Due diligence for real estate M&A transactions in Vietnam

Due diligence

Describe the legal due diligence required in the context of a real estate business combination and any due diligence specific to a real estate business combination. What specialists are typically involved and at what point in the transaction are the various teams typically brought in?

Typically, the scope of the legal due diligence for a real-estate business combination is similar to others’ industries but more focused on the real-estate projects, the land where the real-estate project is located, and related issues such as loans and encumbrances, the environment and litigation. In particular, the legal counsel of the buyer will check the following key issues:

• whether the seller or target has obtained valid title over the land, including the seller’s or target’s financial capacity to be allocated with or lease the land from the state, and whether the allocation or lease of land from the state is subject to any bidding or auction requirements;
• whether the seller or target has the right to develop the real-estate project (including the compliance with zoning);
• whether the seller or target has completed its financial obligations to the state (eg, land rent or land use fees);
• whether there are any encumbrances on the real properties (especially housing properties), or any restrictions that could affect the transfer or assignment of the real properties; and
• whether there is any dispute about the real properties or inspection or examination of the real-estate project.

In addition to the legal due diligence, the buyer may also engage other advisers to conduct the technical due diligence on the real properties (eg, compliance with the construction permit such as height of the building and other factors within the approved construction permit, or bomb and land mine clearance), and all due diligence works should be completed after execution of the non-disclosure agreement and at the same time as the negotiation process.

How are title, lien, bankruptcy, litigation and tax searches typically conducted? On what levels are these searches typically run? What protection from bad title is available to buyers, and does this depend on the nature of the underlying asset?

It depends on the nature of the transaction (either equity or asset deal). For equity deals, encumbrances over the equity interest can be independently checked at the National Registration Agency for Secured Transactions if the relevant parties choose to register the security transaction. 

Information on the security transactions over the land and the immovable assets is locally monitored and managed by the relevant Land Registration Office. Vietnam does not have a centralised system from which to conduct a search for this information. In practice, the security transaction over the land and the assets attached to land are generally not searchable by third parties, except for the current land user and other state authorities for their regulatory management purpose.

To ascertain title to the land and assets attached to the land, the buyer, through legal counsel, will need to review the originals of land title documents (especially, the certificate of land use right, ownership of residential houses and assets attached to land). Protection against encumbrance over the equity interest, shares or real estate will be based on representations and warranties (R&Ws) given by the seller and the seller’s indemnification obligation; insurance over the bad title is not common in Vietnam.

Do sellers of non-public real estate businesses typically purchase representation and warranty insurance to cover post-closing liability?

Similar to the insurance over bad title, insurance for the seller’s R&W is not common in Vietnam.

What are some of the primary agreements that the legal teams customarily review in the context of a real estate business combination, and does the scope vary with the structure of the transaction?

Depending on the nature of the real properties, the material agreements to be reviewed by the legal teams will vary, such as (1) for residential housing development project, the land lease decision and the land lease agreement with the state, or land allocation decision, and if the houses have been sold to the homebuyer, the template sale and purchase agreement (which must be registered with the competent authority); (2) for office or commercial building or industrial properties (eg, warehouses), the land lease decision, the land lease agreement and the template lease agreement with tenants; or (3) for hotels, the land lease decision, the land lease agreement and the hotel management service agreement. In addition, agreements for the restructuring of the target will also need to be reviewed.