Legal issues must be considered in the purchase of off-plan apartments

Off-plan apartment refers to a property that does not exist at the time of the transaction, thus the agreement is the only thing that guarantees the buyer will receive such property in the future. Therefore, if buyers lack adequate legal understanding and do not thoroughly review the agreements, they may enter into agreements with many unfavorable terms, or even be scammed.

Here are some key notes that buyers should be aware of before signing agreements to purchase off-plan apartments based on the practice of disputes resolution in Court.

 

First, the investor puts apartments on sale while the conditions have not been fulfilled 

Since many investors regularly reinvest their funds, they often enter into sale and purchase agreements with buyers even if they are not yet qualified to sell apartments. As a result, if the project is forced to halt construction, the investor will be unable to hand over the apartment on time, resulting in disputes. Then, these transactions will mostly be void due to infringement of prohibitions of the laws.

In such case, buyer will only be able to claim back the money they paid and compensatory damages, which are quite small compared to the profit that could have been made while the investor delayed handing the apartment over. In some cases, buyers could even lose all their initial investment.

For instance, in Judgment No. 413/2022/DS-ST dated 15 September 2022 of the People’s Court of District 8, Ho Chi Minh City, the buyer signed an apartment sale and purchase agreement with the investor. It is nearly 10 years past the handover deadline, but the project is still suspended from construction, so the investor is unable to hand the apartment over to the buyer on time. According to the Court’s judgment, at the time of signing the apartment sale and purchase agreement, the investor failed to comply with the requirements to open for sale as prescribed in Decree No. 71/2010/ND-CP dated 23 June 2010, which resulted in the agreement being void due to violation of the prohibitions of the laws, and the fault was entirely on the investor. Therefore, the Court ordered the investor to return the full sum received and compensate the buyer for damages.

 

Second, the investor sells the apartment in the bank-mortgaged project

Currently, many significant projects are implemented using the credit capital of banks. Investors must mortgage their property to obtain a loan, and in this instance, the collateral property are projects of apartments on sale.

In real estate trading, this type of loan is quite common and permitted by law. In particular, Article 147.1 of the Law on Housing states that “The investor in the project on housing construction is entitled to mortgage the project or houses in the project at a credit institution operating in Vietnam to apply for loans to invest in the project or build houses in the project; in case the investor has mortgaged the house, but wishes to raise capital contribution to divide the house according to the provisions of the law on housing or wants to sell, lease-purchase that house, it must release the mortgage before signing an agreement to raise capital contribution, an agreement to purchase and sale, or lease-purchase a house with a customer, unless otherwise agreed by the capital contributor, the house purchaser, or lease-purchaser and the mortgagee”.

Thus, the laws allow investors who mortgaged the project to retain the right to sell or transfer the apartments in the project, provided that the buyer and the mortgage bank provide their consent in writing. Currently, buyers have the right to request investors to provide the bank’s written approvals for the investor to sell the apartments to raise capital.

But if unfortunately, the buyer deals with an investor who does not release the mortgage, pays the debt late, withholds information, or arbitrarily adds the apartment as a mortgage after it has been sold, the buyer will fall into a difficult situation and may potentially risk losing their house in a matter of days when the bank collects the debt. As a result, buyers must carefully negotiate this matter with the investor and the bank.

 

Third, the investor does not carry out construction work and does not hand over the apartment to the buyer

Since the investor intends to profit from the project, there are several factors that can cause it to be delayed, such as a lack of funding or demand for apartments, and rising construction expenses and costs, etc.

In this case, the buyer has no choice but to file a lawsuit to unilaterally terminate or cancel the apartment purchase and sale agreement and demand the investor to refund all payments. As shown in dispute resolution practice, buyers often do not fully comprehend or thoroughly review all termination clauses before signing apartment purchase and sale agreements based on the investor’s sample contracts, resulting in their requests to file a lawsuit being denied on occasion. Consequently, the buyer is caught in a dilemma, unable to either terminate the apartment purchase and sale agreement or continue to invest in the project.

For instance, in Judgment No. 416/2014/DS-PT dated 26 March 2014 of the People’s Court of Ho Chi Minh City, the buyer and the investor agreed on the delay in payment and in the delivery of apartment as follows “[…] The seller will be fined 0.05% for each day of delay for the amount the buyer has paid the seller for the delay in delivering the apartment […]”.

The above clause sounds beneficial, but in fact, the buyer has removed themself from the right to request the termination of the apartment purchase and sale agreement when the investor is late in handing over the apartment. The judgment determined that the buyer was only entitled to demand the investor to pay the fine but not to terminate the apartment purchase and sale agreement.

 

Fourth, the investor collects payments beyond the limits of the laws

Article 57.1 of the Law on Real Estate Trading 2014 stipulates that “The payment in the purchase and sale, and lease purchase of off-plan real estate may be made in multiple instalments, […] but the total amount must not exceed 70% of the contract value before handing over houses and construction works to customers; […]”.

Many investors tend to ignore the above regulation and blatantly violate them by requesting buyers to pay in multiple instalments totaling more than 70% of the apartment purchase and sale agreement value even though the apartment has not been handed over. When a dispute arises, the Court determines that the above agreement violates the prohibitions of the laws and declares the apartment sale and purchase agreement null and void.

For instance, in the dispute at Civil Judgment No. 95/2020/DS-ST dated 06 April 2020 of the People’s Court of District 8, Ho Chi Minh City, the buyer paid the investor 95% of the apartment purchase and sale agreement value while the investor has not yet handed over the apartment. Therefore, the buyer sued to declare the apartment sale and purchase agreement void and claim for damage compensation. The Court took the case to trial and accepted the buyer’s claims.

As evidenced above, disputes on purchase and sale of apartments, especially off-plans, caused from many reasons and are difficult to resolve. In practice, there are other disputes that still exist, such as ambiguity between the Letter of Guarantee for each buyer and the Letter of Approval of Guarantee given by the bank to the investor, the agreement between the parties to use foreign currencies for payment, the project is revoked, etc. Therefore, before signing off-plan apartment sale and purchase agreements, buyers need to have a grasp of related legal regulations, project information, the capacity of the investor, and it is advisable to have a lawyer with you from the start to assist limit the risks while making an investment.

 

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.

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