Vietnam continues to be considered an important destination for production investment capital flows, the demand for land lease in industrial parks and industrial clusters is increasing. For investors, especially foreign investors, obtaining the right to stably use an area of land in an industrial park is often a prerequisite for implementing projects, applying for investment registration certificates, building factories, organizing production and operating supply chains. However, practice shows that a land lease contract in an industrial park is not just a normal commercial transaction. This type of transaction is located at the intersection of civil law, land law, investment law, real estate business law and also foreign exchange, tax, and invoice law.
Source: Government News
Judgment No. 21/2024/KDTM-PT dated June 26, 2024 of the High People's Court in Hanoi is a typical example. The case arose from an "Agreement in Principle" between a Korean enterprise and a Vietnamese enterprise related to the sublease of land in an industrial cluster in Bac Giang. Although the document is named the "agreement in principle", the Court does not stop at the name but considers the substantive content of the transaction: land area, rental price, lease term, payment schedule, land handover obligation and commitment to land use rights. Since then, the Court determined that this was actually a land sublease transaction with infrastructure, but the sublessor did not have sufficient legal conditions to exercise this right at the time of signing. As a result, the agreement was declared invalid and the recipient had to refund more than 5 billion VND to the lessee.
From this case, it can be seen that disputes over land lease contracts in industrial parks usually do not break out right at the time of signing. It often simmers from risks that are overlooked: the lessor does not have enough rights, the land is not eligible for sublease, the infrastructure has not been handed over, the certificate has not been completed, the contract is named incorrectly, or the parties pay before the legal conditions are fully established. When the project cannot be implemented, these risks are transformed into disputes.
The lessor has no right to sublease
First of all, the biggest risk lies in the legal status of the lessor or sublease. Not all enterprises using land in industrial parks have the right to sublease it to other enterprises. According to the logic of the land law, the right to sublease depends on the origin of the land, the form of land rent payment, the status of the certificate, the purpose of land use, the right to invest in and business in infrastructure, as well as the scope of rights recorded in the contract with the industrial park investor. An enterprise may be "holding" the land in fact, have signed a land lease contract with the infrastructure investor, or even paid part or all of the rent, but that does not mean that the enterprise has the right to transfer the right to exploit the land to a third party.
In Judgment 21/2024/KDTM-PT, the key point is that at the time of signing the agreement with the lessee, the subleaser has not been granted a land use right certificate for the relevant area. Moreover, they are also not allowed to do infrastructure business for sublease as required by Vietnam's land law. The land lease enterprise in this case should not only check the land lease contract between the lessor and the infrastructure investor, but must check more deeply whether the sublease right is allowed by law and the original contract.
Risks from concealing the true nature of trading
The second risk is confusion between "lease land", "sublease land", "lease infrastructure" and "use infrastructure services". In practice, many contracts are designed with softer names such as "in-principle agreement", "reservation agreement", "cooperation contract", "infrastructure use fee", "infrastructure development fee" or "service fee". However, when a dispute occurs, the Court will not only look at the name of the document. The court will look at the nature of the transaction: does the lessee pay for the use of a particular area of land for a long period of time or only pays a fee for an independent infrastructure service? Is there a commitment to handing over the land or not? Is the location, area, rental price, and lease term determined? Is there an obligation to support the issuance of investment certificates or licenses?
If the answers to these questions indicate that the recipient is actually subleasing the land, calling the amount an "infrastructure fee" will not be enough to avoid the risk of invalidation. This is the highlight of the judgment we quoted above. The Court held that the infrastructure usage fee could not be separated into a part of an independently effective contract, because the infrastructure was not owned or exploited independently by the lessor; at the same time, the entire transaction structure is closely associated with the goal of subleasing land. This interpretation shows that in industrial land transactions, the economic and legal nature is more important than the commercial name.
Risks to payment terms
The third risk is to pay too early, before the legal conditions are finalized. In many transactions, the lessee often has to pay a significant amount immediately after signing the agreement to "keep the land", secure the lease or help the lessor complete the next procedures. This approach may be commercially sensible, but the risk is huge without a clear prerequisite and refund mechanism. Once the lessee has paid most or all of the money, but the sublease right has not been established, the project may be stalled, and the recovery of the money depends on the goodwill of the recipient or the outcome of the proceedings, which sometimes take too many years.
In the above case, the lessee has fully paid more than 5 billion VND through many installments. However, after that, they did not receive the land use rights as expected, were not actually handed over and could not implement the project. When the Court declares the agreement invalid, the legal consequence is that the recipient must return the amount received. However, in reality, winning a lawsuit and recovering money are two different stories. After the judgment, the winning party may still have to continue to pursue judgment enforcement procedures, verify assets and face the risk of delay in recovery.
Source: The Saigon Times
Risk of missing handover documents or unclear handover documents
The fourth risk is the lack of evidence of land handover and use. In the industrial land lease contract, the land handover record, boundary markers, location drawings, current status of infrastructure, electricity and water connections, internal roads, wastewater treatment systems, land access rights and infrastructure acceptance documents are all important evidences. If the lessor believes that the land has been handed over but there are no actual records or evidence, the claim for rent, infrastructure fees or compensation for damages may be rejected. Conversely, if the lessee has actually used the land but then considers the contract invalid to claim the full amount, they may also have to repay the value of the benefits received.
In the judgment 21/2024/KDTM-PT, the Court noted that the lessee has not been handed over, managed, and used the land; the land area has not yet been put into operation. This is an important basis for the Court to force the sublessor to refund the entire amount received and reject many counterclaims related to costs, land price differences, VAT and other arising amounts. The lesson is: in land lease transactions, actual evidence is no less valuable than contractual clauses.
Risks from the trading structure
The fifth risk is that the three-party transaction structure is unclear. In many industrial parks, transactions are not only lessees and lessors, but also infrastructure investors. If the lessee signs with an intermediary enterprise, and the infrastructure investor is the one who has the real rights to the land and infrastructure, the dispute can become complicated. The lessee may have paid the intermediary, but then had to sign a contract directly with the infrastructure investor. When the project fails, the question arises: who has to refund, who bears the costs incurred, which contracts are valid, which contracts are affected, and whether the obligations between the parties are offset?
Judgment 21/2024/KDTM-PT shows that the Court only settles within the scope of the parties' request for the agreement between the lessee and the lessor, while other contractual relationships between the lessee and the infrastructure investor are not thoroughly handled in the same case. This reflects a reality: if the initial transaction structure is not designed synchronously, the dispute can be broken down into many lawsuits, multiple legal relations, and even many different jurisdictions.
Risks of violations of regulations on the use of foreign currencies in transactions in Vietnam
The sixth risk is the improper use of foreign currency, invoices and taxes. In transactions with foreign elements, the parties are often used to negotiating the rental price in USD or an international reference currency. However, the recording of prices, payment, invoicing and tax declaration in Vietnam must comply with regulations on foreign exchange management, value-added tax and invoices. If the contract is priced in foreign currency in the wrong circumstances, or the invoice issued to the subject is not in accordance with the cash flow and nature of the transaction, civil disputes may entail tax and accounting risks.
From the above risks, businesses need to change their approach when renting land in industrial parks. Instead of only caring about the location, rent, and lease term, the tenant needs to do full legal due diligence before making a deposit or payment. In all cases, enterprises that lease land/infrastructure that have been completed in industrial parks also need to check the land use right certificates, land allocation or land lease decisions, land lease contracts between infrastructure investors and sub-lessees, sublease rights, etc. the status of land rent payment, planning, land use purposes, infrastructure status, investment licenses, construction permits and restrictions on the transfer of land exploitation rights.
Regarding the contract, it is necessary to clearly stipulate the prerequisites before payment: the lessor must prove the legal right to lease or sublease; the infrastructure investor must approve in writing if necessary; the land must be free of disputes, not distrained, and not restricted from transactions; infrastructure must meet the conditions for handover; and the handover must be made in writing. Large payments should be split by legal milestones, not just by timeline. In particular, the contract needs to have a mechanism for refund, late payment interest, penalties for violations and compensation if the legal conditions are not completed.
Judgment 21/2024/KDTM-PT is a reminder that the industrial land lease market, although attractive, contains many legal risks if the parties believe too much in the commercial agreement and ignore strict conditions and regulations on land use rights. In industrial land transactions, safety does not come from verbal commitments, goodwill emails, or flexible names of contracts. Safety comes from clear legal rights, complete land records, prudent payment structure, strict proof of handover, and contracts that reflect the true nature of the transaction. This is the most important lesson that businesses need to learn before signing any land lease contract in an industrial park in Vietnam.
