Vietnam: Introduction of New Land Law

Summary

The much-awaited new Land Law was passed by the National Assembly on 6 November 2003.  It is a single comprehensive piece of legislation that attempts to deal with current land issues of concern to all land users.  However, foreign investors may be disappointed to find that the right to mortgage land use rights to offshore lenders is not provided for and they must still lease land from the State.  Foreign individuals are still not permitted to purchase homes in Vietnam; and overseas Vietnamese allowed to purchase homes are still limited to a small categories of eligible buyers (although there is a general provision allowing the Government to expand this list).

Although the legislation has not yet been published, this update examines the key issues which we understand the new legislation will address.

Land in Vietnam belongs to its people and the State is delegated the responsibility to manage it, although in recent years it seems the State has lost some control in this regard.

The new Land Law tries to remedy this by setting out detailed provisions on uniform administration of land by the State.  Specifically, it provides that there will be a plan for use of land for the entire country that is to be prepared by the Government and approved by the National Assembly.  The Ministry of Natural Resources and Environment is responsible for ensuring land is used in compliance with the approved plan.  The allocation, leasing and change or withdrawal of land use must also comply with the approved plan and must be registered at "land use right office" (details of which are not provided in the new Land Law).  Procedures are also set out regarding resolution of land disputes.

In addition, the new law guarantees that all land users will be issued land use rights ("LURs") certificates and specifically requires the Government to provide a deadline by the end of which all land users in Vietnam will have received such certificates.

The above is a good foundation that hopefully will enable the Government to centralise the management of land and will rectify the current problems with the land system where land users are not using land for the purpose for which they have been granted and boundary disputes abound.   Much will depend on how this will be implemented.

If successful, in the long run foreign investors or potential investors will also benefit by having certainty as to the status of the land on which they would like to set up their projects and avoid any potential boundary disputes.  An uniform land administration regime will also provide transparency and may also speed up land lease formalities, which have deterred some investors from investing in or expanding their operations in Vietnam.

The establishment of a "land use right office" or registrar is also a positive step that will also provide additional transparency to the land system in Vietnam. Further guidelines should be issued in this regard as to the role of this body.

Another positive change that will benefit all land users is an entire chapter in the new law which sets out clear formalities for the State to allocate/lease land, issue LUR certificates, register changes in the purposes and transfers of LURs, and register contributions of LURs as capital to ventures by land users.

Deadlines are also provided for when the Government must take certain action. For example, in respect of allocation/lease of land that has not been cleared (a process that currently contributes significant delay to the implementation of projects outside industrial zones), the relevant authorities must issue a decision to allocate/lease land within 30 days from the date they receive the complete application from the land user.  Based on the decision, the local People’s Committee must clear the land and within 10 days of completion of land clearance and payment by the land user of the relevant fees/rental, the land must be handed over and the land use right certificate must be issued. 

Formalities to register, deregister and enforce mortgages of LURs are also stipulated.  In the event of a default, the mortgagee (without any further action required) may sell the LUR to a third party if this has been agreed in the mortgage agreement and the new user will be issued with a LUR certificate in accordance with the current purpose for the remaining term of the land use.  This, along with the recent new legislation on registration of mortgages, should facilitate the taking and enforcement of mortgages of LURs.

Of importance to foreign investors are their rights with respect to land. This is currently governed by the 1993 Land Law and an Ordinance issued in 1994.  With the exception of overseas Vietnamese, the new Land Law does not significantly change their rights. 

Overseas Vietnamese, investing under the domestic law (Law on Encouraging Domestic Investment) will be "allocated" land (as opposed to being leased land) for which land use fees are payable and will have the same rights as domestic individuals and organisations. This is a significant change and accord with the Government’s policy to encourage investments from overseas Vietnamese. 

Other foreign land users and overseas Vietnamese investing under the Foreign Investment Law must still obtain LURs via a lease from the State.  Their rights will depend on whether they pay land rental annually or for the entire term of the land lease. Land users that pay land rental for the entire term have the additional rights to:

1. assign/sell their LURs and assets thereon during the lease term (whereas lessees that pay land rental annually may only assign/sell their assets on the land).
2. sublease their LURs and assets thereon during the lease term.
3. contribute LURs and assets thereon to do business with other parties during the lease term.
4. sell or lease houses (where they are permitted to invest in the residential property sector) and the buyers will be granted LUR certificates.  Land lessees (investing in the residential property sector) that pay rent annually can only lease but not sell residences built by them.

Currently, these additional rights (which are granted to domestic land users) are not available to foreign investors and thus the changes could be seen as a significant step to level the playing field between foreign and domestic land users.  In practice, however, most foreign land users may not benefit much, because to enjoy these rights, they would have to effectively purchase the land.  Many may be unable to do so, as this will involve investing a large amount of capital upfront just to pay for the land rental. Thus, most will opt the annual payment scheme. This will be a burden especially for those investors contemplating investments in the residential property sector for sale and may effectively discourage them altogether. 

In addition, this change will cause difficulty for current foreign land users wishing to mortgage their LURs since in order to do they must pay land rental for the entire in advance.  The current law at least allows those who have paid rental in advance for some years to mortgage their LURs provided that the 5 years remains the term of their lease for which rental has been paid in advance.  This so-called 5-year rule will no longer exist. Assuming that most foreign land users have not paid (and perhaps cannot pay) all rental upfront, it appears that in practice most foreign land users will only be able to mortgage assets on land but not the LUR itself. 

The new Land Law finally recognises the existence a real estate market and regulates what types of land that can be traded in the market. It specifically prohibits land users from putting land allocated/leased to them by the State to carry out investment projects into the market. It also recognises that the State must play a role in the development of this market and empowers the State body in charge of land to regulate the registration of real estate transactions; establishment of real estate investment funds; establishment of related-service providers and to take measures to avoid speculation and protect participant in the market.  Clearly, further implementing legislation need be issued in this regard.

An entire section is devoted to how land price, a key market factor, will be determined.  This will be done in one of three ways:

(1)  by the relevant People’s Committee in the cities, provinces; 

(2)  via an auction; or

(3)  by the land users themselves upon the transfer/lease, sublease of LURs or contribution of LURs as capital.

Basically, the State will determine land price based on the actual value of the land in "normal circumstances" and if there is a "large" discrepancy in its calculation compared to the actual selling price in the market, the State must adjust the price.  Land price determined by the State will be for the purposes of:

(1)  assessing land use tax, income tax for the transfer of LURs, land use registration fee, compensation when LURs are withdrawn by the State, penalties for those that violate the Land Law causing harm to the State, land rental;

(2)  putting a project that involves land out for bidding; and

(3)  calculating LUR value when land is allocated without a land use fee. 

This will mean that all amounts payable to the State in respect of land will no longer be based on the currently arbitrary, low land rental tariff issued from time to time.  In part, this is probably intended to cool the speculation on land and to enable the Government to collect proper tax for land transactions.  It is expected that future legislation to provide for a land use tax and income tax upon the transfer of land will be issued in the near future. 

In respect of amounts payable by the State in cases of compensation for its withdrawal of LURs, the principle of determining land price based on actual market value will hopefully enable the land user to receive fair compensation for land taken away by the State.  Foreign investors should also benefit if compensation is more in line with market prices as opposed to the current Government tariffs, which are much lower than market prices leading to significant delays in the clearing of land or their projects.

For foreign investors the changes in the new Land Law may not have a large impact and certainly more changes could have been made in this regard.  However, compared to the existing 1993 Land Law, the new law does contain some significant changes in respect of land administration formalities, recognition of the reality that land is a valuable commodity and the existence of a real estate market and pricing of land. These basic changes should form a good foundation going forward.  Of equal importance is its implementation and, until clear guidelines are issued, the effect of these changes cannot yet be assessed.

The new Land Law will become valid on 1 April 2004 and will replace the current 1993 Land Law and its amendments in 1998 and 2001 as well as the 1994 Ordinance on rights and obligations of foreign individuals and organisations ("foreign land users") leasing land in Vietnam. Its ramifications will not be known until the implementing guidelines are issued.