PROTECTING THE RIGHTS OF BUYERS OF FUTURE HOUSING THROUGH BANK GUARANTEES
PROTECTING THE RIGHTS OF BUYERS OF FUTURE HOUSING THROUGH BANK GUARANTEES
Vũ Thế Hoài
PhD, Vice Dean of the Faculty of Law, Saigon University
Nguyễn Phạm Thanh Hoa
Bachelor, Department of Science and Technology, Hồ Chí Minh City University of Technology
ABSTRACT
The demand for purchasing or leasing future housing is substantial, yet it encompasses many risks, particularly for buyers. Due to the weaker position when compared to investors, the laws on real estate business have progressively improved the legal framework for protecting the rights of buyers of future housing through various legal measures, including bank guarantees. Currently, the 2023 Law on Real Estate Business has been enacted and will come into effect from August 1st, 2024. By analyzing certain legal provisions on bank guarantees and assessing practical cases, this article proposes several suggestions to further improve the legal regulations related to bank guarantees.
Keywords: Future housing, buyers, bank guarantees
I. OVERVIEW OF PROTECTING THE RIGHTS OF BUYERS OF FUTURE HOUSING THROUGH BANK GUARANTEES
- The necessity of protecting the rights of buyers of future housing in residential construction projects
Purchasing future housing is a form of real estate transaction officially regulated by the 2006 Law on Real Estate Business (Clause 8, Article 4). Although this type of transaction has been recognized for many years, the legal mechanisms to ensure transaction safety, particularly the legal interests of buyers, have not been fully and tightly regulated (Lưu Quốc Thái, 2023). In reality, transactions involving future real estate contain many risks, and the majority of those disadvantaged are still the people. Therefore, protecting the rights of buyers of future housing in residential construction projects is extremely necessary for several reasons as follows:
First, the demand for purchasing future housing among the people is immense, but they face many risks as the object of this type of transaction is future real estate. The “future” aspect of this asset is reflected in its “non-existence” at the time of transaction/purchase and its formation in the future. This formation process depends on many factors such as the project’s legality, funding, and legal policies at each stage. Moreover, the value of future real estate may change depending on the investor’s reputation, project location, and scale (Đoàn Phú, 2023). This also implies challenges in financial protection for buyers.
Second, in future housing transactions, buyers are always at a weaker position compared to investors. The weakness of future housing buyers is demonstrated in the following aspects:
(i) Asymmetry of information access. Typically, investors in housing projects possess more information about the project, the implementation process, the legality, and the actual value of the project compared to the buyers.
(ii) Lack of diversity in future housing choices. Compared to other markets, the real estate market is considered less flexible. Therefore, finding a suitable property is a process, and when found, buyers often worry whether the property is being built and sold in accordance with the law.
(iii) Disparity in economic power between investors and buyers leads to a reality where buyers are limited in their ability to negotiate the terms of the contract. Most future housing purchase contracts are pre-drafted by investors, resulting in an imbalance of benefits between investors and buyers (Phan Phương Nam & Ngô Gia Hoàng, 2023).
Third, the current laws still have certain shortcomings, making the protection of future housing buyers’ rights less effective. Currently, there are several mechanisms in place to protect the rights of future housing buyers, including bank guarantees. This will be analyzed and clarified in the following sections of the article.
- Regulations on protecting the rights of buyers of future real estate through bank guarantees
Currently, the 2023 Law on Real Estate Business stipulates bank guarantees for the sale and lease-purchase of future housing in Article 26, inheriting and improving upon the 2014 Law on Real Estate Business. Specifically:
First, the content regarding the bank’s guarantee responsibility was also stipulated in Article 56 of the 2014 Law on Real Estate Business as follows: Before selling or lease-purchasing future housing, the investor must obtain a bank guarantee from a competent commercial bank to ensure the investor’s financial obligations to customers if the investor fails to deliver the housing according to the committed schedule.
In the 2023 Law on Real Estate Business, the bank guarantee regulations have been increasingly refined with clearer and more specific adjustments. Accordingly, a bank guarantee is mandatory; before selling or leasing future housing, the project investor must obtain approval for a bank guarantee from a domestic commercial bank or a legally operating foreign bank branch in Vietnam to ensure the investor’s financial obligations to buyers or lease-purchasers if the investor fails to deliver the housing as committed in the future housing sale or lease-purchase contract.
Second, the content regarding the financial obligations of the bank when providing guarantees for the guaranteed party. Regarding the guarantee content, the investor has financial obligations to the buyer or lease-purchaser when the investor fails to deliver the housing as committed in the future housing sale or lease-purchase contract.
This obligation includes the amount of money the investor has received in advance from the buyer or lease-purchaser and other amounts (if any) according to the signed future housing sale or lease-purchase contract that the investor is obligated to pay the buyer or lease-purchaser if the investor fails to deliver the housing as committed (Clause 1, Article 26, the 2023 Law on Real Estate Business).
Regarding the form of expressing the guarantee content, when the guarantor bank agrees to issue a guarantee for the investor, the bank and the investor will sign a guarantee agreement outlining the guarantee content. After the guarantee agreement is signed, the guarantor bank will send the investor a commitment letter confirming that it will issue a guarantee letter to all buyers and lease-purchasers of the housing project approved for the investor’s guarantee.
Third, the rights of buyers and lease-purchasers of future housing regarding bank guarantees. Accordingly, when signing a future housing sale or lease-purchase contract, the buyer or lease-purchaser has the right to choose whether or not to have a guarantee for the investor’s financial obligations (Clause 3, Article 26, the 2023 Law on Real Estate Business). If the buyer or lease-purchaser chooses not to have a guarantee for the investor’s financial obligations to them, the parties are not required to perform related responsibilities or tasks concerning bank guarantees.
When the buyer or lease-purchaser refuses the guarantee for the investor’s financial obligations, the investor and the buyer or lease-purchaser of future housing must sign a written agreement at the time of signing the future housing sale or lease-purchase contract. Accordingly, the bank guarantees the financial obligations of the real estate project investor, representing the binding relationship between the guarantor bank and the investor, while the decision of the buyer or lease-purchaser of future housing to accept or reject the guarantee for the investor’s financial obligations is based on their “will” and is not mandatory.
II. PRACTICAL ASPECTS OF PROTECTING THE RIGHTS OF BUYERS OF FUTURE REAL ESTATE THROUGH BANK GUARANTEES
- Judgment No. 239/2020/DS-PT dated May 6th, 2020 by the Hồ Chí Minh City People’s Court on the dispute over the purchase contract of future apartments
Case details:
Plaintiff: Ms. Vòng Nhộc Z; Defendant: S Investment and Construction Joint Stock Company.
– On November 29th, 2010, Ms. Z signed a contract with Company S for the purchase of apartment A14 of the X Tower project. Ms. Z made payments in 5 installments, but Company S failed to deliver the apartment as agreed.
– On December 8th, 2010, Ms. Z signed another contract with Company S for the purchase of apartment B12 of the X Tower project. Ms. Z made payments in 3 installments, but Company S failed to deliver this apartment as well.
– Consequently, Ms. Z requested the court to annul the two purchase contracts for apartments A14 and B12 and demanded Company S return the paid amount along with accrued interest.
Court’s resolution:
The court accepted all of Ms. Z’s claims.
Analysis and assessment of bank guarantee activities:
In the above judgment, the court stated: “Due to difficulties, the defendant delayed the contract implementation, which is the defendant’s fault. However, the contract is still ongoing, Block A is being handed over, and Block B is under construction. When the pink book is issued, the defendant will impose penalties for contract violations. If the plaintiff wants to terminate the contract, it must be liquidated according to the signed contract terms…”.
It is evident that the cause of the dispute in this future housing transaction case was the investor’s delay in delivering the property. However, in the context of the judgment, the measure to protect the buyer, which is the bank guarantee, was not mentioned, which is a regrettable omission. Therefore, when the dispute arose, recognizing that her rights were affected, Ms. Z filed a lawsuit with the court. It was only after two levels of trial that Ms. Z’s rights were truly ensured.
- Judgment No. 60/2023/DS-ST dated March 28th, 2023 by the District 8 People’s Court, Hồ Chí Minh City on the dispute over the apartment purchase contract
Case details:
Plaintiff: Mr. Trần Quốc D; Defendant: Company V.
– On June 21st, 2012, Mr. D signed an apartment purchase contract with Company V. After signing the contract, Mr. D paid Company V an amount of 420,000,000 VND. Despite having signed the contract and received the payment from Mr. D, Company V did not fulfill the agreement, and the project was not implemented as planned. By the delivery deadline, Company V had not completed the construction and did not have the apartment to hand over as committed.
– Consequently, Mr. D requested the court to annul the signed apartment purchase contract and demand Company V return the entire paid amount.
Court’s resolution:
The court accepted the plaintiff’s request.
Analysis and assessment of bank guarantee activities:
The violations of Company V in the process of selling future apartments included: Company V signed apartment sales contracts to raise capital without completing the foundation, violating regulations on capital mobilization in housing development investment projects, new urban areas, and industrial park infrastructure; raising capital from advance house purchase payments from individuals entitled to home ownership in Vietnam, related to the contract signing process between Mr. D and Company V without going through the real estate exchange.
Although not mentioned in the judgment, one regulation that Company V did not comply with in the transaction process with Mr. D is that, according to the regulations, before selling future housing, the project investor must obtain a guarantee from a domestic commercial bank or a legally operating foreign bank branch in Vietnam for the investor’s financial obligations to the buyer. However, Company V did not comply with this crucial regulation, leading to the buyer’s rights being affected.
It can be seen that bank guarantees are one of the responsibilities that investors must fulfill before selling future housing. However, as evidenced in the two cases above, it seems that this responsibility has been overlooked by investors. As a result, the rights of buyers of future housing have not been fully ensured. Besides the shortcomings in law enforcement, some legal provisions still have certain inconsistencies.
Specifically, there is a lack of compatibility between the financial obligation provisions guaranteed by banks for future housing buyers and lease-purchasers in the Law on Real Estate Business and relevant regulations of the State Bank of Vietnam. Both the 2023 Law on Real Estate Business and Circular No. 11/2022/TT-NHNN stipulate the investor’s financial obligations in future housing guarantees, but their scopes are somewhat different.
While Circular No. 11/2022/TT-NHNN states that the amount the investor has received in advance from the buyer is guaranteed from the effective date of the guarantee letter (the guarantee letter is effective from the date of issuance until at least 30 days after the committed handover date in the housing purchase or lease-purchase contract – Clause 6, Article 13),
the 2023 Law on Real Estate Business generally stipulates that the investor’s financial obligations to the buyer or lease-purchaser in the future housing purchase or lease-purchase contract include the amount the investor has received in advance from the buyer or lease-purchaser and other amounts (if any) according to the signed future housing purchase or lease-purchase contract. One regulation relies on the effective date of the guarantee letter, while the other relies on the agreement between the parties as mentioned in the contract.
According to the authors’ viewpoint, Circular No. 11/2022/TT-NHNN needs to be adjusted to align consistently with the investor’s financial obligations to the buyer or lease-purchaser in bank guarantee activities involving future housing to create practical uniformity.
III. PROPOSALS TO PROTECT THE RIGHTS OF BUYERS OF FUTURE REAL ESTATE THROUGH BANK GUARANTEES
First, Circular No. 11/2022/TT-NHNN should adjust the provision in Clause 15, Article 3 regarding the investor’s financial obligations in future housing guarantees to be fully consistent with Clause 1, Article 26 of the 2023 Law on Real Estate Business.
Second, regulations on the buyer or lease-purchaser refusing the guarantee for the investor’s financial obligations. The 2023 Law on Real Estate Business stipulates, “When signing a future housing sale or lease-purchase contract, the buyer or lease-purchaser has the right to choose whether or not to have a guarantee for the investor’s financial obligations.
If the buyer or lease-purchaser chooses not to have a guarantee for the investor’s financial obligations, the parties are not required to comply with the provisions of Clauses 4, 5, 6, 7, and 8 of this Article for the signed contract. The buyer or lease-purchaser’s refusal of the guarantee for the investor’s financial obligations must be agreed upon in writing at the time of signing the future housing sale or lease-purchase contract” (Clause 3, Article 26).
However, in practice, there are cases where the parties do not have a written agreement to refuse the guarantee, and although the bank has committed to the guarantee, the future housing sale or lease-purchase contract does not include any clauses stipulating this guarantee obligation (possibly due to oversight). In such cases, it remains unclear whether the bank guarantee will be implemented and how the rights of the future housing buyer or lease-purchaser will be protected.
Although the 2023 Law on Real Estate Business has made progress compared to the 2014 Law on Real Estate Business, particularly in Clause 3, Article 56, which added the case of the buyer or lease-purchaser refusing the bank guarantee, it still lacks comprehensive coordination. Article 26 of the 2023 Law on Real Estate Business should include provisions for cases where, despite the bank’s guarantee commitment, the future housing sale or lease-purchase contract does not clearly express this content.
Third, regarding the bank’s guarantee capability. If the bank guaranteeing the real estate project faces difficulties, or even bankruptcy, how the legal rights of home buyers will be addressed is a challenging issue (Lưu Quốc Thái, 2023). Currently, the economic and financial market experiences many fluctuations, making such a situation possible.
Therefore, to anticipate this scenario, the 2023 Law on Real Estate Business should specify who will undertake the guarantee in place of the financially troubled bank. According to the authors’ perspective, this entity should be related to insurance organizations. However, the scope of the guarantee, the guaranteed amount, and the timing of the guarantee must be clearly stipulated in the Law to avoid arbitrary situations and to prevent the guaranteeing bank from evading its guarantee responsibilities.
Fourth, future housing buyers need to take the initiative in protecting their own rights. Therefore, when purchasing future housing, which carries many risks, buyers must thoroughly research all related information about the real estate. They should not rush into buying based on the investor’s “invitations” or the current real estate price. People need to remain alert and assess the legality of the real estate and the investor’s responsibility level through bank guarantees when conducting transactions related to future housing.
IV. CONCLUSION
The real estate market is one of the markets with many fluctuations, and its impact on other sectors of the socio-economic landscape is significant. To promote the healthy and stable development of this market, completing related legal regulations is essential. Due to this importance, the formulation, issuance, and adjustment of laws always receive substantial attention from the public, investors, and policymakers. From the above analyses and assessments, the authors have proposed several solutions to further complete and harmonize the legal regulations on bank guarantees for future housing purchases.
REFERENCES
- Đoàn Phú (2023). Risks in future real estate transactions. Retrieved from: https://baodongnai.com.vn/ban-doc/202311/rui-ro-ve-giao-dich-bat-dong-san-hinh-thanh-trong-tuong-lai-95545b0/.
- Lưu Quốc Thái (2023). Measures to ensure safety for customers buying future housing. Retrieved from: http://www.lapphap.vn/Pages/tintuc/tinchitiet.aspx?tintucid=211680.
- State Bank of Vietnam (2022). Circular No. 11/2022/TT-NHNN dated September 30th, 2022, on bank guarantees.
- Nguyễn Thị Hồng Nhung (2022). Legal issues regarding the purchase of future housing. Retrieved from: https://lsvn.vn/mot-so-van-de-phap-ly-ve-mua-ban-nha-o-hinh-thanh-trong-tuong-lai1657031860.html.
- Phan Phương Nam, Ngô Gia Hoàng (2023). Ensuring the rights of homebuyers in mortgaged real estate projects. Retrieved from: http://lapphap.vn/Pages/tintuc/tinchitiet.aspx?tintucid=211682.
- National Assembly (2014), 2014 Law on Real Estate Business. National Assembly (2023), 2023 Law on Real Estate Business.
- District 8 People’s Court, Hồ Chí Minh City (2023), Judgment No. 60/2023/DS-ST dated March 28th, 2023 on the dispute over the apartment purchase contract.
- District 8 People’s Court, Hồ Chí Minh City (2023), Judgment No. 60/2023/DS-ST dated March 28th, 2023 on the dispute over the apartment purchase contract.
- Hồ Chí Minh City People’s Court (2020), Judgment No. 239/2020/DS-PT dated May 6th, 2020 on the dispute over the purchase contract of future apartments.
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