For a long time, Vietnam’s housing law has restricted housing developers (generally, “master developer”) from distributing houses or residential land use rights within a project as in-kind profit to capital-contributing partners (generally, “secondary investors”). This restriction aims to prevent the master developers from using capital contribution arrangements to sell off-plan houses to customers before those properties are legally qualified for sale. In particular, Article 116.1(e) of the Housing Law 2023 currently provides that:

· Restriction 1: the secondary investors participating in the housing projects via capital contribution, investment cooperation, business cooperation, joint venture, or affiliation may only be entitled to profit distribution in form of cash or equity shares based on their capital contribution ratio agreed with the master developer; and

· Restriction 2: the master developers is not permitted to use the capital mobilization methods set out above or other capital mobilization methods to distribute housing products or to grand priority registration, deposit, the right to purchase houses or to distribute land use right in projects to the secondary investors, […].

However, it remains unclear whether the above restrictions extend to non-residential products of the housing project (e.g., retail space, shophouses, or parking areas) when used in capital mobilization agreements with secondary investors. Accordingly, there are two conflicting interpretations of this regulation:

First Interpretation: Based on a literal reading of the law, it is arguable that the restrictions under Article 116.1(e) are not applicable to the non-residential products. Particularly,

· In term of Restriction 1, the agreement on distributing, granting priority registration, deposit, the right to purchase is literally not a form of “profit distribution”; and

· In term of Restriction 2, the law does not explicitly mention the non-residential products but specifically applies the relevant restrictions to housing products and the land use rights only.

Second Interpretation: On the other hand, one may take a conservative view that the restrictions under Article 116.1(e) should extend to non-residential products of housing project. This interpretation is supported by the following reasoning:

· In essence, receiving or reserving non-residential products in return for a capital investment is a form collecting “profit” in kind;

· Restriction 1 provides that the profit is “only” distributed in cash or equity shares. The word “only” (in Vietnamese, “chỉ”) suggests an absolute and exclusive list of two permitted forms of profit distribution. Since the non-residential products or reservation of such products are not “cash” or “equity shares”, it is prohibited by Restriction 1; and

· In fact, Restriction 2 has no contrary to Restriction 1. Accordingly, Restriction 2 should not be construed as an independent provision, but as a reinforcement of Restriction 1. As such, the draftsman intends to be unequivocally clear about the unlawful nature of using capital mobilization contracts as disguised pre-sales agreements for off-plan apartments and land use rights.

While First Interpretation may be plausible and favored by master developers and secondary investors, Second Interpretation is more likely to be upheld by the authorities. Presumably the prudent approach is to assume all in-kind product distributions (whether housing or non-residential) are now prohibited under these types of capital mobilization contracts, leaving cash or equity shares as the only permissible returns.

This post is written by Nguyen Hoang Duong.

Vietnam Business Law