Changes under amended Law on Real Estate Business to benefit customers

Senior partner Anh Dang and associate Linh Pham of VILAF law firm analyze key changes brought about by the newly-appoved Law on Real Estate Business 2023.

On November 28, 2023, the Law on Real Estate Business 2023 was passed by the National Assembly, Vietnam's highest legislative body. The new law, including 10 chapters, 83 articles, will take effect from January 1, 2025 and replace the old Law on Real Estate Business 2014.

New definition of economic organizations with foreign investment capital

Instead of using the term of “foreign-invested enterprises” (“doanh nghiệp có vốn đầu tư nước ngoài” in Vietnamese) under the old law, the Law on Real Estate Business 2023 uses the term “foreign-invested business organizations” (“tổ chức kinh tế có vốn đầu tư nước ngoài” in Vietnamese). This is in line with the term used in the Law on Investment 2020, synchronizing the contents of the two laws.

Condition on equity capital

Previously, Article 10.1 of the Law on Real Estate Business 2014 required that organizations and individuals in the real estate business establish enterprises or cooperatives (hereinafter referred to as “enterprises”) with equity capital of at least VND20 billion ($825,000). However, the requirement on equity capital was later removed by Article 75.2(a) of the Law on Investment 2020.

As a result, organizations conducting real estate business are currently no longer subject to the VND20 billion equity threshold. Nevertheless, this is set to change after the new Law on Real Estate Business 2023 enters into force.

Specifically, under the new provisions, real estate businesses approving real estate projects must have equity not less than 20% of the total investment capital for projects with land use scale of less than 20 hectares, and not less than 15% of total investment capital for projects with land use scale of 20 hectares or more, and must ensure the ability to mobilize capital to implement the project.

In case a real estate business simultaneously implements multiple projects, it must have enough equity allocated to ensure the above ratio of each project to implement all projects (Article 9.2(c) of the Law on Real Estate Business 2023). This new provision is considered being in line with the development of the market and capable of ensuring market stability.

Conditions of real estate formed in the future to be put on the market

Overall, the bar for real estate formed in the future to be put on the market has been raised. Articles 14 and 24 of the Law on Real Estate Business 2023 stipulate more requirements than its predecessor. Among these, the most important requirement is that investors must complete financial obligations regarding land before putting real estate into business (Article 14.2(c) of the Law on Real Estate Business 2023).

This requirement, although highly important, was not clearly stipulated under the old law and regulations. Consequently, many projects nowadays are put on the market and sold to buyers even when the investors themselves have not completed their financial obligations with the government, resulting in the inability to obtain valid land use right certificates for homebuyers.

This new provision will hopefully resolve such complications. Additionally, other conditions on documents on land use rights and construction are also specified more clearly and specifically than the provisions of Article 55 of the Law on Real Estate Business 2014.

Publication of project information on Housing and Real Estate Market Information System

Publicizing project information on the Housing and Real Estate Market Information System managed by the Ministry of Construction existed as one of the conditions for putting real estate into business under the Law on Real Estate Business 2014. The information that must be disclosed will, however, under the new law be more extensive than the old one, including information about the project, information that must be published applicable to housing, construction works formed in the future, existing housing and construction works, and land use rights with technical infrastructure in real estate projects (Article 6 of the Law on Real Estate Business 2023).

Deposits in housing business and construction projects formed in the future

While the old Law on Real Estate Business 2014 does not have provisions on deposits in the housing business and construction projects formed in the future, Article 23.5 of the Law on Real Estate Business 2023 clearly stipulates that real estate project investors are only allowed to collect from customers a deposit of no more than 5% of the selling price and the lease purchase price of houses, construction works, construction floor area in construction works when housing and construction works have met all conditions for being put into business according to the provisions of the Law on Real Estate Business 2023.

This is a welcome move since it aims to protect homebuyers in these transactions and requires investors to mobilize sufficient capital to invest in these projects. However, in practice, these days some of these deposit contracts are disguised as “cooperation contracts” or under other names. It is unclear whether such concealment could circumvent the requirement under Article 23.5 of the Law on Real Estate Business 2023.

The author of this article takes the view that this should not be the case and the courts should utilize a purposive approach to the interpretation of the provision to ensure that all types of transactions which are deposit transactions in nature, regardless of their names or other formalities, are captured under Article 23.5 of the Law on Real Estate Business 2023 to ensure that the draftsmen’s intention is preserved and homebuyers are protected.

Payment for buying, selling, and leasing real estate to be formed in the future

Changes under the new Law on Real Estate Business 2023 on payment for buying, selling, and leasing real estates to be formed in the future are also another move towards strengthening protection for buyers. Specifically, the Law on Real Estate Business 2023 stipulates that payments in the purchase and sale of houses and construction works to be formed in the future can be made in multiple installments, but the amount paid in the first installment, including deposits, shall not exceed 30% of the contract value (Article 25.1 of the Law on Real Estate Business 2023).

Meanwhile, the old law only stipulated that the first payment must not exceed 30% of the contract value, without mentioning deposits (Article 57 of the Law on Real Estate Business 2023). Subsequent installments must be made in accordance with the construction progress until the house, construction project, and construction floor area are handed over to the customer. The amount of advance payment to the lessor and seller must not exceed 50% under the new law, as opposed to 70% in the old law, of the value of the houses, construction works, and construction floor area (Article 25.2 of the Law on Real Estate Business 2023).

Use of prescribed contract forms in real estate business

Another very important change under the new regulations is the abolishment of the compulsory obligation to use prescribed contract forms in real estate business. Under Decree 02/2022, which is currently in force, Article 6 requires that contracts must follow certain forms attached to the decree. However, this has left many businesses confused as to the level of negotiation allowed as well as the presentation of new provisions which are discussed among the parties in those sample contracts.

This shall be resolved by the abolishment of this requirement in the new Law on Real Estate Business 2023 (Article 45). Under these new rules, as long as the parties enter into a contract which conforms to the provisions of the Civil Code 2020 and general regulations on real estate business, they should have a valid and enforceable contract, without having to follow any prescribed contract forms.

Guarantee for housing formed in the future

Regarding bank guarantees for financial obligations of investors for future housing, Article 56 of the old Law on Real Estate Business 2014 stipulates that bank guarantees are required. The new Law on Real Estate 2023 retains this regulation, but allows homebuyers to choose whether or not to demand a guarantee from the investor.

The new law also adds a new regulation that the investor must provide a bank guarantee to each customer within 10 days from the date of signing the house purchase and sale contract. The investor can only receive payment under the purchase and sale contract after the customer has received a letter of guarantee (Article 26.6 of the Law on Real Estate Business 2023).

Lot division

Certain aspects on lot division are also clarified under the new Law on Real Estate Business 2023. The law stipulates more clearly that divided lots and plots in real estate projects where infrastructure has already been built can only be sold to individuals to build houses. This cannot be implemented in areas belonging to the special class, class I, class II and class III urban areas; and such land must also not be subject to auction of land use rights for housing construction projects according to the provisions of the Land Law (Article 31 of the new Law on Real Estate Business 2023).

Conditions for transferring all or part of a real estate project

A new and controversial provision under the new Law on Real Estate Business 2023 is that before transferring a real estate project, the transferring investor must fulfill its financial obligations to the state (Article 40 of the Law on Real Estate Business 2023). There have been many suggestions that the parties could reach an agreement so that the transferee could continue to fulfill the transferor’s financial obligations post-transfer, but such suggestions were not adopted.

The actual impact of this provision is to be experienced in the future. However, this provision is expected to be a significant hurdle in the real estate market to many investors wishing to transfer their projects.

Real estate brokerage

Finally, according to the Law on Real Estate Business 2023, from January 1, 2025, individuals practicing real estate brokerage must practice in real estate service businesses such as real estate trading floors or real estate brokerage companies. This would mean that individuals are not allowed to practice freelance real estate brokerage as currently.

Overall, the new regulations are expected to contribute to “screening” investors, and forming more professional and capable real estate businesses after requirements on financial and technical capacity are applied. Such requirements, together with numerous provisions aimed at strengthening the protection of customers, have the potential to raise standards and contribute to a more prosperous real estate market in the future.