APPLICATION OF TRUSTS IN REAL ESTATE BUSINESS IN RELATION TO THE PROTECTION OF BUYERS’ RIGHTS – LESSONS FROM LEGAL SYSTEMS IN SOME COUNTRIES AND IMPLICATIONS FOR VIETNAM
APPLICATION OF TRUSTS IN REAL ESTATE BUSINESS IN RELATION TO THE PROTECTION OF BUYERS’ RIGHTS – LESSONS FROM LEGAL SYSTEMS IN SOME COUNTRIES AND IMPLICATIONS FOR VIETNAM
Đoàn Thị Phương Diệp
Associate Professor, PhD. University of Economics and Law, VNU-HCM
Dương Kim Thế Nguyên
PhD. University of Economics – Hồ Chí Minh City
ABSTRACT
Trust is a rather unique institution, recognized and formed long ago in English and American law, and has been adopted by many countries into their legal systems to regulate trust management and asset exploitation transactions, including France and China. This article aims to clarify the reception of the trust institution in some countries, which traditionally do not have trusts, but have adopted and currently regulate them. Consequently, the article places this within the context of Vietnamese law on trust in real estate business to highlight the necessity of recognizing this institution in Vietnam.
Keywords: Trust, Real estate business, Asset trusteeship, Real estate investment fund
I. OVERVIEW OF TRUST IN THE LAWS OF SOME COUNTRIES
Vietnam has not recognized trust as an official institution in the Civil Code. However, to a certain extent, trust has been mentioned as a service provided by securities companies in managing individual investors’ trading accounts. According to a document issued in 2020, if an individual securities investor needs it, they can entrust the “Securities company licensed for securities brokerage activities according to Clause 1, Article 86 of the Law on Securities” to “provide trust management services for individual investors’ trading accounts” (Article 19 of Circular 121/2020/TT-BTC).
This vague recognition in the securities business field makes researchers feel that the trust institution does not exist in Vietnam’s law, leading to misunderstandings that Vietnamese law does not allow for the existence of multiple assets simultaneously for the same entity (Thuỷ, 2020).
- Concept of Trust
Trust is recognized as a security measure in the Civil Code of the French Republic. Article 2011 stipulates that “trust is an operation by which one or more people (trustors) transfer all or part of the assets, rights, or obligations that the trustor owns to one or more other people (trustees), with the responsibility to act for a specific purpose for the benefit of one or more beneficiaries”. Subsequently, Article 2012 also stipulates that “trust can be established by contract or by legal provisions.”
From these provisions, it can be understood that trust in the law of the French Republic is defined as “an operational mechanism formed based on the agreement of the parties involved or according to legal provisions, whereby the trustor transfers all or part of the assets, rights, or obligations that the trustor owns to one or more other people (trustees), with the purpose that the trustee will be responsible for acting for the benefit of one or more beneficiaries.”
Meanwhile, according to the provisions of Article 2 of the Chinese Trust Law, trust is understood as “the act where the trustor, based on their faith in the trustee, entrusts their property rights to the trustee and allows the trustee, according to the will of the trustor and in the name of the trustee, to administer or dispose of such property in the interest of a beneficiary or for any intended purposes”.
Thus, the provisions of Chinese law and the law of the French Republic differ right from the definition of trust. The most noticeable difference is whether the trustee has ownership rights over the trust property. Accordingly, French law allows the ownership of trust assets to be transferred to the trustee upon the establishment of the trust, whereas Chinese law, on the contrary, stipulates that the trustee does not have ownership rights but merely manages and disposes of the trust property based on the will of the trustor. In other words, the trust model under Chinese law is quite similar to asset authorization under current Vietnamese civil law.
- Common Characteristics of Trust
Despite certain differences in the perception and operation of trust, both Chinese law and the law of the French Republic establish quite similar identifying characteristics to distinguish trust from other types of asset transactions. From the research results and review of the provisions of the French Republic and Chinese laws on trust, it can be seen that trust is identified by the following prominent characteristics:
First, trust is always a mechanism involving three parties, including the trustor (trustor-constituant, the person establishing the trust or the trustor), the trustee (trustee-fiduciaire), and the beneficiaries (beneficiaries-bénéficiaires). This three-party mechanism is the outstanding advantage of trust, ensuring the necessary protection for the party with rights/the beneficiaries of the trust.
Thứ hai, Trong cơ chế tín thác luôn có sự chuyển giao tài sản tín thác từ bên lập tín thác sang cho bên nhận tín thác. Việc chuyển giao này tuỳ thuộc vào đặc thù pháp lý của mỗi quốc gia mà đó là chuyển quyền sở hữu (như luật của Pháp) hay chỉ chuyển quyền quản lý, sử dụng tài sản tín thác (như luật của Trung Quốc).
Second, in the trust mechanism, there is always a transfer of trust property from the trustor to the trustee. This transfer depends on the legal specifics of each country, whether it is a transfer of ownership (as in French law) or only a transfer of management and usage rights of the trust property (as in Chinese law).
Third, trust can be established by agreement (contract) or on the basis of legal provisions (statutory trust).
Fourth, trust is applied in both civil life and business activities. In China, initially, when building the trust law, lawmakers intended to limit the scope of this law to business trust relationships, aiming to manage the rather chaotic capital investment trusteeship during the opening phase (Tan, Zhenting, 2001). However, later, recognizing the diverse and widespread nature of this relationship, lawmakers decided to expand the scope of the Trust Law to both civil and business fields (see Article 3 of the Chinese Trust Law).
Fifth, trust is considered a professional activity and therefore must be provided by entities that meet the requirements set forth by law.
Sixth, trust property exists independently of the responsibilities of both the trustor and the trustee. This is a superior advantage of this mechanism in protecting the rights of the trustee. According to Article 2024 of the Civil Code of the French Republic, “The opening of a safeguard procedure, judicial reorganization, or liquidation for the benefit of the trustee does not affect the trust property”. This means that in the event the trustee is declared bankrupt, the trust property cannot be liquidated to pay off the trustee’s debts.
Seventh, trust is always a transaction established with a time limit. Both the Civil Code of the French Republic and the Chinese Trust Law provide for this time limit. Accordingly, French law stipulates that the trust term is agreed upon by the parties but cannot exceed 90 years (Article 2018-2). Chinese law does not specify the maximum duration of the trust relationship between the parties but stipulates that the specific duration is agreed upon by the parties and must be clearly stated in the contract (Article 9 of the Chinese Trust Law).
II. THE ROLE OF TRUST IN REAL ESTATE BUSINESS DEVELOPMENT AND THE ISSUE OF BUYER PROTECTION IN REAL ESTATE TRUST
- Trust in Real Estate Business
If trust as a security exists in the Civil Code of the French Republic with the purpose of protecting the lender by ensuring the most effective way to fulfill the borrower’s debt obligations, then management trust is a service provided to asset owners with the goal of preserving assets when they are unable to manage their own property. Therefore, management trust is performed by temporarily transferring ownership of one or more specific assets to the trustee, who becomes the sole owner, and the original owner, who is also the trustor, becomes the beneficiary of the trust. Management trust creates several clear benefits for the trustor and the beneficiary:
First, the trust property, once transferred to the trustee, will not be confiscated by the original owner’s creditors, except in cases where there is evidence that the trust was fraudulently established to avoid fulfilling obligations.
Second, the trust property is protected from the bankruptcy of the trustee. This benefit is similar to that of security trust; even if the trustee goes bankrupt, it does not affect the trust property they possess.
Third, asset trust helps free the owner from cumbersome procedures in managing the property to protect vulnerable individuals, the beneficiaries of the trust.
Fourth, any type of asset that can be owned can be the subject of a management trust, including stocks, bonds, real estate, insurance contracts, patents, etc. Especially when the trust property involves stocks or company shares, the trustee is considered a shareholder of the enterprise. Therefore, as a partner, this person has the right to receive dividends and exercise voting rights for collective decisions according to the law (Lucille Berdery).
A trust contract must clearly stipulate the rights and obligations of the trustee and the scope of their authority to manage and dispose of the property. The asset management trust contract must be established by a notarized document or a regular written document.
The trustee must be an expert (credit institution, investment company, insurance company, or lawyer) as stipulated in Article 2015 of the Civil Code of the French Republic. The duration of the trust contract can be adjusted according to the needs of the trustor and the beneficiary but cannot exceed 99 years. Upon the termination of the management trust, the trustor will reclaim their assets. In the event that the original owner passes away before the end of the management trust term, the trust property will automatically fall into the assets of the owner’s heirs.
From the operational mechanisms of management trust mentioned above, it can be seen that in the law of the French Republic, asset management trust in general, and real estate management trust in particular, is a profit-driven activity of the trustees. This operation will bring about the emergence of professional entities that carry out these trust activities. In France, trust companies (also known as fiduciary companies – Société fiduciaire) mainly focus on trust assets that are real estate.
In both France and Switzerland, trust companies/fiduciary companies are usually banks, investment companies, management companies, and insurance companies, as these entities are often the ones qualified to be trustees (Amédia Fiduciaire). Based on holding the trustor’s assets, trustees typically perform the following tasks: investment support, asset management, inheritance, real estate investment consulting, tax, pensions, bank account management, etc. Among these, real estate trust for real estate investment is an activity that requires the trustee’s professionalism in this field.
The advantages of asset management trust are diverse in practice in France and Switzerland. One of the main benefits of using trust services is saving time. Administrative procedures and asset supervision, whether the owner is an individual or a company, always take a lot of time. This time-saving often translates into cost-saving, as using a trust company to manage certain tasks allows asset owners to exploit their assets more thoroughly and effectively, leading to better asset development. This is because investments and investment decisions made by professional investors will yield higher efficiency compared to those made by the owner (non-professional) (Bouchard, 2000), (Hiền, 2023).
In summary, trust is used as a supplementary service that can be effectively applied in exploiting real estate for business purposes, thereby bringing economic benefits to the asset owner and profits for the trustee as a professional activity.
- Trust in Protecting Real Estate Buyers
From the application of trust in two areas, ensuring the fulfillment of obligations and asset management, the combined application model of these two types of trust in practice in France has led to the development of the escrow trust model (dépôt fiduciaire) as an intermediary mechanism in real estate transactions. Escrow trust is provided by escrow trust agents (agent de dépôt fiduciaire), whereby the real estate buyer will select a suitable and reliable escrow trust agent. After an agreement is made, the agent will require the parties to provide all relevant information related to the intended real estate transaction, including the proposed sales contract, loan documents (if any), ownership commitments, etc.
In real estate transactions in France, the role of the trust agent is crucial in ensuring that the buying and selling process runs smoothly and safely for all parties involved.
As a neutral third party, the escrow trust agent plays a central role in protecting the interests of both the buyer and the seller, especially the buyer’s rights. One of the main responsibilities of the escrow agent is to manage the financial aspect of the transaction.
They act as supervisors of the involved funds, ensuring that the buyer’s money is kept safe until all contractual obligations are met. Specifically, when the buyer makes an offer to purchase a property, they often deposit escrow funds with the escrow trust agent. The agent then holds this money until the transaction is completed, after which they pay the seller. This mechanism provides a level of protection for both parties as the money is held by a neutral and trusted third party.
In addition to handling the financial aspect, the escrow trust agent also plays an important role in overseeing the transaction process, including the provision of documents. They ensure that all necessary documents, such as the sales contract, ownership papers, and loan documents, are properly signed and delivered to the relevant parties.
The role of the escrow trust agent in real estate business has similarities with the escrow agent in the legal context of Vietnam, but there are certain differences. Specifically, the escrow agent is always a credit institution, whereas the escrow trust agent can be a bank or an enterprise.
Moreover, the rights and obligations of the escrow agent under Vietnamese law are quite simple. According to Clause 2, Article 330 of the 2015 Civil Code, “In the event that the obligor does not perform or improperly performs the obligation, the obligee has the right to receive payment and compensation for damages from the escrow credit institution, after deducting service charges.”
Meanwhile, the escrow trust agent, in addition to being responsible for paying the real estate purchase price from the trust funds, also monitors and supervises the seller’s performance to protect the buyer’s rights. The escrow trust agent holds the money until the obligations secured by the lien have been fulfilled and the asset is released, preventing the buyer from bearing any existing debts or legal issues related to the property being sold (Faster Capital).
The trustee can also play the role of the party responsible for transferring property ownership to the buyer (entrusted by the seller). The trustee must ensure that the transfer is legal and valid by verifying the buyer’s identity, confirming that they have sufficient funds to purchase the real estate, and ensuring that all necessary legal documents are fully provided to the buyer (Faster Capital).
In summary, real estate trust is a useful service in real estate transactions. The trustee acts as an intermediary, using the buyer’s money to purchase the property, and subsequently selling the real estate within the framework allowed by the trustor. In the context of buying and selling real estate, which requires a lot of legal and market information along with various risks that may arise, using professional services like real estate trust effectively addresses the need to protect the rights of both the buyer and the seller.
III. THE POTENTIAL APPLICATION OF TRUST IN REAL ESTATE BUSINESS IN VIETNAM
- Legal Context for Trust Relationships in Vietnam
As previously mentioned, in Vietnam, trust has not been fully regulated in civil law or a specific legal document. It is currently modestly recognized in the specialized field of securities business. Specifically, according to Circular 121/2020/TT-BTC on guidelines for the operation of securities companies, there is a mention of trust management services for individual investors’ trading accounts.
Thus, an individual securities investor can open a trading account at a securities company, and although the money in the account belongs to the investor, the entrusted securities company has the right to use and dispose of it to execute securities transactions for the investor’s benefit. The operation mechanism of the trust management service for trading accounts is quite close to the essence of trust as identified in the previous section.
However, the securities company is not the owner of the money in the client’s account. In other words, the trustor – the individual securities investor – does not transfer ownership of the trust property – the money in the securities account – to the trustee – the securities company. This is the main difference between trust and the investment trust service for securities. Nonetheless, the author believes that this difference is not significant enough to “dilute” the essence of “trust,” which involves entrusting assets based on trust (“tín”) to execute investment activities within the agreement’s framework.
Previously, the Real Estate Investment Trust (REIT) as stipulated in Circular 228/2012/TT-BTC also embodied the “appearance” of trust application. This investment form allowed investors to purchase issued fund certificates instead of directly buying houses/land. Subsequently, they could entrust the management of these fund certificates to the REIT. Investors received profits in the form of dividends, paid periodically according to the fund’s regulations. Thus, this operational method makes the real estate investment trust a type of real estate securities investment fund (securitization of real estate). This investment form allows investors (through the fund) to have the opportunity to own real estate, even with small amounts of money, including particularly valuable real estate (Hiền, Bùi Thu, 2023).
Therefore, it can be affirmed through the aforementioned legal provisions that, although the 2015 Civil Code of Vietnam has not officially regulated trust, other legal areas, specifically the securities business combined with real estate business, have begun to recognize the existence of this form of trust.
- The Necessity and Potential Application of Trust in Real Estate Business in Vietnam
The application of trust in various areas of civil life has been addressed by legal researchers in Vietnam in in-depth studies and convincingly demonstrated (Lê Vũ Nam, 2020). Additionally, researchers have initially pointed out the possibility of implementing trust in Vietnam as an application in profitable investment activities (Nguyễn Hùng, 2023).
In the real estate business, many real estate companies and real estate service companies have recently sold real estate. After purchasing the real estate, the buyers deposit the purchased properties back with these companies. The companies that receive the deposits find buyers or renters for the real estate. The money obtained from selling or renting the deposited real estate is returned to the owners (the depositors).
This operational mechanism is quite popular in practice and mainly caters to investors with idle money who do not have the conditions to directly manage and exploit real estate. The entity receiving the deposit only has the actual status of the depositor, not ownership rights like the trustee, so the scope of rights is quite limited. It depends on the deposit agreement, and usually, the deposit-receiving entity only acts as an intermediary, a bridge between the initial property owner and the buyer or renter.
The limitations of the rights of the real estate deposit-receiving entity have some disadvantages compared to the trust model: (1) the owner still has to be the responsible entity and has rights over the deposited property, still having to spend time and effort to decide on the transactions introduced by the deposit-receiving entity, (2) the professionalism of the securities business is still not clear, (3) having to go through many entities leads to time-consuming and costly transactions, thereby reducing the profitability of the transaction.
III. THE POTENTIAL APPLICATION OF TRUST IN REAL ESTATE BUSINESS IN VIETNAM
From the analysis above, it can be seen that clearly recognizing the trust institution in the regulations of the Civil Code of Vietnam or similar legal documents can solve the following issues:
- A professional business sector can be formed in the form of trust management and real estate exploitation.
- It creates a clear legal basis to implement the Real Estate Investment Trust (REIT) model. Currently, although this model has been recognized since Circular 228/2012/TT-BTC in 2012, it has not clearly defined the difference between investing in real estate company securities and directly investing in real estate. Furthermore, until now, the implementation of this model has not been widespread in practice. There are many reasons for this situation, but one of the main reasons is the lack of clarity in the operation mechanism of this fund. Specifically, if a real estate investment trust invests in purchasing the actual property instead of securities, who will own the real estate held by the fund raised from investment money? Does the original property owner need to transfer ownership of the real estate to the fund for investment management? These issues need to be clearly analyzed and regulated under the perspective of real estate trust.
The emergence of the trustee as an intermediary between the seller and the real estate buyer will help better protect the rights of the real estate buyer, especially in the context of increasingly complex legal issues in establishing real estate ownership in Vietnam, which requires professionalism in transaction establishment.
IV. CONCLUSION
In conclusion, it is perhaps now the appropriate time to recognize trust in Vietnamese legal regulations. This recognition will legalize real estate entrustment transactions in business, provide more options for investors, and protect the rights of real estate buyers in managing and operating assets. These activities will contribute to creating opportunities for safe and substantial real estate market development.
REFERENCES
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