Important amendments to the Land Law of 2013 are under consideration by the National Assembly. The first drafts give rise to concerns that Vietnam may miss the chance to take advantage of one of its most
significant capital resources – its land.
The draft Land Law would help to resolve several long-standing issues arising out of the 2013 Land Law, though it does not address vexing issues, such as how to treat fee-free and fee-reduced land use rights for incentivized projects; how to better enable cross-border secured finance; how to clarify the definition of a “foreign-invested enterprise”; or how to mobilize pre-sales for a reasonable part of a project’s capital structure, among other things.
Here, the draft Land Law effectively broadens existing restrictions on the use of land-use rights and land leases in investment projects for purposes of raising capital.
Article 120 of the draft Land Law provides that there are only two case circumstances in which an upfront land rental may be paid to the state for land-use rights. Since upfront payment of a lease for land-use rights is a condition for mortgaging those rights, and since any serious project requiring project finance would normally include land-use rights mortgages as part of the overall security package, this would be a deal killer for many projects that require financing.
Specifically, only two categories of projects will be allowed to pre-pay their land-use fees under Article 120, namely:
(1) agricultural production projects, forestry, aquaculture, or salt-making projects; and (2) land in industrial zones, industrial clusters, processing zones, and high-tech zones.
If the draft Land Law is adopted this way, then nearly all other projects will be subject to annual land rental payments. Types of projects that will no longer be allowed to pre-pay their lease include infrastructure projects, hotels, resorts, commercial residential, office developments, etc.
Some investors prefer annual rental payments to reduce their upfront capital expenditure for a project. However, investors prefer to have a choice to do what is most financially expeditious in light of various circumstances, and there are circumstances in which upfront payment makes more sense.
These issues were discussed constructively at the Vietnam Business Forum in March 2023 in Hanoi. The Prime Minister and others noted the concerns expressed, and one may be hopeful that the next draft will address these issues. [C]
The most concerning change to the 2013 Land Law-the one that will impact the nation’s struggling infrastructure developments- is the issue of whether leases of land use rights may be mortgaged to lenders to help secure project finance.
