Financing

Secured lending

Discuss the types of real estate security instruments available to lenders in your jurisdiction. Who are the typical providers of real estate financing in your country? Are there any restrictions on who may provide financing?

The security instruments available to lenders include collateralisation, pledges, security deposits and guarantees. Collateralisation is used most by lenders, as it allows lenders to retain the property’s title document even though the borrower is in the possession and use of the property. The debtor cannot assign the property without the title document, but can exploit the property commercially and thus generate earnings to repay the loan. A collateral must be notarised and registered with the relevant land registration department to be valid and enforceable. The collateralisation may grant a lien and charge upon the real estate collateral if it is clearly stated. A valid collateralisation with a lien or charge can operate as a title conveyance to the lender.

Leasehold financing

Is financing available for ground (or head) leases in your jurisdiction? How does the financing differ from financing for land ownership transactions?

In the context of normal rent of property between private parties, financing is available for both ground and head leases without much difference from financing for land ownership transactions. The most notable difference is that the borrower may have to use other assets as collateral for the loan if his or her interests in the ground (or head) lease cannot cover the loan.

Form of security

What is the method of creating and perfecting a security interest in real estate?

A real estate collateralisation is perfected by way of notarisation and registration with the relevant Land Registry department. A pledge, however, requires only notarisation to be valid.

Valuation

Are third-party real estate appraisals required by lenders for their underwriting of loans? Are there government or industry standards for appraisals? Must appraisers have specific qualifications or required government or industry certifications? Who is required to order the appraisal?

Real estate appraisals may be conducted by either a lender or a professional appraiser. If it is a high-value property, appraisal is often undertaken by a professional appraisal company. Generally, to obtain a practising licence for property valuation, real estate appraisers must:

  • possess a university degree on price valuation or have completed a training course on price valuation at a competent institution;
  • have at least three years’ experience; and
  • pass an examination administered by the Ministry of Finance.
Legal requirements

What would be the ramifications of a lender from another jurisdiction making a loan secured by collateral in your jurisdiction? What is the form of lien documents in your jurisdiction? What other issues would you note for your clients?

Lenders from other jurisdictions may grant loans to investors in Vietnam without the necessity of qualifying to do business in Vietnam. Generally, loans with terms of more than one year must be registered with the State Bank of Vietnam; otherwise they are voidable. Lenders are subject to corporate income tax from earnings from the loans, which must be withheld by borrowers.

Foreign lenders cannot hold a direct collateralisation or pledge on a borrower’s real property, but can do so with other intangible property (such as shares). Foreign lenders may appoint a bank in Vietnam as agent to hold collateral or pledges over the borrowers’ properties. There are two separate security registration systems available for real estate property and non-real estate property. Real property security must be registered with the Land Registry. Non-real estate property security must be registered with the National Registration Agency for Secured Transaction. Security instruments are assignable without any restriction.

Loan interest rates

How are interest rates on commercial and high-value property loans commonly set (with reference to LIBOR, central bank rates, etc)? What rate of interest is legally impermissible in your jurisdiction and what are the consequences if a loan exceeds the legally permissible rate?

The State Bank of Vietnam issues a minimum lending rate with a capped margin from time to time to which credit institutions must adhere. Short-term loans granted by credit institutions to borrowers are subject to a rate capped by the maximum lending rate issued by the State Bank from time to time. Interest rates for loans between businesses are subject to mutual agreement, but cannot exceed 50 per cent of the loan principal published by commercial banks, and interest on overdue outstanding payments must not exceed 150 per cent per year. Fees and lender costs are not included in the interest for calculation of legally permissible interest rates.

Loan default and enforcement

How are remedies against a debtor in default enforced in your jurisdiction? Is one action sufficient to realise all types of collateral? What is the time frame for foreclosure and in what circumstances can a lender bring a foreclosure proceeding? Are there restrictions on the types of legal actions that may be brought by lenders?

The borrower is deemed in default if he or she is unable to repay the loan as agreed without any need for further action by the lender. Although the laws on lending grant lenders the right to foreclose the secured assets at the judgment of competent courts on the default of the debtor, the lender may choose to reserve the rights and execute a repayment schedule with the debtor instead. The last recourse is probably to initiate legal proceedings against the debtor.

The concept of ‘one action’ does not exist in Vietnamese law. Lenders can dispose of assets used as collateral for the loan. If the proceeds from the disposal of the assets are not sufficient to repay the loan (including the principal, interest and other costs), the lender may be pursued for the deficiency. Vietnamese law does not set out specific timeframe for foreclosure. The timeline for such will therefore depend on various factors, such as the method of foreclosing and the willingness of debtors or the party in actual possession of the property to cooperate. In practice, the whole process may take from six to 12 months to complete.

Pursuant to the Civil Code, the lender may not bring an action against the guarantor if the guarantor proves that the debtor can repay the debt (by way of foreclosure) with the lender. There is no legal restriction on the type or the number of legal actions that can be taken by lenders against defaulting borrowers to recover debt.

Loan deficiency claims

Are lenders entitled to recover a money judgment against the borrower or guarantor for any deficiency between the outstanding loan balance and the amount recovered in the foreclosure? Are there time limits on a lender seeking a deficiency judgment? Are there any limitations on the amount or method of calculation of the deficiency?

If there is a deficiency between the amount recovered in foreclosure and the outstanding loan, the lender may file a claim against the debtor or debtors to recover a money judgment for the deficiency. Aside from bankruptcy proceedings, there are no limitations on the amount or the method of calculation of the deficiency.

Protection of collateral

What actions can a lender take to protect its collateral until it has possession of the property?

For lenders to protect their collateral, they should properly register it with the competent authority. In addition, the lender may check the collateral from time to time for information about its status. There is no concept of receivership under the laws of Vietnam. The lender must have an assignment from the borrowers to collect rent directly during the foreclosure. Under the laws of Vietnam, a pledge can be a mortgagee in possession, whereby the mortgagee can possess the collateral. The lender will assume the risks associated with the assets when in possession.

Recourse

May security documents provide for recourse to all of the assets of the borrower? Is recourse typically limited to the collateral and does that have significance in a bankruptcy or insolvency filing? Is personal recourse to guarantors limited to actions such as bankruptcy filing, sale of the mortgaged or hypothecated property or additional financing encumbering the mortgaged or hypothecated property or ownership interests in the borrower?

Security documents provide for recourse to the mortgaged assets only. If the collateral is properly registered, the loan is a secured debt and has first priority in bankruptcy or insolvency filings.

Cash management and reserves

Is it typical to require a cash management system and do lenders typically take reserves? For what purposes are reserves usually required?

It is not common to require case management systems to be lenders or for the lender to take reserves.

Credit enhancements

What other types of credit enhancements are common? What about forms of guarantee?

Other types of credit enhancements, such as letters of creditor or holdbacks, are common. A guarantee must be in writing and may be in various forms, such as guarantee of completion, performance bond or payment guarantee by a third party. A payment guarantee may be comparable to a limited recourse guarantee for losses or the entire debt. To secure the guarantee, the guarantor is also required to provide collateral.

Loan covenants

What covenants are commonly required by the lender in loan documents?

The common covenants required by the lender of the borrower are:

  • to use the loan for the purpose specified in the loan documents;
  • to repay timely the loan and interests;
  • to notify the lender of any material effects to its business or of any default;
  • to notify the lender of its financial status from time to time; and
  • to not to make any changes to the collateral.
Financial covenants

What are typical financial covenants required by lenders?

Typical financial covenants required by lenders include the ceiling ratio between the principal and the collateral value, the ratio of total borrowings to tangible net worth (gearing) or debt service coverage ratio. Lenders always require the borrower to update their periodical financial reports. It is also common to require ongoing appraisals of the collateral’s value.

Secured movable (personal) property

What are the requirements for creation and perfection of a security interest in movable (personal) property? Is a ‘control’ agreement necessary to perfect a security interest and, if so, what is required?

Upon collateralising, the collateral as movable property must be registered with the National Registration Agency for Secured Transactions to perfect the security interest, by which the lender’s interests to the collateral gain first priority.

Single purpose entity (SPE)

Do lenders require that each borrower be an SPE? What are the requirements to create and maintain an SPE? Is there a concept of an independent director of SPEs and, if so, what is the purpose? If the independent director is in place to prevent a bankruptcy or insolvency filing, has the concept been upheld?

It is not common to require each borrower to be an SPE in Vietnam. The law treats an SPE like other entities and there is no independent director requirement.