstanding debt. In other words, the debt is “converted” into the value of the land use rights, and the transfer is deemed to complete the repayment obligation.
However, in practice, significant difficulties arise concerning formality requirements. Under land and civil law, contracts for the transfer of land use rights must be notarized or authenticated, and the contract must state the transfer price.
In reality, notarized contracts often record only a formal transfer price and include a clause stating that payment is conducted by the parties outside the notary’s supervision. Due to the sensitive nature of offsetting a debt obligation, details such as the outstanding debt amount, the timing of termination of the loan, or any difference payable are frequently excluded from the notarized contract.
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As a result, to ensure the completion of transfer procedures, parties often separate the “debt performance” content from the land transfer contract and record it in separate agreements. This separation creates significant evidentiary gaps.
After notarization and registration of the transfer, the transferee may consider the land use rights fully acquired and pay little attention to the prior loan relationship. In some cases, parties even return debt acknowledgments without executing any document confirming that the debt has been settled through the land transfer.
These evidentiary gaps give rise to disputes when, after a long period, the transferor initiates proceedings to have the transfer contract declared invalid as a sham, arguing that it was intended only to secure the debt rather than to discharge it. This marks the starting point of legal confusion between two transactions that appear similar in form but differ fundamentally in substance.
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Transfer of Land Use Rights to Secure a Repayment Obligation
Unlike a transfer intended to fulfill a repayment obligation, a transfer of land use rights to secure repayment does not aim to terminate the loan relationship but serves merely as a security measure. In such cases, land use rights are formally “transferred” to the lender, yet the true intention of the parties is not to effect a definitive transfer of ownership, but rather to create leverage ensuring debt recovery.
In practice, this arrangement typically arises in two contexts. First, at the time of loan establishment, the lender—holding a stronger bargaining position—requires the borrower to sign a land transfer contract as a condition for disbursement, instead of using conventional security measures such as a mortgage.
Second, where a loan already exists without sufficient security, the parties execute a land transfer contract to convert an unsecured loan into a secured one, without intending to discharge the repayment obligation.
Legally, this constitutes a sham transaction intended to conceal another civil transaction. The land transfer contract serves merely as a formal “cover” for the underlying loan relationship, while the actual intention is that the land will be “returned” once the debt is fully repaid. The inconsistency between internal intention and external expression renders the transaction vulnerable to being declared invalid due to sham.
The greatest risk in such arrangements falls on the borrower. Although the borrower may continue to manage and use the land or rely on a promise of redemption, legally the land use rights have been registered in the lender’s name through a formally valid transfer contract.
If the lender subsequently transfers the land to a bona fide third party or mortgages it to a bank, the borrower’s ability to protect their rights is significantly diminished, and restoration of the original status of the property may become impossible.
Therefore, confusing or intentionally using a land transfer contract as a security measure not only risks invalidation but may also lead to severe legal consequences for the borrower when disputes arise.
Causes of Litigation and Factors Obscuring Transaction Identification
Although the theoretical distinction between the two types of transactions is relatively clear, in judicial practice this boundary is often blurred by various factors. This explains why claims seeking to declare land transfer contracts invalid due to sham remain common, even many years after the transaction was established.
One primary cause of litigation is the substantial increase in land value over time. When the land’s value at the time of dispute resolution greatly exceeds the original debt amount, economic incentives to deny the original intent become apparent. In such cases, invalidation claims are often used as legal tools to reclaim land rather than to resolve a pure civil obligation dispute.
This motivation is facilitated by evidentiary challenges. Since claims of sham transactions are not subject to a statute of limitations, litigation may occur many years later. Over time, essential documents such as loan agreements, payment receipts, or offsetting agreements may be lost or incomplete. Witnesses may be unavailable or unable to recall events accurately, and the original transactional context cannot be fully reconstructed.
Oral agreements and cash payments further weaken evidentiary capacity. Unclear or inconsistent financial documentation complicates the determination of the true transaction value. Large discrepancies between the recorded transfer price and the appraised land value are often cited as indications that the transaction served merely as security.
In some cases, after the land transfer is completed and the original debt is presumed settled, the parties later establish new loan relationships. If documentation for the initial transaction was incomplete, subsequent payment records may be misinterpreted as evidence that the original loan remained in force and that the prior transfer served only as security.
Another significant complicating factor is the transferor’s continued use of the land after the transfer without a written lease agreement. Prolonged use by the transferor may be interpreted as evidence that ownership was not genuinely transferred, reinforcing arguments of a security arrangement. The situation becomes more complex when periodic payments lack clear descriptions, leading to disputes over whether they constitute rent or loan interest.
Finally, there may be instances where documents are deliberately created to support future litigation. Messages, recordings, or ambiguous exchanges referring to “outstanding debt” or “interest payments” may be formalized and presented as evidence. Without careful assessment of their timing, context, and purpose, such materials may distort the original transaction’s nature.
Collectively, these overlapping and cumulative factors render the boundary between a lawful transfer to fulfill a debt and a sham transfer to secure a debt exceedingly fragile in dispute resolution practice.
Recommendations and Preventive Measures
To minimize dispute risks and ensure legal stability in land use rights transfers intended to fulfill repayment obligations, preventive measures should be implemented from the transaction’s inception and performance stages.
First, parties should establish and retain comprehensive and consistent documentation relating to debt settlement. This includes preparing written offsetting agreements clearly stating the debt amount, the land value applied for offset, any difference payable, and the date of termination of the repayment obligation. Such documents should be signed and preserved together with the land transfer contract and payment evidence to ensure coherence and evidentiary strength.
Second, post-transfer land management must be strictly controlled. If the transferor continues to use the land under a lease arrangement, a written lease contract should be executed, specifying rights and obligations, rent, payment method, and termination date. Allowing continued use without legal documentation may be interpreted as evidence of a security arrangement.
Third, subsequent loan relationships must be clearly separated from the prior transaction. A key indicator of a transfer intended to fulfill repayment is the complete and definitive settlement of the original loan. If new loans arise, separate documentation specifying the timing, purpose, and payment method is essential to prevent conflation with the earlier transaction.
Fourth, all financial transfers between the parties after completion of the land transfer should be transparent and clearly described in payment records. The purpose of each transfer—such as land rent, reimbursement, or other obligations—should be expressly stated. Ambiguous descriptions may be construed as interest or principal repayment, supporting arguments that the loan relationship persists.
Given that claims for sham transactions are not time-barred, proactive risk prevention through comprehensive, transparent, and consistent documentation is the most fundamental means of safeguarding the legitimate rights and interests of parties involved in land use rights transfers associated with repayment obligations in Vietnam.
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