Mortgaging Land Use Rights for FDI Loans: A Guide

Mortgaging land use rights for FDI loans is a common security method in the corporate finance activities of foreign-invested enterprises (FIEs). Land use rights serve as collateral for a loan, enabling FIEs to access capital from credit institutions. A clear understanding of the legal regulations governing the mortgage of land use rights for FIEs is a key factor in executing lawful and effective transactions.

Regulations on Mortgaging Land Use Rights for FDI Loans

The mortgage of land use rights in FDI capital lending is specified in Article 317, Clause 1 of the 2015 Civil Code. Accordingly, a mortgage of land use rights is a form of security for a repayment obligation where an FIE uses its land use rights as collateral for the mortgagee. Thus, a foreign-invested enterprise is permitted to mortgage its land use rights to borrow capital for production and business activities.

Additionally, under Article 318, Clause 3 of the 2015 Civil Code, if land use rights are mortgaged and assets attached to the land are owned by the mortgagor, those attached assets are also part of the mortgaged property, unless otherwise agreed. This provision ensures consistency in handling collateral when disputes arise. Therefore, FIEs must understand the scope of the mortgaged assets to avoid unnecessary risks during the loan process and the use of land use rights.

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Conditions for Mortgaging Land Use Rights

Mortgaging land use rights for FDI loans is a significant financial solution that helps FIEs mobilize capital for production and business operations in Vietnam. For this transaction to be successful, the FIE must meet a series of strict conditions stipulated by law.

Conditions for the Land Use Rights

The conditions for land use rights are clearly defined in Article 45 of the 2024 Land Law. An FIE wishing to mortgage its land use rights must fully meet the legal and physical status requirements of the land parcel. Specific conditions include:

• Financial obligations have been fulfilled for cases of deferred or recorded financial obligations.
• Possession of a Land Use Right Certificate or other types of certificates as prescribed by land law.
• The land is free from disputes, or any disputes have been resolved by a competent state authority, with an effective court judgment or decision.
• The land use rights are not subject to distraint or other measures to secure judgment enforcement under the law on civil judgment enforcement.
• The land use rights must be within the land use term specified in the certificate.
• The land use rights are not subject to any temporary emergency measures under the law.

The legal appraisal of the land use rights as collateral is of great importance. It forms the basis for the bank’s decision to approve the loan and mitigate credit risk and bad debt.

Scope and Purpose of the Loan

The scope and purpose of an FIE’s loan when mortgaging land use rights for FDI loans from a credit institution are regulated in Article 7 of Circular 39/2016/TT-NHNN of the State Bank of Vietnam dated December 30, 2016, as amended by Article 2 of Circular 06/2023/TT-NHNN dated June 28, 2023, and Clause 3, Article 1 of Circular 12/2024/TT-NHNN dated June 28, 2024, as follows:

• The FIE must demonstrate a need to borrow capital for a lawful purpose.
• The loan purpose must align with the business lines stated in the investment license.
• The use of loan capital must be consistent with the land use purpose specified in the Land Use Right Certificate.
• The legal entity must have civil legal capacity as prescribed by law.
• The FIE needs to have a feasible capital utilization plan; this condition is not mandatory for small-value loans.
• The financial capacity to repay the debt is a critical factor that banks assess when reviewing a loan application. The FIE must prove a stable income source and the ability to make timely debt payments.
• Furthermore, the scope of the land use rights mortgage includes all legal rights and interests the FIE has in the land parcel.
• The mortgage of land use rights for an FDI loan must comply with regulations on the minimum equity ratio for investment projects using land.

You must demonstrate a lawful loan purpose that is consistent with your registered business lines and land use purpose. The enterprise also needs a feasible capital utilization plan and strong financial capacity to ensure debt repayment ability. Full compliance is a key factor for the credit institution’s approval of the FIE’s loan application.

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Important Notes on Mortgaging Land Use Rights for FDI Loans

Mortgaging land use rights for FDI loans is a complex financial transaction. It provides significant resources for the enterprise but also entails legal risks. To ensure a successful and secure transaction, both the mortgagor (FIE) and the mortgagee (credit institution) must understand their obligations and proceed with caution.

For the Mortgagor

Fulfilling the obligations under Article 320 of the 2015 Civil Code is not only a mandatory requirement but also a basis for building trust with the bank and preserving the value of the collateral. From proving the legal status of the land to the responsibility of preserving the asset, these are core considerations for the enterprise.

• Ensure possession of a valid Land Use Right Certificate according to Article 45 of the 2024 Land Law.
• Complete financial obligations to the State, with no outstanding land-related debts.
• Notarize or certify the mortgage contract as per Article 16, Clause 3 of the 2024 Land Law.
• Preserve and maintain the mortgaged property throughout the loan term according to Article 320 of the 2015 Civil Code.
• Do not sell, transfer, or exchange the mortgaged property without the bank’s consent.
• Provide truthful information about the condition of the mortgaged property to the mortgagee.
• Promptly notify the bank of any third-party rights over the mortgaged property.
• Apply necessary measures to preserve the asset’s value; cease exploitation if there is a risk of value loss.
• Repair or replace the mortgaged property if it is damaged within a reasonable time.
• Hand over the mortgaged property to the bank for enforcement if the repayment obligation cannot be met.

In summary, any shortcoming can lead to disputes and the risk of asset enforcement. The enterprise must be fully aware of and strictly adhere to its responsibilities throughout the mortgage process.

For the Mortgagee

Mortgaging land use rights for FDI loans is a significant financial transaction that opens development opportunities for businesses but also carries legal risks for the mortgagee. To ensure loan capital safety and avoid complex disputes, strict adherence to legal regulations is paramount.

• Thoroughly check the legal status of the land use rights and related documents.
• Conduct an asset valuation of the collateral by a certified valuation organization.
• Register the mortgage at the land registration office as required.
• Clearly define the scope of the mortgaged property, including assets attached to the land, per Article 318, Clause 3 of the 2015 Civil Code.
• Assess the FIE’s financial capacity to repay the debt according to Article 7 of Circular 39/2016/TT-NHNN of the State Bank of Vietnam.
• Verify that the loan purpose complies with legal regulations and the investment license.
• Inspect the mortgaged property without impeding its lawful exploitation.
• Request the mortgagor to apply asset preservation measures if there is a risk of value loss.
• Follow the correct procedures for enforcing the collateral as prescribed by law.
• Return related documents to the mortgagor upon termination of the mortgage according to Article 322 of the 2015 Civil Code.
• Notify the mortgagor before enforcing the security interest.
• Ensure the mortgagor’s right to receive the remaining value of the collateral after deducting the debt.

By completing all steps from legal review, valuation, and security interest registration to strictly following enforcement procedures and protecting the mortgagor’s rights, the mortgagee can minimize risks and ensure the efficiency and safety of the invested capital.

For the Contract

The mortgage contract for land use rights is the core legal document, forming the basis for the rights and obligations between the FIE and the credit institution. To ensure the loan transaction is secure and lawful, drafting the contract requires attention to the following issues:

According to Article 27, Clause 3 of the 2024 Land Law, a mortgage contract for land use rights must be notarized or certified as required by law.

Additionally, under Article 398 of the 2015 Civil Code, a mortgage contract for land use rights is also a standard civil contract and must contain all mandatory elements:

• The contract must clearly specify the area, location, land use purpose, and land use term.
• The value of the mortgaged property must be determined based on a lawful valuation result.
• The conditions and term for performing the secured obligation must be specifically agreed upon.
• The contract for mortgaging land use rights for FDI loans must clearly state the circumstances and procedures for collateral enforcement.
• The parties must agree on the registration of the mortgage with the competent authority to ensure its legal validity.
• The contract needs to detail the FIE’s rights to exploit the utility and enjoy the benefits from the mortgaged property.
• Clauses on property insurance for the collateral and the allocation of responsibilities in case of risk must also be clearly agreed upon in the contract.

In conclusion, a robust and transparent land use right mortgage contract is not just a legal requirement but also a shield protecting the FIE’s interests. The enterprise must carefully review every detail in the contract to ensure the loan transaction proceeds safely, smoothly, and successfully.

Consulting Services for Mortgaging Land Use Rights for FDI Loans at Long Phan Consulting Company

Long Phan Consulting Company provides comprehensive consulting services on the procedures for mortgaging land use rights for FDI loans with a team of experienced experts. Our consulting services include:

• Drafting and reviewing mortgage contracts for land use rights and related documents.
• Assisting FIEs with the mortgage registration procedure at the land registration office.
• Advising on the procedure for mortgaging land use rights for FDI loans.
• Consulting on loan conditions, mortgage scope, and potential legal risks.
• Supporting the legal due diligence of the collateral.

With experience advising numerous FIEs, Long Phan Consulting Company understands the legal specifics and practical requirements of mortgaging land use rights. Our services are tailored to each type of FIE and the scale of the investment project. Long Phan Consulting Company ensures a transparent consulting process, reasonable costs, and prompt execution to meet the urgent needs of FIEs.

Frequently Asked Questions about Regulations on Mortgaging Land Use Rights for FDI Loans

To help you better understand the regulations on mortgaging land use rights for FDI loans, we have compiled some common questions:

Are assets attached to the land required to be mortgaged along with the land use rights?

The law presumes that when land use rights are mortgaged, assets attached to the land owned by the mortgagor are also part of the collateral. However, the parties have the full right to agree in the contract to exclude assets attached to the land from the scope of the security property.

What is the procedure for releasing a mortgage on land use rights if the enterprise repays the loan early?

Coupon completing the early repayment, the FIE must notify the credit institution. The two parties will then sign a document to terminate the mortgage contract, and the credit institution is obliged to return the original Certificate. Finally, the enterprise carries out the procedure to delete the mortgage registration at the Land Registration Office to officially release the asset.

What happens if the mortgaged land plot is recovered by the State for national defense, security, or socio-economic development purposes?

In case the land is recovered, the mortgage contract will terminate. The mortgagee (the bank) will have priority in payment of the debt from the compensation, support, and resettlement money that the FIE receives from the State, after deducting related costs.

Can an enterprise continue to mortgage land use rights for another loan?

An enterprise can use one asset to secure multiple obligations if the asset’s value at the time of the transaction is greater than the total value of the secured obligations, unless otherwise agreed. This requires the consent of the prior mortgagee and must be registered according to regulations.

What are the legal consequences if a mortgage contract is not notarized or certified?

According to Article 27 of the 2024 Land Law, notarization or certification of a mortgage contract for land use rights is a mandatory requirement. Non-compliance may result in the contract being declared void by a court. In that event, the parties must return to each other what they have received and may have to pay damages if at fault.

With these answers, you will have a clearer understanding of the regulations related to mortgaging land use rights for FDI loans and can carry out the mortgage lending procedure in compliance with the law.

Conclusion

A firm grasp of the regulations on mortgaging land use rights for FDI loans under the 2024 Land Law and the 2015 Civil Code is the foundation for a successful transaction. Clients must comply with all legal conditions and mandatory procedures to avoid risks. If you have any questions about mortgaging land use rights for FDI loans, contact the hotline 1900 636389. Long Phan Consulting Company is ready to assist you in completing all procedures quickly and accurately.