Acquisitions and leases

Ownership and occupancy

Describe the various categories of legal ownership, leasehold or other occupancy interests in real estate customarily used and recognised in your jurisdiction.

Real estate in Vietnam means the assets on the land (eg, trees, crops and any structures thereon) and the land use rights over the land. Therefore, legal ownership in real estate includes ownership over the tangible assets and the land use rights, and ownership over the assets is limited to the duration of the land use rights.

The land use rights vary depending on the land category in terms of the extent and duration of the rights. Regarding residential housing investment projects for sale or for lease in Vietnam, the state will allocate to the project developer (either local or foreign) the land for a duration equal to the duration of the project. A foreign homebuyer of such a project is entitled to ownership over the property for a maximum term of 50 years, while a local homebuyer will be entitled to stable and long-term use of the land (similar to freehold). Rights over real estate are recognised under a certificate of land use rights and the assets attached thereon issued by local government.

Generally, a land user with a land use rights certificate may exercise rights over the real estate, such as the right to transfer, lease, sublease, exchange, donate, contribute as capital, bequeath or mortgage the real estate. However, the extent of these rights varies depending on the category of the land. For example, agricultural land use rights may not be freely transferred to others in some cases.

Foreign investors may acquire land use rights via land lease from the Vietnamese authorities or industrial park developers, or by way of capital contribution from local partners. When leasing land from Vietnamese authorities, foreign investors may elect to pay rent annually or once for the entire lease duration. In the case of annual rental payment, the rent may be reviewed from time to time by the local authority and the land users may be subjected to restricted land use rights (eg, cannot transfer to others if not approved by local authority). In the case of a one-time payment of rent for the entire lease duration, the land user has the same land use rights as local land users do. With land use rights contributed by local partners, the to-be-formed entity is entitled to the land use rights granted to the local partner.

Pre-contract

What are the typical pre-contractual steps?

Memoranda of understanding or term sheets, commonly used in Vietnam, are a form of pre-contractual agreement before the execution of a binding contract of sale. As long as the agreement explicitly states that it is non-binding, then it is not enforced by the courts.

In principle, what the agreement is called is not determinative of its enforceability. The Civil Code 2015 provides that any agreement giving rise to lawful rights and obligations to the parties in a transaction is a binding agreement (unless the parties agree otherwise) provided that the contractual parties are of full civil capacity; enter into the contract at their free will; and the purpose and substance do not violate the prohibition provisions of the laws and moral of society. Therefore, whether it is a term sheet, letter of intent, memorandum of understanding or an in-principle agreement used as a pre-contract document for the transaction, in Vietnam all of these may be enforceable if they satisfy the above principles. Before entering into a binding agreement, either party may walk away from the deal without any liability if so stipulated in the agreement.

Contract of sale

What are typical provisions in a contract of sale?

Typical provisions in a contract of sale for property include:

  • the identification of the parties to the transactions;
  • details of the property;
  • price and payment schedule;
  • rights and obligations of the parties;
  • representations and warranties;
  • breach and termination; and
  • dispute settlement.

 

In real property transactions, the seller usually provides representation and warranties, including good title in the property, no collateralisation to secure for any financial liabilities, no existing encumbrances or disputes and no rights of third parties. As title search is not compulsory under Vietnamese law and there is no public system to carry out a title search over real estate property in Vietnam, the certificate of land use right is the main evidence to present the good title of the seller in the property.

Any income tax incurred from the sale of property is imposed on the seller, unless the buyer accepts to undertake that liability.

The down payment is usually 10 per cent of the property value, which is normally held by the seller as a security performance of the transaction. However, when dealing with high-value properties an escrow arrangement may be used. The buyer may forfeit the security performance if the buyer unilaterally and unduly terminates the transaction. Similarly, the seller may have to return the security and pay the penalty equivalent to the amount if the seller unilaterally and unduly terminates the transaction. The parties can contractually agree otherwise.

The seller bears any applicable income tax while the buyer pays the registration tax (unless otherwise agreed by the parties) and the value added tax (10 per cent of the sale price), if either party is an entity. The seller remains liable for any land tax assessed to, or utility charges at, the property until the legal title is transferred to the buyer. In practice, parties agreed on a fixed sale price until closing.

Environmental clean-up

Who takes responsibility for a future environmental clean-up? Are clauses regarding long-term environmental liability and indemnity that survive the term of a contract common? What are typical general covenants? What remedies do the seller and buyer have for breach?

The Law on Environmental Protection requires the persons causing the harm to the environment to compensate for damages caused thereby and to restore the environment as much as possible to the condition prior to the damage.

Once title is transferred to the buyer, the buyer is liable for environmental damages to the property, including any environmental clean-up as required by the competent authority. A survival provision is not common and it does not shield the existing owner from environmental liability with the authority.

If the seller has agreed to indemnify the buyer, then the buyer may seek indemnity from the seller for any damage incurred on the buyer.

Lease covenants and representation

What are typical representations made by sellers of property regarding existing leases? What are typical covenants made by sellers of property concerning leases between contract date and closing date? Do they cover brokerage agreements and do they survive after property sale is completed? Are estoppel certificates from tenants customarily required as a condition to the obligation of the buyer to close under a contract of sale?

In selling a property with existing leases, the seller’s rights and obligations under existing leases will be transferred to the purchaser. Therefore, the normal representations include:

  • tenants’ consent to continue the leases until their expiry date;
  • all financial obligations and liabilities by the seller in respect of the property before the closing have been cleared or will be at the seller’s expense; and
  • tenants shall not solicit or induce any existing tenants, suppliers or property managers to take any action that is detrimental to the buyer.

 

The seller must covenant not to execute any new leases or amend existing leases without the consent of the buyer between the contract and closing date. Estoppel certificates from tenants are customarily required by the buyers.

Leases and real estate security instruments

Is a lease generally subordinate to a security instrument pursuant to the provisions of the lease? What are the legal consequences of a lease being superior in priority to a security instrument upon foreclosure? Do lenders typically require subordination and non-disturbance agreements from tenants? Are ground (or head) leases treated differently from other commercial leases?

A lease can be subordinate to a security instrument if the security instrument is properly registered with registration office. In principle, a landlord must seek the lender’s consent if it wishes to lease the property to a lessee. Upon foreclose, the lease must be terminated and the tenant must return the property to the lender, unless otherwise agreed by the parties.

The owner may also collateralise real property that has already been leased. In such cases, the owner must serve written notice to its lessees. However, the lender usually requires the owner to show the subordination or non-disturbance agreements to tenants. In such a situation, the tenant is allowed to remain at the property until the lease term expires, and the lender may be entitled to rights of landlord, including to the right to the rental payment.

Delivery of security deposits

What steps are taken to ensure delivery of tenant security deposits to a buyer? How common are security deposits under a lease? Do leases customarily have periodic rent resets or reviews?

The delivery of tenant security deposits to a buyer requires consent from the respective tenant. This may be in the form of a clause in the lease agreement. The landlord often requires the security deposits in the form of cash or a bank guarantee. Periodic rent review provisions are customarily used by the parties.

Due diligence

What due diligence should be conducted before executing a contract? Is any due diligence customarily permitted or conducted after contract but before closing? What is the typical method of title searches and are they customary? How and to what extent may acquirers protect themselves against bad title? Discuss the priority among the various interests in the estate. Is it customary to obtain government confirmation, a zoning report or legal opinion regarding legal use and occupancy?

In low-value transactions, the buyer may ask the seller to show the original title certificate (land use rights and ownership of assets on the land). The certificate provides strong evidence of the seller’s lawful title to the property. In high-value and risky transactions, legal counsel is necessary to check the legal status of the property. The due diligence may cover the following aspects:

  • the lawful rights of the owner;
  • the owner’s fulfilment of any financial obligations;
  • environmental requirements;
  • rights and interests of the parties;
  • encumbrances and restrictions;
  • constructions and zoning requirement; and
  • the owner’s compliance with land use requirements.

 

In Vietnam, purchasers do not have access to title insurance, legal opinions on title or indemnity funds to protect against bad title. Instead, purchasers can protect themselves against bad title by representation and warranty clauses, by agreeing that closing occurs only when they receive title certificates issued by the relevant competent authority under the purchaser’s name, or by retaining a certain amount from the purchase price within a specified period.

Vietnamese laws provide statutory priority for registered security instruments. Among registered property interests, the first in time is the first in priority. Among property interest that are all non-registered, the first in time is the first in priority. Priority can be recorded by agreement between the relevant and affected parties.

Structural and environmental reviews

Is it customary to arrange an engineering or environmental review? What are the typical requirements of such reviews? Is it customary to get representations or an indemnity? Is environmental insurance available?

An environmental impact assessment is required by law for residential projects of more than 400 households or 2,000 users. The assessment must cover and forecast the sources of waste and its impact on the environment and health, the risk management and mitigation measures, the environmental management and monitoring programme implemented, any estimation of costs for the construction of environmental protection works, and environmental protection measures.

It is customary to obtain representations or an indemnity to cover these issues. Environmental insurance is available and recommended by the state, and is compulsory for residential housing projects. A zoning report or legal opinion is advisable, although this is typically arranged only in relation to new development projects or where the buyer intends to build new structures or have a specific purpose for the property.

Review of leases

Do lawyers usually review leases or are they reviewed on the business side? What are the lease issues you point out to your clients?

It is advisable to have an attorney review leases on legal as well as business issues given the complexity of real estate law in Vietnam, especially with commercial leases, where landlords usually impose various tenant restrictions. Among other things, a tenant should pay attention to:

  • any limitation to rights to use the property;
  • circumstances under which the landlord may assign its obligations to other parties;
  • rent must be quoted in Vietnamese currency; otherwise the lease may be void;
  • circumstances allowing the landlord to terminate the lease: normally the landlord provides more and broader grounds to terminate a lease with a tenant;
  • circumstances allowing the tenant to unilaterally terminate the lease without penalty; and
  • replacement of the property management company.

 

Lenders usually prefer the property management agreements to be subordinate to the mortgage to keep in place the continuity of the property management company.

Other agreements

What other agreements does a lawyer customarily review?

With commercial property as well as high-value transactions, it is highly advisable to retain lawyers to review all documents relating to the transaction. Vietnamese laws on real property are unique, and a proper legal assessment of the terms and conditions contained in the documentation is necessary. Brokerage agreements are voidable if the broker is not qualified under the laws of Vietnam.

Closing preparations

How does a lawyer customarily prepare for a closing of an acquisition, leasing or financing?

The preparation for a closing of transaction, among other things, may include:

  • authorisation of the signature in the transaction documents;
  • fulfilment of conditions precedent for the closing set forth by the parties;
  • verification of original documents as required;
  • preparation of transaction documents necessary for the signatories; and
  • execution of transaction documents at the notary office or a competent authority (if required by relevant laws).

 

The financing source often requires the financing recipient to hand over original documents regarding the property or the development project for its custody, and to duly register the financing transaction to secure its rights and interests.

Lawyers may base their analysis on the constitutional documents of an entity (eg, the articles of association, the business registration certificate and board resolutions) to verify the authorisation of signatures.

There is usually a reasonable period between the contract and closing so that the parties are properly prepared to close the deal. The length depends on the deal size as well as the agreement of the parties. It may be one or two weeks for a low-value deal, or several months for a high-value transaction.

Closing formalities

Is the closing of the transfer, leasing or financing done in person with all parties present? Is it necessary for any agency or representative of the government or specially licensed agent to be in attendance to approve or verify and confirm the transaction?

The law does not require all parties to be present on the closing day to make the signing of the contract valid. The Civil Code provides that an agreement shall be deemed executed on the date the last signature is made, and effective from that date (unless otherwise agreed by the parties). Most property transactions must be conducted before a notary officer except for transactions involving real estate developers. Omitting this procedure may make the agreement voidable and invalid.

In property sale transactions by a real estate developer to a homebuyer, notarisation is not required but certification by a licensed agent is required. The certification is an essential document for the homebuyer to obtain the ownership title.

Contract breach

What are the remedies for breach of a contract to sell or finance real estate?

The laws on contracts allow a non-defaulting party to claim for all actual damages caused by a breach by the defaulting party. The non-defaulting party can also claim a penalty if the contract so stipulates. In certain cases, it is sometimes advisable to structure a performance security deposit payment whereby the defaulting party loses the deposit (if it is the buyer) or to return the deposit to the non-defaulting party at double the value (if it is the seller). The parties can settle contract breaches themselves; otherwise disputes can be resolved by a dispute settlement body (a competent court or arbitration).

Breach of lease terms

What remedies are available to tenants and landlords for breach of the terms of the lease? Is there a customary procedure to evict a defaulting tenant and can a tenant claim damages from a landlord? Do general contract or special real estate rules apply? Are the remedies available to landlords different for commercial and residential leases?

In property leases, the common remedies available to tenants and landlords include claiming for damages incurred by the non-defaulting party (eg, costs to rectify the breach, other third-party claims and so on), applying a penalty if set forth in the lease, forfeiting the security deposit and early termination of the lease. In principle, general contract rules will be applied, but specific real estate laws on a subject matter may take precedence if there is a conflict with general contract rules.

To evict a defaulting tenant, the landlord must obtain a court order and the enforcement authority will carry out the eviction. The defaulting tenant must pay the rent and for damages incurred up to the time of eviction to the landlord.