IF THE PRIOR LAND TRANSFER TRANSACTION IS DECLARED NULL AND VOID, IS THE SUBSEQUENT BANK MORTGAGE AGREEMENT ALSO INVALIDATED?

description enLegal practice shows that in numerous instances, land use right transfer transactions are declared null and void by the Court due to the failure to meet the validity conditions for civil transactions as prescribed by law. The legal consequences of such invalidation are not limited to the relationship between the parties in the initial transfer, but also raise complex legal issues concerning the validity of subsequent transactions, particularly the mortgage of land use rights at credit institutions. If the prior land use right transfer transaction (which serves as the basis establishing the mortgagor's ownership rights) is declared null and void, is the mortgage of such land use rights at a credit institution also rendered invalid?

1. Validity conditions of civil transactions:

For a civil transaction to be considered legally valid, it must meet all of the following conditions:

In addition, civil transactions must also satisfy conditions regarding their form in cases prescribed by law.

If a civil transaction fails to satisfy even one (01) of the above conditions, it shall be considered invalid (null and void). Some common cases of invalid civil transactions include: Civil transactions being invalid due to violations of legal prohibitions or being contrary to social ethics; Invalid civil transactions due to falsification (sham transactions); Invalid civil transactions established and performed by minors, persons having lost their civil act capacity, persons with difficulties in cognition and behavior control, or persons with restricted civil act capacity; Invalid civil transactions due to mistake; Invalid civil transactions due to deception, threat, or coercion; Invalid civil transactions due to the establishing person being incapable of cognition and behavior control;…

Legal basis: Article 117, Article 122 of the 2015 Civil Code.

2. Legal consequences of the mortgage of land use rights at credit institutions when the prior land use right transfer transaction is declared null and void:

As analyzed, a civil transaction is valid when it fully satisfies the conditions regarding subjects, purpose, content, and form. However, regarding the mortgage of land use rights at credit institutions where the prior land use right transfer transaction has been declared null and void, determining the validity of the mortgage transaction does not merely depend on examining ordinary validity conditions. It also requires thorough consideration and balancing of various objective factors due to the complex legal nature of multiple interconnected transactions, ensuring that the legitimate rights and interests of all parties are comprehensively protected.

The prerequisite for determining the validity of the land use right mortgage transaction in this case is examining the bona fide third-party status of the credit institution - the Mortgagee. Current law does not explicitly define what constitutes a bona fide third party in civil transactions; however, based on cases where bona fide third parties are protected when a civil transaction is invalid, a bona fide third party is understood as an entity participating in a civil transaction without knowing, and with no reasonable way of knowing, that the prior transaction violated the law or that the transacted asset did not belong to the lawful disposal right of the transferor.

Clause 2, Article 133 of the 2015 Civil Code stipulates the protection of the interests of bona fide third parties when a civil transaction is invalid as follows: "In case a civil transaction is invalid but the asset has been registered at a competent state agency, and is subsequently transferred via another civil transaction to a bona fide third party, and this person, relying on such registration, establishes and performs the transaction, then that transaction shall not be invalid."

Herein, the scope of "transferred via another civil transaction" is not limited to ownership transfer transactions such as contracts for sale, gift, exchange, or capital contribution of housing; or the transfer, exchange, or capital contribution of land use rights,... but also includes transactions that give rise to rights over the asset, such as land use right mortgages. For land use right mortgages, although the land use right is not "physically" transferred to the mortgagee at the time of contract execution, the legal essence of the mortgage is a security measure for the performance of obligations, establishing a legal mechanism for the mortgagee to handle the asset if the mortgagor fails to perform or improperly performs their obligations. Therefore, the land use right mortgage is considered a conditional form of asset transfer, and "transferred via another civil transaction" under Clause 2, Article 133 of the 2015 Civil Code applies to land use right mortgage transactions as well.

From the above regulation, it can be understood that determining the legal consequences regarding the validity of a land use right mortgage transaction will depend on whether the credit institution – the Mortgagee – is considered a bona fide third party when the prior land use right transfer transaction is declared null and void.

Based on the provisions in Section 1, Part II of Official Letter No. 64/TANDTC-PC dated April 3, 2019, and Section 1, Part III of Official Letter No. 02/TANDTC-PC dated August 2, 2021, it can be determined as follows:

a. Cases where the land use right mortgage at the credit institution is not invalidated:

If the land use right transfer transaction is invalid, but the transferee has been issued a certificate of land use rights and has mortgaged such land use rights to a credit institution in accordance with the law, and concurrently, the credit institution has properly carried out the procedures for verification and appraisal of the asset, bears no fault in establishing the mortgage transaction, and can prove the legality of the mortgaged asset, then the land use right mortgage at the credit institution is not invalidated because the credit institution – the Mortgagee – is considered a bona fide third party.

b. Cases where the land use right mortgage at the credit institution is invalidated:

If the land use right transfer transaction is invalid, the mortgage of such land use rights to the credit institution does not comply with the law, and simultaneously the credit institution lacks responsibility, fails to properly execute verification and appraisal procedures for the asset, or if there are signs indicating that the credit institution knew or could have known about the illegality of the mortgaged asset but proceeded to establish the mortgage transaction anyway, then the land use right mortgage at the credit institution is invalidated because the credit institution – the Mortgagee – is not considered a bona fide third party.

3. Legal consequences:

a. Cases where the land use right mortgage at the credit institution is not invalidated:

When a land use right transfer transaction is declared null and void, but the land use right mortgage at the credit institution remains valid, the owner does not have the right to reclaim the asset (the land use right) from the credit institution (the bona fide third party). Instead, they only have the right to initiate a lawsuit requesting the at-fault party—whose actions led to the transaction being established with the third party—to reimburse reasonable expenses and compensate for damages. Concurrently, the credit institution has the right to handle the mortgaged asset, which is the land use right, in case the mortgagor fails to perform or improperly performs their committed obligations.

Legal basis: Clause 3, Article 133 of the 2015 Civil Code.

b. Cases where the land use right mortgage at the credit institution is invalidated:

The parties to the land use right mortgage transaction must restore everything to its original state and return to each other what they have received. If returning in kind is impossible, the value must be converted into money for repayment. The at-fault party causing damage must compensate. The mortgagee must return the Certificate of Land Use Rights to the mortgagor and carry out the procedures to deregister the mortgage, and concurrently has the right to receive back what was given to the mortgagor upon concluding the Asset Mortgage Contract. Accordingly, the mortgagee loses the priority right to handle the mortgaged asset, and the loan, currently secured, will convert into an unsecured loan or a partially secured loan, depending on whether the Mortgage Contract is partially or entirely invalid.

Legal basis: Article 131 of the 2015 Civil Code.

Determining the validity of a land use right mortgage transaction in this case cannot be approached mechanically, but must be placed within the overall context of fundamental principles of civil law, particularly the principle of protecting bona fide third parties and ensuring the stability of legal relationships. Therefore, it is necessary to continue refining the legal framework and unifying the understanding in applying the law, in order to ensure the legitimate rights of related subjects and maintain the safety and stability of civil transactions in society.

DL PINNACLE LAW FIRM LLC