Cleaning up condotel legislation in Vietnam

Dao Nguyen

Condominium hotel (condotel), is generally understood as a residential condominium apartment building that is operated as a hotel. The term, in fact, has no definition under Vietnamese laws and has been used by developers to include both condominiums/apartments and villas, offering buyers a number of ownership structures. Below are the four common scenarios.

Scenario 1: The sale of a residential condominium unit/villa in a real estate development project in which the developer is licensed to build residential premises for sale as well as to operate a hotel/resort. The owner can put the units/villas into the rental pool programme managed by the hotel and receive income from it.

Scenario 2: The sale of membership in a club by the developer. Payment of the membership fee entitles the member to use a certain number of days at a villa or room in the resort. This is similar to a “timeshare” arrangement where there is no ownership of a unit and the buyer simply purchases the right to use a certain number of days at a resort.

Scenario 3: The sale of the right to use a specific condominium or villa with a return on investment paid by the developer if the premises are part of the hotel rental pool and the owner is given a certain number of days to use the same or an equivalent unit at the resort. In most cases in Vietnam, the developer guarantees a minimum rate of return on the investor/owner’s investment. There is, however, no ownership right involved. The buyer will never get the red book. This scheme is in fact similar to a loan or investment into a project to finance a developer with the lender or investor receiving monetary benefits in return.

Scenario 4: The long-term lease of a condominium or villa with a guaranteed return if it is put into the rental pool with the owner holding the right to use the unit for a certain number of days. Again, there is no ownership right and no red book.

The laws of Vietnam do not prohibit any of these schemes. The risks of each scenario are laid out below.

Scenario 1, in fact, is the true definition of a condotel. The owner has legal ownership of the unit/villa because the developer is licensed to sell residential premises and the particular land is zoned as residential. Thus, the owner has all the protections under the Law on Housing 2014, which contains clear regulations on construction warranties to be provided by the developer as well as on the management of common areas, and all the protections of an owner such as the right to receive the land use right certificate of the unit/villa and the related land (red book). In this case, the buyer (either foreign or local) shoulders no risk, because this is no different from buying a unit at any residential development project.

The issue, however, is that most buyers in scenarios 2 and 3 also believe that they are buying real estate and that they have true ownership of the relevant property. In fact, what they have is the contractual right to use a particular room or villa in a resort development project and in certain cases a guaranteed return from the developer. They will not get the red book. They will not enjoy the safeguards provided by the Law on Housing. This does not protect the buyers from the bankruptcy of the developer or even early termination by the developer. In addition, because the guaranteed return is also purely contractual and the buyer may have difficulty in enforcing payments, especially if the developer has no funds to oblige. Forcing it into bankruptcy will not help because the buyer will essentially become an unsecured creditor lining up behind other secured creditors. It is also unclear (unless specifically negotiated) whether these arrangements remain binding if the developer sells the project to a new owner.

In Scenario 4, a Vietnamese lessee under long-term lease arrangements does have some means to protect their right to use the leased premises in the event of bankruptcy of the lessor, because the Civil Code and other laws recognise the right of a lessee. However, contractually, the lessee still has to shoulder all the other risks set out above such as enforcement of the guaranteed return, no red book, and no clear laws on the management of common areas. In addition, lessees who are foreign individuals do not have the right to sublease the property. Thus, although the long-term lease by a foreign lessee may be for 50 years and so seem similar to ownership, the rights of a foreign lessee or owner of residential premises are quite different. An owner, for example, will get the red book, can transfer ownership, is guaranteed the right to extend the initial term for another maximum period of 50 years (100 years of total use), and can convert VND into foreign currency from the sale and lease of the premises.

Given the above, buyers in scenarios 2, 3, and 4 may have difficulties selling these rights to third parties in the future because potential buyers will want something closer to ownership. Thus, buyers may not be able to realise the expected value on the sale of these rights.

The reason the developer in scenarios 2, 3 and 4 cannot give the buyer ownership is that the developer only has the licence to build and operate a resort/hotel. This is “commercial” land use and therefore it is not possible for the developer to transfer “long-term” use rights or ownership to the buyer. Typically, this is the case for most resort development projects. Thus, in order to raise pre-construction financing, the developer has no choice but to offer these condotel arrangements and in most cases offer a guaranteed return to help buyers mitigate the risks discussed above.

We understand that the government is considering a condotel law to deal with scenarios 2, 3, and 4, and perhaps the buyer will receive a certificate of right of use similar to the red book and the law may set out certain protections to the buyers. We are unclear as to the progress on this, but highly support this effort to help developers raise financing and protect the rights of buyers.