Construction for international lenders to take mortgage over Land Use Proper held by Vietnamese debtors — Vietnam Enterprise Regulation

Beneath Land Regulation 2013, a international lender (International Lender) shouldn’t be permitted to take mortgage over land use proper (LUR) from a Vietnamese borrower. Nevertheless, a international lender with the assist of a Vietnamese financial institution could take into account the next the construction to permit a Vietnamese firm (Borrower) to make use of its LUR as safety for a international lender. The construction might be summarized as follows:

  • A Vietnamese financial institution (Vietnam Financial institution) will lend a mortgage (Home Mortgage) to the Borrower. The Borrower will mortgage to the Vietnam Financial institution its LUR as safety for the Home Mortgage (such mortgage, the LUR Mortgage). Beneath the Land Regulation 2013, an organization in Vietnam can mortgage its LUR to a financial institution licensed to function in Vietnam.

  • Beneath Vietnamese regulation, upon enforcement of LUR Mortgage by the Vietnam Financial institution, the Borrower has the best to obtain the remaining proceeds after fee of the Home Mortgage (Proper to LUR Mortgage). If the worth of the Home Mortgage is lower than the worth of the LUR then the Proper to LUR Mortgage might have substantial worth. The Proper to LUR Mortgage is often recorded within the mortgage settlement between the Borrower and the Vietnam Financial institution. Accordingly, Proper to LUR Mortgage is a kind of contractual property proper, which can be utilized to safe efficiency of obligation below Article 14 of Decree 21/2021.

  • Accordingly, the Borrower might mortgage the Proper to LUR Mortgage to a international lender (International Lender) as a mortgage of contractual rights (Rights Mortgage) as a way to safe a mortgage prolonged by the International Lender (International Mortgage) to the Borrower. Beneath Article 33 of Decree 21/2021, the International Lender might want to notify the Vietnam Financial institution of the Rights Mortgage earlier than the Vietnam Financial institution pays the remaining proceeds to the Borrower. To facilitate the enforcement of the Rights Mortgage and on the bottom of Article 54.2 of Decree 21/2021, the International Lender ought to have an settlement with the Vietnam Financial institution as obligor concerning the Proper to LUR Mortgage to the Borrower (as obligee) that after the enforcement of the LUR Mortgage by the Vietnam Financial institution, the Vietnam Financial institution can pay the remaining proceeds on to the International Lender after settlement for the Home Mortgage.

  • If the Borrower defaults below the International Mortgage, the Home Mortgage will probably be cross-defaulted, and the Vietnam Financial institution will implement the LUR Mortgage by transferring the LUR or taking on the LUR, then the Vietnam Financial institution will settle the Home Mortgage and pay the remaining proceeds to the International Lender.

The lack to take mortgage over LUR from Vietnamese borrower has been a long-term situation for structuring a safety package deal acceptable to international lenders for giant infrastructure initiatives. The above construction supplies the International Lender with a direct and registrable mortgage over a kind of asset completely different from LUR, however intently linked with LUR. Particularly,

  • The construction has the identical business impact as within the case the place the International Lender can take mortgage over LUR. Since a international lender shouldn’t be entitled to be a land person, even when the International Lender can take mortgage over the LUR, upon enforcement of the LUR mortgage, the International Lender can solely switch the LUR to get cash, moderately than taking the LUR in lieu of the reimbursement of the International Mortgage;

  • The LUR Mortgage can successfully stop the Borrower from mortgaging the LUR to a 3rd social gathering; and

  • Technically, the construction won’t contain a safety agent to take the LUR Mortgage, thus, it doesn’t elevate the priority whether or not the safety agent scheme can be utilized to take the LUR Mortgage below Vietnamese regulation. To date, debtors in giant infrastructure venture typically obtained particular approval from the Prime Minister and Ministry of Justice for the mortgage of LUR to a Vietnam Financial institution as agent for international lenders.

There’s a concern that the Borrower can “escape” the above safety association with the International Lender by the use of repaying the Home Mortgage, and utilizing such reimbursement as the idea for the termination of the LUR Mortgage. As soon as the LUR Mortgage is terminated then the Rights Mortgage can also be terminated. This threat might doubtlessly be mitigated by having acceptable endeavor between the Borrower, Vietnam Financial institution and International Lender.

The construction might be described within the beneath diagram:

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