Precedent No. 11/2017/AL on Recognition of a Mortgage Contract for Land Use Rights Where the Land Includes Assets Not Owned by the Mortgagor in Vietnam

Precedent No. 11/2017/AL, adopted by the Judicial Council of the Supreme People’s Court on December 14, 2017, and promulgated pursuant to Decision No. 299/QD-CA dated December 28, 2017, issued by the Chief Justice of the Supreme People’s Court.

1. Definition of a Precedent

A precedent refers to the legal reasoning and rulings contained in a legally effective judgment or decision of a court regarding a specific case, selected by the Judicial Council of the Supreme People’s Court and promulgated by the Chief Justice of the Supreme People’s Court as a precedent for courts to study and apply in adjudication. (Article 1, Resolution No. 04/2019/NQ-HDTP)

A precedent must meet the following criteria:

• It clarifies legal provisions subject to differing interpretations, provides analysis and explanation of legal issues and events, and indicates principles, guidelines for adjudication, or applicable legal norms in a specific case, or reflects fairness in matters not specifically regulated by law;
• It is normative;
• It provides guidance for the uniform application of law in adjudication.

2. Precedent No. 11/2017/AL on Recognition of a Mortgage Contract for Land Use Rights Where the Land Includes Assets Not Owned by the Mortgagor in Vietnam

2.1. Source of the Precedent

Cassation Decision No. 01/2017/KDTM-GDT dated March 1, 2017, issued by the Judicial Council of the Supreme People’s Court regarding the business and commercial case “Dispute over a Credit Contract” in Hanoi City, between the plaintiff, A Joint Stock Commercial Bank (represented by Mr. Pham Huu P, authorized representative Ms. Mai Thu H), and the defendant, B Limited Liability Company (represented by Mr. Tran Luu H1); with related persons: Mr. Tran Duyen H, Ms. Luu Thi Minh N, Mr. Tran Luu H1, Ms. Pham Thi V, Mr. Tran Luu H2, Ms. Ta Thu H, Mr. Nguyen Tuan T, Ms. Tran Thanh H, Mr. Tran Minh H, and Ms. Do Thi H.

Location of the Precedent Content

Paragraph 4 of the “Court’s Findings” section.

2.2. Summary of Precedent No. 11/2017/AL

Precedent Situation 1:

A party mortgages land use rights and assets attached to the land that they own to secure a civil obligation, but the land also includes assets owned by another party; the form and content of the mortgage contract comply with legal provisions.

Legal Solution 1:

In such cases, the court must determine that the mortgage contract is legally valid.

Precedent Situation 2:

The mortgagor and mortgagee agree that the mortgagee may sell the secured asset, being the land use rights, where the land includes a house not owned by the land user.

Legal Solution 2:

In such cases, the court must grant the owner of the house on the land a priority right to purchase the land use rights if they express a need to do so.

Relevant Legal Provisions:

• Article 342 of the Civil Code of Vietnam 2005 (corresponding to Article 318 of the Civil Code of Vietnam 2015);
• Articles 715 and 721 of the Civil Code of Vietnam 2005;
• Clause 19, Section 4, Article 1 of Decree No. 11/2012/ND-CP dated February 22, 2012, amending and supplementing certain provisions of Decree No. 163/2006/ND-CP dated December 29, 2006, on secured transactions (codified in Clause 2, Article 325 of the Civil Code of Vietnam 2015).

Keywords of the Precedent:

“Mortgage of land use rights”; “Assets on land owned by another party”; “Recognition of mortgage contract for land use rights”; “Agreement on handling secured assets”; “Priority right to purchase.”

CASE DETAILS

Based on the lawsuit filed on October 6, 2011, and statements at the court, the plaintiff, A Joint Stock Commercial Bank, stated:

On June 16, 2008, A Joint Stock Commercial Bank (hereinafter the Bank) and B Limited Liability Company (hereinafter Company B) signed Credit Contract No. 1702-LAV-200800142. The Bank loaned Company B 10,000,000,000 VND and/or equivalent foreign currency to supplement working capital for Company B’s registered business activities.

Under the contract, the Bank disbursed a total of 3,066,191,933 VND to Company B through credit contracts cum debt acknowledgment deeds. As of October 5, 2011, Company B owed principal and interest totaling 4,368,570,503 VND (principal: 2,943,600,000 VND; interest: 1,424,970,503 VND).

The secured asset for this loan was a house and land [plot No. 43, map sheet No. 51-1-33 (1996)] at No. 432, Group 28, Ward E, District G, Hanoi City, owned and used by Mr. Tran Duyen H and Ms. Luu Thi Minh N (per Certificate of House Ownership and Land Use Rights No. 10107490390 issued by the Hanoi City People’s Committee on December 7, 2000), mortgaged under a Mortgage Contract for Land Use Rights and Attached Assets dated June 11, 2008. This contract was notarized by Hanoi Notary Office No. 6 and registered for secured transactions by the Hanoi Department of Natural Resources and Environment on June 11, 2008.

On October 30, 2009, the Bank and Company B signed Credit Contract No. 1702-LAV-200900583, under which the Bank loaned Company B 180,000 USD to pay for the transport of an export shipment, with a 9-month term, an interest rate of 5.1% per year, and an overdue interest rate of 150%.

The Bank disbursed the full 180,000 USD. Company B repaid principal of 100,750 USD and interest of 1,334.50 USD. As of October 5, 2011, Company B owed principal of 79,205 USD and interest of 16,879.69 USD, totaling 96,120.69 USD.

The secured assets for Credit Contract No. 1702-LAV-200900583 included:

• A batch of 19 finished 1.75-ton JMP trucks valued at 2,778,750,000 VND (assembled by Company B, stored at the unit’s warehouse, with the Bank holding quality inspection certificates), mortgaged under Mortgage Contract No. 219/2009/EIBHBT-CC dated October 29, 2009, registered at the Hanoi Secured Transactions Registry on November 2, 2009;
• A 3-month fixed-term deposit balance of 1,620,000,000 VND issued by the Bank. As Company B repaid part of the loan, the Bank released this 1,620,000,000 VND deposit corresponding to the repaid amount.

At the first-instance trial, the Bank’s representative confirmed: For the 180,000 USD loan, Company B repaid the principal, leaving overdue interest of 5,392.81 USD; the secured assets were 19 trucks, of which 18 were sold, leaving 1 truck; the Bank requested the court to allow the sale of the remaining truck to recover the outstanding debt.

The Bank requested the court to compel:

• Company B to pay the principal and interest in VND under Credit Contract No. 1702-LAV-200800142, totaling 4,368,570,503 VND;
• Company B to pay 5,392.81 USD in overdue interest under Credit Contract No. 1702-LAV-200900583.

If Company B fails to pay or pays insufficiently, the Bank requested the court to foreclose the secured assets:

• House ownership and land use rights at No. 432, Group 28, Ward E, District G, Hanoi City, owned and used by Mr. Tran Duyen H and Ms. Luu Thi Minh N;
• One 1.75-ton JMP truck assembled by Company B under Mortgage Contract No. 219/2009/EIBHBT-CC dated October 29, 2009.

The defendant’s representative, Mr. Tran Luu H1, General Director of Company B, stated: He acknowledged the principal, interest, and secured assets as presented by the Bank but requested the Bank to allow gradual repayment.

Related persons, Mr. Tran Duyen H and Ms. Luu Thi Minh N, stated: They acknowledged signing the mortgage contract for the house and land at No. 432 to secure a loan of up to 3,000,000,000 VND for Company B. The contract was notarized and registered. Their family supported Company B in repaying nearly 600,000,000 VND for the loan secured by their house and land. They requested the Bank to extend Company B’s debt to allow time for production recovery and debt repayment, and asked the court not to summon their sons, daughters-in-law, daughters, and sons-in-law.

Mr. Tran Luu H2, representing the children and grandchildren of Mr. Tran Duyen H and Ms. Luu Thi Minh N living at No. 432, stated:

In late 2010, he learned his parents had mortgaged the family’s house and land to secure Company B’s loan. After receiving the Certificate of House Ownership and Land Use Rights in 2000, Mr. Tran Luu H2 and Mr. Tran Minh H funded the construction of an additional 3.5-story house on the land, where 16 family members currently reside. When signing the mortgage contract, the Bank did not consult them or others living there. He requested the court not to recognize the mortgage contract and to review the 550,000,000 VND contributed by him and his siblings to repay Company B’s loan, which the Bank incorrectly applied to the foreign currency loan secured by the 19 trucks.

At First-Instance Business and Commercial Judgment No. 59/2013/KDTM-ST dated September 24, 2013, the Hanoi City People’s Court decided:

• To accept the lawsuit of A Joint Stock Commercial Bank against B Limited Liability Company.
• To compel Company B to pay the Bank the outstanding debt under Credit Contract No. 1702-LAV-200800142, including: principal of 2,813,600,000 VND; regular interest of 2,080,977,381 VND; overdue interest as of September 23, 2013, of 1,036,575,586 VND; penalty interest as of September 23, 2013, of 123,254,156 VND; totaling 6,054,407,123 VND.
• To compel Company B to pay the Bank the overdue interest of 5,392.81 USD under Credit Contract No. 1702-LAV-200900583.

If Company B fails to pay or pays insufficiently under Credit Contract No. 1702-LAV-200800142, the Bank may request the Hanoi City Civil Judgment Enforcement Agency to foreclose the secured asset, being the house ownership and land use rights at plot No. 43, map sheet No. 51-1-33 (1996), per Certificate No. 10107490390 issued on December 7, 2000, to Mr. Tran Duyen H and Ms. Luu Thi Minh N, at No. 432, Group 28, Ward E, District G, Hanoi City, to recover the debt.

If Company B fails to pay or pays insufficiently under Credit Contract No. 1702-LAV-200900583, the Bank may request foreclosure of the secured asset, being one 1.75-ton JMP truck assembled by Company B under Mortgage Contract No. 219/2009/EIBHBT-CC dated October 29, 2009.

The first-instance court also decided on court fees and appeal rights per legal regulations.

After the first-instance trial, the defendant and related persons appealed the judgment.

At Appellate Business and Commercial Judgment No. 111/2014/KDTM-PT dated July 7, 2014, the Appellate Court of the Supreme People’s Court in Hanoi decided:

To uphold the first-instance judgment’s decisions regarding the credit contract and Company B’s repayment obligations to the Bank; to annul the first-instance judgment’s decision on the third-party mortgage contract, specifically:

To annul the decision on the mortgage contract for land use rights and attached assets (house and land at No. 432, Group 28, Ward E, District G, Hanoi City) signed on June 11, 2008, at Hanoi Notary Office No. 6 and registered at the Hanoi Department of Natural Resources and Environment on June 11, 2008.

To remand the case to the Hanoi City People’s Court to verify, collect evidence, and re-adjudicate to determine the lawful assets owned by Mr. Tran Duyen H and Ms. Luu Thi Minh N as security for Company B’s loan under Credit Contract No. 1702-LAV-200800142 dated June 16, 2008.

The appellate court also decided on court fees.

After the appellate trial, the Bank and the Hanoi City People’s Court requested cassation review of the appellate judgment.

In Cassation Protest No. 14/2016/KDTM-KN dated April 12, 2016, the Chief Justice protested Appellate Business and Commercial Judgment No. 111/2014/KDTM-PT dated July 7, 2014, proposing that the Judicial Council annul both the appellate and first-instance judgments (No. 59/2013/KDTM-ST dated September 24, 2013) and remand the case to the Hanoi City People’s Court for re-adjudication at the first-instance level per legal regulations.

At the cassation hearing, the Supreme People’s Procuracy representative agreed with the Chief Justice’s protest, proposing annulment of the appellate judgment and remand to the High People’s Court in Hanoi for re-adjudication at the appellate level.

COURT’S FINDINGS:

[1] The case file shows that to secure the loan under Credit Contract No. 1702-LAV-200800142 dated June 16, 2008, for Company B, managed by Mr. Tran Luu H1, son of Mr. Tran Duyen H and Ms. Luu Thi Minh N, on June 11, 2008, Mr. Tran Duyen H and Ms. Luu Thi Minh N mortgaged the house and land at No. 432, Group 28, Ward E, District G, Hanoi City, owned and used by them, under a Mortgage Contract for Land Use Rights and Attached Assets dated June 11, 2008. This contract was notarized and registered per legal regulations.

[2] Per the Certificate of House Ownership and Land Use Rights dated December 7, 2000, the property at No. 432 includes: land area of 147.7 m², house area of 85 m², concrete and brick structure, 2+1 floors. When appraising the secured asset, the Bank knew that, besides the registered 2-story house, the 147.7 m² land included an unregistered 3.5-story house but only valued the land use rights and the registered 2-story house at 3,186,700,000 VND, failing to collect information to clarify the origin or ownership of the 3.5-story house, which was a deficiency affecting the parties’ rights.

[3] During the case, on June 6, 2012, the Hanoi City People’s Court conducted an on-site inspection, confirming: the property at No. 432 has two structures (first structure: land area of 37.5 m², 5.9 m long, 6.35 m wide; second structure: 3-story concrete house with balcony, area of 61.3 m²), with 16 permanent residents. Before the first-instance trial, on September 21, 2013, Mr. Tran Luu H2 (son of Mr. Tran Duyen H and Ms. Luu Thi Minh N) submitted a petition stating that, after receiving the 2000 Certificate, due to housing needs, in 2002, their family agreed to let Mr. Tran Luu H2 and other children fund the construction of the 3.5-story house beside the old 2-story house. Thus, the Hanoi City People’s Court knew the actual state of the land at the time of the mortgage included two houses, inconsistent with the 2000 Certificate and the 2008 Mortgage Contract. Although the court considered Mr. Tran Luu H2’s and other children’s claims regarding the 3.5-story house, it failed to clearly decide whether the 3.5-story house would be foreclosed, which was incorrect and did not protect the parties’ lawful rights and interests.

[4] Per Clause 19, Section 4, Article 1 of Decree No. 11/2012/ND-CP dated February 22, 2012, amending Decree No. 163/2006/ND-CP dated December 29, 2006, on secured transactions: “Where only land use rights are mortgaged without the attached assets, and the land user is not the owner of the attached assets, upon handling the land use rights, the owner of the attached assets may continue using the land as agreed between the land user and the asset owner, unless otherwise agreed. The rights and obligations between the mortgagor and the asset owner are transferred to the buyer or recipient of the land use rights.” In this case, when signing the mortgage contract, both the mortgagors (Mr. Tran Duyen H and Ms. Luu Thi Minh N) and the mortgagee (the Bank) knew that, besides the registered 2-story house, the land included an unregistered 3.5-story house, but they agreed to mortgage only the land use rights and the 2-story house. Where the land includes multiple attached assets, some owned by the land user and some by others, and the land user mortgages only the land use rights and their owned assets, if the mortgage contract’s form and content comply with the law, it is legally valid. Thus, the appellate court’s determination that the June 11, 2008, Mortgage Contract was partially invalid (regarding the 3.5-story house), annulment of the first-instance judgment’s mortgage decision, and remand to the Hanoi City People’s Court to verify the lawful assets of Mr. Tran Duyen H and Ms. Luu Thi Minh N were incorrect. Instead, with the case file’s evidence, the appellate court should have decided on handling the secured assets, being the land use rights and the lawfully owned 2-story house, per legal regulations. Upon re-adjudication, the appellate court should require parties to provide evidence proving the 3.5-story house’s origin to protect the rights of those who funded and reside in it. The court should also encourage the parties to negotiate the handling of the secured assets. If the mortgagor and mortgagee agree that the mortgagee may sell the secured land use rights, which include a house owned by another party, the owner of that house must be granted priority to purchase if they express a need.

[5] Additionally, the first-instance court’s acceptance of the Bank’s claim for penalty interest of 123,254,156 VND, based on Clause 5.4, Article 5 of the Credit Contract stipulating penalty interest for unpaid interest (2% after 10 days past due, 5% after 30 days), was unlawful as it constitutes interest on interest. The appellate court’s failure to detect and uphold this error was also incorrect.

For the foregoing reasons,

DECISION:

Pursuant to Clause 2, Article 337, Clause 3, Article 343, and Article 345 of the Civil Procedure Code of Vietnam 2015; Resolution No. 103/2015/QH13 dated November 25, 2015, on implementing the Civil Procedure Code;

1. To accept Cassation Protest No. 14/2016/KDTM-KN dated April 12, 2016, of the Chief Justice of the Supreme People’s Court.

2. To annul Appellate Business and Commercial Judgment No. 111/2014/KDTM-PT dated July 7, 2014, of the Appellate Court of the Supreme People’s Court in Hanoi, regarding the business and commercial dispute over a credit contract between the plaintiff, A Joint Stock Commercial Bank, the defendant, B Limited Liability Company, and ten related persons.

3. To remand the case to the High People’s Court in Hanoi for re-adjudication at the appellate level per legal regulations.

CONTENT OF THE PRECEDENT

“[4] Where the land includes multiple attached assets, some owned by the land user and some by others, and the land user mortgages only the land use rights and their owned assets, if the mortgage contract’s form and content comply with the law, it is legally valid…

… If the mortgagor and mortgagee agree that the mortgagee may sell the secured land use rights, which include a house owned by another party not the land user, the owner of that house must be granted priority to purchase if they express a need.”