Under the Land Law 2013, a foreign lender (Foreign Lender) is not permitted to take a mortgage over the land use right (LUR) of a Vietnamese borrower. However, a foreign lender with the support of a Vietnamese bank may consider the following the structure to allow a Vietnamese company (Borrower) to use its LUR as security for the foreign lender. The structure could be summarized as follows:

• A Vietnamese bank (Vietnam Bank) will lend a loan (Domestic Loan) to the Borrower. The Borrower will mortgage to the Vietnam Bank its LUR as security for the Domestic Loan (such mortgage, the LUR Mortgage). Under the Land Law 2013, a company in Vietnam can mortgage its LUR to a bank licensed to operate in Vietnam.

• Under Vietnamese law, upon enforcement of the LUR Mortgage by the Vietnam Bank and after payment in full of the Domestic Loan, the Borrower has the right to receive the remaining proceeds (Receivable) from the sale of the LUR (LUR Receivable). If the value of the Domestic Loan is significantly less than the value of the LUR then the LUR Receivable could have substantial value. The LUR Receivable is usually recorded in the mortgage agreement between the Borrower and the Vietnam Bank. Accordingly, the LUR Receivable is a type of contractual property right which can be used to secure the performance of obligations under Article 14 of Decree 21/2021 on secured transactions.

• Accordingly, the Borrower could mortgage the LUR Receivable in favour of a foreign lender (Foreign Lender) as a mortgage of contractual rights (Receivable Mortgage) in order to secure a loan extended by the Foreign Lender (Foreign Loan) to the Borrower. Under Article 33 of Decree 21/2021, the Foreign Lender will need to notify the Vietnam Bank of the Receivable Mortgage before the Vietnam Bank pays the Receivable to the Borrower. To facilitate enforcement of the Receivable Mortgage and pursuant to Article 54.2 of Decree 21/2021, the Foreign Lender would need an acknowledgment from the Vietnam Bank (as debtor) that after enforcement of the LUR Mortgage by the Vietnam Bank and after discharge of the Domestic Loan in full, the Vietnam Bank would pay the Receivable directly to the Foreign Lender.

• If the Borrower defaults under the Foreign Loan, the Domestic Loan would be cross-defaulted, and the Vietnam Bank would be entitled to enforce the LUR Mortgage by either selling the LUR or foreclosing on the LUR. The Vietnam Bank would settle the Domestic Loan first and pay the Receivable to the Foreign Lender.

The inability to mortgage the LUR of a Vietnamese borrower has long been an issue for structuring a security package acceptable to foreign lenders in Vietnam. The above structure provides the Foreign Lender with a direct and registrable mortgage over a type of asset that, whilst different from the LUR, is closely linked with the LUR. In particular,

• The structure enables the lenders to be secured against the full value of the LUR;

• The structure has the same commercial effect as if the Foreign Lender were able to take a mortgage over the LUR. Since a Foreign Lender is not entitled to be a land user, even if the Foreign Lender may take a mortgage over the LUR, upon enforcement of the LUR Mortgage, the Foreign Lender would only be able to sell the LUR to raise funds, rather than foreclosing on the LUR in lieu of receiving repayment of the Foreign Loan. The Receivable Mortgage gets us to the same place;

• The LUR Mortgage can effectively prevent the Borrower from mortgaging the LUR to a third party and hence acts as defensive security; and

• Technically, the structure would not require the involvement of a security agent to take the LUR Mortgage which is usually employed with special approvals from the Government in special cases (e.g., large BOT projects). Thus, it does not raise the concern whether or not the use of a security agent to take the LUR Mortgage would be effective under Vietnamese law. In this regard, borrowers in large infrastructure projects often obtain special one-off approval from the Prime Minister and the Ministry of Justice for the mortgage of the LUR to a Vietnam Bank as security agent for foreign lenders.

There is a concern that the Borrower may discharge itself from the above security arrangement with the Foreign Lender by repaying in full the Domestic Loan, and using such repayment as the basis for the termination of the LUR Mortgage. Once the LUR Mortgage is terminated then the Receivable Mortgage is also terminated. However, this risk could potentially be mitigated by having the appropriate undertakings between the Borrower, Vietnam Bank and Foreign Lender.

In addition, since the Receivable Mortgage will need to be declared to the State Bank when the foreign is registered. There is a risk that the State Bank may object to the Receivable Mortgage on the ground that the structure is still a LUR mortgage.

This post is written by Nguyen Hoang Duy, Hoang Thi Thanh Thuy and Nguyen Quang Vu.

The structure is set out in the below diagram: