In recent years, off-plan housing has become increasingly popular in the real estate market due to the shortage and rising rates of existing properties. Purchasing off-plan properties relieves buyers of financial stress since payments can be made in multiple installments. However, there are also numerous risks associated with this form of investment, such as lengthy delays or being scammed in investing in “ghost projects“.
To avoid these risks, the 2014 Law on Real Estate Trading regulates that prior to selling an off-plan property, the investor’s financial obligations to the buyer must be guaranteed by a competent commercial bank if the investor fails to handover the property on the committed schedule. However, the regulations on the sale of off-plan property have not been clearly and completely prescribed in the 2014 Law on Real Estate Trading.
Therefore, on 30 September 2022, the State Bank of Vietnam issued Circular No. 11/2022/TT-NHNN regulating bank guarantees which includes regulations on off-plan housing guarantee. Circular No. 11/2022/TT-NHNN will come into effect on 01 April 2023.
What is Guarantee for sale of off-plan housing?
Pursuant to the Circular No. 11/2022/TT-NHNN, “Guarantee for sale of off-plan housing” means a commercial bank undertakes to act on behalf of the investor to fulfill their financial obligations to the buyer in the event the investor fails to transfer the house to the buyers on the agreed-upon schedule and fails to fulfill or insufficiently fulfills their financial obligations under the signed purchase contracts; the investor shall have the obligation to repay the debt to the guarantor that is commercial bank under the signed agreement.
Conditions to be guaranteed off-plan housing
Conditions for investor
General requirements for investor:
- Having the full civil and legal capacity in accordance with law regulations.
- The guaranteed financial obligations must be lawful.
- Being determined by the commercial bank issuing the guarantee that the investor is capable of repaying sums paid by the commercial bank to fulfill the guaranteed obligations in their favor.
Furthermore, if the investor is a non-resident, the investor must be an organization and must meet one of the following requirements:
- Being an enterprise established and operating in a foreign country with capital contributed from Vietnamese enterprise in the form of investments prescribed in Points a and c, Clause 1, Article 52 of the Law on Investment or in other investment form prescribed in Point dd, Clause 1, Article 52 of the Law on Investment; or
- Having fully made an escrow equivalent to 100% of the guarantee value or having ensured 100% of the guarantee value by the investor’s assets, including the investor’s deposit balance at the commercial bank issuing the guarantee, and deposit certificates issued by the same; or
- The buyer is a resident.
Conditions for the commercial bank
A commercial bank is considered to be capable of giving off-plan housing guarantee if:
- Having the license for establishment and operation, or the document stating amendments to this license includes the scope of bank guarantee operations;
- Not being subject to any prohibition, restriction or suspension from providing off-plan housing guarantee.
The list of commercial banks capable of providing guarantees for off-plan houses in each period will be made public on the Portal of State Bank of Vietnam.
Procedures of issuance of off-plan housing guarantee
Step 1: Provide guarantee
The commercial bank shall consider, appraise, and decide whether to issue a guarantee to the investor based on the investor’s request.
Step 2: Sign guarantee for sale of off-plan housing contract
To issue a guarantee to the investor, the commercial bank and the investor enter into a guarantee for sale of off-plan housing contract, which governs the scope, conditions, contents, and guarantee fee agreed upon by the parties. When the sale of a housing agreement is signed, the investor must send a copy of the contract to the buyer.
Any amendment, supplementation, or termination of contents of the guarantee for sale of off-plan housing contract shall be agreed upon and decided by relevant parties in compliance with laws.
The guarantee for the sale of off-plan housing contract is valid from the time of signing until guarantee obligations to the buyers under all letters of guarantee expire and all obligations of the investor to the bank under the guarantee for sale of off-plan housing contract have been fulfilled.
Step 3: Issue the letter of guarantee
The investor shall send the signed purchase contract in which the investor’s financial obligations are specified to the commercial bank and request it to issue the letter of guarantee to the buyer.
The commercial bank shall, based on the purchase contract and the guarantee for sale of off-plan housing contract, issue the letter of guarantee and send it to each buyer or to the investor that shall then provide it for the buyer as agreed.
Step 4: Fulfillment of guarantee obligations
If the investor fails to transfer the house to the buyers on the agreed-upon schedule and at the request of the buyer, the commercial bank shall reimburse the advance fee and other payments to the buyer under the purchase contract and the guarantee for sale of off-plan housing contract.
In order to request fulfillment of guarantee obligations, the buyer shall submit an application for fulfillment of guarantee obligations (including the application form, the letter of guarantee issued by the commercial bank to the buyer and required documents) to the commercial bank.
The commercial bank shall then verify the validity of the application for fulfillment of guarantee obligations and compare it to the terms and conditions of the letter of guarantee.
The commercial bank is responsible for properly and fully performing the committed guarantee obligation for the buyer within 5 working days of receiving the valid dossier of request for performance of guarantee obligations. At the same time, the commercial bank is also responsible for debiting the mandatory loan account with the amount paid on behalf of the investor and notifying the investor.
The investor is obliged to reimburse the commercial bank in full for the amount paid as well as any applicable interest as prescribed by laws.
Note: This article is provided for reference purposes only and does not constitute legal advice. Depending on each specific matter from time to time, the content presented above may no longer be appropriate. For detailed advice, please contact LMP Lawyers.