LEGAL PROVISIONS ON DEPOSIT MEASURES TO SECURE THE CONCLUSION/PERFORMANCE OF REAL ESTATE SALE AND PURCHASE CONTRACTS
LEGAL PROVISIONS ON DEPOSIT MEASURES TO SECURE THE CONCLUSION/PERFORMANCE OF REAL ESTATE SALE AND PURCHASE CONTRACTS
MSc. Pham Thi Hong My
Faculty of Law – Saigon University
Abstract: Disputes on security deposits for entering into/performing sales contracts with real estate as their object occur a lot in practice. The rights and obligations of the parties are specified in legal documents. However, there are many cases were real estate buyers are at a disadvantage because the law does not specifically stipulate or lack uniform guidance in resolving deposit disputes.
Therefore, the article will focus on analyzing: (1) overview of deposit measures according to Vietnamese law; (2) practical application of provisions of law to resolve disputes on real estate purchase and sale deposit contracts; (3) Propose solutions to improve regulations on security deposits for concluding/performing sales contracts.
Keywords: deposit; security measures; buyer; real estate.
Introduction
When entering into a contract for the sale and purchase of real estate, parties often utilize a security measure to ensure the execution or performance, or both, of the contract, which is a deposit. This can be a deposit to secure a house purchase contract or a land use right transfer contract. Deposits are specifically regulated in the Civil Code and several sectoral legal documents, such as the 2024 Law on Real Estate Business.
However, in practice, not all parties fully understand or grasp the legal issues related to deposits. Moreover, this measure still faces many inadequacies and limitations, such as unclear regulations and the lack of specific guidance documents, for example, regarding penalties for forfeiting a deposit.
Therefore, it is essential to study and analyze the legal provisions on deposit measures to ensure the execution or performance of sale and purchase contracts, aimed at protecting the rights of real estate buyers from a practical perspective.
I. Overview of Deposit Measures According to Vietnamese Law
Deposit measures are regulated in key legal documents such as the 2015 Civil Code, Decree No. 21/2021/ND-CP dated March 19, 2021, of the Government on the implementation of the Civil Code regarding security for the performance of obligations, the 2023 Law on Real Estate Business, and the 2023 Law on Housing. The content includes:
– Purpose of the Deposit:
Ensuring the performance of obligations such as the obligation to conclude a contract, the obligation to perform a contract, or both.
– Time of Deposit Execution:
The deposit is made within a period to ensure the conclusion or performance of the contract.
– Form of Deposit:
The 2015 Civil Code does not specify the form of the deposit. Thus, the deposit can be made in writing, orally, or through actions. The 2023 Law on Real Estate Business emphasizes that “The deposit agreement must clearly state the sale price, lease-purchase price of the house, construction work, and the floor area in the construction work,” indicating that the form should be in writing.
– Value/Rate of Deposit in Relation to the Contract Value:
The 2015 Civil Code does not specify the value or rate of the deposit. The lack of regulation leads to parties agreeing on their own. However, in real estate business activities, the deposit amount is specifically regulated.
Clause 5, Article 23 of the 2023 Law on Real Estate Business stipulates: “Real estate project investors may only collect a deposit not exceeding 5% of the sale price, lease-purchase price of the house, construction work, and the floor area in the construction work from the depositor for purchase or lease-purchase when the house, construction work has met the conditions for business as prescribed by this Law.”
This new regulation ensures the conclusion of the contract (the 2023 Law on Real Estate Business regulates real estate transactions occurring before the official contract signing) and protects the buyer’s rights.
– Deposit Rate:
According to the National Assembly Standing Committee’s report on reception and amendment, the regulation of a 5% deposit rate is to accurately reflect the nature of the deposit, while minimizing risks for buyers and lessees, who are usually in a weaker position in real estate business activities.
By clearly stipulating that real estate project investors “are only allowed” to collect deposits from customers when the conditions for selling future-formed houses are met, it helps reduce or end the situation where investors illegally mobilize capital, collecting deposits from homebuyers when the houses are not yet eligible for business through contracts labeled as escrow agreements or reservation agreements (Vu Thi Hong Yen, 2024).
Compared to the deposit rates in the draft of the 2023 Law on Real Estate Business, which were 2% and then 10%, the author agrees with the 5% deposit rate in the current document because it is neither too low nor too high, but at an average level, sufficient to maintain the trust of the parties.
Furthermore, a 5% deposit rate is also the standard deposit rate according to the practices of some countries like the UK, the US, and Japan. The 2023 Law on Housing does not stipulate a deposit rate in the sale of houses, the sale, or lease-purchase of social housing but only sets the deposit rate in renting social housing, specifically stating that “… only deposit contracts and collect rental deposits up to 12 months’ temporary rent may be signed.”
– Deposit Penalty:
The 2015 Civil Code stipulates that if the party receiving the deposit refuses to conclude or perform the contract, besides returning the deposit to the depositor, they must also pay “an amount equivalent to the value of the deposited property,” which is the deposit penalty.
The deposit penalty is set to be equivalent to the value of the deposited property. However, the 2015 Civil Code also includes the provision “unless otherwise agreed upon.”
Therefore, in practice, parties may understand that they are allowed to agree upon a deposit penalty that can be equivalent to the value of the deposited property, but they can also agree on a higher or lower penalty compared to the value of the deposited property.
Additionally, these documents also regulate: the handling of deposited property when the contract is concluded/performed; the relationship between the deposit and the contract obliging the deposit; cases where it is unclear whether it is a deposit or advance payment; rights and obligations of the parties in the deposit arrangement.
II. Practical Application of Legal Provisions in Resolving Disputes over Real Estate Sale Deposit Contracts
- Case 01: Contract Terms Unclear on Deposit Return and Compensation
The appellate court panel found it necessary to interpret the contract in a manner that, in cases where the seller breaches the obligation, the seller is responsible for returning the deposit to the buyer and paying a deposit penalty (compensation equal to the deposit amount) in accordance with the judgment No. 1091/2023/DS-PT dated November 27, 2023, by the People’s Court of Ho Chi Minh City regarding the dispute over a house sale deposit contract.
In this case, the author agrees that the appellate court’s resolution is reasonable. When there is no clear agreement in the deposit contract regarding the return of the deposit and compensation, it should follow the provisions of Article 328 of the 2015 Civil Code, meaning the party receiving the deposit must return the deposit and an amount equivalent to the deposit.
However, when there is no clear agreement between returning the deposit and compensation, it is necessary to have guidance documents on this issue to avoid inconsistencies in resolving cases among courts. For example, in this case, the courts of two levels provided two different solutions.
- Case 02: The Effective Date of the Deposit Contract
The court panel determined that Mr. N.H.M. did not provide documents or evidence to prove that he had fully transferred the deposit of 1,100,000,000 VND to Mr. N.V.H. and Ms. N.N.T.U. Therefore, the panel found that to resolve the civil case objectively, accurately, fairly, and legally, and to assert a point, there must be evidence (Judgment No. 30/2023/DS-ST dated April 11, 2023, of the People’s Court of District 4, Ho Chi Minh City, regarding the dispute over the deposit contract).
For Case 02, the effective date of the deposit contract is crucial in considering the consequences and liability for breaches, as there needs to be an actual transfer of the deposit property.
Vietnamese civil law, as explained, only defines the concept of a deposit as “transfer,” and Decree No. 21/2021/ND-CP presents the validity of the security contract in a general manner, not specifically for deposits, since a deposit is one of the security measures.
In resolving this case, the court emphasized the need for evidence proving the actual transfer of the deposit money. Reference to the civil law of the People’s Republic of China also specifies in detail that “The deposit contract is effective when the money is actually transferred.”
Therefore, according to the author, we should learn from this experience by specifically stipulating the effective date of the deposit contract.
- Case 03: No Compensation for Damages When Not Agreed in the Deposit Contract
In Case 03, when the parties did not agree on compensation for damages in the deposit contract, the panel determined that the parties had no other agreements and no agreement on compensation for damages, Mr. T did not complete the purchase as agreed, thus he must be responsible for returning an amount equivalent to the deposit, which is correct according to the agreement and the law. Therefore, there is no basis to accept the claim for compensation for damages (Judgment No. 209/2022/DS-ST dated September 30, 2022, of the People’s Court of District 6, Ho Chi Minh City, regarding the dispute over the deposit contract).
This determination is significant, addressing the issue that when there are no other agreements, especially no agreement on compensation for damages, one party must fulfill their responsibility for violating the deposit, thus not accepting the claim for compensation for damages.
This issue raises the reverse scenario: if, when resolving the liability for breaching the deposit obligation, the parties have agreed on compensation for damages, will the court, in addition to handling the liability for breaching the deposit obligation according to Article 328 of the 2015 Civil Code, also accept the claim for compensation for damages according to Article 419 – Compensation for Damage Due to Contract Violation?
The law has not clearly defined this issue, and judicial practice indirectly indicates that it can be accepted if there is an agreement on compensation for damages. In contrast, foreign laws provide clear regulations on this matter.
Chinese civil law stipulates: “If the parties agree on both compensation for damages and the deposit, then when one party violates the contract, the other party has the right to choose to apply the compensation clause or the deposit. If the deposit is insufficient to cover the loss caused by the contract violation, the other party can claim compensation for the loss exceeding the deposit.”
Russian civil law also stipulates: “Additionally, the responsible party, if failing to fulfill the contract correctly, is obliged to compensate the other party for damages with the deposit amount, unless otherwise stipulated in the contract.”
According to the author, it is necessary to have specific guidance documents on this issue, and the experience of foreign laws is very worth learning from.
- Case 04: Deposit Penalty Exceeding Twice the Deposit Amount
The court panel determined that Mrs. Le Ngoc T. must return the deposit amount received, which is 150,000,000 VND, and pay an additional penalty amount equivalent to twice the deposit amount (i.e., 300,000,000 VND) according to the agreement between the parties, which is based on and compliant with Clause 2, Article 328 of the 2015 Civil Code (Judgment No. 25/2020/DS-ST dated April 24, 2020, of the People’s Court of District 6, Ho Chi Minh City, regarding the dispute over the land use rights transfer deposit contract).
As analyzed, Vietnamese civil law uses the term “unless otherwise agreed upon,” so in practice, parties may agree on a deposit penalty that is equivalent to, lower than, or higher than the deposit amount. Thus, when the penalty is twice or even ten times the deposit value, is it acceptable?
In this case, the penalty is twice the deposit amount, and the court panel deemed it consistent with the legal provisions and accepted this penalty. In other localities, there have been cases where courts dealt with penalties agreed upon by parties to be ten times the deposit amount. Some courts accepted this penalty, while others did not, considering it too high and in violation of Article 328 of the Civil Code.
Therefore, according to the author, the deposit penalty as currently regulated by Vietnamese civil law also requires detailed guidance documents.
- Case 05: Claim for Interest on Deposit Penalty
The court panel determined that since the parties did not agree on the violating party’s obligation to return the deposit in case the land/housing sale and purchase contract could not be notarized, there is no obligation to pay interest on the deposit penalty (Judgment No. 449/2023/DS-PT dated April 17, 2023, of the People’s Court of Ho Chi Minh City regarding the dispute over the deposit contract).
The author agrees with this reasoning, where interest on the deposit penalty is not calculated if the parties did not agree on it. If the parties had an agreement, then their agreement would apply.
Referring back to Article 328 of the Vietnamese Civil Code, there is no provision on this issue. Therefore, in this case, the author believes that specific guidance documents are needed to create a legal basis for resolving such cases effectively.
III. Proposed Solutions for Improving Regulations on Deposits Ensuring the Conclusion/Performance of Real Estate Sale Contracts
Through analyzing the legal provisions on deposits to ensure the conclusion/performance of sale contracts, the author believes that while upholding the principle of respecting the parties’ agreements and autonomy, there should also be clear and transparent legal regulations to protect the parties’ rights.
In practice, not all parties fully understand the legal issues related to deposits, especially in ensuring the conclusion/performance of real estate sale contracts, where the buyer is usually in a weaker position.
Therefore, in the near future, it is necessary to promptly issue guidance documents on applying legal provisions in resolving deposit disputes. Specifically, the author proposes some solutions as follows:
– Firstly, regarding the form of the deposit contract:
There should be a clear regulation on the form of the deposit contract, which can be expressed in writing, orally, or through specific actions. Additionally, there should be a provision interpreting “specific actions,” such as in electronic data form, to facilitate dispute resolution in courts.
– Secondly, regarding the effective date of the deposit contract:
To facilitate the court in resolving disputes with a clear legal basis, as seen in Case 02, and based on the civil law experience of the People’s Republic of China, it is necessary to add a provision: The effective date of the deposit contract is when the deposit property is actually held by the receiving party.
– Thirdly, regarding the application of the deposit penalty:
Referring to the experience of other countries, not approaching from the perspective of “unless otherwise agreed upon,” but setting the deposit penalty at twice the deposit amount (including the deposit and an amount equivalent to the deposit), i.e., a clear and specific regulation on the deposit penalty.
In Vietnam, as seen in Case 04, a penalty exceeding twice the deposit amount is considered appropriate. The 2023 Law on Real Estate Business only stipulates the deposit rate but does not specify the deposit penalty. Therefore, in principle, if the specialized law does not regulate it, the general law (Civil Code) should be considered.
Hence, the author proposes that the deposit penalty should be clearly stipulated, creating a legal basis for practical application by regulating that the parties can agree, but the deposit penalty should not exceed twice (02) the deposit amount.
– Fourthly, regarding the resolution of compensation claims and interest on the deposit penalty:
Based on Cases 03 and 05 discussed above, the author suggests that this issue needs to be specifically regulated by adding: No compensation claims or interest on the deposit penalty will be resolved if the parties do not have an agreement.
– Fifthly, regarding the return of the deposit and compensation:
From Case 01, the author proposes adding an explanatory provision for cases where the agreement is unclear about the return of the deposit and compensation to ensure consistency in court resolutions.
– Sixthly, regarding the deposit rate:
The 2023 Law on Real Estate Business stipulates a rate of not more than 5%, while the 2015 Civil Code, the 2023 Law on Housing, and the 2024 Law on Land do not regulate it. So, in cases where the deposit falls under the scope of the 2023 Law on Housing, what should the deposit rate be?
As analyzed, the 2023 Law on Housing only specifies the deposit rate in the single case of renting social housing. For deposit security in land use rights transfer contracts, the 2024 Law on Land does not stipulate the deposit rate, and neither does the 2015 Civil Code, so what deposit rate should be applied?
Currently, the deposit rate is still based on the parties’ agreement. The author proposes that, regarding the deposit rate, it should be supplemented by referring to the civil law of the People’s Republic of China and Japan, which regulate the deposit value/rate in relation to the contract value, allowing the parties to agree but not exceeding 20% of the main contract value, and the excess amount will not be effective.
IV. Conclusion
Social relations need to be regulated by law to ensure social order and protect the rights of the parties involved. Therefore, by establishing legal provisions on deposit measures and issuing guidance documents for resolving deposit disputes, the rights of the depositor and the receiver can be guaranteed, preventing the exploitation of unclear regulations for unfair advantage and ensuring social and ethical safety.
References
- Judgment No. 1091/2023/DS-PT dated November 27, 2023, by the People’s Court of Ho Chi Minh City regarding the dispute over the house sale deposit contract.
- Judgment No. 30/2023/DS-ST dated April 11, 2023, by the People’s Court of District 4, Ho Chi Minh City, regarding the dispute over the deposit contract.
- Judgment No. 209/2022/DS-ST dated September 30, 2022, by the People’s Court of District 6, Ho Chi Minh City, regarding the dispute over the deposit contract.
- Judgment No. 449/2023/DS-PT dated April 17, 2023, by the People’s Court of Ho Chi Minh City regarding the dispute over the deposit contract.
- Vu Thi Hong Yen. (2024). New Points of the Law on Real Estate Business on Civil Transactions Related to Real Estate. Proceedings of the Faculty-level Seminar on New Points of the Law on Civil Transactions Related to Real Estate. Ho Chi Minh City University of Law.
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“The article’s content refers to the regulations that were applicable at the time of its creation and is intended solely for reference purposes. To obtain accurate information, it is advisable to seek the guidance of a consulting lawyer.”
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