Draft amended law on real estate business fails to meet expectations

The construction ministry recently released a draft amended law on real estate business for public comment. Dang Duong Anh, senior partner at Vilaf law firm, argues that the draft law does not live up to expectations.

The Law on Real Estate Business adopted by the National Assembly on November 24, 2014, has been implemented for almost eight years since its enactment. Although the law was considered modern and progressive at the time of its promulgation, certain shortcomings have been revealed over time.

Particularly, several provisions of the current law overlap with other relevant laws such as the laws on land regarding the transfer of land use rights, the laws on housing regarding purchases, hiring or hire-purchase of residential houses, and the laws on investment regarding the transfer of real estate projects.

The Ministry of Construction (MoC) recently released a draft amended Law on Real Estate Business (draft new law) for public comment and feedback, which will, once issued, replace the current law.

The MoC expects that the draft new law will be able to tackle those shortcomings of the current law. However, it seems that the draft new law does not live up to that expectation.

Several provisions of the draft law appear to be inconsistent with those of the law on Investment 2020, the draft amended Law on Housing and the draft amended Law on Land. These inconsistencies would inevitably lead to difficulties in their implementation if the draft new law and the stated draft laws are adopted in their current versions.

1. Forms of raising capital for investment and construction of future-formed houses and construction works

According to Article 26 of the draft new law, owners of projects for the construction of future-formed houses and construction works can raise investment capital for real estate projects as follows:

(i) Mobilizing capital by way of capital contributions, investment cooperation, business cooperation, joint venture, affiliation with organizations, households, individuals; and/or

(ii) Mobilizing capital by receipt of advanced payment of purchase prices, and hire purchase prices for future-formed houses and construction works pursuant to contracts signed with customers.

However, the above-restricted forms of mobilizing investment capital would prevent the owners of projects for the construction of future-formed houses and construction works from mobilizing funds from other lawful sources such as borrowing from credit or financial institutions (which is a very popular way to finance a project).

Furthermore, those provisions are inconsistent with Article 122 of the draft amended Law on Residential Housing which provides for various forms of capital mobilization for housing development (including housing development in the form of projects for construction of future-formed houses), including, inter alia, issuance of bonds, stocks, and fund certificates in accordance with the laws; raising funds from public investment capital and state capital sources other than public investment; borrowing from credit institutions, foreign bank branches and financial institutions operating in Vietnam; borrowing from the Bank for Social Policies; from foreign direct investment capital; and/or any other lawful capital sources.

2. Conditions to be satisfied for trading the land use rights in real estate projects

According to Article 30.1 of the draft new law, trading of the land use rights (LURs) including the transfer, lease, and sub-lease of LURs in real estate projects must satisfy certain requirements, including, among others, that the Land Use Right Certificate (LURC), Ownership of Houses and Other Assets Attached to Land has been granted (except for the case of transfer, lease, sub-lease of the LUR for land on which technical infrastructure is already available for a real estate project). It means that the LURC of the land used for the real estate project is not required when trading the LUR (including, transfer, lease, sub-lease of the LUR) in a real estate project where technical infrastructure has already been constructed.

The above provision is inconsistent with Article 29 of the draft amended Law on Land, which only permits the trading of LURs (including the LUR for land on which technical infrastructure for the construction of houses for sale or lease is already available) after the LURC has been granted. Article 29 of the draft amended Law on Land, therefore, needs to be revised if Article 30.1 of the draft new law is kept unchanged.

3. Conditions to be satisfied for transfer of real estate projects

Procedures for the transfer of real estate projects as provided in the draft new law appear to be inconsistent with the Law on Investment 2020 and its implementing decrees. Particularly, Article 48 of Decree 31/2021 provides as follows:

(i) The investor of a real estate project for which the investor receives approval pursuant to either clause 3 or 4 of Article 29 of the Law on Investment or is issued with an Investment Registration Certificate is only required to proceed with the procedure for amendment of the project as prescribed by the laws on investment; and

(ii) The investor of other real estate projects not prescribed above is only required to proceed with the procedure for approval of project transfer as prescribed by the laws on real estate business.

However, Article 43.6 of the draft new law seems to suggest that the investor of real estate projects for which the investor receives approval pursuant to either clause 3 or 4 of Article 29 of the Law on Investment or is issued with an Investment Registration Certificate shall be required to proceed with both the procedure for amendment of the project as prescribed by the laws on investment and the procedure for approval of project transfer as prescribed by the laws on real estate business.

Particularly, Article 43.6 of the draft new law provides that the decision which approves the transfer of the whole (or part) of a real estate project issued by the competent state authority and the agreement on the transfer of the project (or part of the project) shall serve as the basis for the relevant parties to perform procedures for the following:

(i) Land allocation, land lease, issuance of the LURC [to the new project owner] or registration of changes in the LURC already issued to the former project owner according to the laws on land; and

(ii) Adjustment to investment projects according to the laws on investment in cases where the laws on investment require such adjustment to the investment project.

Article 43.6 of the draft new law appears to mean that, regardless of whether or not the laws on investment require the investor to amend the investment registration certificate (and the in-principle approval, if applicable), the investor shall still have to apply for a permit to transfer all or part of a real estate project from the provincial People’s Committee (or the Prime Minister, as in the case specified under Article 45 of the Draft New Law).

Moreover, this would cause an administrative burden to the investor as they would need to proceed with two different procedures with respective authorities pursuant to two different laws (i.e., the procedure to apply for permission to transfer a real estate project according to the laws on real estate business and the procedure to apply for an amendment to the investment project according to the laws on investment).

4. Requirement for real estate transactions to be conducted on real estate exchanges

Article 60.1 of the draft new law provides that real estate transactions must be conducted on real estate exchanges. This mandatory requirement had already been set out in Article 59 of the Law on Real Estate Business 2006, which was thereafter repealed by the current law. From a legal perspective, this approach seems to contradict the principles of business freedom as set out in the Law on Enterprises, and the principles of equality, freedom in commercial activities as set out in the Law on Commerce 2005. Particularly:

(i) Article 7 of the Law on Enterprises 2020 stipulates that an enterprise has the right to “freely run the business and choose the type of business organization; proactively choose […] the areas and types of operation; adjust the scale and business lines... freely find markets, customers and enter into contracts.” The provisions set out in Article 60.1 of the draft new law would “infringe” on enterprises’ right to freely run their business, choose the type of business organization, freely find markets, customers. A real estate exchange is basically a “bridge” to connect relevant parties. The exchanges contribute nothing to the development of projects, however they are granted the right to decide the sale of project owners’ products. Project owners are therefore dependent on real estate exchanges despite being the owners.

(ii) Articles 10 and 11 of the Law on Commerce 2005 provide all traders with equality in the eyes of the laws in conducting commercial activities, and that parties shall act of their own free will. Article 60.1 of the draft new law is not in line with this principle. Real estate transactions on the exchanges should originate from actual demand, for example, when the project owner does not run the business on its own and wishes to trade on the exchanges; or when the buyer wishes to search for houses and/or real estate products on the exchanges. The provision of the current law should be kept unchanged in a way that does not force project owners to sell/lease their products on the real estate exchanges.

Conclusion

The real estate business will likely encounter a difficult year in 2023 because demand has dropped dramatically and incidents involving key players in the market such as FLC, Tan Hoang Minh, Van Thinh Phat and others. Restricted forms of raising capital for the investment and construction of future-formed houses and construction works, the conditions required for trading the right to use land for real estate projects and transfer real estate projects and other areas should be re-considered by the drafting committee in the next round of the draft new law in order to ensure consistency with existing laws and promote the real estate market.