Under Article 41 of the Law on Real Estate Business 2023 (Real Estate Business Law), a real estate project (Project) eligible for transfer may follow one of two sets of legal procedures, depending on how it was approved. While the difference may appear procedural at first glance, it has significant implications for when the transfer transaction is legally completed, and for what the parties can (or cannot) do if the transaction ultimately falls through. This post discusses the two procedures and the practical implications arising from the distinction between them.

Article 41 of the Real Estate Business Law divides transferable Projects into two categories:

Group 1 – Projects to be transferred under the Investment Law. This group comprises Projects that have obtained an investment policy decision or an investment registration certificate under the Investment Law. The transfer of a Group 1 Project follows the project-adjustment procedures of the Investment Law; and
Group 2 – Projects to be transferred under the Real Estate Business Law. This group comprises all remaining real estate business Projects (for example, a Project approved under the housing law before 1 July 2015). The transfer of a Grsoup 2 Project follows a separate, self-contained procedure under the Real Estate Business Law.

The fundamental difference between the two procedures lies in the point at which the transfer transaction is regarded as legally completed.

For a Group 1 Project, the transferor must carry out the project-adjustment procedure under the Investment Law. The result of this procedure is a decision of the competent authority approving the adjustment of the investment policy (Adjustment Approval), which records the transferor, the transferee, and the portion of the Project being transferred. Legally, the transfer may arguably be regarded as completed at this point, because the State has already recognised the transferee as the new investor of the transferred Project.

For a Group 2 Project, the result of the transfer procedure is a decision of the competent authority permitting the transfer of the Project (Transfer Permission). However, the Transfer Permission does not, by itself, complete the transaction. The transfer is regarded as completed only after the parties sign the Project transfer contract and hand over the Project within 60 days from the date of the Transfer Permission. If they fail to do so within that period, the Transfer Permission automatically ceases to be effective.

The Group 2 procedure sits comfortably with the way M&A transactions are typically completed in the market, where closing usually occurs only after certain conditions precedent have been satisfied. This procedure also makes the transaction easy to unwind. If, for any reason, the deal cannot be completed, the parties are not required to carry out any further legal procedure, because the Transfer Permission will lapse automatically upon expiry of the 60-day period. The legal status of the Project is, in effect, restored without any additional action by the parties.

For a Group 1 Project, the position is considerably more difficult if the transaction cannot be completed. In a typical transaction, the purchaser often requires the State’s approval for the transfer (here, the Adjustment Approval) to be a condition precedent to closing. Once the Adjustment Approval has been obtained but the transaction subsequently fails for any reason, the seller will face significant difficulty in restoring the original legal status of the Project, because at that point:

As a matter of law, the purchaser has already been recorded as the new investor of the transferred portion of the Project, even though it has not yet taken actual control of it; and
The Investment Law does not provide any mechanism for a deferred closing after the Adjustment Approval has been issued, nor does it provide any basis for the seller to request the competent authority to revoke or cancel an Adjustment Approval already issued merely because the transaction cannot be completed.

To mitigate these risks, a seller involved in transferring a Group 1 Project should build in a robust unwinding mechanism, or structure the transaction differently, rather than transferring the Project directly under the Investment Law. This preserves the seller’s ability to restore the Project’s original legal status if the deal ultimately fails.

This post is written by Nguyen Hoang Duong.

Vietnam Business Law