Introduction

On 27 and 28 November 2023 respectively, the two foundation Acts of the real estate sector i.e. the Law on Residential Housing No. 27/2023/QH15 (the “LRH 2023”) and the Law on Real Estate Business No. 29/2023/QH15 (the “LREB 2023”) were passed by the Vietnam National Assembly in its 6^th meeting session. These laws, which shall take effect from 01 January 2025, are expected to solve some constant legal issues and enhance the sustainability, and transparency of the Vietnam real estate market in the future. Among several updates, highlighted below are the key changes that may be of interest to market participants.

1.      More tightening on launching a real estate project for sale

To launch a residential housing development project to the market, the developer is required to meet certain requisite conditions such as:  possessing lawful project land use rights[1], obtaining project approval[2], construction permit[3], completing building foundation works[4], obtaining bank guarantee (for off-plan residential projects)[5], obtaining a confirmation from the provincial construction authority[6] and so on.

However, in reality, some developers tried to collect advance payments from their homebuyers while not fulfilling all such requirements due to homebuyers’ lack of information about the project. The LREB 2023, which requires residential housing developers to make such information transparent and requires relevant authorities to act as a final gate-keeper, is expected to address the past issue.  Accordingly, to launch a project for transactions, the LREB 2023 requires a residential housing project developer:

(i)To fulfill all financial mandatory obligations to the State[7]:

(i)To have obtained the approvals required for off-plan real estate sales[8];

(ii)To meet the requirements for off-plan property sales and publicize the project details on its website and on the information portal on residential estates controlled by provincial People’s Committees[9]. The disclosed must include principal permits and papers of the project, namely contracts for real estate transfer transactions, technical design approvals, construction permits (or equivalences), notices of construction commencement, completion certifications on technical infrastructure or foundation works, collateral information on the real estate (if any).

The requirement for publicizing the information about properties launched for transactions has become mandatory[10], and non-compliance with this clause may be considered as “frauds, defrauds, or scams in real estate business activities” which is one of the prohibitions under the LREB 2023[11].

2.      Clarification on real estate business scope of Foreign-invested enterprise (“FIE”) and overseas Vietnamese

A noteworthy clarification in the LREB 2023 is that an FIE, which is not subject to foreign investment procedure under the Law on Investment (i.e. those with less than 50% foreign-owned capital), has the same real estate business scope as a local real estate business[12]. This has significantly improved the interpretation of FIEs in real estate business so far in relevant laws, which commonly treats a real estate business FIE even with 1% foreign-capital involvement, and also widens the business scope of those FIEs, for example, purchasing and/or leasing finished residential units, infrastructured land lots for sale and/or lease[13].

An overseas Vietnamese with a Vietnamese citizenship holding is entitled to do real estate business in the same scope as his/her Vietnamese locals do, while an overseas Vietnamese without a Vietnamese citizenship holding can do real estate business in the same scope permitted for FIEs.

3.      Financial mobilization in a residential housing project

Financial mobilization sources for residential housing development in the LRH 2023 are listed in a more apparent and logical manner as compared to its predecessor[14]. Accordingly, a developer may obtain financing from advance payments of its homebuyers, capital from its partners by way of joint venture, business cooperation, or loans from banks (incorporated within Vietnam only), capital raised from its issuance of stocks and/or corporate bonds, foreign-invested capital and “other legit sources”.

It happened in the past loans by a foreign-invested developer in Vietnam were not accepted by the State Bank because this kind of capital was not clearly written in the previous LRH. The State Bank interpreted that the housing developers were supposed to obtain loans from banks within Vietnam only.

LRH 2023 mentions “direct foreign-capital” as a legitimate financial source for housing development projects[15]. However, there needs further clarification from the State Bank of Vietnam to define if shareholder loans by FIEs in real estate development may be assumed to fall under this capital source.

It is also noteworthy that using capital raised for the project development must be strictly adhered[16], otherwise may be subject to sanctions by law. This is expected to address the aftermaths by misusing capital from the rampant issuance of corporate bonds by some real estate developers.

4.      More controls on payment collection by developers in respect of off-plan real estate projects

LREB 2023 stipulates a real estate developer is permitted to collect deposit amounts from its homebuyers only after it has met requirements for putting an off-plan property project into transactions, and the maximum deposit amount collectable is not more than 5% of the property sale price[17]. This is expected to address the trend that many developers tried to make use of gaps between the Civil Code and the LREB on deposit collection while not completing conditions for housing transactions under the LREB.

Upon transacting the then the first payment shall not be over 30% of the sale price and gradually up to 50%[18] or 70%[19] of the sale price before hand-over of the property to the buyer[20]. The developer is entitled to collect up to 95% of the property sale price, and 5% shall be remained until such time the developer hands the ownership title to its buyer.

5.      Bank guarantee in transactions for off-plan residential houses is under the purchaser’s power of choice[21]

Currently, a bank guarantee is required for sale or lease-purchase transactions in respect of properties under construction. Costs for having developer’s obligations guaranteed by a commercial bank are added to the transaction costs, borne by homebuyers finally. Once the LREB 2023 comes into effect, this is no longer a compulsory condition for parties as the buyers will have the flexibility to choose whether or not to have bank guarantees for the financial obligations of developers. With this change, buyers now can reduce the added cost of the guarantee when they enter into contracts with high-reputation developers if they assess that it is not worth for the extra security. The buyer’s refusal of having the bank guarantee shall be agreed upon in writing at the time of signing the contract.

However, it is also necessary to note that a bank guarantee in the LREB is originally designed to protect homebuyers’ interests, who have lesser powers in dealing with real estate developers.  Accordingly, a developer has to arrange for the bank guarantee and get it issued to its buyer within 10 days as from the transaction date or another date as agreed. In case the developer fails to deliver the purchased housing unit to the buyer as agreed, the buyer may opt to get refunded its payments from the bank who provides the guarantee. Therefore, homebuyers should be thoughtful if he/she wants to exercisethis choice.

6.      Supplementation to wholly or partially transfer a real estate development project[22]

LREB 2023 sets more conditions for transferring real estate projects, namely:

(i) The project’s investment policy shall be approved by the competent authority, and the project’s investor has been selected or recognized according to the Law on Investment.

(ii) Instead of requiring the land use right certificate as a mandatory condition for transferring the project as previously, LREB 2023 allows the developer to transfer the project if obtaining other equivalent legal documents, i.e. decision on land allocation/ land lease/ permit on land use purpose conversion issued by the competent state authority.

(iii) In case the project is mortgaged, the mortgage shall be released before the transfer.

(iv) The project is still within its registered investment term

(v)As to the partial transfer of the project, the construction items or the business purposes of the transferred part can be separated from other components of the real estate project.

These additional regulations are expected to ensure the ability to operate real estate projects after the transfer.

7.  Rebuilding and renovation of condominium buildings

LRH 2023 has a new chapter on rebuilding or renovating deteriorated condominium buildings that are not safe for residence (Chapter 5). This chapter has ended controversies on whether condominiums should have long-term use duration (like landed houses) or short-term use duration.  Accordingly, the land use right duration of condominium buildings, which is for residential use, is still with “stable and long-term use duration” as it is in landed properties. However, condominium buildings will have use duration by law. If the use duration expires and condominium buildings are so deteriorated that are unsafe for residence, as assessed by State competent authorities, then the buildings will be renovated or even demolished for re-construction as stipulated under Chapter 5 of the LRH 2023 as decided by the State competent authorities. The authorities may select eligible developers for such renovation or rebuilding works by bidding process.  In principle, condo owners are arranged for resettlment, unless they decide otherwise. They are compensated for their land use rights over the building land proportionately if they opt not to follow the resettlement programs.

Others

In addition, the LRH 2023 and LREB 2023 also have other amendments that affect real estate business. For instance, the LREB 2023 provides that those who do real estate brokerage services must possess a practicing license and must provide services through a business registered with real estate brokerage service[23]. The LRH also provides foreign capital-invested real estate enterprises may be engaged in developing social housing projects, which were previously favorable mainly to locally-owned enterprises[24].  Of note, the social housing project developers will be entitled to land use fees or land rent waiver in respect of the project land, tax incentives, etc.[25] The LRH 2023 also requires the military authorities must promptly reply to other relevant authorities on locations whether a real estate development project is subject to national defense area or not in defining which projects foreigners are permitted to own. Hopefully, this will resolve the ongoing stagnancies of housing ownership certificates issued to foreign buyers in some provinces due to land-management authorities’ uncertainty in defining the project is not subject to national defense area as required by the LRH.

In short, both laws with amendments this time have addressed some shortcomings of their previous versions while creating synchronization and consistency with other applicable laws as well. The two laws significantly affect real estate business activities, but there are still areas needing further interpretation and/or guidance from authorities by decrees or circulars. So, it is advised that those engaged into the area should further consult for a comprehensive view of the new legal framework and for better preparing their business strategies to adapt to the real estate business in Vietnam.

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[1] Article 14.1 and 24.2 of the LREB 2023

[2] Article 11.3 of the LREB 2023

[3] Article 11.4 of the LREB 2023

[4] Article 24.3 (c) of the LREB 2023

[5] Article 26 of the LREB 2023

[6] Article 14.2 (b) of the LREB 2023

[7] Article 14.2 (c) of the LREB 2023

[8] Article 24.5 of the LREB 2023

[9] Article 6 of the LREB 2023

[10] Article 8.3 of the LREB 2023

[11] Article 8.4 of the LREB 2023

[12] Article 10 of the LREB 2023

[13] Article 10.1(c) of the LREB 2023

[14] Article 112 of the LRH 2023

[15] Article 114.1(e) of the LRH 2023

[16] Article 116.3 of the LRH 2023

[17] Article 23.5 of the LREB 2023

[18] Applied to FIE developers as stipulated under Article 10.4 of the LREB 2023

[19] Applied to local developers as stipulated under Article 10.1 of the LREB 2023

[20] Article 25.1 of the LREB 2023

[21] Article 26.3 of the LREB 2023

[22] Article 40 of the LREB 2023

[23] Article 61.2 of the LREB 2023

[24] Article 80.5 of the LRH 2023

[25] Article 85.2 of the LRH 2023