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Official Gazette

Saturday, September 23, 2017

Mortgage over a future building

Updated: 14:46’ - 17/06/2014

Vu Thi Hong Yen[1] and
Bui Duc Giang[2]

KEY POINTS:

l The existing law allows the creation of security over a future building (e.g., a commercial building or a house) in favor of a bank.

l In case of a mortgage over a future commercial building, particular care should be taken to the description of the secured asset in order to ensure priority.

l The law of security over a house remains unclear even in light of the draft regulations and thus does not seem to support credit.

Overview

Under the Civil Code, a security interest can attach in a future object (Article 320) and the mortgaged asset can be a future asset (Article 342.1). Furthermore, Article 4.1 of Decree No. 163/2006/ND-CP dated December 19, 2006, on secured transactions, as amended by Decree No. 11/2012/ND-CP dated February 22, 2012 (Decree 163), provides that the secured asset[3] may be future property that the law does not prohibit from being traded. Therefore, in principle, it is possible to create security over future property[4]. Article 4 of Decree 163 provides that future property doesn’t comprise land use rights and intends to include (i) property to be acquired from utilization of the loan; (ii) property currently in the phase of being created or currently being created in compliance with the law as at the time of entering into the security transaction; and (iii) property already in existence and falling into the category of assets for which ownership must be registered, but which is only registered in accordance with the law after the time of entering into the secured transaction. This definition of future property fits well with a building to be erected in the future.

More specifically, Land Law No. 13/2003/QH11 dated November 26, 2003, as amended in 2009 and 2010, allows an enterprise, whether domestic or foreign invested, to mortgage at an onshore credit institution its assets attached to the land that it has obtained from the State by way of allocation or lease (Articles 110.2 (d), 111.1(b) and 119.2 (b)). New Land Law No. 45/2013/QH13 dated November 29, 2013, with effect on July 1, 2014, preserves the same position (Articles 174.2 (d), 175.1 (b) and 183.2 (b)). 

Under Article 174.1 of the Civil Code, an asset attached to land may be inter alia a house or a construction work (e.g., a commercial building).

Therefore, it is possible for a bank to take a mortgage over a future building

[5]

. However, attention should be paid to specific rules applicable to mortgages

[6]

over a future commercial building (section 2) and a house (section 3).

 

 

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Mortgages over future commercial buildings

Attachment and perfection

Under Article 343 of the Civil Code, the mortgage agreement must be in writing. However, the law does not require registration of the mortgage over a commercial building to ensure its validity as in case of a mortgage over the land use right: the security is enforceable against the parties from the date of its execution, unless otherwise provided by the parties (Article 10.1 of Decree 163). Attention should be paid to the description of the secured future building. In practice, it should contain at least the information related to the building as mentioned in the construction permit.

It is noteworthy that the parties may choose to notarize their mortgage agreement (Article 9.1 of Decree 163) (e.g., for legal certainty or to avoid the requirement of submission of the construction permit to the registrar provided in Article 10.4 of Joint Circular No. 20/2011/TTLT-BTP-BTNMT of the Ministry of Justice and the Ministry of Natural Resources and Environment, providing guidelines for registration of mortgages over land use rights[7] and assets attached to land dated November 18, 2011 (Joint Circular 20)[8]). It may happen that a notary public refuses to notarize a mortgage over a future building (or more broadly a future asset) by arguing that the object of the mortgage should be ‘real’ in accordance with Article 35.4 of the Notarization Law, although this view is strongly criticized by both academics and practitioners.

The mortgage over a future building is enforceable against third parties from the date of its registration with the provincial land use right registration office (Article 11 of Decree 163 and Articles 3.3 and 5 of Joint Circular 20). The registration application file must contain all the particulars prescribed in Article 13 of Circular 20. As noted above, although re-registration of the mortgage upon completion of the building is not a compulsory further step to ensure its enforceability against third parties, it is advisable to proceed with such re-registration, for a third party (a purchaser or another mortgagee) may claim their interest in the building and may get priority if the information related to the building in the registered contents is different from the information related to the building in existence.

Priorities

Under Article 11.1 of Decree 163 and Article 325 of the Civil Code, priority is determined by the dates of registration and, in absence of registration, by the dates of creation of the security interests.

Enforcement

Under Article 56 of Decree 163, a creditor may enforce its security on a default. A further prerequisite for enforcement is set forth in Article 8.1 of Decree 163 under which the mortgagee may enforce its security only after the securing party has become the owner of the secured asset. However, pursuant to this text “with respect to property for which the law requires that the ownership must be registered, but for which the securing party has not yet completed registration, the secured party is still entitled to realize the asset at the enforcement date”. As such, the mortgagee may enforce its security over the commercial building even if the mortgagor has not acquired ownership over it.

The enforcement of the security is conducted in accordance with the methods of enforcement that the parties have agreed on in the security agreement (Article 58.1 of Decree 163). Those methods of enforcement may be either (i) the sale of the building, or (ii) the take-over of the building in lieu of performance of the secured obligation by the securing party (Article 59 of Decree 163). In both cases, the parties may reach an agreement or rely on a property valuation entity to fix the selling price of the building (Articles 64a.2 (a) and 64b.1 of Decree 163). Pursuant to Article 68.2 of Decree 163, in case there is no agreement on the method of realization of the secured property, then such property shall be sold by auction. If the mortgage is only created over the asset attached to land, on enforcement of the security the purchaser or the secured creditor taking over such asset attached to land is permitted to continue to use the land and will be subrogated to the rights and obligations of the mortgagor in the contract on land use right as between the mortgagor and the land user (for example a contract for lease of a commercial building), unless there is some other agreement.

Before enforcing the mortgage, the mortgagee must give notice of the enforcement[9] to the mortgagor and the other registered secured creditors (if the asset has been secured in favor of more than one creditor) or register the notice of enforcement with the relevant registrar of security. The secured party can only enforce the security upon the expiry of a waiting period, which may be agreed on by the parties. Absent such agreed-on waiting period, the time for realization shall not be earlier than fifteen (15) days for real property as from the date of the notice of enforcement (Article 62 of Decree 163).

Furthermore, the competent state authority shall rely on the outcomes of the realization of the building in order to conduct procedures to transfer ownership over this asset to the purchaser or to the mortgagee taking over the building (Article 8.2 of Decree 163).

Finally, as from the date on which a court accepts jurisdiction over a petition to commence insolvency proceedings, realization of the secured shares of the insolvent mortgagor is suspended unless otherwise authorized by the court (Article 27 of Law No. 21/2004/QH11 on Bankruptcy dated June 15, 2004). However, on liquidation of the insolvent mortgagor, the mortgagee ranks in priority to all preferential creditors (e.g., insolvency expenses, claims of employees against the company or tax claims) and unsecured creditors (Articles 35, 36 and 37 of the Law on Bankruptcy) although the current law remains unclear about how the secured creditors may enforce their security upon declaration of bankruptcy of the company.

Mortgages over future houses

Legal obstacles

Under Articles 90 and 91 of Law No. 56/2005/QH11 on Housing dated  November 29, 2005, as amended in 2009 (the Law on Housing), in order to mortgage a house, the mortgagor must have a certificate of ownership over that house. Basically, this implies that the mortgage may attach only in an existing house over which the mortgagor has acquired ownership. In other words, it would not be possible to take a mortgage over a future house.

However, such prohibition appears to be too rigid to support credit. This is why Article 61.2 of Decree No. 1/2010/ND-CP dated June 23, 2010, as amended in 2013 (Decree 71) sets out an exception. This text prescribes that “any entity purchasing a future house from a real estate company shall have the right to mortgage such future house with a credit institution in order to take out a loan. The procedures for mortgaging future houses shall be implemented in accordance with the guidelines to be issued by the State Bank of Vietnam”. Therefore, in principle, banks may lend against a mortgage over a future house. Nevertheless, as Decree 71 refers to implementing regulations to be issued by the State Bank of Vietnam, this security is not so far a common one in practice. A draft joint circular which is supposed to implement this provision is being prepared by the State Bank of Vietnam, the Ministry of Construction, the Ministry of Justice and the Ministry of Environment and Natural Resources and its last version made available for public comments dated January 13, 2014 (the Draft Circular). We will analyze below some key points of this Draft Circular.

Notarization

Reading together Articles 90 and 93.3 of the Law on Housing, it can be inferred that the mortgage over a future house must be notarized or certified by a competent state body. This requirement ensures the enforceability of the mortgage agreement against the parties.

Implementing Draft Circular

The Draft Circular requires a strong probability of the residential house subject to the mortgage. At this regard, under its Article 3.1 and 6.1, the following conditions must be met:

l At the time of creating the security, there is an approved technical design for the house, the foundations of the house have been built, the formalities for the sale and purchase through the real estate trading floor have been completed and notice has been given to the Construction Department of the province where the housing development project or the project of investment into the construction of a new urban zone (the Project) is located; or,

l The house has been already built but the certificate of land use right and ownership of houses and other assets attached to land has not yet been issued.

In either case, the Project must have obtained the certificate of land use right for the land on which the house is constructed or the project owner has been issued with a decision approving the land allocation or lease (as the case may be) in its favor (Article 6.4). More specifically, the following particulars shall be provided to the registrar: name and address of the Project and number of the apartment and the floor where it is located or address, number of the building and its surface area in case of a separate house (Article 14). As such, the mortgagor will have to give a detailed description of the house subject to the mortgage. Since registration of the mortgage ensures priority of the mortgagee over those claiming an interest on the residential building, the mortgagee should also insist on the mortgagor procuring such description at the stage of attachment.

Furthermore, not all types of house may be mortgaged. Pursuant to Article 5, only those being built in a Project (apartments, villas and houses constructed side by side) can be used to secure loans in accordance with the Draft Circular. As such, reading together the above-mentioned provisions of the Law on Housing and Decree 71 as well as this text, it can be inferred that it is not possible to mortgage other types of future houses.

Finally, registration of the mortgage can be effected with the National Registration Agency for Secured Transactions (NRAST) under the Department of Secured Transaction Registration of the Ministry of Justice. When the house comes into existence and the mortgagor obtains then the certificate of ownership over it, a further registration is to be effected with the relevant land use right registration office (Article 12). This double registration can be attributed to the fact that the lawmakers appear to consider the future house as a patrimonial right (intangible) and not as real property. As seen below, this view seems to be incorrect and unjustified.

Pursuant to Article 8.1 of Decree 163, “when the securing party acquires ownership over a part or the whole of the secured asset, the secured party has rights to such part or the whole of such secured asset”. As such, in principle, a security interest cannot attach in an asset before the securing party has acquired ownership over it. The rights of the secured creditor arise only upon acquisition of the asset. Indeed, the agreement for security over a future asset “creates an inchoate security interest which is waiting for the asset to be acquired so that it can fasten on to the asset but which, upon acquisition of the asset, takes effect as from the date of the security agreement[10]”. However, as mentioned above, Article 8.1 of Decree 163 provides that “with respect to property for which the law requires that the ownership must be registered, but for which the securing party has not yet completed registration, the secured party is still entitled to realize the asset at the enforcement date”. Consequently, the mortgagee may enforce its security even if the mortgagor has not acquired ownership over the mortgaged house.

Other alternatives?

As a contract for the sale of the future house exists between the project owner and the purchaser, it is possible to take a security interest over the rights of the purchaser under this contract since Article 322.1 of the Civil Code expressly recognizes rights under a contract as a type of secured asset. However, the current law does not provide a sufficient legal framework to the creation of security over contractual rights[11]. For that reason, this alternative is of little practical importance.

At this regard, it should be noted that Article 4.8 of the Draft Circular allows for the creation of a mortgage over a future house in the form of a mortgage of rights arising from the contract for the sale and purchase of the future house and provides that if such mortgage has been created, the mortgagor is prohibited from granting other security over the same future house. Lawmakers seem confused as a mortgage over a future residential building is different from a mortgage over rights under the contract for the sale of the future house, the former attaching in an object being an immovable asset and the latter on intangible property.

To conclude, the law on this area has not been settled yet. It appears to require a strong probability of future buildings being mortgaged. Registration issues should be sorted out in a coherent manner to ease the registration process and the implementation of priority rules.-



[1] Senior lecturer at Hanoi Law University

[2] PhD candidate at l’Université Paris 2 Panthéon Assas, France

[3] Vietnamese law uses the expression “property to be formed in the future” which is confusing and inaccurate. It should be read “future property” instead. See Bui Duc Giang, “New decree on secured transactions”, Vietnam Law & Legal Forum, vol. 18 – No. 216, August 2012, pp. 11-14.

[4] See also Bui Duc Giang, “Security over future property under Vietnamese law”, Vietnam Law & Legal Forum, vol. 20, No. 230, October 2013.

[5] Pursuant to Article 318 of the Civil Code, security measures include pledge of assets, mortgage of assets, security deposit, deposit securing the return of leased property, escrow deposit, guarantee and reputation-based security. The first five security types constitute asset-based security whereas guarantee and reputation-based security involve mere personal undertakings to perform. All asset-based security interests mentioned in the Civil Code confer mere rights over the secured assets, while the ownership of the secured assets remains with the securing party. Vietnamese law does not recognize the transfer of ownership over shares in favour of a secured lender as security for a loan.

[6] For a presentation of mortgages of property generally, see (in Vietnamese) Vu Thi Hong Yen, Mortgaged assets and their realization under Vietnamese civil law in force, doctoral thesis, Hanoi Law University, June 2013; Bui Duc Giang, “Legal consequences of mortgage over property under applicable provisions”, Banking Review, issue 4, February 2012, pp 41-48 and “In search for the philosophy of mortgages over patrimonial rights under Vietnamese law”, Banking Review, issue 7, April 2012, pp. 56-63.

[7] There is no true concept of private ownership of land in Vietnam. Land is owned by the people of Vietnam and the State administers the land on their behalf. The State allocates or rents out parcels of land to a named individual or entity for a specific use only. This individual or entity will then be issued with a certificate of land use right and ownership of residential housing and other assets attached to land. Security over land relates only to the land use right rather than ownership title to the land itself.

[8] The rationale behind such exemption would be that as the notary public is deemed to have checked the secured asset before notarizing the mortgage agreement, there would be no need for looking at the information about the building in the construction permit.

[9] The notice of enforcement must contain inter alia (i) the reasons for enforcement; (ii) the secured obligation; (iii) a description of the secured asset; and (iv) the method, time and location of the enforcement.

[10] Gullifer (L.) (ed), Goode on Legal Problems of Credit and Security, Sweet & Maxwell, 4th edn, 2008, para. -13.

[11] See (in Vietnamese), Bui Duc Giang “Debt claims as a category of property: Filling in the legal gaps”, State and Law Journal, No. 8, August, 2013.

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