PROTECTION OF THE RIGHTS OF FUTURE HOUSING BUYERS UNDER PROJECTS OF REAL ESTATE BUSINESS INVESTORS
PROTECTION OF THE RIGHTS OF FUTURE HOUSING BUYERS UNDER PROJECTS OF REAL ESTATE BUSINESS INVESTORS
Quách Thị Ngọc Thiện
Master of Law, Faculty of Law, Saigon University
Hồ Trần Hưng
Master of Law, Lawyer, Hoàng Anh Sơn Law Office
ABSTRACT
In this article, the group of authors will focus on explaining the main risks for buyers of future housing products based on the perspective of asymmetric information theory along with accompanying legal economic viewpoints, based on the provisions of the 2023 Law on Real Estate Business, which will take effect on August 1st 2024. From there, the group of authors proposes ideas and solutions to address the shortcomings surrounding the protection of the rights of buyers of future housing.
Keywords: future housing, asymmetric information theory, buyers.
I. INTRODUCTION
The Vietnamese economy is experiencing strong growth. Following this trend, the real estate market (RE) of Vietnam is perceived as a market full of opportunities. The contribution of the RE – construction sector to the national GDP in recent years is approximately 3.5%. The proportion of RE to the total assets of the entire economy in 2020 is 20.8%, projected to be 21.2% by 2025, and 22% by 2030 (Economic and Forecast Magazine, 2023).
The great potential of the Vietnamese RE market attracts a large number of domestic and foreign investors to participate in business, creating many types of products to meet the diverse needs of the market. Among these is a very specific type of product: future housing.
Future housing (FHS) can be understood as housing or construction works that are under construction or have not been accepted for use according to Clause 5, Article 3; Clause 1 and Clause 2, Article 5 of the 2023 Law on Real Estate Business. Therefore, these are not products that can be used immediately. The time to start commercial exploitation of these products depends on the progress of project implementation, including the progress of completing investment procedures, construction, and completion of the works (Articles 24, 25 of the 2023 Law on Real Estate Business).
Under stable economic conditions, the completion of RE projects is not too difficult. However, during the period of the Covid-19 pandemic along with the global economic recession, the Vietnamese RE market has become quiet and revealed many potential dangers for investors participating in the market (Nguyen Minh Ngoc, Nguyen Hoang Tien, 2021).
It is noteworthy that when investors face disadvantages, buyers of future housing according to the project are also inevitably affected. For example, investors might have their notice of eligibility to mobilize capital canceled (Nguyễn Tuấn, 2022), or other necessary permits revoked/canceled, which are needed to complete investment, construction, and finalization procedures. Investors may not have enough capital or fail to obtain credit to continue building and handing over houses as scheduled, even after collecting and using buyers’ money.
The risks for project investors arise from numerous aspects, but for buyers of future housing, the primary risk lies in paying money but not receiving the product, or receiving it incompletely. Buyers are always at a disadvantage compared to investors due to information asymmetry (Song Hà, 2023). They do not have enough information to predict, respond to, and prevent risks. Therefore, they often bear the brunt of damages if the State does not implement policies that incentivize market participants in the real estate business to choose positive business behaviors over negative ones.
In the article “Protection of the rights of buyers of future housing based on the theory of information asymmetry”, the group of authors will focus on explaining the risks faced by buyers of future housing products due to their disadvantaged position compared to project investors. This will be done from the perspective of asymmetric information theory (Nobel Prize, 2001), along with accompanying legal economic viewpoints, based on the provisions of the 2023 Law on Real Estate Business, which will take effect on August 1st 2024. From there, ideas and solutions to address the shortcomings surrounding the protection of the rights of buyers of future housing will be proposed.
II. IDENTIFYING BUYERS OF FUTURE HOUSING AND INVESTORS IN FUTURE HOUSING PROJECTS
- Identifying buyers of future housing
The term “buyer” appears only three times in the entire content of the 2023 Law on Real Estate Business. This law also does not specifically define the concept of a future housing buyer. Generally, under the 2023 Law on Real Estate Business, a future housing buyer is a person who has signed a contract with a real estate business entity to buy, lease, or lease-purchase housing or construction works formed in the future (Clause 5, 8 Article 3 of the 2023 Law on Real Estate Business).
Notably, real estate business contracts are only signed when the real estate is eligible for business (Clause 3 Article 44 of the 2023 Law on Real Estate Business). Therefore, transactions involving the sale of future housing are only recognized as valid if they occur from the time they become eligible for business (Clause 2 Article 4 of the 2023 Law on Real Estate Business). Transactions that occur before this, even if similar in content, form, and contractual objects, will not be valid due to violations of prohibitions by law (Clause 1, 5 Article 8 of the 2023 Law on Real Estate Business).
Thus, the status of a future housing buyer can only arise after the eligibility conditions are met. If considered in a narrow scope, a future housing buyer serving personal needs, not for commercial purposes, will be identified as a consumer. As such, they will be protected under the law on consumer protection (Article 3, Article 11 of the 2023 Law on Protection of Consumer Rights).
- Identifying investors in future housing projects
In the laws on investment, construction, and real estate business, the terms “investor” and “developer” coexist and can be understood similarly or differently depending on the context. In the 2023 Law on Real Estate Business, the term “developer” is used more frequently than “investor.” Conversely, in the 2020 Law on Investment, the opposite is true. The 2014 Law on Construction defines a “developer” as an agency, organization, or individual that owns capital or borrows capital to invest in construction (Clause 9 Article 3, Point đ Clause 2 Article 7 of the 2014 Law on Construction (amended and supplemented in 2020) and Clause 4 Article 4 of Decree 59/2015/NĐ-CP).
In cases where an investor must be selected to implement a project, the developer is the investor approved by the competent authority (Point đ Clause 2 Article 7 of the 2014 Law on Construction (amended and supplemented in 2020)). The 2023 Law on Real Estate Business does not specifically define “developer” or “investor.” The 2020 Law on Investment only defines “investor” without defining “developer,” in which an investor is defined as an organization or individual that carries out investment activities (Clause 18 Article 3 of the 2020 Law on Investment). According to the authors, this inherent inconsistency makes identifying who the developer of a future housing project is quite complex from a legal perspective.
Considering all three sources of law mentioned above, the authors temporarily understand a real estate project developer as an investor who invests capital or borrows capital to conduct real estate business projects and has been approved by the competent authority. Therefore, within the scope of the 2023 Law on Real Estate Business, the terms “investor” and “developer” refer to the entity investing in and conducting real estate projects in two stages: before and after the project’s products have been confirmed by the competent authority as eligible for business or transfer.
When the products of a real estate project have not been confirmed as eligible for business, the entity investing capital or borrowing capital to conduct the project is understood as an investor and is likely to be identified as such. When the competent authority confirms that the project’s products are eligible for business, this entity is established as the developer of the real estate project.
Future housing is a stage-based status of a real estate project, not the final result of a real estate business project. Therefore, there is no concept of a future housing project investor or developer, but only an investor or developer of a real estate project. The products of future housing are quite unique, formed from the buyers’ belief in the feasibility of completing the project by the developer.
III. LEGAL RISKS FOR BUYERS OF FUTURE HOUSING
Risks in real estate business activities refer to the possibility of damages or a decline in revenue compared to expectations. Common risks include financial capacity risks, management risks, currency exchange risks, legal risks, credit – interest rate risks, macroeconomic risks, etc. These can be categorized into two groups: risks from the investor’s side (subjective) and risks of the project (objective) (Nguyen Minh Ngoc, Nguyen Hoang Tien, 2021).
The real estate project investor is the party that directly bears most of the risks throughout the project implementation process, due to involvement in numerous complex tasks from legal procedures to construction implementation. However, considering the relationship between the investor and the buyer of future housing, it is difficult to assert that any risks only affect the investor without impacting the buyer.
Buyers do not directly bear most risks but are indirectly affected by the risks, whether objective or subjective, faced by the investor. For instance, if the investor has their notice of eligibility to mobilize capital canceled, or has other necessary permits revoked/canceled which are needed to complete investment, construction, and finalization procedures; if the investor does not have enough capital to continue building and delivering houses on schedule amid general credit bottlenecks in the real estate sector (Anh Minh, 2023), or any other unforeseen events affecting the investor’s project implementation.
These risks all impact the buyer’s right to receive a complete product of future housing.
Conversely, risks for buyers of future housing primarily stem from three main sources: the risk of making incorrect decisions due to a lack of information, the risk of not receiving a complete product, and the risk of not recovering capital. The 2023 Law on Real Estate Business mainly focuses on controlling these three types of risks by inheriting and expanding the scope of risk control.
For example, it clarifies the information categories that must be disclosed for future housing projects, adds regulations prohibiting the distortion of information, specifies that full disclosure of information is one of the criteria for future housing to be eligible for business, adds entry conditions for the real estate business market for enterprises (primarily aimed at controlling the financial capacity of enterprises),
specifies that assets in the form of future housing and construction works and the floor area of these works are permitted to be used for business, mandates the proper use of mobilized capital, prohibits collecting deposits exceeding 5% of the selling price or lease-purchase price of future housing, and requires the investor to send a copy of the bank’s commitment to issue a financial obligation guarantee letter to the buyer upon signing the real estate business contract.
When the buyer has signed a real estate business contract, the bank must issue a guarantee and send it to the buyer through the investor. The investor can only receive money from the buyer after they have received the bank’s guarantee letter. Finally, it specifies the principles for handing over future housing (Articles 6 to 27 of the 2023 Law on Real Estate Business). Accompanying these regulations are numerous tools and enforcement measures, ranging from administrative to criminal sanctions.
The relationship between investors and buyers of future housing is fraught with risks because each side must face its own risks while also dealing with the negative impacts when the other party encounters risks. There is also the possibility of one side trying to shift the risks to the other and gaining all the advantages.
The impact potential from the buyer to the investor is less than from the investor to the buyer. Buyers are particularly disadvantaged because they are passive, lack information, and do not have sufficient professional knowledge or practical experience. This leads to difficulties in early detection and timely response to risks.
In contrast, with their superior capacity, investors can better predict and prepare for risks. Despite this, there are strong motivations for investors and buyers to connect. For buyers, it is the urgent need for suitable housing. For investors, it is the business need and the constant pressure to seek profits.
In such an inherently risky environment, without any balancing factors, buyers often suffer disadvantages and losses.
IV. LIMITATIONS OF THE 2023 LAW ON REAL ESTATE BUSINESS IN PROTECTING THE RIGHTS OF BUYERS OF FUTURE HOUSING AND RECOMMENDATIONS
Looking at the legal provisions related to protecting the rights of buyers of future housing in the 2023 Law on Real Estate Business, it can be seen that the law-making agency had clear directions and objectives and has basically succeeded with these directions. However, the authors believe that some provisions of the 2023 Law on Real Estate Business lack flexibility and are not impactful enough to guide market participants in the real estate business to voluntarily act positively.
This is an inevitable consequence of undervaluing the research and selection of theories in legal, economic, and other fields as a reference basis, orientation, and argument for revising legal normative documents. Without a theoretical foundation, the content of issued legal documents easily becomes emotionally driven, lacks depth, and lacks a systematic approach, thus becoming unstable and incompatible with the constantly changing reality of social relationships (Government, 2023).
When discussing the lack of flexibility in legal regulations, we see that the 2023 Law on Real Estate Business currently outlines numerous categories of information for each type of real estate project that investors are required to disclose. However, this still does not sufficiently meet the diverse information access needs at different times.
For instance, information about the competent authority’s delay in processing project dossiers, which may affect the handover of housing or construction works, or incidents occurring during construction leading to temporary suspension for investigation (future housing buyers are not the subjects to be disclosed information about construction incidents according to Decree 06/2021/NĐ-CP and the 2015 Law on Occupational Safety and Hygiene), or disputes arising between the investor and third parties that may adversely affect the project’s progress.
These events, whether more or less, can affect the rights of future housing buyers but are not required to be disclosed. Clearly, future housing buyers cannot feel assured even though the 2023 Law on Real Estate Business lists multiple layers of dense regulations. The enumeration of many regulations does not ensure anticipating the diversity of reality.
The lack of flexibility in legal regulations, as analyzed above, shows us that buyers often lack essential information, while investors generally hold the upper hand due to easier access to information. This is a typical case of information asymmetry.
Theoretically, the state of asymmetric information is created by opportunism occurring before and after the parties engage in specific transactions, resulting in concealed information leading to adverse selection and moral hazard (Tạ Doãn Trinh, Nguyễn Thanh Tùng, Đặng Thu Giang, and Tạ Doãn Hải, 2014). For investors, if there is unfavorable information about the project that is not on the list of mandatory disclosures, they have no motivation to disclose it (act ethically) but have ample incentive to act opportunistically.
This leads to two consequences when asymmetric information occurs: buyers lack information and make adverse choices when purchasing future housing, and investors conceal information leading to many moral risks. The issue lies in the party with information potentially affecting the transaction choosing not to act ethically (disclose information). Therefore, it is necessary to supplement an appropriate mechanism to encourage the information-holding party to disclose information, balancing the interests of both parties.
According to the authors, the viewpoint of legal economics can be applied to address the existing issues of the 2023 Law on Real Estate Business. Accordingly, information can be classified into useful and useless information (Bạch Thị Nhã Nam, 2022). Information is considered useful when its use can increase the wealth of society. For example, information about inventions in the pharmaceutical field that helps extract valuable drugs from cheap raw materials is useful because it helps better exploit the wealth of society.
Useless information does not help better exploit society’s resources and may even threaten overall fairness and stability. For instance, information that the director of a pharmaceutical company is being prosecuted, known by some shareholders beforehand, leads them to sell off shares to investors who do not yet know the news.
Thus, when imposing obligations on investors and buyers of future housing, the obligation to provide useless information as illustrated above should be proposed to balance the position between the two parties, reducing the buyer’s disadvantage. The proposed provision on this obligation should be added as a separate clause in Article 6 of the 2023 Law on Real Estate Business and arranged to become a contingency clause for arising cases. Along with imposing the obligation to provide information are appropriate sanctions when parties fail to comply.
When discussing the lack of depth in legal regulations related to capital mobilization, we see that the 2023 Law on Real Estate Business prohibits capital mobilization activities before the real estate is eligible for business, as stipulated in Clause 5, Article 8 of the 2023 Law on Real Estate Business. It even prohibits investors from receiving money before future housing buyers receive a bank guarantee letter (Clause 6, Article 26 of the 2023 Law on Real Estate Business).
From the consumer protection perspective, this is entirely justified and correct to maintain the market’s health and stability. However, in practice, real estate project investors tend to violate regulations on capital mobilization for future housing, with violations occurring over long periods and increasingly severe. Yet, these regulations also directly cause significant difficulties for investors and other business entities in preparing capital for business investment.
Moreover, Vietnam’s real estate capital market is flawed and unhealthy due to its excessive reliance on bank credit (Trâm Anh, 2024). This critical issue causes the entire real estate market to stagnate when the banking system introduces adjustments impacting capital access.
Issuing regulations without timely considering appropriate policies to facilitate investors’ access to capital inadvertently leaves investors behind. This exemplifies the lack of depth in policy issuance. To address this issue, the authors propose connecting real estate project investors with capital flows through a venture capital mechanism, which is familiar in other countries but not yet facilitated in Vietnam.
Creating a venture capital policy to finance real estate business projects at the stage when investors are not yet eligible for business brings several benefits. The core benefit is diversifying capital sources for entities in need. It also motivates real estate project investors to adopt appropriate, standard, and transparent behaviors to seize opportunities to access capital from venture capitalists—professional, experienced, risk-accepting entities capable of filling the information asymmetry gap between investors and venture capitalists. This policy indirectly promotes transparent and clear differentiation in the investment stages.
V. CONCLUSION
By analyzing the legal risks for buyers of future housing, the authors have proposed recommendations to minimize these risks for the disadvantaged parties. The most notable recommendations are the obligation to provide information accompanied by sanctions, and the venture capital mechanism. According to this, entities that accept investing in real estate projects at the stage when they are not yet eligible for business will act and be governed by venture capital regulations.
Once the projects are eligible for business, buyers will be protected by the real estate business law. This approach limits investors from disregarding the risk of sanctions to mobilize capital when the projects are not yet eligible, as this policy has created a pathway for their development rather than mere prohibition.
REFERENCES
- Anh Minh (2023). Real estate enterprises still ‘lament’ difficulties with lending regulations. Government Electronic Newspaper. Retrieved from [link](https://baochinhphu.vn/doanh-nghiep-bat-dong-san-van-than-kho-voi-quy-dinh-cho-vay-102231116162551095.htm)
- Bạch Thị Nhã Nam (2022). The obligation to provide pre-contract information from a legal economic perspective. Journal of Science, Vietnam National University, Hanoi, Volume 38, Issue 2, pp1-20. Retrieved from [link](https://js.vnu.edu.vn/LS/article/view/4375/3973)
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- The Nobel Prize (2001). Retrieved from [link](https://www.nobelprize.org/prizes/economic- sciences/2001/popular-information/)
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