Introdcution

The National Assembly issued the Real Estate Business Law 2023 ("REBL 2023") on 28, November 2023, which will replace the Real Estate Business Law 2014 (“REBL 2014”) as of 1, January 2025. The REBL 2023 will focus on new points related to payment and guarantee in off-plan real estate transactions under REBL 2023.

1. Limit the deposit to 5% for off-plan housing and building transactions

Article 23.5 of REBL 2023 states that the investor in a real estate project may only receive a deposit of up to 5% of the selling price or lease-purchase price for housing or construction projects from the depositor for future properties, whereas REBL 2014 does not include such a provision.

There are concerns related to the risk that parties may avoid applying this regulation by using alternative terms such as "advance payment" or "cooperation agreement." However, we are of the view that the current legislation has mechanisms to control this risk. Specifically, the so-called “cooperation agreement” shall be considered a false transaction according to Article 124 of the Civil Code 2015 and will become invalid. The practice of dispute resolution in Vietnam has shown that the nature of the transaction will decide rather than the mere name. As a result, making a considerable contribution in advance to proceed with the construction of a housing project will be considered capital mobilization and must adhere to tight regulatory rules. Currently, there is no decree or draft decree guiding REBL 2023. However, according to Article 19 of Decree 99/2015/ND-CP guiding REBL 2014, capital mobilization for commercial housing development is strictly regulated. The form of mobilization must be in the form of capital contribution contracts, investment cooperation contracts, or business cooperation contracts. The investors must meet the capital mobilization requirements, among which is the requirement to send a notice of eligibility to mobilize capital to the Department of Construction. Decree 99/2015/ND-CP also provides that if the capital mobilization contract is not in compliance with the provisions of Articles 68 and 69 of REBL 2014 and Article 19 of Decree 99/2015/ND-CP, it will not be legally recognized, and the investor will be fined for violations and must compensate for the damages to the capital contributors.

It is also essential to note that REBL 2023 explicitly states that "receiving money in the sale, lease-purchase of residential houses, construction works, the floor area of construction works forming in the future not in accordance with this Law" is a prohibited act. Therefore, violating the regulations on receiving deposits will render the contract null and void.

The regulation on limiting deposit for off-plan housing and building transactions aims to restrict the early-stage capital mobilization for investors in off-plan real estate projects.

2. Adjustments to payment milestones in buying, lease-purchase of off-plan constructions

For the first payment

According to REBL 2023, the first payment in buying, lease-purchase of off-plan constructions shall not exceed 30% of the contract value, including the deposit. This regulation mirrors the one in REBL 2014, adding that the limit now includes the deposit. Consequently, if the deposit is subtracted from the first payment, investors will receive up to 30%, covering the deposit. If the deposit is subtracted from further payments, the first payment will be 30% minus the deposit. Hence, it's evident that the new regulation imposes a lower maximum initial payment than the previous provision.

From the second payment until the handover

In REBL 2023, local investors still face a second payment limit of 70%, consistent with REBL 2014. Economic organizations with foreign investment capital defined in the Investment Law, are limited to a 50% second payment. However, according to Article 26 of the Investment Law, economic organizations holding land use rights certificates in areas affecting national defence and security must undergo foreign investment procedures if foreign investors are involved, regardless of their capital ratio. As "other areas" lack a precise definition, this rule is assumed to apply universally to real estate projects in any location. Thus, the 50% second payment limit is presumed to apply to any real estate business with foreign investor capital.

Regarding lease-purchase transactions for houses, construction projects, and floor areas in future construction projects, REBL 2023 removes the differentiation between domestic and foreign-invested economic organizations for payments made during the off-plan lease-purchase phase until handover. Both now face a maximum payment limit of 50%, a departure from REBL 2014, which allowed a 70% limit for domestic and 50% for foreign-invested economic organizations. This change eliminates the preferential treatment for local investors, ensuring an equal advantage between local and foreign investors in mobilizing capital for lease-purchase projects.

In addition, the new regulation in REBL 2023 is better aligned with the nature of lease-purchase contracts. In lease-purchase transactions, the seller/landlord transfers the construction to the buyer/tenant for use before determining whether to acquire it entirely at the end of the lease period. Requiring the buyer/tenant to pay more than 70% of the contract value upfront is similar to giving the buyer/tenant no choice but to purchase the construction.

3. Real estate trading companies must use bank accounts to receive payments, rather than cash.

Article 48.2 of REBL 2023 stipulates that project investors, real estate trading enterprises, and real estate service business enterprises must receive payment for real estate business contracts or real estate service contracts via bank accounts. Apart from these subjects, other parties have the option to agree on payment terms as outlined in Article 48.1 of REBL 2023.

4. Guarantee in the sale, lease-purchase of off-plan construction

REBL 2023 maintains the provision from REBL 2014 requiring project investors to obtain bank approval for a guarantee covering the investor's financial obligations to the buyer or tenant in the event of failure to deliver the construction as promised. Under the current regulations, conducting the sale or lease-purchase of off-plan residential construction without a contract with a capable commercial bank to provide a guarantee for the financial obligations of the investor when the property is not delivered according to the agreed schedule may result in fines ranging from 400,000,000 VND to 600,000,000 VND and the signing of a financial obligation guarantee contract is required (Article 58.3.d, 58.6.h of Decree 16/2022/ND-CP).

However, on the customer's side, REBL 2023 introduces a new provision: When signing a contract for the sale or lease-purchase of off-plan residential constructions, the buyer or tenant has the option to choose whether or not to have a guarantee for the financial obligations of the investor. According to the current contract templates for the off-plan construction sale/lease-purchase under Decree 02/2022/ND-CP, details regarding the guarantee contract, including the number, date of the contract, and a notarized copy of the contract, must be clearly stated. In accordance with the newly introduced provision in REBL 2023, contract templates for the sale/lease-purchase of off-plan construction will need to be modified accordingly.

This new provision provides flexibility by allowing buyers or tenants to choose whether or not to include a warranty for the investor's financial commitments. While this option may help to save expenses and procedures for all parties involved, it also lays responsibility on the buyer or tenant, who must carefully weigh the decision not to seek a warranty before signing the contract.

Conclusion

Overall, REBL 2023 aims to protect the legal rights and interests of parties involved in real estate transactions, especially the buyer, who is often considered the party with little opportunity to negotiate. The changes to REBL introduce stricter rules for off-plan real estate transactions, aligning more closely with standard transaction practices. However, mandatory cash transactions might pose challenges for some individual buyers, mainly rural or elderly customers who may not have bank accounts.

Disclaimer: This Legal Update is intended to provide updates on the Laws for information purposes only, and should not be used or interpreted as our advice for business purposes. LNT & Partners shall not be liable for any use or application of the information for any business purpose. For further clarification or advice from the Legal Update, please consult our lawyers: Ms Minh Vu at minh.vu@lntpartners.com