Introduction
New provisions on guarantee agreement for off-plan housing


Introduction

Bank guarantees significantly contribute to promoting the activities of buying and selling goods as well as providing services in general, creating trust for the parties entering into contracts. Circular 07/2015/TT-NHNN (Circular 07) amended and supplemented by Circular 13/2017/TT-NHNN (Circular 13) has created a relatively complete legal framework for bank guarantees. However, the implementation of Circular 07 in the last few years has revealed some limitations in relation to the regulations governing guarantees for off-plan housing, the lack of regulations governing guarantees on digital platforms and nonconformity with other legal documents, such as the Civil Code 2015 or the Law on Real Estate Trading 2014. To make the real estate market transparent and guarantee bond market security, the government has introduced new rules, regulations, standards and restrictions relating to real estate transactions and bond issuance. On 30 September 2022, the Governor of the State Bank of Vietnam issued Circular No. 11/2022/TT-NHNN on Bank Guarantee (Circular 11), which will come into force on 1 April 2023 and replace Circular 07 and Circular 13.

This article discusses the amendments to the regulations under Circular 11 that relate to guarantee agreements for off-plan housing. For details of the amendments that relate to e-guarantees and guarantees for the issuance of enterprise bonds, see "New regulations on bank guarantees in Vietnam".

New provisions on guarantee agreement for off-plan housing

Amendments and supplements in interpretation of terms
The prominent feature in the regulation on the interpretation of terms is the amendment of the definition of guarantee for off-plan housing. Accordingly, off-plan housing guarantee means a type of bank guarantee whereby the guarantor that is a commercial bank undertakes to act on behalf of the obligor (that is the investor) to fulfil their financial obligations to the obligee (that is the buyer or the tenant-buyer) in the event that the investor fails to transfer the house to the buyer on the agreed-upon schedule and fails to fulfil or insufficiently fulfils their financial obligations under the signed purchase contract or lease-purchase contract. Although a definition of "guarantee for off-plan housing" has been regulated in Circular 13, the interpretation of the term is not sufficiently comprehensive.

In addition, Circular 11 defined the term "guarantee agreement for an off-plan house" as a guarantee issuance agreement between the commercial bank and investor and related parties (if any) about the bank's acceptance to provide the investor with a guarantee (which is a guarantee commitment) regarding the sale or hire-purchase of the off-plan houses. This new definition is meant to distinguish between:

  • a "guarantee agreement for an off-plan house", which is a "guarantee issuance agreement" stipulated in article 3.12; and
  • a "guarantee contract", which is one of two types of "guarantee commitment" stipulated in article 3.14.

Expanding scope of guarantee
The old regulation provided that the balance of guarantee for the investor should be the total amount that the investor has received from purchasers according to the agreed-upon schedule before the date of conveyance. The new regulation is that the balance of the guarantee for the investor is the sum equivalent to the investor's financial obligation. A notable provision recognising the extended scope of bank guarantees is the change in the content from "total amount which the investor has received from purchasers " to "total amount of financial obligations of the investors".

This amendment is appropriate with the practice on the market because if the investor fails to fulfil or delays the delivery of the purchased apartments, the investors may be obliged to pay a fine or compensate for any arising harm or costs, in addition to a refund of the purchasers' advance money. This new regulation will help to better protect homebuyers' interests – under the previous regulation, investors frequently availed themselves of the excuse of the bank's refusal to extend the scope of guarantee of other their financial obligations under an apartment sale and purchase contract. Accordingly, purchasers can, based on this new regulation, negotiate with investors about the scope of the guarantee, which will include the total amount of financial obligations of the investors.

Supplementing regulations on guarantee agreement for off-the-plan housing
Under Circular 11, guarantee agreements for off-the-plan housing are effective from the date they are signed until the expiration of guarantee obligations under all letters of guarantee and all obligations of the investor towards the commercial bank under the agreement have been completed.

The guarantee agreement for off-the-plan housing must contain the contents listed in article 15.2 of Circular 11, as well as the following:

  • The commercial bank must issue a letter of guarantee to the purchaser when receiving the contract for the purchase or hire-purchase of the house before the deadline for transfer of the house under the contract.
  • The commercial bank and the investor specifically agree that the commercial bank or investor will send a letter of guarantee to the purchaser after the issuance of the letter of guarantee.
  • Financial obligations of the investor.
  • The application for guarantee sent by the purchaser to the commercial bank must be enclosed with the issued letter of guarantee.

In a typical guarantee transaction, the bank will deliver a letter of guarantee to the beneficiary. However, each letter of assurance sent to a homebuyer will cost the sender money, especially for off-the-plan housing, where there will be many receivers for each purchase respectively. Therefore, it will also be helpful for homebuyers to know their rights and information if the guarantee contract specifies which party is responsible for providing the guarantee letter to the buyer. At the same time, it serves as the foundation for the bank and investor to agree on the costs incurred if the investor does not give letters of guarantee to its clients.

The guaranteed obligations are the investor's obligations under the apartment sale and purchase contracts. The principle of allowing the expansion of the guarantee scope, as recognised in this new circular, is also implemented by the requirement that the guarantee contract explicitly state the investor's financial obligations, as opposed to the previous condition that the guarantee contract only be limited by the total amount that the investor has received from purchasers.

Guarantee obligation remains valid even if bank has been removed from list of eligibility
Under the new Circular's transition clause, commercial banks suspended from guaranteeing off-the-plan houses because they no longer meet the conditions must continue to perform signed agreements and commitments until the guarantee obligations are terminated. As a result, commercial banks that no longer meet the requirements for guaranteeing capacity (such as Dong A Bank and Construction Bank in reality) are excluded from the list of the banks that can provide the service of guarantee for off-the-plan housing. Therefore, they must continue to perform the signed agreement and the issued letter of guarantee for off-the-plan housing until the guarantee obligation terminates.

For further information on this topic please contact Thanh Minh Vu, Anh Thu Le or Dang Thuy Linh at LNT & Partners by telephone (+84 28 3821 2357) or email ([email protected], [email protected] or [email protected]). The LNT & Partners website can be accessed at www.lntpartners.com.