1. Land law

Basic principles of land law

In Vietnam, the land belongs to the people with the State as the representative owner. The State exercises the following rights over the land: deciding on land use purposes; approving land use zoning and land use plans; deciding on land allocation quotas and on duration of land use; deciding on allocation of land; lease of land; land recovery; conversion of land use purpose; and determining land prices.

In general, land users may exercise the right to exchange, assign, lease, sub-lease, bequeath and donate land use rights and also to mortgage, guarantee and contribute capital using land use rights. Instead of ownership, land users are only vested by the State with land use rights certificates (LURCs). LURCs are issued by the Ministry of Natural Resources and Environment which is similar to a deed in most countries. However, LURCs cover only land use rights, not ownership of the land. Unlike the indefeasible deed, the cornerstone of land law in many developed legal systems, it is not clear how strong an LURC is in the face of legal challenges.

While the land law allows domestic companies to purchase land use rights from others, foreign investors are not allowed to do so. Foreign investors in Vietnam can only obtain land use rights either by way of capital contribution in the form of the land use rights value by the local partner to a joint venture company or by way of land leased directly from certain permitted lessors, including the State, industrial zones and export processing zones.

Land as capital contribution

In practice, joint ventures have been established where the local partner contributes their portion of the capital in the form of the right to land use. In some cases, foreign investors advance the land usage fees to the local partner in the form of a foreign loan in order for the latter to pay the fees to the State.

In general, the local partner in a joint venture makes capital contributions in the form of land use rights after receiving a land “allocation”, rather than a land “lease” from the relevant People’s Committee. After the joint venture is incorporated as a result of issuing the investment certificate, the LURC will be issued to and in the name of the joint venture.

Land lease instead of capital contribution

Instead of obtaining the land use rights in the form of capital contributions, a foreign investor has the option of leasing the land directly from the State after the establishment of the foreign-invested company (FIC) in Vietnam. This approach is now preferred by foreign investors because of the discrepancies between foreign and local partners in joint venture companies in recent years. Specifically, foreign investors have experienced difficulties in finding land in a desirable location or coming into an agreement with the lessor on the amount of the lease.

Where the land is leased from the State, the State may impose payment of annual rent or lump sum payment for the entire term of the lease.

Rights over leased land

The rights of foreign investors who lease land from the State depend on the nature of the lease payment. Where leases are paid as an annual rent, lessees have:

• the right to mortgage or guarantee or to make capital contribution using assets owned by them and attached to the leased land with credit institutions authorised to operate in Vietnam; and
• the right to sell assets owned by them and attached to the leased land.

Transfer, sublease or mortgage of the land use rights is not allowed.

On the other hand, foreign investors subject to one-time payment of the complete rent may enter into transactions with respect to the land use rights, in addition to the assets attached to the land. They have the rights, among others, to:

• assign the right to use the leased land and the assets attached to the land;
• sub-lease the land use right and the assets owned by them and attached to the land;
• mortgage or guarantee using the land use right and the assets owned by them and attached to the land – with credit institutions authorised to operate in Vietnam; and
• make capital contribution using the land use right and the assets owned by them and attached to the land in order to engage in business or production co-operation.

Mortgage over land use rights

As previously stated, the law in Vietnam expressly recognises mortgages over land use rights in favour of credit institutions in Vietnam, including foreign bank branches in Vietnam, provided the lessee makes payment as a lump sum. There is no reference under the law to the creation of security interests in favour of offshore entities and this is usually understood to mean that the land use rights cannot be mortgaged in favour of offshore financial institutions.

Duration of lease

In general, the duration of lease of land use rights to foreign investors to implement investment projects in Vietnam must not exceed 50 years. For investment projects with large capital, but a slow capital recovery rate and investment projects in areas with difficult socio-economic conditions or especially difficult socio-economic conditions, a longer period is allowed provided it does not exceed 70 years.

Withdrawal of land

The State has the power to reclaim land leased or allocated to parties, including foreign investors, including under the following circumstances:

• the land is used in an inefficient way or for an incorrect purpose;
• the land user intentionally destroys the land;
• the land user intentionally fails to discharge financial obligations to the State;
• the land has not been used for 12 consecutive months from the date of handover of the land; or
• the land-use schedule of the project has been delayed for more than 24 months from the date recorded in the investment project.

II. Housing law

The Housing Law was adopted by the National Assembly on 29 November, 2005 and it took effect as of 1 July, 2006. The law regulates house ownership, housing development, the management of the use of houses and house-related transactions and state management of houses.

Ownership of houses

Foreigners are prohibited from owning houses, except for foreign investors who invest in the construction of houses for lease and who are granted certificate of ownership rights to such houses. In this case, the duration of house ownership corresponds to the duration stated in the investment certificate and is specified in the house ownership certificate.

In the case of investment in the construction of houses for sale, house ownership certificates are not granted to foreign investors. After the completion of construction under projects, the foreign investors may sell such houses to those entitled to own houses in Vietnam. When their investment certificate expires, if it is not extended in accordance with law, the foreign investors must hand over, without compensation, the houses for lease and any unsold houses to the People’s Committee where the houses are located.

Mortgage of houses

Owners of houses have the right to mortgage such houses through credit institutions licensed to operate in Vietnam.

Rent of houses by foreigners

Foreigners allowed to enter and stay in Vietnam for three or more consecutive months may rent houses in Vietnam.

New development: ownership of apartments

On 22 May, 2008, the deputies of the National Assembly approved a resolution (on a five-year trial basis), which allows eligible foreigners to buy and own apartments, excluding villas or houses, in a commercial housing development project in Vietnam. The resolution takes effect as of 1 January, 2009.

Eligible foreigners are comprised of those who:

• invest directly in Vietnam;
• are hired for management positions by local or FICs;
• receive the President’s or Government’s certificates of merit or medals;
• work in socio-economic fields, hold a bachelor’s degree or higher and possess special knowledge and skills that Vietnam needs;
• are married to Vietnamese residents.

FICs in Vietnam (excluding those operating in the real estate sector) are also allowed to buy and own apartments for use by their foreign employees.

The regulation allows an eligible foreigner to own one apartment for up to 50 years, subject to an extension for a maximum of 70 years. The apartments may be used as security for bank loans in Vietnam. The owners are required to sell or donate the apartment within one year from the date the certificate of ownership expires. An FIC may purchase more than one apartment for the accommodation of its foreign employees.

III. Real estate business law

The Law on Real Estate Business was adopted by the National Assembly on 29 June, 2006 and took effect as of 1 January, 2007. The law regulates real estate business activities of domestic and foreign organisations and individuals; the rights and obligations of the parties; and real estate transactions related to real estate business.The contents of contracts relating to real estate business are also regulated by the law.

Investment in real estate business is a conditional sector in Vietnam with a required legal capital of VND 6bn (approximately $375,000.00). The Ministry of Construction recently issued Circular 13/2008 dated 21 May, 2008 (which will become effective 15 days after its publication in the Official Gazette) providing for the procedure in proving the legal capital, that is, a confirmation letter from the bank where the company opened the account.

Permissible activities for foreign investors

FICs wanting to establish in Vietnam need to apply for an investment certificate which serves as both the business registration certificate for the local establishment of the FIC and the license for the project. Foreign investors will be able to obtain the land use rights or own any real property only after the FIC has been granted an investment certificate. Foreign investors who want to do business in Vietnam need to have a project that fits into the government’s “master plan”. They may engage in the following activities:

• investing in the creation of houses or construction works for sale, lease or lease purchase;
• investing in land reclamation and infrastructure works on the leased land for the lease of land with infrastructure;
• real estate services (brokerage; valuation; transaction floor service, consultancy, auction, advertisement and management).

Financial requirements

Investors in projects in new urban centres, residential housing complexes or technical infrastructure works of industrial parks are required to have the following investment capital for project implementation:

• for new urban centres and projects on technical infrastructure works of industrial parks, the investor’s capital must not be lower than 20% of total investment capital of such projects;
• for residential housing complexes, the investor’s capital must not be lower than 15% of total investment capital of projects occupying less than 20ha each, or must not be lower than 20% of total investment capital of projects occupying 20ha or more.

Transfer of real estate projects

Transfer of entire projects in new urban areas, residential quarters or technical infrastructures of industrial parks is allowed provided there is an approval in writing by the authorities.The project can be transferred only after:

• the completion of the ground clearance;
• payment of ground clearance compensation for the whole project, or the current stage of the project, has been made; and
• technical infrastructure works have been built according to schedule.

The transfer to a foreign invested company needs to be carried out in the early stage of development since foreign investors are not allowed to acquire already developed property.

Development of houses

Foreign organisations and individuals may participate in the development of houses for sale or lease in Vietnam. If, after publication of land plots reserved for housing developments two or more organisations or individuals have registered as investors, the project must undergo bidding to select an investor.

Housing development requirements

The investors must have the appropriate investment certificate, and their investment capital for project execution must not be lower than 15% of the total investment project if it uses less than 20ha of land, or 20% if the project uses 20ha of land or more.

Rights of housing development investors

For cities, provincial towns, new urban centres of cities or provincial towns, or new urban centres planned for development in cities or provincial towns, the transfer of land use rights to households or individuals in the form of selling house foundations, while houses have not yet been built, is prohibited. However, the project site can be transferred to a corporate entity for the latter to continue the project, subject to the condition that the construction of the completed infrastructure on the site be completed in accordance with the approved project.

IV. Bidding law

The Bidding Law 2005 regulates the bidding activities for the selection of suppliers of consultancy services, including construction and installation contractors for projects where 30% of the capital originates from the State budget. In cases not covered by the Bidding Law, organisations or individuals may voluntarily choose to apply its provisions. In general, bidding dossiers must contain:

• technical requirements, that is, technical designs, which are accompanied by estimates, and technical instructions;
• financial and commercial requirements; and
• evaluation criteria, important requirements, preferential conditions if any, taxes, insurance and any other requirements.

In December 2007, this law was applied in the selection of investors to implement the development of prime real estate (the Golden Triangle project) in Ho Chi Minh City.

This article was written by Maria Glenda Ramirez, a senior associate at Salans.