LEGAL NEWSLETTER NO.14 - 09/2020: RISKS TO CONSIDER WHEN BUYING OFF-THE-PLAN REAL ESTATE

PART 1: RESEARCH AND EXCHANGE

Off-the-plan real estate is one of the types of real estate that is being very interested in recent years. Customers are interested in this type of real estate for profitability, and looking for opportunities to achieve profits that are many times higher than the initial investment amount. Therefore, normally, customers take a certain proportion of risk when investing in this type of real estate. Indeed, the customers must understand the legal risks of establishing and concluding the transactions related to off-the-plan real estate to minimize the possible risks and enhance their chances of achieving the desired profits.

LEGAL RISKS OCCURRED WHEN ESTABLISHING TRANSACTIONS RELATED TO OFF-THE-PLAN REAL ESTATE

Currently, according to some survey results, it can be seen that customers may face several legal risks if the real estate project research is not executed, specifically:

1. The legal status of the projects not legible to be put on the market:

Currently, according to Article 15 of Law on Real estate trading, requirements to be met in terms of off-the-plan real estate to be put on the market are: (i) There are documents on land, project documents or construction drawing approved by competent agencies, License for construction if it is required, documents on certification of completion of technical infrastructure in equivalent to project progress; or it is required to gain the certification of completion of the foundation of the building regarding off-the-plan apartment buildings or mix-used buildings. (ii) Before entering an agreement on sale or lease purchase of an off-the-plan building, the investors shall submit a notification of the building permitted to be sold or leased purchase and be accepted by the agency in charge of housing of province.

However, some investors, despite understanding the above provisions, publicly establish the purchase transactions. In case where the dispute arises, these transactions may be declared invalid due to breach of legal prohibitions and the customers may be reimbursed their payment. It is often difficult for the parties to prove the faults because most of these purchase and sale contracts are established according to the template of the investors, and always states that the customers have been fully understood about the legal situation of the project and voluntarily conclude such contracts. Thus, it is determined that the customers are also at fault, and neither party is obliged to compensate for any damage when such contracts are declared invalid.

In fact, such disputes arise very commonly. According to the guiding Resolutions of the Judicial Council of the Supreme People's Court such as Resolution No. 01/2003/NQ-HDTP dated April 16, 2003, Resolution 02/2004/NQ-HDTP dated August 10, 2004..., one of the damages that needs to be considered when declaring the purchase and sale of houses/land use rights invalid is the difference in the value of land use rights/houses agreed by the parties at the time Contract signing against value at the time of the first-instance trial. If an agreement on the value of the land use right/houses and the value of the damages between the parties cannot be reached, the Court may request a price based on the market price or the price list set by a competent state agency.

However, it is not easy to prove the actual damage. When the parties sign sale and purchase contracts, the projects may be not eligible to put on the market, or the projects are just a land, and the location of real estate products is not fixed leading to cases where appraisal companies refuse to valuate because the projects are not eligible for transfer. There are also many cases where the State agencies have not officially decided on land prices for such projects, the Court has no basis to determine the price. If the customers have to fulfill the obligation to prove these damages, the above problems will make it very difficult for them to protect their rights and interests as well as prolong the court proceedings.

2. The acts of illegal capital mobilization of the investors:

Currently, there are forms and conditions of capital mobilization, stipulated in Law on Real Estate Business 2014, Law on Housing 2014 and other guiding documents... However, many investors also conduct the acts of illegal capital mobilization, or look for the loophole of the law by establishing some forms of transaction such as reservation agreement, agreement of promised purchase, capital contribution contract, contract of apartment purchase and investment cooperation, contract of project development, capital mobilization and product receipt ... leading to "implicit" agreements that pose risks to the customers. In the event of disputes, it will be very complicated to settle them. Rights and obligations of the parties will be based on evidences as well as arguments made by each party.

3. Disputes arise between the investors and relevant parties that affect the rights and interests of the customers

Currently, many investors do not directly perform the work of searching for customers, but often cooperate and sign contracts of brokerage or product sale with service providers. Accordingly, these service providers perform the brokerage services, introduce products, and find customers who are approaching the project to receive commissions and brokerage fees as agreed by the parties. In many cases, there are disputes arising out of the partnership that lead to the litigation. As a result, the projects are delayed, and the interests of the customers are severely affected.

For example, in the dispute arose from the contract of deposit and brokerage between Bach Dat An Jointstock Company and Hoang Nhat Nam Investment Jointstock Company for the series of projects in Quang Nam – Da Nang, thousand of customers investing in these projects “stuck” in that dispute despite their payment of most of the price of the real estate products. It can be clearly seen that notwithstanding of the faults of the parties in this dispute, its prolonged procedure will lead to the servere damages of the customers, especially the customers who have borrowed money to invest.

4. Risks from agreements, documents, templates of contract of the investors that cannot be controlled by customers

Currently, there are many cases where customers, investors of Condotel apartments and the bank sign a three-party agreement with the following contents: Customers are the borrowers using their real estate to mortgage the loans at the bank. The loan, also known as real estate purchase price, is transferred to the investor's account, also known as the party that owns and uses this amount of money. To attract customers, the investors offer a policy of paying 100% of the price as well as the interest on behalf of customers based on the credit contracts concluded by the customers and the bank. However, it should be noted that the customers are the ones who directly make and guarantees the loan.

It can be inferred that:

- In case where the condotel project is legible to be put on the market and the title of the condotel is granted, according to the three-party agreement signed, the title shall be kept by the bank because the customer mortgage the loans at the bank, and the profit from the condotel shall be made by the investor because the customer has signed the contract of condotel management and lease and received 12% of the profit. Thus, it is not feasible as expected. All income from this lease will be transferred to the customer's account opened at the bank and the bank has the right to temporarily lock it to recover the loan. In fact, the customer will only receive the promise of the desired rate of return and the assets are held by the investor and the bank.

- In case the Condotel project is implemented later than planned, the customer must make interest payment in addition to the principal because the investor's support policy is only applied for a certain period of time. In case the investor's condotel exploitation is ineffective, resulting in a profit as committed is not able be paid by the investor, while the customer cannot afford to pay the principal and the interest, the bank will liquidate the collateral which is the condotel that bought by the customer.

In case the Condotel project is shut down, the investor defaulted, the customer will lose the original purchase amount and not own the apartment. At the same time, because the customer is the borrower, the customer will become a debtor of the Bank and be forced to pay both principal and interest on the loan that the investor appropriated. Thus, when signing these commitments, customers are faced with the risk of not getting the apartment they want but having to pay the full value of the apartment, including bank interest rates, in advance. These contracts are like "financial traps" which are full of risks and difficult to escape for customers. In addition, there are other disadvantages shown in the agreement that cannot be foreseen by the customer.

- In case the customer breaches the mortgage contract or another agreement signed with the bank, a fourth party appointed/authorized by the Bank or introduced by the investor to receive the transfer of the sale and purchase contract becomes the transferee and all the money previously paid by the customer to the investor will be considered being paid by the fourth party to the investor. This means that a customer who violates the mortgage contract will automatically lose the purchased Condotel.

5. Risks from the form of the off-the-plan real estate not regulated by any legal frame

In fact, up to now, legally, there is no legal frame regulating the type of condotel, because:

Condotel is defined as a type of housing combined with motels, hotels, or resorts, but its definition does not fall into any housing concepts explained in Article 3 of the Law on Housing 2014, including “housing”, "detached house", "apartment house", "commercial house", "public housing" or "social housing".

If we consider Condotel a type of housing but build it in the land for commercial use purpose, we may violate the law provisions under Clause 4, Article 6, Law on Housing 2014 as follows: “Building houses on the pieces of land other than residential land; build houses in contravention of standards for design standards, housing area standards applied to each type of houses as prescribed.”

If the Condotel is considered as an apartment built in a building with dozens or hundreds of apartments, it is not allowed to be used for business purposes as prescribed in Clause 11, Article 6 of the Law on Housing. 2014 regarding the prohibited acts, specifically: “Using the apartments not for residential purposes; using the area for business purposes in the apartment building under approved project for trading flammable materials, explosives, providing services causing environmental pollution, noise or negative effects on the lives of households and individuals in the apartment building as prescribed in regulations of the Government.”

Besides, from February 14, 2020, the Ministry of Natural Resources and Environment has issued Official Letter No. 703/BTNMT-TCQLĐĐ on guidance on land use regime and certification of ownership of non-residential construction works, including Condotel.

However, there is no complete legal framework for the type of condotel. Therefore, it will be difficult for the management of construction investment, operation, and ownership of certificates such as red book, pink book. The actual transfer, purchase and sale transactions are formed under the consensus between the parties on the basis of voluntary agreement of civil law. In many cases, if transactions between an investor and a customer are established in the direction of thoroughly protecting the investors’ righs, there is no clause protecting the customers’ right. If the investor’s commitment is not fulfilled, the customer must take any risk. The huge risk is that real and legal ownership of the condotel still belongs to the investor or the bank. It can be clearly seen that although customer spends a lot of money but do not have legal ownership of the apartment and the debt is still borne by him/her.

6. Risks of delay of the project implementation and risks related to the investor’s uses of funds. For example, the progress of the off-the-plan real estates is slow down due to the investors’ weak capacity, the change in the process of implementation (There are some technical changes of the project that take a long time to appraise and process; the administrative procedures in State agencies are prolonged; the project is changed in design; there is price fluctuations of materials, raw materials, equipment ...) or the investors’ faults in using the deposit of the customers leading to the lateliness. Although it is stipulated in the Law on Housing that the investors must use the payments of the customers for developing the housing projects, there is in fact no effective mechanism for the authority or customers to control the use of investors’ capital.

7. Restrictions on mortgage of off-the-plan houses

According to Clause 2, Article 147 of Law on Housing 2014 on the mortgage on projects on housing construction and mortgage on off-the-plan housing, “Any organization or individual who builds an off-the-plan house on their lawful piece of land; any organization or individual who buys an off-the-plan house in a project on housing construction from an investor is entitled to mortgage that house at a credit institution operating in Vietnam in order to apply for a loan to build or buy that house.”

Therefore, the buyer of the off-the-plan housing may only be allowed to mortgage their houses at credit institutions operating in Vietnam for the purpose of housing construction or buying that house themselves without using them for another purpose.

8. Although there is no regulation in the Vietnamese laws on the sellers’ liabitilies in the cases of circumstance changes, changes in material prices, labor, and government policies, in reality, the contract contains this clause. For example, “Both parties agree that the clearance area in this clause is temporarily recorded and may increase or decrease as per the actual measurements at the time of handing over the apartment. The buyer is responsible for paying the amount according to the actual area when handing over the apartment. In case the clearance area is 2% higher or lower than the area stated in the contract, the two parties are not required to adjust the apartment's selling price. If the difference exceeds 2% of the area in the contract, the price of the apartment will be adjusted according to the actual measured area”. That the investors mention this issue in the contract while there are no provisions on it may lead to disadvantages for the buyer because the rate is decided by the investor. Meanwhile, the important clause such as the buyers’ right of refusal due to the investors’ fault may not be stated in the contract.

9. Risk of building quality when home buyers receive the real estate: It is possible that the real estate quality cannot reach the expectation of the buyer. However, the buyer may do nothing in this case because it is consistent with the signed contract. Another risk is that the investor handover the property against the commitments.

WHAT YOU NEED TO DO TO AVOID RISK WHEN BUYING OFF-THE-PLAN REAL ESTATES?

[1] Before signing the contract, the buyer should carefully consider the capacity of the investor, the legal status of the property, and the construction progress of the project (these are the rights and obligations of the buyers specified in the Civil Code). Specifically, the investors must obtain the following legal documents of the project:

- The approved detailed construction planning map of 1/500 scale;

- Papers on the right to use, papers of the land, project dossiers, construction drawing designs approved by competent authorities;

- Construction permit in the case of requiring a construction permit, papers on the pre-acceptance test of construction of the corresponding technical infrastructure according to the project schedule. In the case of the off-the-plan apartment building or off-the-plan mixed-use residential building, there must be a report on the acceptance of the  foundation completion of that building;

- A written approval of the province-level housing management authority on the investors' capacity on doing business;

- Bank guarantee on the Investors' financial obligations when the real estate is not handed over on schedule;

In case the Project has been mortgaged, the investors must enclose papers proving it has been accepted or a written agreement for the buyers not to mortgage and be entitled to purchase, sell or rent-purchase the house there.

Off-the-plan real estate business can only be conducted when all the above mandatory conditions are met. In case of lacking any documents, the buyers need to ask the investors for the supplementation to avoid the transaction invalidation.

[2] The payment progress of the off-the-plan real estate purchase

The buyers should pay attention to the payment progress to avoid risks when buying off-the-plan real estate, the payment is made under Article 57 of the Law on Real Estate Business 2014:

The off-the-plan real estate sale or lease purchase shall be paid by installments, the initial installment do not exceed 30% of the agreement value, the next installments shall be conformable with real estate construction progress provided that total installment does not exceed 70% of the agreement value if the building has been not transferred to clients; if the seller or the lessor is a foreign-invested enterprise, the total installment does not exceed 50% of the agreement value.

If the buyer or the lessee has been not granted the Certificate of land, ownership of land and property on land, the seller or the lessor shall not collect payment not exceeding 95% of the agreement value from the buyer or the lessee; the remaining value shall be paid when the buyer or the lessee is granted the Certificate of land, ownership of land and property on land by competent agencies.

[3] It is necessary to clearly state in the contract the liability for contract compensation in case the seller breaches the contract, specifically:

The seller may be fined and compensated for the damage caused by the delay in real estate handover under Clause 2, Article 16 of the Law on Real Estate Business 2014:

The payment for real estate transactions shall be agreed by contracting parties and followed the regulations of laws on payment.

Penalties and compensation for damage caused by late payment from the buyer, transferee, lessee, or renter, or late real estate transfer from the seller, transferor, or lessor shall be agreed by contracting parties and stated in the agreement.

[4] It is necessary to have a direct regulation on the payment account in the contract of purchasing off-the-plan real estate to avoid the investor's failure in complying with the commitments with the bank and the buyers.

It is currently stipulated in Clause 1, Article 56 of the Law on Real Estate Business 2014 that the investor’s financial obligations must be guaranteed by a competent commercial bank in case the investor fails to transfer the building on schedule as commitment to clients before the investor sell or lease purchase off-the-plan buildings. When signing the contract of purchasing off-the-plan house, the investors are usually required to transfer the amount of payment to the payment account opened at the bank so that the bank can monitor and control the investors’ use of capital and ensure the right purpose of the use. Besides, the buyers may feel more secure because the bank will control the investors in using the money raised from them. However, in reality, there are many cases where buyers pay by cash or transfer to accounts at other banks other than the investor's bank account. Then, the investors use the money for other purposes, leading to the risk of affecting the legitimate rights and interests of the buyers. Therefore, it is necessary to have a direct regulation on the payment account in the contract of purchasing off-the-plan real estate to avoid the investor's failure in complying with the commitments with the bank and the buyers.

[5] It is necessary to have the specific regulations on handling fluctuations, the seller's responsibility when there is a change of circumstances to ensure the benefits of the buyers and the investors as well as a mechanism to ensure the fair and effective contract implementation.

[6] Before signing the contract, the buyer should note that in case of receiving transfer of land use rights through a broker, it is necessary to find out information or contact the investors to determine the status of the transferred land. The terms of the contract should be read carefully. The person signing the contract must be the legal representative or the person authorized by the legal representative of the investors or the legal owner (with a legal power of attorney). The buyers have the right to ask the sellers to include the design of the house in the contract appendix to determine whether it will be the model or the structure to be handed over. The buyer has the right to negotiate and change the terms of the contract before signing.

[7] It is necessary to strengthen the inspection, management and control measures of the competent authorities over the business entities, the transaction conditions of the off-the-plan real estates, the template of the contracts, and the information channels about the investors, the implementation and legal status of projects so that the buyers can conveniently learn and limit the risks in the process of purchasing the off-the-plan real estate.

Hoàng Trần Ngọc Anh – FDVN Law Firm

LIST OF REFEREANCES

[1] Master Nguyễn Đình Phong, “Some shortcomings of contract of purchasing off-the-plan real estates”, https://tapchitoaan.vn/bai-viet/thao-go/mot-so-bat-cap-ve-hop-dong-mua-ban-nha-o-hinh-thanh-trong-tuong-lai.

[2] Master Nguyễn Thị Hồng Nhung, “Law provisions on off-the-plan real estates business”, https://tapchitoaan.vn/bai-viet/kinh-doanh/phap-luat-ve-kinh-doanh-bat-dong-san-hinh-thanh-trong-tuong-lai.

PART 2: LAW AND PRACTICE