Vietnam's new Land Law offers project developers more certainty and new complexities

Land Law 2024 makes a marked shift towards promoting annual payment of rent over one-off payment to ensure stable revenue source and avoid loss of State budget. Changes include:

• fewer cases able to choose one-off payment of rent;
• new ability to convert from one-off to annual payment; and
• new 'lease right' concept for lessees of land with annual payment that can be transferred or leased.

While annual land rent will help reduce the upfront financial burden of investors, it also means they will not have long-term cost certainty as rent will be adjusted over time. It also means fewer lessees will be able to transfer or mortgage their land use rights, as such rights are not available to lessees that pay rent annually.

• People's Committees (instead of management boards of economic zones and high-tech zones) will be in charge of clearing and leasing land.
• 70-year lease terms will no longer be expressly allowed in economic zones, only for high-tech zones.

If land rent is reduced or exempted under the law, economic organisations (both domestic and foreign invested) will enjoy the same rights and obligations as if they pay land rent upfront in full, thereby allowing mortgage and transfer of land use rights. In addition, Land Law 2024 expands the list of cases eligible to land rent exemption and reduction.

• The list of projects for which the State will be responsible to clear necessary land (ie 'projects for socio-economic development for national and public benefit') is now more detailed.
• Linking land prices directly with market value rather than artificial State price tables (see section 6) should facilitate faster land clearance/compensation processes, but also add to expenses, and any benefit could be offset by other changes that may prolong procedures. 
• Allowing developers to reach private agreement with existing land users to acquire land is a significant change, although subject to consent from provincial People's Committee. This change formalises a relatively common practice for project developers and will enhance developers' ability to properly recognise actual project expenses.

• For the first time, cases subject to 'direct land lease/allocation' (ie without holding a tender or auction), cases subject to land use right auction and tendering for purposes of investor selection are all gathered in one place, being the Land Law.
• There will still be cases where renewable energy project investors can lease land directly without going through tendering or auction, but details won't be available until an implementing Decree.

Changes to the land price regime will have a major impact on all existing and future projects using land. Even though provincial People's Committees will still set land prices (based on market value), removal of the current five-year land price framework will provide greater flexibility to ensure land prices reflect market conditions. Land prices will likely be higher than previously, and will fluctuate annually rather than on a five-year basis as under current law. 

• More clarity on 'foreign invested economic organisation' (FIEO) definition.
• Using land for multiple purposes is allowed.
• Vietnamese commercial arbitration is allowed to resolve 'disputes arising from commercial activities relating to land'.
• New regulation on sea reclamation of relevance to port, LNG-to-power projects and offshore wind projects.
• Risk of land being taken back by the State for failure to pay land rent or land use fee.

Only in the following limited cases can land users opt to pay rent on a one-off basis upfront:

• Using land to implement investment projects in agriculture, forestry, aquaculture and salt making.
• Using land in industrial parks, industrial clusters, high-tech parks and worker accommodation in industrial parks.
• Using land for public purposes having business purposes. This includesconstruction works for transportation, energy, telecommunications, water supply, drainage and waste treatment. For energy projects at least, this is status quo.
• Using commercial and service land for tourism and office business activities.
• Using land to build social housing for rent according to the provisions of housing law.

For other types of land that do not fall within the cases listed above (eg 'non-agricultural production and business land', which under Land Law 2013 potentially covers a wide range of privately funded projects), land users must pay land rent annually.

Notably, in the case of annual payments, investors cannot control the overall land rent payable given that the annual amount will be subject to adjustment over time. Another key concern when paying land rent annually is that the land user is not permitted to transfer or mortgage the land use right, both of which are permitted in the case of leasing land with a one-off payment. For cases where such rights are crucial (eg project financing), investors may be able to shop for the project location strategically (eg inside industrial parks) to secure their choice of paying rent upfront regardless of the project's business sector. That said, from experience, many local developers initiate projects and opt to lease land with annual payment rather than one-off payment (assuming land is not exempt from rent) for cost reasons. As a result, this change may not have a material impact on the status quo in practice. 

We note for completeness that if a land user has opted for a specific land rent payment method prior to the effective date of Land Law 2024, that option will be permitted to remain until the end of the relevant lease period (regardless of how the land/location would be categorised under Land Law 2024).

While Land Law 2013 only allows conversion from annual payment to one-off payment of land rent, Land Law 2024 now allows the inverse, provided the relevant use falls within the cases for which Land Law 2024 allows one-off payment of land rent. In case of conversion to annual payment, land rent already paid upfront will not be refunded to the investors, but instead be deducted from the annual rent. Given a change to annual payment would not result in any cash back, and also limit the rights of the land user (no right to transfer or mortgage the land use rights), we do not expect to see this option used often in relation to projects.

Note that annual rent will be adjusted after the first five years of the lease term, however, Land Law 2024 provides certain stability such that the increase must not exceed a percentage approved by the Government (tied to the consumer price index (CPI)).

For land leases with annual payment, land users cannot transfer, sublease or mortgage the land use right. This principle remains unchanged in the new law. However, lawmakers appear to have sought to 'compensate' for this drawback by introducing a brand-new concept of a 'lease right' derived from a land lease agreement with annual payment. In particular, Land Law 2024 allows land users to transfer or lease this new lease right, provided it is done together with transfer or lease of assets attached to land and subject to certain conditions. Transfer of such lease right appears intended to be not just 'transfer of a right' but complete transfer of all the lessee's rights and obligations under the original land lease agreement to the transferee. The transferee in such case will be allowed to continue using the land with the same purpose within the remaining lease term and must carry out necessary land registration steps with the local authorities. It is less clear what form of lease of this new 'lease right' would entail, but it appears to be a form of sub-lease. More guidance is required to clarify this. Notably, the new law is silent as to whether this new 'lease right' can be mortgaged together with assets on the land—we expect this issue will be further clarified under the implementing regulations of the new Land Law.

Cases where investors can lease/be allocated land without having to go through either a land use right auction or tendering for investor selection are:

• allocation of land without land use fee or land use fee is exempted, unless the specialised law requires determination of the number of investors with interest;
• land lease with land rent exempted, unless the specialised law requires determination of the number of interested investors;
• projects the land for which shall be recovered by the State (Article 79 projects) that use public investment capital;
• PPP projects;
• Article 79 projects that do not use public investment capital and the specialised law requires determination of the number of interested investors, but only one investor meets the interest calling requirements;
• having carried out a land use right auction twice but unsuccessfully—ie there is only one person registering to participate or there is no participant;
• a foreign invested economic organisation being transferred real estate projects; and
• certain cases relating to land users being individuals.

In general, this list of projects eligible for 'direct land lease/allocation' is broader than that set out under Land Law 2013. The list is also non-exhaustive as it contains a catch-all provision covering other cases as 'decided by the Prime Minister'.

Based on the above list, for privately funded projects such as a solar/wind power plant or a port, 'direct land lease/allocation' may apply in three instances:

• the land rent for the project is exempted (see further section 3) and specialised laws do not require to determine the number of interested investors. Currently we are not aware of such requirement for wind and solar power plants as well as ports;
• if specialised laws in the future require determination of the number of interested investors but only one investor meets the interest calling requirements; or
• a land auction fails twice for the reason that there is only one person registering to participate or there is no participant.

Under Land Law 2024, tendering is compulsory to select investors for projects using land in the following cases:

• investment projects to build a new or renovate urban areas with mixed service functions; rural residential projects; or
• investment projects using land which requires land recovery and having to organize tendering to select investors according to specialized laws.

This means that, other than urban areas projects and rural residential projects (as set out in the first bullet point above), potential investors must look into the specialised laws to see whether their contemplated projects using land are subject to mandatory tendering procedures for investor selection. In absence of which, potential investors will have to look further to the cases of land auction under Land Law 2024 and investor selection under Investment Law 2020, to know how investors will be selected for the projects.

Unless new specialised regulations for the renewable energy sector require tendering to select investors (there is no such requirement at present, but it has been mooted), tendering pursuant to the Land Law for selection of renewable energy investors will not be required. However, in practice, there are still cases where provinces actively choose to carry out tenders (on an ad-hoc and voluntary basis) even though tendering is not compulsory at law.

Land Law 2024 has simplified some of the rules on land auctions in comparison to Land Law 2013.

First, with respect to types of land subject to auctions, all land areas (eg land use for public purpose, land having water surface, land under management of the land development funds or unused land) that are managed by the State can be put out to auction, provided they do not fall under cases of direct land lease/allocation (Article 124) or tendering for investor selection (Article 126). The provisos here (direct lease/allocation and tendering) mean the provision is not as broad as it might first appear. For example, if the relevant land falls within the case of rent exemption, then no land auction process would be required. Under Land Law 2013, renewable energy projects are subject to land rent exemption, thus the land for those projects is not required to be auctioned. Under Land Law 2024, this likely remains unchanged, though needs to be confirmed in the guiding Decree in due course.

Second, auction of land is not applicable where the State leases land with annual payment, but only for allocation of land with a one-off land use fee (applicable only to domestic land users) or leasing land with a one-off payment. Under Land Law 2013, authorities may choose to apply land auction regardless of the land rent payment method.

Third, Land Law 2024 requires that the land area to be auctioned must be 'clean'—ie all the land recovery, clearance, compensation and reallocation for such land area has been completed. This is a higher condition as compared to Land Law 2013, which only requires completion of the land clearance step. Such 'clean' land must also be within a project area with established transport infrastructure. For housing projects, the 1/500 detailed master plan for the relevant land plot must also be approved if the authority wants to conduct a land auction.

In general, we believe these changes to the land auction regime will not likely affect development of large-scale projects, given they usually require land recovery and thus do not qualify for land auction, but instead tendering for investor selection. In addition, if land rent or land use fee is exempted (which is likely for projects falling within encouraged sectors or located in geographic areas with special conditions), then land auction will not apply either.

Nevertheless, if a project is subject to land auction, we expect the overall timeline for project development might be extended given the stricter rules and new time limit on 'direct land lease/allocation' in the event of a failed auction. In particular, a 'direct land lease/allocation' can only be conducted within 12 months from the date of a second failed auction, (failing which the land must be subject to re-auction).

Land Law 2013 defines 'foreign-invested enterprise' to capture all enterprises with foreign ownership, regardless of ratio. Under Land Law 2024, an FIEO is an 'economic organization that must meet the conditions and carry out investment procedures prescribed for foreign investors according to the provisions of the Law on Investment to implement projects using land.' The new definition can be interpreted in two ways. First, it could refer to Article 23.1 of Investment Law 2020 (covering economic organisations which must meet the conditions and carry out investment procedures prescribed for foreign investors). If so, the scope of captured FIEOs is different under Land Law 2024. In particular, enterprises having less than 50% direct foreign ownership will likely no longer be considered FIEOs for purposes of Land Law 2024 and can therefore be treated similar to purely domestic organisations. On the other hand, enterprises having more than 50% direct or indirect foreign ownership will likely be considered FIEOs for purposes of Land Law 2024. Alternatively, the new definition could refer to Article 3.22 of Investment Law 2020 under which FIEOs are enterprises having foreign investor(s) as member(s)/ shareholder(s). This echoes the FIEO definition under the current Land Law. As of this Insight's date, evidence suggests that MONRE favour this second interpretation based on a MONRE official's presentation at a recent public event. The status of an FIEO would impact the right to use land of the relevant entity, as in principle rights and obligations of the domestic organisation would be broader than those of an FIEO.

A land area can now be used for multiple purposes provided that, among other conditions, land can still be converted to its 'main' purpose anytime and such multi-purpose use does not impact national security. For example, this change means agricultural or non-agricultural land can also be used for construction of telecommunication infrastructure or solar power plants without having to conduct procedures to convert the recorded land use to public purpose use. This change signifies a potential development for new business models such as an agri-solar power project, though more guidance is expected on this new way of using land.

Land Law 2024 expressly allows parties to choose Vietnamese commercial arbitration to resolve 'disputes arising from commercial activities relating to land'. Land Law 2013 only refers to People's Committee and courts as venues for resolving land disputes. While a welcome change on the face of it, the key question here is still what would constitute a dispute arising from commercial activities relating to land (eg whether a land use right transfer agreement or a mortgage agreement qualifies). If this is not defined more clearly, there will be arguments as to whether a dispute falls within this category, risking the validity of an arbitral award on same.

Land Law 2024 sets out, for the first time, principles and competent authorities responsible for land reclamation activities. Sea reclamation activities in certain areas (such as in port-related areas) are subject to in-principle approval from the National Assembly or the Prime Minister. This is highly relevant to projects having port components or power projects such as LNG-to-power projects or offshore wind projects. While awaiting further guidance from the Government, one immediate noteworthy point is that Land Law 2024 makes it clear that allocation of sea area will be conducted simultaneously with land allocation/land lease.

Under Land Law 2013, if a land user fails to pay land use fees or land rent when due, the authorities must impose an administrative fine first, giving the land user a second chance to make the outstanding payment, before having any power to take back the land. Land Law 2024, however, empowers authorities to immediately take back land following missed payments without having to impose an administrative fine first. Investors, especially those that pay land rent annually, should pay extra attention to ensuring they meet their land payment obligations.