In Vietnam, industrial parks are usually developed by private investors (IP Developer), rather than the State. The IP Developer will directly lease a large land parcel from the State, build necessary infrastructure, and then sublease land with ready-built infrastructure to the ultimate tenants (IP Tenant) for their investment projects.

From a legal standpoint, the nature of these land sublease agreements (sublease contract) between the IP Developer and the IP Tenant is an interesting issue. Should the sublease contract be treated as a property sale or a traditional lease? The answer has significant implications for the rights and obligations of both parties.

On the one hand, several factors suggest that a sublease contract is, in substance, a purchase of land use rights. In particular,

· Ownership-like Rights: Under Vietnam’s land law, an IP Tenant is granted a land use right certificate (LURC), which serves as evidence of the IP Tenant’s ownership over land use right. The law also expressly grants the tenant rights same as those who directly lease land from the State, including the rights to sell, sublease, mortgage the IP Tenant’s land use right and/or its assets on the land;

· Economic Substance of a Sale: The commercial terms of the sublease contracts in practice often mirror a sale. The sublease term is typically for the entire duration of the IP Developer’s own lease with the State. Furthermore, IP Tenants are usually required to make a single, lump-sum payment for the entire sublease term (i.e., the premium charged on top of the IP Developer’s land rental payable to the State), which functions more like a purchase price than periodic rent; and

· The IP Developer’s Role: From this perspective, the IP Developer acts less like a traditional landlord and more like a middleman, facilitating the allocation of State-managed land to private investors.

On the other hand, IP Developers often structure the sublease contracts to retain control, reflecting a traditional landlord-tenant relationship. Particularly,

· Restrictions on IP Tenant’s Rights: The sublease contract frequently limits the IP Tenant’s autonomy. It often imposes conditions that require the IP Developer’s prior consent for certain actions, even for rights that are statutorily granted to the tenant; and

· Imposition of IP Tenant’s Obligations: The contract also imposes obligations typical of a lease, such as strict compliance with the stated purpose of the land use and adherence to the IP Developer’s internal park regulations.

In conclusion, the dual nature of the sublease agreements means their final character is determined by the specific terms negotiated between the parties. An IP Tenant will want to negotiate for maximum flexibility and control, pushing the agreement to resemble a purchase. In contrast, an IP Developer will typically seek to impose restrictions and ongoing obligations, maintaining the characteristics of a traditional lease to retain control over the industrial park's operations and standards.

Understanding this duality is the first step for any potential IP Tenant in securing terms that best protect their investment in Vietnam.

This post is written by Nguyen Hoang Duong.

Vietnam Business Law