CAN THE DEVELOPER OF A MORTGAGED HOUSING PROJECT RAISE CAPITAL?

Currently, taking out loans is a common method to finance the development and construction of residential projects. To secure their loan obligations, developers of residential projects often use the project itself or the housing units built within it as collateral at credit institutions. This raises a notable legal question: When a residential project is under mortgage, is the developer permitted to mobilize capital from other investors?

This issue not only directly affects the rights and obligations of the residential project developer but also profoundly impacts the interests of other investors participating in the project and the mortgagees (credit institutions), as well as the stability and transparency of real estate business operations.

1. What is a residential construction investment project?

Current law clearly defines the concept of a residential construction investment project in Clause 12, Article 2 of the 2023 Housing Law. Accordingly, a residential construction investment project is a collection of proposals related to the use of capital to carry out new construction, reconstruction, renovation, or repair of housing, technical infrastructure, and social infrastructure to serve housing needs at a specific location within a defined period and cost.

2. Who is the developer of a residential construction investment project?

The developer of a residential construction investment project is an organization selected to implement the project in accordance with housing laws. Pursuant to Article 35 of the 2023 Housing Law, the developer of a residential construction investment project includes:

Enterprises or cooperatives, unions of cooperatives, including foreign-invested economic organizations established and operating under Vietnamese law and having real estate business functions (hereinafter collectively referred to as real estate enterprises) that meet the following conditions:

Having equity capital in accordance with real estate business laws to implement each residential construction investment project;

Having the land use rights to implement each type of residential construction investment project according to the 2023 Housing Law or being allocated or leased land according to the Land Law;

Having the capacity and experience to implement the residential construction investment project according to legal regulations.

Organizations investing in housing construction using trade union financial resources under trade union laws; public investment capital under public investment laws; capital from national bonds, government bonds, official development assistance (ODA), concessional loans from donors, State development investment credit capital; capital mobilized from the Land Development Fund, and other off-budget state financial funds according to legal regulations. At the same time, they must meet the condition of being an organization assigned by the investment decision-maker to manage and use capital to implement the residential construction investment project.

3. Mortgaging a residential construction investment project:

Current law allows the developer of a residential construction investment project to mortgage part or all of the project at a credit institution operating in Vietnam to borrow capital serving the project's investment.

This has significant meaning both economically and legally. Firstly, it creates a legal basis for the developer to mobilize medium- and long-term credit capital, meeting the large capital demands during project implementation, thereby helping to ensure investment progress and efficiency. At the same time, it increases flexibility in business operations, helping the developer maximize asset value and improve capital efficiency. Besides, the mechanism of mortgaging residential construction investment projects also serves as a safety tool for credit institutions, as loans are secured by specific, valuable assets that can be handled according to legal regulations in case of risks.

However, to mortgage a residential construction investment project, the developer must meet the following conditions:

If the mortgage of part or all of the residential construction investment project does not comply with the regulations on mortgage conditions, the mortgage transaction shall be deemed invalid.

Legal basis: Clause 1, Article 183 and Article 184 of the 2023 Housing Law.

4. Can the developer of a mortgaged residential construction investment project raise capital contributions?

Pursuant to Clause 2, Article 183 of the 2023 Housing Law, if a developer of a residential construction investment project has mortgaged part or all of the project but needs to mobilize capital under housing laws, they must release the mortgage (de-mortgage) on the respective part or the entire project and the land use rights before signing capital contribution mobilization contracts with other investors.

Thus, it can be understood that the imposition of mandatory conditions regarding the execution and timing of the mortgage release clearly reflects the law's standpoint of prohibiting the developer from executing capital contribution mobilization transactions for a currently mortgaged project. Executing a capital mobilization transaction is only permitted by law when the developer has released the mortgage on the mortgaged part of the project at the credit institution. Upon signing the capital contribution contract, the developer must provide the contributing party with the mortgage release document from the credit institution.

To ensure legal safety and balance the interests among related parties, the law establishes strict constraints in housing project investment and construction activities. This also clearly reflects the State's regulatory direction: Both facilitating developers to access capital sources for project implementation and controlling risks to protect the legitimate rights and interests of relevant parties, as well as ensuring the safety of the credit system. Practice shows that most disputes arising in this field stem from the developer's failure to fully comply with legal conditions when mobilizing capital against mortgaged assets, leading to the risk of invalid transactions or complex legal obligations. Therefore, the developer's strict compliance with the procedures, conditions, and limits prescribed by law when raising capital is not

DL PINNACLE LAW FIRM LLC