PwC partners Richard Irwin and Phan Thuy Duong look at some of the common issues which foreign investors should be aware of when leasing land in an industrial zone in Vietnam.
Leasing a plot of land in an industrial zone is the most common method to acquire land use rights in Vietnam for manufacturing. Most local authorities now require manufacturing activities to be conducted in industrial zones (IZ), economic zones, or export processing zones which have been zoned for manufacturing purposes.
Foreign investors should consider the following matters, amongst others, when leasing land from IZ developers:
Land leases with one-off or annual rental payments
Under the 2013 Land Law, IZ developers can lease land from the state with either one-off or annual rental payments. In practice, most IZ developers choose to lease land in the form of annual rental payments.
For land leased from the state under a one-off rental payment, IZ developers can sublease this to tenants including foreign-invested enterprises in the form of one-off or annual rental payments. However, for land leased with annual rental payments to the state, IZ developers can only sublease land under annual rental payments.
Therefore, foreign investors need to consider the differences between these two forms of rental payment.
For land leased with a one-off rental payment, tenants are entitled to transfer the associated land use right (LUR), mortgage the LUR, or contribute the LUR as capital to another company. However, for land leased with annual rental payments, tenants have fewer rights and for example cannot transfer their LUR.
In practice, some IZ developers which lease land with annual rental payments typically allocate the rental fee into two parts, land rental fee and infrastructure fee. The infrastructure fee accounts for a large proportion and is usually paid once for the entire lease term. The land rental fee is determined according to the state land rental price, which is generally much lower than the infrastructure fee, and paid annually by the tenant. From a legal perspective, the tenants, in this case, are treated as leasing land in the form of annual rental payments.
In light of the above, before deciding to lease land, investors should clarify the form of the IZ developers’ land lease, i.e., whether it is an annual or a one-off rental payment.
Cooperation of the IZ developer when tenants exercise rights over their leased land
By law, tenants are entitled to exercise certain rights such as transferring or subleasing the LUR and/or assets attached thereto, depending on the form of the land lease. However, land sublease agreements often provide that in order to exercise such rights, the tenants must seek advance approval and support from the IZ developer before performing such transactions. In some cases, the tenants must also pay a fee as requested by the IZ developer.
Therefore, during the negotiation of land lease agreements, to avoid potential subsequent problems, investors should ensure that there are appropriate terms which require the support and cooperation of the IZ developer in this regard.
Points to consider regarding MoU for land leases and deposits
To build factories in accordance with the technical requirements of the tenants, the leased land must meet certain conditions. Therefore, investors should carefully research and agree in advance with the IZ developer on such technical requirements, e.g., construction planning, construction density, and foundation elevation before construction, so they can properly estimate the costs before signing any MoU and paying deposits.
Investors should also agree and clarify with the IZ developer regarding wastewater treatment systems, allowable treatment capacities, as well as who bear which costs if in the future there is a need to increase treatment capacities. This can help to avoid the case where wastewater treatment systems do not cope with the production scales or cannot be expanded.
The above are just some of the issues related to land leases which investors should consider. There are various other matters which investors should consider before deciding to sign agreements and place deposits for land.