On 26 March 2021, the Vietnamese Government issued Decree No. 31/2021/ND-CP (“Decree 31”) providing guidance on the Law on Investment No. 61/2020/QH14 (“LOI 2020”). Decree 31 took effect from the same date and replaces instruments regulating similar matters, i.e. Decree No. 118/2015/ND-CP on onshore investment (“Decree 118”) and Decree No. 83/2015/ND-CP on offshore investment.

Under Civil Code 2015, a collateral has the following characteristics: (i) It must be owned by the securing party, except for cases of property lien or title retention; (ii) It is generally describable but identifiable; (iii) It is available property or off-plan property; and (iv) Its value may be greater, equal or smaller than the secured obligation’s value. [1] However, the Civil Code 2015 does not regulate further on any collateral types. In order to solve this issue, on 19 March 2021, the Government issued Decree no. 21/2021/ND-CP providing on the implementation of the Civil Code 2015 regarding the security for the obligation fulfillment (“Decree 21”). In our assessment, this guidance is very important, especially in property transactions when it is the first time regulated that individuals and/or entities can take land use rights, and properties in general as secured assets.

This legal briefing will mainly focus on some remarkable points about collateral types introduced by this Decree 21, especially the real estate collaterals.

1. What types of asset can be used as collaterals?

Under Decree 21, there are four types of property may be used as collaterals as follows: [2]

(a) Any existing property or off-plan property, unless such a property’s ownership is by-law prohibited from transferring at the time of establishing security transaction (e.g. void transaction under the Civil Code 2015 [3] or off-plan real estate property not yet approved by the Department of Construction on its eligibility to trade [4]);

(b) Property sold under property sale agreements with title retention;

(c) Property being the obligation’s subject under bilateral agreement which is infringed regarding the property lien measure;

(d) Property belonged to the entire people’s ownership (e.g. land, natural resource, etc.).

2. Is the description of the collateral a condition in the security transaction agreement?

No, as a further explanation, the description of the collateral is to be agreed upon by the securing party and the secured party [5]. In case the parties agree to record the description of the collateral, it must be recorded in a manner that complies with the following conditions:

(a) For collateral which is subject to compulsory registration (i.e. real estate property, aircraft and marine ship [6]), then the agreed description must comply with the information on the use right/ownership right certificates; [7]

(b) For collateral being property right, the agreed description must reflect the name and the legal basis for the property right; [8]

(c) For collateral being investment project (e.g. house development, non-housing construction project, etc.) which is subject to certificate and/or decisions of the competent authority or other legal basis, then the agreed description must reflect such legal basis. [9]

3. What types of real estate property may be used as collateral?

Under Decree 21, the following real estate properties may be used as collateral:

3.1. Land use right and property attached to land [10]

The land user/owner may either use land use right or property attached to land separately or both collectively for security transaction. In addition, it is worth noting that:

(a) Due to their temporary characteristics, as we deduce, for collateral being annual plant under the crop production law and temporary construction under the construction law, the security transaction thereof will not be subject to compulsory registration;

(b) For collateral being real estate property enjoying the right to adjoining real estate property, the right to adjoining real estate property still remains effective;

(c) The land use right is not used as the collateral being off-plan property.

3.2. Real estate property formed under the surface right and the usufruct right [11]

This is one of the notable supplements in the Decree 21 as real estate property formed under the surface right and the usufruct right may be used as the collateral (e.g. construction, crop or plant derived from the exploitation and usage of ground, water surface, space thereon, the water and the earth bowel of the land whose land use right is owned by other entity).

3.3. Contractual property right [12]

Amongst other contractual property rights provided under the Decree 21, it is notably worth noting that rights to exploit and manage investment project and rights to lease or sublease may be used as the collateral.

3.4. Investment project and property in the project [13]

Decree 21 affirms that project developer may use its investment project as the collateral, provided that the investment project is not by-law prohibited from transferring. For avoidance of doubt, investment project in this context means the whole investment project, the developer’s property rights to exploit, manage the project as well as other property rights and other property(ies) in the project.

3.5. Off-plan real estate property [14]

As clearly provided in the Civil Code 2015 and Decree 21, except for land use right (as mentioned in item 3.1(c) above), the off-plan real estate property may be used as the collateral and the secured party will establish its right to the collateral from the date such off-plan real estate property is formed. It is also worth noting that, since collateral being the property attached to land is subject to compulsory registration (as mentioned in item 2(a) above), the effect against a third party of the security transaction will only take place from the date on which the registration is implemented. [15]

4. Special cases provided in Decree 21

4.1. Can the securing party invest in the real estate collateral?

Yes, but the securing party must seek for the secured party’s consent in the following cases:

(a) The collateral is invested by a third party;

(b) The newly formed property is exclusive from the collateral as agreed in the security transaction agreement.

In addition, the secured party is entitled to request such investment to be terminated if the investment reduces the collateral’s value. Failed to comply above mentioned regulation, the securing party and/or the third party must compensate the secured party for damages caused, if any. [16]

4.2. Is there any solution in case the real estate collateral is changed?

Yes, if the real estate collateral is changed, the following solutions will be applied: [17]

(a) In case the securing party and the secured party agree to divide or separate the collateral into multiple properties, if such division or separation does not alter the ownership, then the newly formed properties will remains as the collateral and vice versa;

(b) In case the securing party and the secured party agree to combine, merge or mix the collateral with other property(ies), if the newly formed property is indivisible, then the combined, merged or mixed value will become the collateral;  

(c) In case the securing party and the secured party agree to contribute the collateral into a legal entity, then the respective stake formed from the contributed collateral shall become the collateral, unless the secured party and the legal entity receiving the contribution otherwise agree;

(d) In case the securing party and the secured party agree to (i) use the insured property as the collateral or (ii) put the collateral under insurance, upon occurrence of the insured event, the compensation or replacement property paid to the beneficiary will become the collateral;

(e) In case the collateral, which is (i) annual plant is harvested, or (ii) temporary construction is disassembled, then the yield or the property gained from such event will become the collateral;

(f) In case the collateral is recovered due to the securing party’s violation of laws, then the securing party must pay compensation for damages caused to the secured party as agreed under the security transaction agreement. However, Decree 21 does not provide how to deal with when the security transaction agreement does not have a clause on damage compensation. In addition, in case the securing party receives payment and/or compensation by the State, then such amount will become the collateral;

(g) In case the collateral is recovered for purpose of national defense, security, socio-economic development or for national and public interest, then the compensation and/or the replaced or exchanged property will become the collateral;

(h) In case the collateral is disposed, damaged entirely or disassembled, confiscated by decision of the State, then the collateral will be deemed no longer existing, except for cases mentioned hereinabove;

(i) In other cases where the collateral becomes unavailable or replaced by-law, then the newly formed property or the replacement, if any, will become the collateral.

4.3. If the property attached to land is used as the collateral in a security transaction, can the land use right be transferred?

Yes, in case the property attached to land is used as the collateral but the land use right is not, then you may transfer the land use right and the security transaction with the property attached to land as the collateral still remains effective against the third party. In case the land use right is used the collateral but the property attached to land is not, then it will be applied vice versa.

Similarly, in case the land use right and/or the property attached to land, which is not the collateral, is transferred, then the security transaction with the collateral formed under the surface right and/or the usufruct right relating to such land and/or property attached to land still remains effective against the third party. [18]

4.4 Security held by individuals and entities other than credit institutions

Decree 21 came into force from 15 May 2021 replacing Decree no. 163/2006/ND-CP dated 29 December 2006 providing on the secured transactions, which was amended and supplemented by Decree no. 11/2012/ND-CP dated 22 February 2012 providing amendment to Decree no. 163/2006/ND-CP (“Decree 163”).

Of note, Decree 163 is still applied to security transactions established and/or implemented before the Decree 21 came into force. In case there is any security transaction still implementing, the parties may amend such security transaction in order to comply with Decree 21. [19]

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[1] Article 295, Civil Code 2015

[2] Article 8, Decree no. 21/2021/ND-CP

[3] Article 122, Civil Code 2015

[4] Article 55.2, Law on Real Estate Business 2014

[5] Article 9.1, Decree no. 21/2021/ND-CP

[6] Article 4.1, Decree no. 102/2017/ND-CP

[7] Article 9.2, Decree no. 21/2021/ND-CP

[8] Article 9.3, Decree no. 21/2021/ND-CP

[9] Article 18, Decree no. 21/2021/ND-CP

[10] Article 10, Decree no. 21/2021/ND-CP

[11] Article 11, Decree no. 21/2021/ND-CP

[12] Article 14, Decree no. 21/2021/ND-CP

[13] Article 18, Decree no. 21/2021/ND-CP

[14] Article 24, Decree no. 21/2021/ND-CP

[15] Article 23.2, Decree no. 21/2021/ND-CP

[16] Article 20, Decree no. 21/2021/ND-CP

[17] Article 21, Decree no. 21/2021/ND-CP

[18] Article 26, Decree no. 21/2021/ND-CP

[19] Article 61, Decree no. 21/2021/ND-CP

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This briefing is for information purposes only. Its contents do not constitute legal advice and should not be regarded as detailed advice in individual cases. For legal advice, please contact our Partners.