Assessing framework holes in wake of Thu Thiem auction

Tran Duc Phuong from the Ho Chi Minh City Bar Association

On December 10, 2021, Ho Chi Minh City Land Fund Development Centre (representing land plot owners) and Ho Chi Minh City Property Auction Service Centre auctioned four land plots in Thu Thiem New Urban Area with 21 participants.

All four plots have a land-use period of 50 years from the date that a decision on recognition of winning the auction is issued. Buyers of the units built on these land plots will have stable and long-term use rights. At the end of the day, all four land plots were successfully auctioned at a total amount of around $1.6 billion, seven times higher than the starting price.

All four winners signed contracts for auctioned land plots on time. At the beginning of January 2022, the Tax Department of Ho Chi Minh City also issued a notice requesting the four winning companies to pay land use fees. Accordingly, within 30 days from the date of issuance of the notice, land users must pay 50 per cent of the land use fee. The rest will be submitted within 90 days from the date of issuance of the notice.

However, on January 11, the chairman of Viet Star Real Estate Investment Co., Ltd. – who won a land plot at the highest ever price of $105,000 per square metre – suddenly announced the unilateral termination of the auction contract and accepted the loss of a $26 million deposit.

With that, the auction of those land plots has raised many questions in terms of related legal regulations.

Correct procedures

According to the Law on Property Auction 2016, an asset auction is a form of asset sale with two or more sides participating in an auction according to this law’s principles, order, and procedures.

Article 49 of the law also regulates that if the first auction fails, a second auction is held. If only one person registers, one person participates in the auction, there is one bidding offer and acceptor, and the property is sold to that person if the asset owner agrees in writing.

Meanwhile, joint circular No.14/2015/TTLT-BTNMT-BTP from 2015 stipulates the organisation of auction of land use rights to allocate land with collection of land use levy or leased land. Accordingly, it describes the order and procedures for organising the auction of land use rights. The local competent People’s Committee is assigned to issue a decision recognising the winning result of the land use right auction.

Article 58 of the Law on Land 2003 and Article 118 of the Law on Land 2013 (currently in effect) stipulates that the auction of land use rights is a form that the state grants land-use rights to winning investors. Accordingly, the local government will put up for auction land plots with construction plans so that buyers can participate in the auction.

After a company wins at auction, under the land-use right of that plot, the implementation can be done in two forms: the investor implements all procedures accordingly to the regulation (under the related laws of investment, housing, and construction). For small scale land lots, the winning organisation or individual should submit the construction permission for separate houses and construction but not have to implement the project procedures.

However, from the start of 2021, the Law on Investment 2020 regulated the selection of investors to implement investment projects through the auction of land use rights. According to the provisions of Point a, Clause 1, Article 29, auction form to select investors to implement an investment project are entirely different from the formation of land use right auction in the above Law on Land 2013 and the Law on Property Auction 2016.

Accordingly, the selection of investors to implement the project in the form of the auction of land use rights can only be done after a “decision on approval of investment policies” (except for cases not subject to the approval of investment policies) is issued.

Meanwhile, according to the Law on Investment 2020, in exceptional auction cases where only one person registers to participate or the auction fails, the competent authority will still carry out the investor approval procedure when that investor satisfies all conditions prescribed by relevant laws. Due to the significant changes in that law, especially when only one person registers to participate or the auction is unsuccessful, the competent authority will carry out the investor approval procedure without having the auction re-organised.

Locating loopholes

We can see that the Law on Investment lacks specific provisions and has not yet assessed the impact of the rising cases fully. On the other hand, this content is about bidding for selection investors to implement the project (according to the Law on Bidding 2013 and Decree No.25/2020/ND-CP), but it was applied only by the provisions of the Law on Bidding 2016 and was not appropriate.

Therefore, this is a legal loophole that poses a very high risk of loss of state budget revenue in the current situation. In fact, there have been many projects implemented through this inadequacy of regulations.

Some localities, such as Thanh Hoa People’s Committee, issued Decision No.21/2021/QD-UBND last September, regulating the auction of land use rights certificates (LURCs) for land allocation with the collection of land use fees or for leasing land for implementing investment projects. This decision stipulates that all individuals and organisations are allowed to register to participate in auctions.

With the auction of four land plots in Thu Thiem New Urban Area, this was an auction without an “investment policy approval decision”, not complying with Article 29 of the Law on Investment 2020. The auction was carried out according to the provisions of the Law on Auction 2016 and the joint circular No.14. Because of this implementation, there were incompatibility points raised when implementing project investment procedures and the conditions prescribed by law right before the auction.

The current provisions of the Law on Auction 2016 have not been amended and supplemented and has many shortcomings. Some provisions, such as pre-payment, are not included in the Civil Code 2015. The stages of the auction process have not been distinguished, so there are overlapping provisions in pre-auction (on conditions for participation), during the auction, and even post-auction (on executing asset purchase contracts). The Law on Property Auction 2016 has not separately provided between the time for deleting approval of the auction results and the time for dealing with violations of contracts to purchase auctioned assets.

Although the law clearly stipulates that the contract to purchase auctioned assets shall be applied according to the Civil Code, it has not made clear contract violations in the case of the buyer of the auctioned asset delaying or refusing to make payment. This shortcoming will lead to many other consequences, affecting the economy when the auction’s participants have their own calculations and interests. For example, putting a high price in the auction to gain the land lot at any price and subsidising by creating a new investment wave in the stock market and bringing about lots of profit.

Meanwhile, with the formation of bidding for investor selection (uncleared land), Decree 25 is divided into international and domestic bidding with different procedures and times. We expect international investors to participate in LURC auctions for clean and cleared land.

However, there have not been any new international investors who participated in those bidding packages. They cannot make relevant procedures such as internal decisions of the company, financial preparation and money transfer to be able to participate in the auction of LURCs to implement investment projects.

Therefore, it is necessary to amend the Law on Auction 2016 and the guidelines of the Law on Investment 2020’s Article 29. Accordingly, competent bodies must issue “decision approving the investment policy” and regulations on the conditions of investors implementing the project (as in the bidding process) in the auction of land use rights.

Currently, the Law on Land 2013 is being amended. It will discuss and consider carefully the converting of land use purposes for projects. The auction of LURCs and bidding for investor selection will be crucial for investors to set up their projects in Vietnam.

Therefore, to reduce loopholes that are at risk of causing losses to the state budget, affecting Vietnam’s socioeconomic situation, the government should issue regulations to guide the detailed activities of land use rights auctions.