PURCHASING APARTMENTS UNDER CONSTRUCTION, ESSENTIAL LEGAL ISSUES

Apartments under construction, classified as future-formed real estate, are a type of asset allowed for transaction under Vietnamese law. However, due to the specific nature of such properties – which are incomplete at the time of transaction – purchasing apartments under construction can pose significant risks for buyers. To protect their interests and avoid legal risks or potential disputes, what essential considerations should be addressed when signing a purchase contract?

Conditions for ensuring legal validity of transactions for under-construction apartment

Regarding parties in transactions involving apartments under construction

Firstly, for transactions involving apartments under construction to be legally valid, the participating parties must meet legal capacity requirements. This means that both the seller (typically the developer) and the buyer must possess the legal and civil capacity, as stipulated by law, to engage in such transactions.

It is also crucial to note that a transaction is only deemed lawful if the buyer falls within the eligible group and ownership limits specified in Clause 2, Article 23 of the Law on Real Estate Business 2023. Accordingly, entities permitted to purchase, lease-purchase housing, construction works, or specific floor areas within future-formed constructions must do so in compliance with Article 15 of this Law.

Article 15 of the Law on Real Estate Business 2023:

“Eligible entities for purchasing, leasing, and lease-purchasing housing and construction works owned by real estate businesses

1. Domestic organizations, individuals, overseas Vietnamese citizens, and economic organizations with foreign investment as specified in Clause 5, Article 10 of this Law are eligible to purchase, lease, or lease-purchase housing, construction works, or designated floor areas within construction projects for use or business purposes.

2. Foreign organizations, foreign individuals, and overseas Vietnamese who are not Vietnamese citizens may purchase or lease-purchase housing as per the Law on Housing. Overseas Vietnamese who are not Vietnamese citizens may also purchase, lease, or lease-purchase construction works and designated floor areas within projects to use according to the designated function of the building.

3. Foreign-invested economic organizations as specified in Clause 4, Article 10 of this Law, within their lawful operating period in Vietnam, may purchase or lease housing for use, lease housing for business as regulated in this Law, and purchase or lease construction works or designated floor areas from real estate project developers or real estate businesses for use in accordance with the designated function of the building, to serve their operational activities. They may also lease construction works or floor areas for subleasing, as long as the usage aligns with the building’s functional purpose.

4. Foreign organizations with lawful operating periods in Vietnam and foreign individuals with lawful residency periods in Vietnam may lease construction works for use aligned with the designated function of the building, serving their operational activities.

5. Eligible entities for purchasing, leasing, or lease-purchasing social housing must comply with the regulations of the Law on Housing.”

Apart from meeting eligibility requirements, a valid transaction necessitates voluntary agreement and lawful purpose in the contractual engagement.

Regarding form requirements for transactions involving apartments under construction

The sale contract for apartments under construction must be prepared in written form with all mandatory content specified by laws, clearly detailing the rights and legitimate interests of the contracting parties. Additionally, notarization or certification may be required in certain cases to ensure the transaction’s legal validity and enforceability under current legal provisions.

Legal documentation for apartments under construction

The legal requirements for off-plan real estate, specifically apartments under construction, must be fully satisfied as stipulated by law to ensure that the property can be lawfully marketed. Comprehensive legal documentation must be provided prior to contract execution, serving as a basis for establishing a legally binding transaction and safeguarding the buyer’s legitimate rights and interests. This is particularly crucial given the high value of such assets and their direct impact on safety for eventual use.

Documents proving legal land use rights

The construction project must ensure legal land use rights, as evidenced by documents certifying land use rights such as land allocation decisions; land lease agreements; contracts for leasing land use rights; certificates of land use rights, ownership of housing, and other assets attached to the land… depending on the specific case.

Documents related to construction

For a condominium under construction to be put into business, it must comply with construction regulations and have all necessary approvals from the investment license, design, commencement, to the completion inspection stages.

Note that for condominiums under construction, a completion report for the foundation of the building must be available at the time of the transaction.

Approval of compliance with sales conditions

Furthermore, the project can only be put into business or traded after completing all necessary procedures and receiving a written notification from the provincial housing authority confirming that the property is eligible for sale.

Financial guarantee obligation by the developer to the buyer

The project developer must ensure financial obligations to the buyer, which are formalized through a guarantee agreement between the bank, foreign bank branch, and the developer.

In this agreement, the bank commits to fulfilling the financial obligations on behalf of the investor in the event that the investor fails to meet the commitments made under the contract with the buyer, such as handing over the property, failing to refund advance payments, or other fees (if applicable)…

The corresponding original guarantee letter must be provided to the buyer after the signing of the sales contract for the apartments under construction.

Additionally, from December 1, 2024, alongside the guarantee letter, the investor must provide the buyer with a guarantee issuance commitment letter (copy) at the time of signing the sales contract. This is a commitment from the bank or foreign bank branch to the investor, affirming that the guarantee letter will be issued as per the agreed guarantee agreement, and that this commitment will remain in effect until the guarantee letter has been successfully issued.

Payment for the sales contract of apartments under construction

The law prioritizes the parties’ right to negotiate in transactions, ensuring that the payment terms align with the actual needs and construction progress of the project.

Payments may be made in multiple installments as agreed upon by the parties, as stated in the contract. However, attention must be paid to the following payment limit ratios to protect the buyer:

– The initial payment must not exceed 30% of the total value of the sales contract for the apartments under construction. Note that the contract value here includes the deposit.

– For subsequent payments, the total value paid must not exceed 70% of the contract value before the property is handed over to the buyer. The payment schedule should align with the construction progress. In the case where the seller is a foreign-invested economic organization, the total payment made must not exceed 50% of the contract value.

If the buyer has not been issued the Land use rights certificate, Property ownership certificate, and other associated property documents, the payment made up to this point should not exceed 95% of the contract value. The remaining balance will be paid once all corresponding legal procedures have been completed.

>> OBLIGATION OF GUARANTEE IN SALE OF OFF-PLAN HOUSING https://linconlaw.vn/obligation-of-guarantee-in-sale-of-off-plan-housing/

>> PROCEDURES FOR ISSUANCE OF ELIGIBILITY CERTIFICATE  FOR CONSTRUCTION EXECUTION CLASS II https://linconlaw.vn/procedures-for-issuance-of-eligibility-certificate-for-construction-execution-class-ii/

Terms of contractual penalty, compensation for damages, and contract termination

In transactions involving the sale of under-construction condominiums, delays, deferrals, or evasion of contractual obligations are quite common in practice.

To mitigate risks arising from delayed or refused obligations, it is essential, in addition to clearly outlining the obligations, to specifically agree on the conditions under which penalty clauses and compensation for damages will apply. Note that penalties for breach of contract can only be enforced if both parties have agreed upon and clearly documented them in the contract.

Furthermore, the parties involved should consider the right to request the termination of the contract before its completion if the breach of contract becomes severe and irreparable. This would allow for timely prevention of potentially larger losses.