The real estate market currently faces legal problems and lack of capital. The two newly amended laws – Land Law and Law on Credit Institutions – are hoped to create remedies that will help recover the property market. For real estate developers and commercial banks, the Law on Credit Institutions has brought both good and bad news.

The amended Law on Real Estate Business approved in November 2023 does not directly regulate the transfer of real estate projects used as collateral for loans to recover debts. Debt settlement is not considered as real estate business and covered by the Law on Real Estate Business, but by the Law on Credit Institutions, and regulations on handling secured assets.

During the compilation of the draft Law on Credit Institutions, experts raised questions about whether the law needed to set regulations on handling secured assets in real estate to collect debts.

The government Resolution 05/NQ-CP dated January 5, 2024 instructed to not include articles 188, 190 and 192 on handling secured assets from the draft law.

As such, after the 2023 Law on Real Estate Business and 2024 Law on Credit Institutions take effect, a ‘legal gap’ will arise because neither law covers the handling of secured assets for debt recovery.

The problem is that while the laws allowed investors to mortgage real estate projects at banks to get loans under loose regulations, they tightened control over the transfer of projects to pay debts. This explains why it was difficult for credit institutions to transfer secured assets to collect debts for many years.

During the compilation of the amended Law on Real Estate Business, ministries and commercial banks pointed out that many real estate projects mortgaged at banks could not satisfy the strict requirements of the law to be transfered.

Furthermore, credit institutions are not real estate trading companies, so they cannot satisfy the requirement that project transferors must be businesses with a real estate trading function.

The bottlenecks have now been removed with the approval of the two new laws. A new clause on transferring real estate projects that are secured assets to ensure debt collection has been added to Article 200 of the Law on Credit Institutions. 

The other good news is that the law allows banks and debt management companies under credit institutions to transfer secured assets mortgaged before the law takes effect to collect debt under easier conditions than those applied to professional real estate firms.

Existing problem

The news that is not as welcome deals with Clause 3 of Article 200 of the 2024 Law on Credit Institutions. It only reduces the necessary conditions for real estate business entities, but not for projects.

This means that real estate assets to be transferred for debt collection still have to satisfy the strict requirements (they must have detailed plans approved; complete site clearance; fulfill financial duties, etc).

The requirements are viewed as unreasonable, because transferring projects is what credit institutions need to do to collect debt.

The fact that the Law on Credit Institutions requires the transfer of secured assets in real estate (to collect debts) to follow rules in the Law on Real Estate Business may make banks shrink back. 

They may hesitate to provide loans with real estate collateral if they foresee that it will be difficult to sell collateral to collect debts. 

If so, real estate projects may still be thirsty for capital after the 2024 Law on Credit Institutions takes effect.

Nguyen Van Dinh