New Laws on Real Estate Business

In its 6^th meeting session in November 2023, the 15^th National Assembly of Vietnam voted and passed the Amended Law on Real Estate Business (Amended LREB) and the Amended Law on Residential Housing (Amended LRH). These laws, which will come into effect starting 1 January 2025, together with an Amended Land Law currently being considered and expected to be voted on in 2024 (Amended Land Law), will form a new set of key laws regulating the Vietnam real estate market. 

In this discussion, we set out the noteworthy amendments and compare these with the current Law on Real Estate Business, the current Law on Residential Housing, and their guiding regulations (Current LREB and Current LRH, respectively).

1. Some welcome amendments

1.1 Certain foreign-invested companies will be treated the same as 100% domestic-owned companies 

Under the Amended LREB, foreign-invested companies that are not subject to conditions and procedures applicable to foreign investors under the Law on Investment (FDI Companies not Subject to FI Procedures) shall be eligible to register and engage in real estate businesses like domestic companies. Upon the effectivity of the Amended LREB, FDI Companies not Subject to FI Procedures will be able to register and participate in certain real estate businesses that were previously prohibited, including:  

1. selling, leasing, and subleasing land use rights after having invested and constructed completely the required technical infrastructures; 
2. purchasing construction works for sale, lease, or lease-purchase; 
3. purchasing land use rights with completed infrastructures in a real estate project for sale or lease; and
4. leasing land use rights that have been equipped with required technical infrastructures in a real estate project for subleasing.

To compare, under the Current LREB, a foreign-invested enterprise was allowed only to enter into the following businesses:

1. lease houses and buildings for sublease; 
2. with regard to land leased by the State, build houses on the land for leases; build houses or non-residential buildings for sale, lease or lease purchase; 
3. receive transfer of part or whole of real estate project from an investor for building houses or buildings for sale, lease or lease purchase;
4. build houses on the land allocated by the State for sale, lease or lease purchase; and
5. build houses or buildings on land leased in an industrial park, industrial cluster, export-processing zone, hi-tech zone or economic zone for trading according to land use purposes.

1.2 Bank guarantees for purchasers of residential houses still under construction may be waived by purchasers

Under the Current LREB, residential house developers must secure a financial guarantee from a qualified commercial bank, before the sale or lease-purchase of a house that is under construction (Future House). If the developer fails to hand over the Future House according to schedule, the guarantor shall return the option fee and other amounts to the client, as provided in the signed purchase or lease-purchase contract and the financial guarantee. 

Under the Amended LREB, this requirement may be waived, at the buyer’s option. This allows buyers the flexibility to choose whether the added cost for the guarantee (which is often passed on by developers to buyers) is worth the extra layer of security.

1.3 “Floor areas” are now formally defined and can be legally traded

Transactions concerning “floor areas” are now explicitly defined in the Amended LREB. Although these transactions have become common as a matter of practice, their status under Vietnam law was unclear. Now, with the Amended LREB, “floor areas” will formally be considered a “real property” for the purpose of real estate business. This express recognition now opens further possibilities, including giving rise to rights to transfer, dispose of, or encumber (e.g., by mortgage) floor areas and floor areas that will be formed in the future. 

1.4 Clear legal framework set out for real estate business over land use rights

The Amended LREB provides a clearer legal framework for the business over land use rights with completed technical infrastructures. As discussed in Section 1.1., FDI Companies not Subject to FI Procedures are now eligible to participate in this business. However, in an M&A transaction, overseas investors must consider how to maintain the necessary ownership ratio, so as to remain qualified to participate in this business.

Of note, the Amended LREB, for the first time, specifies the conditions with respect to geographic areas that are eligible for land use rights (with completed technical infrastructures) trading (Qualified Areas). In particular, Qualified Areas must (i) not be located in a ward, district, or city of a special class, class I, class II and class III urban areas (refer to the Schedule at the end of this article for the list of special class, class I, class II and class III cities and towns, as at 22 December 2023); and (ii) be in an eligible list issued by the relevant provincial People’s Committee.

1.5 Disputes concerning private residential houses may be submitted to arbitration

The Amended LRH now provides that disputes over ownership, use rights, transactions, and management concerning private residential houses may be resolved by arbitration if the parties agree. Under the Current LRH, only courts have jurisdiction over disputes involving residential property.

We are aware of certain court decisions where courts take very conservative approaches as regards their jurisdiction over real property disputes (vis-à-vis arbitration clauses). As the Amended LRH now allows arbitration of real property disputes as regards private residential houses, the amendments may impact the approach of courts moving forward. 

However, as the Amended LRH comes into force on 1 January 2025, it is unclear whether an arbitration agreement, signed before effectivity, will be enforceable after.

2. Newly imposed restrictions

2.1 A lower cap for pre-collections for hire-purchases of Future Real Properties

The Amended LREB sets a lower cap of pre-collections of hire-purchases of Future Real Properties, regardless of the project. Currently, the cap of 50% of the contract price has only been applied to the hire-purchases of Future Houses (i.e., residential property). When the Amended LREB is effective, developers of all types of Future Real Properties will only be allowed to pre-collect a maximum of 50% of the hire-purchase contract value before the handover. 

2.2 Cap deposit for sales, hire-purchases of Future Real Properties.

The Amended LREB, for the first time, provides a cap of 5% of the contract price for deposit payments for sales, hire-purchases of Future Real Properties. Of note, this 5% is inclusive in the 30% first time pre-collection threshold.  

Caps (% of the contract price) for pre-collections with respect to the sales or hire-purchases of Future Real Properties under the Amended LREB: 

(supplemented regulations are emphasised in bold underlined)

2.3 Leasing Future Real Properties is no longer eligible  

The Amended LREB no longer explicitly provides that Future Real Properties may be leased. All provisions relating to the lease of Future Real Properties were omitted from the Amended LREB (as compared to the Current LREB, e.g., Chapter III), though the right to sell (even through hire-purchase) remains. Therefore, it appears that the Amended LREB no longer permits developers to lease Future Real Properties.

2.4 New prohibition on signing deposit contracts

Under the Amended LREB, developers may not authorize other parties to sign deposit contracts in relation to their sales, transfers, and hire-purchase transactions. This is now in addition to the prohibitions against delegating authority to sign sale, hire-purchase contracts under the Current LREB. 
We note, however, that under the Current LRH, residential house developers are already prohibited from delegating authority to sign deposit contracts.

2.5 Construction must be actually commenced for non-residential Future Real Property, prior to transactions

Under the Current LREB, the foundation of Future Houses must be completed before they may be traded. Under the Amended LREB, the construction of all Future Real Properties must have been commenced before they may be traded. 
Although the initial construction requirement for non-residential Future Real Properties is lower (i.e., construction be merely commenced), this imposes an additional step before developers are allowed to transact over these properties. We note, though, that the requirement for Future Houses (which is a higher threshold, as the foundation must be completed) remains.

In line with the promulgation of the Amended LREB and Amended LRH, the Amended Land Law is also anticipated. The amendments in the Amended LREB and LRH may preview what we may expect from the final version of the Amended Land Law, including the new business available to foreign-invested entities, and the availability of arbitration.  
The Amended LREB and Amended LRH shall come into force on 1 January 2025. It is expected that guiding regulations shall also be issued. In this regard, we suggest that concerned stakeholders seek pre-emptive legal advice from your respective legal counsellors in order to consider how the amendments may impact real estate investments in Vietnam.

¹ Updated to 22 December 2023.

Click here to download: Legal Update - New Laws on Real Estate Business - January 2024.pdf

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The summary is not intended to be nor should be relied on as a substitute for legal or other professional advice.

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