Failure to publicly disclose project mortgages: The current maximum penalty of 1 billion VND is not

Experts opine that the penalty of 800 million to 1 billion VND may deter developers from mortgaging project assets without disclosure, but this is not a sufficiently strong deterrent.

According to statistics from the Ho Chi Minh City Department of Natural Resources and Environment, as of 2023, there were 60 housing projects in the city that had been mortgaged to banks by their developers. Of these, 41 projects were mortgaged between 2016 and 2023, and many others were mortgaged between 2008 and 2011, resulting in delays in issuing pink books to homebuyers.

Accordingly, there are three types of mortgages commonly used by project developers: mortgage of land use rights (land); mortgage of land use rights and attached assets formed in the future (land and buildings); and mortgage of attached assets formed in the future (buildings on land).

According to the regulations, before initiating the procedure for requesting a pink book for the homebuyer, the developer must discharge the mortgage and submit the original land use right certificate to the Department of Natural Resources and Environment for amendment, convert the land use type to common use.

However, in reality, some developers have failed to discharge the mortgage, leading to prolonged delays in issuing pink books for the project and widespread public dissatisfaction. Furthermore, it is concerning that homebuyers are almost always uninformed about the developer's decision to mortgage the project assets to the bank.

To curb the practice of developers concealing information about mortgaged real estate projects, the Ministry of Construction has proposed a fine of 800 million to 1 billion VND for such violations in the draft Decree on administrative sanctions for construction violations. Lawyer Le Cao, Managing Director of FDVN Law Firm, suggests that this penalty may deter some developers from concealing information about mortgaged project assets. However, it may not be a sufficient deterrent for many businesses.

This penalty level may not be severe enough to deter many businesses

Journalist: The Ministry of Construction is getting public opinion on a draft Decree prescribing administrative sanctions for construction violations. Of these, proposing fines of between 800 million and 1 billion VND for developers who fail to disclose information about mortgaged real estate projects. Additionally, developers may be subject to a supplementary penalty of a 3-6 months suspension of their real estate business activities related to the non-compliant project."

As a legal expert, what is your professional assessment of this proposal?

Lawyer Le Cao: Clause a, Paragraph 8, Article 59 of the draft Decree on administrative sanctions for construction violations, which is currently under public consultation, includes a provision addressing violations where "real estate Businesses fail to publicly disclose information about the mortgage of housing, construction works, building floor area, land use rights, and real estate projects offered for sale as prescribed.

This provision is intended to enforce compliance with the violations arising from real estate businesses' failure to publicly disclose mortgage information as required under Article 6 of the 2023 Real Estate Business Law. The obligation to provide this information rests with the real estate business, and the proposed penalty is the highest administrative fine stipulated in the draft Decree.

Currently, Article 6 of the Real Estate Business Law provides a framework for the Government to issue more specific regulations for implementation from August 1, 2024. If the aforementioned regulation is combined with other regulatory measures, this provision can help prevent developers from concealing information about the mortgaged project assets.

Journalist: How do you evaluate the legal implications of developers concealing information about mortgaged real estate projects? What are the potential consequences of such actions?

Lawyer Le Cao: A significant number of developers have transferred ownership of their real estate projects to customers through various means such as receiving deposits, capital contributions, and investment partnerships, ... despite the fact that the project assets have already been mortgaged to banks.

However, at the time of transactions with customers, many businesses fail to disclose the asset information of the project that has been mortgaged. Subsequently, when facing financial difficulties or feigning such difficulties, these businesses collect funds from investors but fail to proceed with the project, absconding with the investors' money and leaving the projects in limbo. This phenomenon is widespread, resulting in numerous investors losing their investments and leading to civil and commercial disputes.

In many projects that have been completed and handed over to purchasers, buyers have not been issued land use right certificates due to the developer's failure to discharge the mortgage. The consequences of this situation not only cause harm to individuals and investors but also contribute to an unhealthy and unsustainable real estate market, eroding market confidence. Moreover, it leads to land wastage as projects become abandoned and left idle."

Journalist: It is widely believed that inadequate legal sanctions contribute significantly to this problem. Do you think the proposed new regulations from the Ministry of Construction will be effective in deterring developers from concealing information about mortgaged projects?

Lawyer Le Cao: I believe that, for the real estate sector, a maximum penalty of 1 billion VND for not disclosing information about mortgaged project assets is insufficient to deter many businesses from engaging in such practices.

For numerous projects, businesses may merely need to forfeit a small portion of land to satisfy the penalty. Consequently, a more stringent approach is necessary. If the concealment of information is a deceitful tactic to sell mortgaged assets, criminal charges for fraud or embezzlement should be pursued.

However, this mortgage must be transparent from multiple perspectives and be widely disclosed, not only should businesses be held accountable, but there should also be responsibilities from a management standpoint. Therefore, in addition to penalizing businesses that fail to disclose information about the mortgaged assets of a project, when implementing Article 6 of the 2023 Real Estate Business Law, it is necessary to stipulate that banks, mortgage registration agencies, Departments of Natural Resources and Environment, and state management agencies for real estate business must also regularly disclose information about real estate projects, including information about mortgages.

In this way, the rights of citizens, investors to receive full information about real estate projects are enhanced, the business can not conceale the information. Businesses will no longer be able to withhold information. Additionally, if the handling of real estate information is synchronized and consistent, businesses will not be able to conceal the use of real estate projects as collateral.

Journalist: How important is the disclosure of information by project developers in ensuring a safe and healthy real estate market?

Lawyer Le Cao: the proactive disclosure of information about real estate projects is essential. The 2023 Real Estate Business Law, particularly Article 6, has stipulated indetail the disclosure requirements for real estate businesses. This increased transparency will contribute to a healthier and more stable real estate market.

A safe and healthy developing market is one where project developers are willing to provide truthful information about their projects. Genuine real estate businesses that engage in legitimate operations will not hesitate to disclose information publicly. Moreover, businesses cannot mobilize large-scale capital for ambitious projects solely based on their reputation if they deliberately obscure the details of their projects. Therefore, the proactiveness and accountability of project developers are crucial.

However, certain information such as progress in fulfilling financial obligations, legal information on planning, mortgage information, construction conditions, and business conditions, ... is not exclusively held by enterprises. Much of this information can be publicly accessed from the Department of Construction, People's Committees of provinces and cities, and real estate registration agencies,...Therefore, if the law includes additional provisions stipulating that businesses are not the sole providers of this information and that competent state agencies must transparently disclose information about real estate projects, we can easily have a transparent real estate market.

The market is anticipating a significant boost once the new laws come into effect

Journalist: Effective from August 1st, 2024, new laws regulating the real estate market, including the Land Law 2024, the Housing Law 2023, and the Real Estate Business Law 2023, will come into force. How will this affect the market?

Lawyer Le Cao: The new laws coming into effect on August 1st, with their provisions on land finance, real estate business conditions, and information disclosure, will undoubtedly serve as a significant catalyst for change in the real estate market.

The early enforcement of these laws will provide a solid legal framework for new project investments. Businesses can now move forward with their development plans, and market dynamics such as property prices and construction activities will be shaped accordingly. Additionally, the legal completion of existing projects can be facilitated, contributing to the overall development of the real estate market. However, due to the delayed effective date of the new laws, as well as the ongoing development and incomplete nature of the new Decrees and the absence of certain regulations, the real estate market is expected to experience only moderate changes until the end of the year. It is more likely that the market will undergo substantial transformations starting from 2025.

Besides, to give the real estate market a significant boost, it will take time for the impact of major real estate-related cases in recent years to subside. A high level of confidence and new aspirations are needed to attract investments back into the market. With the new laws coming into effect and a clear legal framework in place, both established and new businesses can develop new plans for the future, gradually revitalizing the market.

Journalist: Many experts believe that the implementation of these new laws will put an end to the practice of favoritism and corruption in project implementation, as all parties involved will be required to adhere strictly to the law. What are your thoughts on this?

Lawyer Le Cao: A systemic issue of favoritism, backroom deals, and undue influence by special interest groups has long been prevalent, with the real estate market being a prime example of its negative consequences.

The imperative to comply with the law in real estate projects is an ongoing process, driven not only by new legislation but also by the broader market environment.

The rule of law will facilitate the sustainable development of businesses. Strict adherence to the law may hinder rapid short-term profits but will contribute to the long-term survival and sustainable growth of enterprises.

Journalist: "What preparations do you believe are necessary for all parties to adapt to the new law when it comes into effect?"

Lawyer Le Cao stated: "Numerous issues arise when new laws come into effect, requiring thorough preparation to ensure that regulations are consistent and synchronized with real-life practices. Accordingly, the Government, ministries, provincial-level People's Committees, and businesses all need to be prepared to adapt to new laws when they take effect."

Firstly, the Government should consider the synchronized application of the Land Law 2024, the Housing Law 2023, and the Real Estate Business Law 2023 to ensure that the Decrees issued to provide detailed regulations or guidance for the implementation of these laws are interconnected and consistent. Furthermore, there should be a connection with other laws such as the Construction Law, the Credit Institutions Law, the Investment Law, the Enterprise Law, and the Bidding Law ... to ensure that detailed regulations and guidelines are interconnected and consistent, avoiding contradictions or overlaps.

Furthermore, lessons should be learned from previous legislation where a single law was accompanied by numerous implementing decrees, resulting in a fragmented and loosely connected body of regulations. Currently, the excessive number of implementing documents for a single law, particularly in the areas of land, housing, and real estate, can lead to a fragmented system. Consolidating these documents into fewer, more comprehensive ones would facilitate practical implementation.

Secondly, ministries, sectors, and localities need to establish a comprehensive, synchronized, and detailed system of administrative procedures as soon as possible. This is to avoid situations where laws are already in effect but there is a need to seek opinions and consolidate related public service regulations while implementing them. Particularly in the land, housing, construction, and real estate sectors, where public services are complex and procedures are often lengthy and cumbersome, the establishment of a standardized administrative system will help streamline procedures, reduce processing time, and facilitate businesses and citizens.

Thirdly, for businesses, the new laws establish a stable legal framework for business operations in the coming years. Therefore, a thorough screening of fundamental regulations is necessary to develop suitable investment and business plans. A comprehensive legal support and analysis system will help businesses grasp the requirements for business conditions and the conditions for bringing real estate products to the market, thereby ensuring that business operations are conducted safely and sustainably.

Thank you for your sharing!

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