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Legal notes of transfer of real estate projects in Vietnam

Legal issues needs to be concerned.


LEGAL CONDITIONS WHEN TRANSFERING REAL ESTATE PROJECTS


Basically, the transfer of existing real estate projects is governed by the Law on Investment 2020 and the Law on Real Estate Business 2014 (“Law on Real Estate Business 2014”). In which, real estate projects whose investors have been approved or have been granted an investment registration certificate under the Investment Law 2020 shall comply with the provisions of the law on investment (Article 9.2 of Decree No. 02/2022). The reality of the market shows that most of the transferred real estate projects have been licensed for implementation before the Investment Law 2020 took effect in early 2021, so the scope of this article will focus on providing legal notes in accordance with the provisions of the Law on Real Estate Business 2014.


For target project


The investor has the right to transfer the whole or a part of a real estate project if that project (i) has been approved, has a 1/500 detailed planning or is approved for the master plan; (ii) compensation and site clearance have been completed; (iii) must have a certificate of land use right ("LURC"); (iv) the land use right is not disputed, not distrained to secure the enforcement of a judgment or to comply with an administrative decision of the government agencies; and (v) no project or land revoked.


It is worth noting that from March 1, 2022, the transfer of real estate projects will be applied in case the project is being implemented according to the approved schedule and contents (Article 9.1, Decree 02/2022). So, will projects that are behind schedule - which is the common situation of most real estate projects - be transferred or not? If in order to be transferred, the investor must adjust the project implementation schedule and if this adjustment falls into the case of adjustment of approval for investment policies under the Law on Investment 2020, then, transferring the project to any other investor will have to comply with the Investment Law 2020 or the Law on Real Estate Business 2014?


In addition, although the law does not prohibit the transfer of real estate projects that are in the process of being implemented, in fact, in some investment policy decisions, the State requires the project to be completed with construction before transfer. At that time, the seller cannot transfer the unfinished project, but needs to work with the buyer on the financial plan and how to finance the project, ensuring that the project meets the conditions for transfer. before transferring to the buyer.


For the buyer


The transferee of a real estate business project must be a real estate business enterprise with sufficient financial capacity and commitment to continue the implementation of construction investment and business, ensuring the progress and the content of the project (Article 49 of the 2014 Real Estate Law).


Regarding financial capacity, if the project has a land use scale of less than 20 hectares, the investor must have equity not less than 20% of the total investment capital of the project; if the project has a land use scale of 20 hectares or more, the investor must have equity not less than 15% of the total investment capital. Equity is determined according to the most recent audited financial statements or the results of independent audit reports (made in the year or the preceding year) of the operating enterprise. In case of newly established enterprises, equity is determined according to the actual contributed charter capital (Article 4.2 of Decree 02/2022).


Authority approval


Real estate project transfer is not only a contractual relationship between the seller - the buyer and is decided by the parties themselves, but depends heavily on the approval of the State agency. The parties in the transaction should note that in addition to the investment management agency or the provincial People's Committee having the authority to authorize the transfer of real estate projects, according to competition law, the decision of the National Competition Commission is also extremely important if the transaction structure to achieve the project assignment is in the forms of economic concentration and the threshold for notification of economic concentration. Sanctions for violations of economic concentration notices are quite heavy, showing the Government's firmness against competition law violations, specifically, depending on the violation, the fine will be from 0 .5% to 5% of the total revenue in the relevant market in the fiscal year immediately preceding the year of violation by the violating enterprise (Articles 14 and 15 of Decree 75/2019).


Tax incurred


If the parties indirectly transfer the real estate project through the method of transferring shares, but at the time of transfer, the target project has not yet been constructed but only has land use rights, instead of the selling Shareholders are only subject to personal income tax due to the transfer of shares at the tax rate of 0.1% of the selling price, the seller has the risk of being thought that they are actually transferring the land use right, so they have to pay individual income tax from real estate transfer at a tax rate of 2% on the sale price.


"HEALTH EXAMINATION" ON THE TARGET PROJECT AND THE PROJECT COMPANY


Taking over a real estate project that is not laid by yourself always requires the buyer to identify potential risks in advance to have a plan to deal with risks, overcome consequences, and at the same time quantify damages when potential risks become real problems. Potential risks will be identified by experts through the 'physical examination' of the target project and the owner, which in professional terms is called legal due diligence (LDD) and financial due diligence (FDD). Like other M&A transactions, in real estate project transfer, the buyer will perform legal due diligence to assess the legality, compliance, and future legal risks of the target project.


Depending on the structure of the transaction, whether it is a direct transfer of the project or an indirect transfer of the project through a method of transferring capital or land use rights, the purchaser will legally examine only the target project or /and for the project company. If the legal due diligence process of the project company must include legal review and assessment of many issues of the company such as business establishment, capital, labor, compliance, taxes, commercial transactions, etc. , loans and secured transactions, litigation and lawsuits, the legal due diligence process for the target project will mainly focuses on the land, the project and the assets on the land.


Land use rights


In general, the buyer and the consulting team easily determine the legal basis of the land use right based on the land use right certificate, land allocation decision, land lease and land lease contract. However, it is difficult for the buyer and the consulting team to determine the legality of the entire process of land allocation and land lease. In other words, the acquirer knows the outcome but has no information or is unable to assess the legitimacy of the steps taken to achieve it. Meanwhile, according to regulations, if the land allocation or land lease is not done according to the right subjects or authority, the land use rights may be revoked (Article 64.1(c) of the 2013 Land Law).


Financial obligations to the land


Similar to when determining the land use right of the project, the buyer can easily determine whether the seller has fulfilled its financial obligations to the land based on the notice of payment of land use levy, tax notice and documents proving that such financial obligations have been fulfilled to the State. However, it is difficult for both the seller and the buyer to confirm the legality and rationality of the appraisal and determination of land prices by state agencies. In fact, there are many cases when the land price applied to the project's land is found to be unsuitable, lower than the market price, causing loss of public property, the project may be frozen and withdrawn. To a lesser extent, the investor may have arrears in the land use levy and land rent difference. As such, outside parties interested in legal issues should also pay attention to the agreement to determine which party's responsibility when required to pay the difference.


Form of land use and project objectives


Users of land leased with annual payment have more limited rights than users of land that receive allocated land or leased land with a one-time payment. The project investor who is allowed to lease land with annual payment will not be able to transfer that real estate project, but may only sell land-attached assets when completing the construction of works on the land in accordance with the detailed construction planning and investment project approval and meet other conditions (Article 175.1(c) and Article 189 of the Land Law 2013).


Another example, if the investment certificate of the project only records the investment goal as construction and business of a tourist area, the transferee may only continue to perform that goal, but can not sell it and can not make long-term rental of the products of the resort tourism project, unless the project's objectives are adjusted.


Risk of project being terminated due to delay in implementation


Not all, but the majority of real estate projects, due to many factors, are often behind schedule commitments. In principle, land allocated or leased by the State for the implementation of an investment project but has not been used for a period of 12 consecutive months or the land use progress is 24 months behind the recorded progress, only is extended for 24 months and must pay rent and land use fees for the extended period. If the extension period expires but the investor still has not put the land into use, it will be confiscated by the State without compensation except for force majeure cases (Article 64.1 (i) Land Law 2013). If the land is taken back by the State, the investment project will also cease to operate (Article 48.2(d) Investment Law 2020).


Project mortgage


To implement the project, the investor needs to have capital support from commercial banks and ensure the ability to pay with the project itself, land use rights, future assets and other sources of income from the sale of assets formed in the future. The real estate project transfer transaction is therefore inseparable from the relationship with the third party receiving the collateral. The principle is that the recipient of the secured property must agree, before the seller can transfer the mortgaged project to the buyer. Not only that, depending on the payment structure and transaction cash flow, the seller and the buyer may have to work with the bank to release the collateral, buy the property at auction if the property is in bad condition handled to secure obligations or transfer rights - obligations between parties in credit contracts, mortgage contracts.


Comply with regulations on sale of real estate formed in the future


Some real estate projects are transferred to the buyer after the seller has raised capital through the sale of real estate formed in the future. At that time, the buyer should pay attention to the compliance of the seller at the capital raising stage. In many cases, the seller has not performed the acceptance test, completed the construction of technical infrastructure or completed the foundation of the apartment building (Article 55.1 of the Law on Real Estate Business 2014). There are also many cases where the investor did not notify the provincial housing authority that the house was eligible to be sold (Article 55.2 of the Law on Real Estate Business 2014) but opened for sale or did not have a guarantee from a commercial bank to ensure the financial obligations of the investor when the house is not handed over on schedule (Article 56 of the Law on Real Estate Business 2014) but still signs a purchase and sale contract with the customer.


CONDUCT TRANSACTION


The transfer of a real estate project must be established by transaction documents between the seller and the buyer, the most basic of which is the purchase and sale contract. The legal risks that have been identified during the project health check and the project company will become the conditions of the transaction, obligations, commitments, undertakings and warranties specified in the transaction documents subject to agreement between the parties.


Prerequisites


These are the decisive conditions that, if not satisfied, the transaction cannot be executed. For real estate transfer transactions, the prerequisites will usually include the approval of the State agency to allow the transfer, fully meeting the statutory conditions for the project to be allowed to transfer, remediate violations discovered during legal due diligence. The contract of sale will terminate if the prerequisites do not occur, but the parties should be aware of handling the consequences of contract termination, such as whether the seller must refund all or part of the amount received from the buyer or not, whether there is a penalty for breach or compensation for damage, compensation for loss or not, sharing of costs that one party has spent to perform the work up to the termination of the contract...


Payment


High-value real estate project transfers often have complex payment structures with multiple payments and the involvement of third parties such as escrow banks, guarantee bank, security transaction registration agency. Corresponding to the additional appearance of a party in the transaction, the parties must establish additional transaction documents such as escrow contract, letter of guarantee, mortgage contract and secured transaction registration documents. These documents of course must be prepared in accordance with the provisions of law and not only that, but must be consistent with the payment agreement of the parties in the sale and purchase contract. Otherwise, there will be contradictions and differences between the above documents and then the parties need to agree on which document will take precedence if the parties have not previously determined this principle.


Terms of representation, warranties


Like any other property purchase and sale transaction, although the common goal of the seller and the buyer is a successful transaction based on a "win - win" relationship, in essence, the rights & interests of both parties are still the same. Because of the two opposing sides, the parties will tend to claim more rights for themselves and ask the other party to perform more obligations and responsibilities. In the real estate transfer transaction, the seller is usually the party that has to perform more obligations and has more guarantees because they are the previous project implementation party, so they are responsible for the risks, legal risks of the project.


The seller's representations and warranties will usually refer to the status of the project and the project company on the principle of "selling as-it-is" up to the time of signing the sale contract or the date of completion of the delivery. The legal issue is how long the seller is responsible for its own representations and warranties, forever or after a certain period from the time of signing the contract. Generally, the parties will categorize the seller's representations and warranties into basic and specific groups, whereby the seller will be permanently liable for the underlying representations and warranties (authority to sign contract, internal approval, the seller's right to dispose of the project, the project is eligible for transfer, etc...) and will be responsible for a certain period (usually 2 - 5 years) for specific commitments and warranties (financial obligations for land, disputes with third parties, etc.).


Along with the provisions on warranties and guarantees of the parties, the sale and purchase contract also needs to have provisions on sanctions when there is a breach of the warranties and guarantees such as termination of the contract or fines for violations, compensation for damage. /.


A few notes above are not all, but they are enough to show that real estate project transfer is a complicated issue, involving many different legal regulations, potentially legal risks that if not determined, either the seller or the buyer may bear future losses. The parties to the deal are therefore not only interested in the business, commercial and financial aspects of the project, but also need to pay attention to the legal issues that follow, and need help from a team of professional consultants to identify and control risks for each party.

GV Lawyers

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