The matter of mobilizing capital for real estate projects and for residential housing projects in particular always attracts special attention from project owners, buyers and relevant authorities.

In practice, to create legal grounds for mobilizing capital for residential housing projects and effectively protect buyers’ basic interests, a series of legal documents was issued providing provisions related to the time when the project owner can sale a product and collect money from the buyers, among which Article 39 of the Law on Residential Housing stipulates that: “An investor may only raise capital by way of payments made in advance by people who  wishes  to  purchase  or  lease  residential  housing  in  the  case  where  the  design  of residential housing has been approved and the construction of the foundation has been completed”.  In the view of legislators the time of completion of foundations should be a point of time appropriate for both the project owner’s raising capital from advance payment by buyers and guarantee of the buyers’ interests.

However, in the context of a boom in residential housing markets, with respect to a number of potential projects buyers expect to buy houses at a low price and sell them at a much higher price in the future. In the meantime, a project owner who always has the demand for raising capital to service a project has to grasp buyers’ expectation. Therefore, an alternative raising capital method, which satisfies the needs of the project owner and buyers and is not in contradiction with the Law on Residential Housing has been proposed. In fact, instead of signing a purchase contract with the buyer, the project owner offers the buyer another kind of contract named a “cooperation agreement”, “capital contribution agreement” or “loan agreement” (Hereinafter collectively referred to as “cooperation agreement”). Under the cooperation agreement, the buyer shall become a partner of the project owner who shall contribute a certain amount to the project and shall be granted with “buying right”. The buying right as mentioned herein is the right entitling the partner to buy a house of the project at a preferential price upon the project owner selling the houses in accordance with prevailing regulations. The partner under the cooperation agreement has a chance to convert its role into the buyer under the house purchase contract, according to which the amount that has been paid under the cooperation agreement shall be deductible to the payable amount under the purchase contract. Despite the fact that the above mentioned transaction implies certain potential risks for the buyer, especially when the project owner cannot implement or delay the project, many buyers still agree to enter into this kind of cooperation agreement in order to obtain such buying rights with a hope that the they can sell the houses in the future at a price much higher than the price agreed with the project owner in the cooperation agreement.

Catching up this reality, the Law on Real Estate Business (LOREB) was issued and took into effect from January 1, 2007, which provides in Articles 11 and 22 that the investors are obligated to publish information related to the real estate before trading and they must sell the houses and construction works via real estate trading floors. The said provisions create a legal basis for the publicity of information and the transparency in sale activities. However, as the period and the method of publicizing the information as well as the way to sell the project’s products via real estate trading floors are not clearly specified, the above mentioned provisions have yet to be implemented.

After nearly one year from the effective date of LOREB, the government has issued Decree No. 153/2007/ND-CP guiding the implementation of LOREB. This decree has addressed some issues related to capital of real estate business enterprises, real estate brokerage certificates, real estate valuation and certificate for management of real estate trading floor, etc., but detailed guiding provisions in connection with the publicity of information and the sale of project products via real estate trading floors is still pending.

The issue is only regulated thanks to the Ministry of Construction’s issuance of Circular 13/2008/TT-BXD guiding the implementation of LOREB and Decree 153, under which a trading floor must publicize information regarding the real estate available for sale, transfer, lease and/or hire purchase on such trading floor to give information to clients and to enable  transaction registrations. The time-limit for publicity of information shall be a minimum of 7 days on the trading floor. Within such a time-limit, the following information including project name, type and quantity of real estates and the location and time for holding the sale, transfer, lease and/or hire purchase, must be publicized in a minimum of three consecutive editions of one locally-issued newspaper, at least once on local television in the location of the project and on any website of the trading floor. At the expiry of the said time-limit for publicity of information, the investor (or the trading floor if so delegated with authority) shall be permitted to hold the sale, transfer, lease and/or hire purchase of the publicized real estate item. If two or more clients register for the same real estate item, or if the number of registered clients is more than the quantity of real estate items, then the investor (or the trading floor if so delegated with authority) must select a client by casting lots or by holding an auction.

Based on such provision, in a case where a product has more than one client registered to buy, the project owner must select a client by casting lots or by holding an auction. As a result, the client who has the buying right via the cooperation agreement may lose his/her right. Therefore, the client shall not be interested in signing this kind of cooperation agreement for obtaining the buying right, because there is no guarantee to ensure that they can execute such rights in the future. In theory, from the effective date of Circular 13 the said cooperation agreement is not a good method for mobilizing capital from the buyer and for overcoming the barrier as stipulated in the Law on Residential Housing.

However, some people have doubted the enforceability of the new regulations. In cases where the project owner violates the regulations related to real estate business, which sanction shall be applied? In practice, there is not any legal instruments issued to provide detailed sanctions against administrative violations in real estate business. Hence, if a real estate business enterprise violates relevant regulations, the state authorities have no legal ground to deal with such violations.

The Ministry of Construction said that it will submit a new decree to the government to replace Decree 126/2004/ND-CP providing sanctions against administrative violations in the fields of construction, management of urban infrastructure and housing. The new decree is expected to create a complete legal frame for real estate business activities, which will help the markets become more transparent and the buyer shall not easily pay money for obtaining the buying right as is the case at present.