by Russin & Vecchi's lawyers

LAND AND CONSTRUCTION

In this Chapter, we discuss a number of legal and practical issues to acquire land to construct a factory. This Chapter does not discuss the special rules that apply to acquire land for development and for resale or sublease.

4.1 Foreign invested enterprises ("FIEs") and Land Use Rights ("LURs")

In Vietnam, land cannot be owned either by individuals or by entities, whether they are Vietnamese or foreign. The Constitution provides that land is owned by the entire people and that the State administers it on their behalf. In its exercise of the people's ownership rights, the State allocates [ie, the State gives a piece of land to a land user to use for a definite or an indefinite period of time, with or without the need to pay a land use fee (levy)] or leases a piece of land to individuals, households or entities to use in accordance with the Land Law and its implementing regulations.

Any individual or entity to which a piece of land has been allocated or leased must use the land for the purposes stipulated in the land allocation decision or in the land lease. After being allocated or leased a parcel of land, or after a land user receives a piece of land (land use rights) transferred from others, the land user is entitled to receive a Certificate of Land Use Rights, Residential House Ownership and Ownership of Other Assets Attached to the Land ("LURs Certificate") granted by a competent State agency. An LURs Certificate permits a land user to protect its rights and interests. Even though individuals and entities do not have outright ownership of land, when they receive LURs, they have basic control over the land and are entitled to exercise the right to use, transfer, mortgage, lease, and many other rights that are associated with land ownership.

Land users include any individual or entity that has been allocated or leased land, or that has had its LURs recognized by the State, or that has received its LURs through transfer.

The rights and obligations of a land user that has been allocated land by the State are different from those of a land user that has been leased land from the State or that leases land from others. Generally speaking, each type of land user has different rights and interests in relation to the use of a specific parcel of land. For example, Vietnamese individuals and entities can receive their LURs by being allocated or leased land by the State or by receiving LURs transferred from another LURs holder. FIEs can only receive their LURs by being leased land from the State or, in some cases, by being leased or sub-leased land from others who are permitted by law to lease or sublease land to them. An FIE might also receive LURs as contribution of capital from a local enterprise. This mode has features of both a lease and of capital contribution.

An FIE with an investment project in Vietnam may select to lease land and pay rent either annually or in a lump sum for the entire term of the lease.

The means by which an FIE can secure land to implement its project vary slightly depending on the location of the project:

  • An FIE that requires land outside an industrial zone, a hi-tech zone or an economic zone to construct a factory or a commercial building for its own use may either: lease land from the State, or lease or sublease land from overseas Vietnamese or domestic economic entities that are permitted to sublease land. In the latter case, they may do so only if there is already construction work or infrastructure affixed to the land. An FIE may also sublease land (on which infrastructure has already been built) from other FIEs, as long as the FIE lessor is permitted to sublease land.
  • An FIE that has a license to develop an industrial zone can lease land from the State. An FIE that puts its factory in an industrial zone may also choose to sublease land from the industrial zone developer, or sublease land with infrastructure from other enterprises located in the zone, if a sublease is approved by the industrial zone developer.
  • An FIE that has a license to develop a hi-tech zone or an economic zone can lease the land from the zone management board.
  • Finally, the foreign investor may form a joint-venture with a Vietnamese company and the Vietnamese company may contribute its LURs as capital for use by the new enterprise. There are many conditions and exceptions to this general statement, and each case must be separately examined.

An FIE will be granted an LURs Certificate if it leases land from the State or subleases land in industrial zones, in hi-tech zones or some specific areas in economic zones. The term of validity of the land lease and of the LURs Certificate of an enterprise coincides with the term of the investment certificate, but may not exceed fifty (50) years in normal cases, and seventy (70) years in special cases. If an FIE leases land in an industrial zone, the duration of the lease may depend on the duration of the industrial zone's own investment certificate.

Besides being the most vital land document that the enterprise might possess, the LURs Certificate brings an added value to the FIE. The FIE can mortgage its LURs with a Vietnamese credit organization, a branch of a foreign bank, or with a joint venture bank licensed to operate in Vietnam when it had paid the rent in a lump sum for the entire term of the lease. There are specific laws which detail the method of calculating the value of LURs and which outline mortgage procedures. There are certain limitations, but we do not discuss these limitations here. In order to mortgage LURs based on a lease, the main requirement is that rent for the entire term of the lease has been paid.

4.2 Choosing and renting a land site: outside vs. inside an Industrial Zone ("IZ")/Export Processing Zone ("EZ")

A foreign investor may lease a piece of land inside or outside of an IZ/EZ. There are advantages and disadvantages attached to each option.

4.2.1 Location outside an IZ/EZ

If an investor decides to locate its project outside an IZ/EZ, it may choose a location which is best suited to its needs such as: close to an airport or a seaport, close to its major suppliers or its major customers, or to secure some other advantage. However, the investor needs to assure itself that its project, once it is built, will be in line with the State's development plan for that area. It must also clear that parcel of land, and must compensate inhabitants or owners of any properties existing on the land. We discuss land clearance issues in more detail below, but it is a difficult exercise, and strong support from the local government is very important.

If an investor decides to lease a factory that has already been built instead of leasing a piece of land in order to construct its own factory, it may lease from the owner of the factory. In such case, the investor must ensure that the lessor owns the factory or that the lessor is allowed by law to sublease that property.

In addition, before leasing a piece of land for a factory outside an IZ/EZ, the investor should check with the licensing authority to ensure that the location of the factory is acceptable, meaning it does not violate any zoning plan. Factories likely to pollute the environment or cause noise may not be allowed to locate in populated areas.

Furthermore, there are infrastructure issues to consider such as: clean water, stable power, waste disposal, and a waste water treatment system. If they are lacking, can existing facilities be augmented? For example, should a power plant be built or can the enterprise tap into a nearby private power source? What is the volume of available clean water?

Although an enterprise located outside an IZ/EZ will not receive benefits available to an enterprise located in an IZ/EZ, discussed below, it can achieve some benefits:

  • If an enterprise located outside an IZ/EZ leases land from the State, the local provincial Department of Finance will decide the rent, based on a Price List issued by the local provincial People's Committee at the beginning of each year (current annual rent ranges from 0.75% to 3% of the price of land for the same purpose as specified in the Price List, subject to some deductions depending on the location and the business objectives of the project). However, if the Price List issued by the local provincial Peoples' Committee is not comparable to the market price, the Peoples' Committee may refer to the actual market price to determine a suitable price. For rent that is paid annually, rent can often be capped for a minimum term of five (5) years. After this, there will be a rent adjustment. For rent that is paid in a lump sum for the entire term of the lease, the rent is equal to the land use fee payable by a domestic enterprise that has been allocated the same piece of land for the same purpose and for the same term. An FIE may also obtain the land through a tender, and in such a case the rent will be decided by bidding.
  • In case the lease term (for which the rent for the entire term has been prepaid) is longer than the term of the investment project stated in the IC, the term of the investment project will be extended to be equal to the lease term.
  • Some provinces provide full rent holidays.
  • The enterprise can sublease the land and/or the assets attached to the land to other parties, if permitted in the lease agreement.

4.2.2 Location inside an IZ/EZ

Locating inside an IZ eliminates any land clearance problems. The enterprise will be located in a zone in which land lots have already been systematically subdivided. The IZ infrastructure is well established, properly maintained, and supplied with wastewater treatment system, security, roadways, and sometimes with a private power supply. Some IZs have on-site Customs clearance. The investor may be entitled to negotiate some commercial terms with the IZ developer. Leases, however, are standardized and many non-commercial terms may be more difficult to negotiate. In certain cases, investment in an IZ is encouraged, and some incentives, mainly tax incentives, are available. Moreover, locating in an IZ eliminates the concern of whether the factory fits into the local development plan.

IZ developers may construct factories to investors' specifications. It may or may not be hard to find a small piece of land or small factory in an IZ. Of course, land within an IZ is more expensive.

If an investor locates in an EZ, besides the benefits to which an investor is entitled if it locates in an IZ, it may also enjoy the following:

  • Generally speaking, in some areas of an EZ, the land has been cleared and there are no occupants to compensate.
  • It will be entitled to separate investment incentives applicable to areas with special socio-economic difficulties (there is a list of remote areas that have special socio-economic difficulties).
  • It will have the opportunity to negotiate an exemption and reduction of land rent for a certain period of time.

There are IZs /EZs in various stages of development. Those that are mature tend to have full supporting facilities, but tend to be more expensive and have less land still available. New IZs/EZs may be less developed, but the rents may be significantly lower, and the developer may be more willing to negotiate both commercial and non-commercial terms.

4.3 Building a factory outside of an IZ

As mentioned, more issues arise if one builds a factory outside of an IZ. If investors want to lease land from the State, the threshold task in many instances is land clearance. By law, it is the State's responsibility to relocate and compensate residents, and to clear the land in order to lease it to investors. Once land is approved for lease by the State, the local People's Committee is responsible to organize both the compensation and the relocation process. The investors often advance the cost of land clearance. That amount is then deducted from the rent that investors must pay to the State. The basic unit price for relocation compensation is fixed according to State regulations, but negotiation may often still be required. If the foreign investor pays compensation that exceeds the government guidelines, there is an issue of whether the excess can be set off against the rent.

If problems occur, it will most often be during the land clearance stage. The most common difficulty is usually that residents do not want to move because they are not satisfied with the compensation, because they do not like the new location, and sometimes because the new location is not ready. Even though the Land Law supports State involvement in land clearance, in practice an investor needs to pay compensation to the existing user of the land to speed up the land clearance process. After approvals for land recovery are issued along with a compensation program, site clearance plans and the resettlement of occupants must proceed according to the land recovery decision. If a land user fails to comply with the decision, the People's Committee can force relocation.

A foreign investor should be sure to examine the site clearance plan for each location it considers. If the local People's Committee plays a strong and active role, as it should, problems can be mitigated. It will be important to secure assistance from the People's Committee.

Leasing land directly from the State may result in lower rent. Because the State tends to reserve land for large and more important projects, obtaining a lease from the State can be difficult, especially for small projects. In order to lease land directly from the State, investors must satisfy certain criteria.

If investors prefer to lease land from enterprises, the investor must negotiate directly with the holder of the LURs Certificate. This is much closer to simple, unregulated economic negotiation. It is important to ensure that the lessors are legally allowed to lease the land and ascertain what infrastructure is available on the land.

4.4 Obtaining a construction permit

An investor must obtain a construction permit before building a factory. The investor may authorize its contractor to obtain the permit on its behalf, and this is often done. In most cases, the zone authority is competent to issue the construction permit. Otherwise, the local construction department under the provincial People's Committee has the responsibility to do so. A construction permit can usually be expected within 20 days from submission of an application.

A construction permit will not be required in a number of special cases, for example:

  • Secret State works; works to be constructed pursuant to an emergency order; temporary works to service construction of the main works;
  • Construction works built along a route which does not pass through an urban area and which comply with the construction master plan; construction works within a construction investment project already approved by authorities;
  • Repairs or improvement, and interior installation of equipment which does not change the architecture, weight-bearing structure or safety of the works;
  • Technical infrastructure works which only require formulation of an eco-technical report, and separate dwelling houses in remote and distant regions for which there is no approved rural residential master plan (master plan on construction of new rural communes).

4.5 Selecting a contractor

A 100% FIE is not required to invite bids in order to select a contractor. A 100% FIE may select any contractor it wishes. However, the contractor must be qualified under the law of Vietnam.

In the case of a joint venture FIE, if the project contains 30% or more state capital, the FIE must invite bids to select the contractor.

4.6 Construction agreements

A construction agreement between an enterprise and a contractor (a legal entity) is a commercial contract. In addition, foreign contractors can be used. For projects performed by international companies, international contract formats are quite common. There is also a model construction agreement provided by law that contains compulsory provisions.

A construction agreement can have special provisions in respect of governing law, place of arbitration, and the arbitration rules under which a dispute will be resolved. Vietnam is a signatory of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, and is developing a record of recognizing foreign arbitral awards. However, because foreign awards are not automatically enforced in Vietnam, there may be a number of obstacles to efficient enforcement. The parties will need to go through a two-part enforcement process: first, it will need to have the award recognized by a competent Vietnamese court; second, once recognized, the award may then be enforced.

Foreign court judgments are generally not enforceable in Vietnam, except in cases where Vietnam and the country in which the court judgment is issued have signed or acceded to an international treaty on judicial assistance in civil procedures. Such countries are mostly former Soviet bloc countries. Enforcement is also possible if judicial assistance in civil procedures is accepted by the two countries on the principle of reciprocity. The outcome of litigation in Vietnamese courts is sometimes unpredictable.

4.7 Approval of completion of construction work

Generally speaking, a construction project can be divided into several phases, each of which is stated in the construction agreement. Upon completion of the whole project, the investor must invite its design consultants, its contractors and its supervising consultants to witness the commissioning of a project. Minutes of commissioning and acceptance are executed by all parties. Such minutes constitute a legal document, and allow the investor to bring the project into operation. In addition, they serve as the basis on which the investor can prove the contribution of its investment capital, and on which the FIE can register its ownership of the building.

4.8 Certification of ownership of a factory

The FIE will be issued an LURs Certificate upon submission of an application dossier to the provincial Peoples' Committee or the Department of Natural Resources and Environment under authorization given by the provincial Peoples' Committee where the factory is located. This LURs Certificate will record the status of the FIE's LURs and the ownership of the FIE over the factory or the construction work which has been developed on the leased land. The FIE may mortgage its factory to credit institutions licensed to operate in Vietnam. If the FIE has paid the rent for the land to which the factory is affixed in a lump sum upfront for the entire lease term, it can also mortgage the LURs as well as the factory affixed to the land, but only at a credit institution licensed to operate in Vietnam.

4.9 The right of FIEs to purchase and own apartments in Vietnam

An FIE is entitled to buy and own apartments in order to provide accommodations for its employees. Representative branches/offices of offshore entities do not have this right.

An FIE must meet certain conditions in order to buy/own apartments: (i) it must have an investment certificate; and (ii) it must not be licensed to operate in the real estate sector.

An FIE is entitled to buy only apartments in commercial residential projects. In other words, an FIE is not permitted to buy or own a private house, villa or land. Moreover, an FIE is entitled to use such apartments only for residential purposes. Other purposes (eg, leasing, using as an office, etc.) are not permitted. There is no limit on the number of apartments that an FIE may own.

Footnotes

38The name of this Certificate of Title has been changed several times. Before December 10, 2009, there were two different certificates: Land Use Right Certificate and House Ownership Certificate (or House Ownership and Land Use Right Certificate if the owner of the house is also the one who has the land use right). Currently, the land user and owner of houses or owner of other assets attached to the land is issued a Certificate called Certificate of Land Use Rights, Residential House Ownership and Ownership of Other Assets Attached to the Land. The Certificate will clearly state information on whether the land user has the right to use such piece of land by being allocated by the State or by being leased by others, and whether there is any residential house or any other assets affixed to the land.
39Decree 12/2009/ND-CP.
40Decree 88/2009/N?-CP.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.