Subleasing land from infrastructure enterprises in industrial parks, export processing zones, high-tech parks, industrial clusters to build factories, warehouses, etc., is the option selected by many investors. For some specific industries, this is a mandatory condition required by the laws of Vietnam. When subleasing land, the lease term usually lasts up to several decades. The cost usually accounts for a major proportion of the total investment capital of the project. However, not in all cases, the lessee can use the land until the end of the lease term. Due to a change in business plan or forced by objective circumstances, the lessee is forced to terminate the sublease contract early by transferring the land to a third party. At that time, the core legal issues of the sublease contract will be carefully reviewed and the risks to the lessee arise clearer. In practice of consulting and providing our clients with legal services, we realize that there are the following common legal issues and risks that the lessee should pay attention to when negotiating and signing a sublease contract with the lessor.
1. The first, pay the rental annually or one-time for the entire lease period
Pursuant to Clause 2, Article 149 of the Land Law 2013, for the land area leased with annual rental payment, the person, who is leased the land by the State, has the right to sublease the land in the only form of annual rental payment, for the land area leased with one-time payment for the entire lease period, the person, who is leased by the State, has the right to sublease the land in the form of one-time payment for the entire lease period or annual payment.
For the lessor, the rental paid to the State usually accounts for a relatively large proportion of the total investment of an industrial infrastructure project. Therefore, in order to reduce pressure from this cost, many lessors have chosen the form of leasing land with annual rental payment with respect to the State. However, in order to maximize revenue, the lessor, in many ways, asks the lessee to pay the rental in form of one-time payment for the entire lease term. The common method used by the lessor is to divide the rental into two parts:
(i) The first part is the land rental: This rental is charged at a very low price, usually only equal to the unit price announced by the competent State authority and the lessee will still pay annually as regulated by the laws.
(ii) The second part is the infrastructure rental: This rental is described in the sublease contract by the cost of paying for the use of infrastructure including: road system, electricity, wastewater treatment…. However, it is worth noting that the cost paid for the use of the infrastructure accounts for a large proportion of the total rental, and the lessee must usually pay this infrastructure rental one-time for the entire rental period.
With the above sub-lease structure, it is clear that the lessor has complied with the regulations on “renting and paying annual rental, only subleasing and collecting annual rental“. However, the lessee does not receive the same balance of rights as the other lessee who pays one-time rental even though the amount of rental to be paid is the same. Specifically, the lessee is not allowed to perform the rights to convert, sublease, inherit, donate, mortgage, or contribute land use rights as capital to another company. When there is no further demand need to use the land up to the end of the lease term, the lessee cannot arbitrarily transfer it to a third party, but can only transfer the property on the land. If there is no construction on the land, the popular solution for the lessee to transfer the land is to sell the whole company or the project. In addition, in the case that the State recovers the land, the lessee will only be compensated for the assets on the land (factories, factories, other works on the land), not for the value of land use rights.
The above-mentioned limitations on the land use rights of the lessee who rent the land and made annual rental payment are not comprehensively recognized and understood by many investors. Therefore, in the case that the lessee has more than one choice, we recommend that you should consider paying the rental in form of one-time payment for the entire lease period in order to obtain fairness between the rental amount paid and the benefits received.
2. The second, is the lessor’s non-cooperation when transferring land to a third party
According to Article 174 of the Land Law 2013, in case of paying the rental at one-time, the lessee has the right to: convert, transfer, lease, sublease, inherit, donate, mortgage, contribute capital with respect to the land. These are statutory rights of the lessee. However, in fact, there are the cases where the lessor has caused many difficulties for the lessee in performing the above statutory rights with the reasoning that “in the land sublease contract, there is no agreement that allows the lessee to have these rights”. For this reason, the lessor refused to sign a new sublease contract with the new lessee. This creates great concern for the new lessee and the transfer transaction may be failed.
The lessor’s refusal for the above reason is against the laws and of course the lessee has the right to initiate the lawsuit to requests for compensation if the transfer transaction cannot be done. However, this is not what either party wants, including the lessee and the new lessee. Therefore, in practice, the lessee was forced to accept some very unfavorable terms when liquidating the sublease agreeement to obtain the lessor’s acceptance for re-signing the new sublease agreement with the new lessee.
In order to avoid the above problem, when reviewing and signing the land sublease contracs, the lessee should rewrite once again the statutory rights and obligations of the lessee as well as the lessor into the contract. This is necessary to create a basis for negotiation with the lessor when it is forced to terminate the lease term early.
3. The third, charge the rental twice for the same land use period
When there is a need to transfer the land with one-time rental payment, the transferee (the new lessee) will normally request to re-sign the new sublease contract with the lessor. In many cases, this is a prerequisite for the success of the transfer transaction.
In fact, there are many cases that the lessor has asked the lessee to pay an “extra” amount of rental from the signing date to until liquidation date as a condition to accept to liquidate the sublease contract and re-sign a new one.
For example: The lease term is 50 years. The rental is paid one-time rental with the amount of VND 50 billion. The lessee had used the land for 5 years, he needs to transfer it now. At that time, the lessor requires the lessee to pay the additional rental of 5 billion VND corresponding to the used time of 05 years, then he agrees to sign the liquidation agreement and the new sublease contract with the new lessee. The reasoning of the lessor for the request is that (i) in the land sublease contract and the provisions of the laws, there is no provision forcing the lessor to re-sign the new sublease contract with the new lessee; (ii) the new lessee is obliged to inherit all the rights and obligations of the old sublease contract after receiving the land.
Although the above reasons are not convincing, in practice they are still applied by many lessors to “cause difficulty” to the lessee when there is a need to transfer the land. With this request, the lessee has 02 options: (i) one is to accept the lessor’s conditions so that the transfer transaction can be done; (ii) bring the lessor to the court/arbitration to claim for damage caused by the failure of the transfer transaction. Many lessees have chosen option (i) for the transfer transaction to be carried out successfully, although this is not fair and unconvincing solution.
In order to limit this unreasonable request of the lessor, when negotiating the land sublease contract, the lessee needs to include in the sublease contract a clause forcing the lessor to re-sign a sublease contract with a new lessee when the lessee performs the right to transfer the land prior to the expiry date and clearly describes the financial obligations that the lessee must pay to the lessor when liquidating the sublease contract. This will be the legal base for the lessee to negotiate or request compensation from the lessor if the transfer transaction cannot be performed due to an unreasonable request of the lessor as mentioned above.
The three cases mentioned in this article are common cases that we have handled while consulting and supporting our clients. In addition, there are many other issues that the lessee cannot fully foresee when negotiating and signing the land sublease contract. Therefore, in order to limit unexpected risks, the lessee should have the support of an experienced lawyer or expert when reviewing and negotiating the land sublease contract with the lessor. The cost for this is not too much compared with the damages that the lessee may suffer if the risk occurs.
Disclaimer: This article is for general information only and is not a substitute for legal advice. Apolat Legal is a Vietnamese law firm with experience and capacity to advise on matters related to Dispute Resolution. Please click here to learn more about our services and contact our lawyers in Vietnam for advice via email info@apolatlegal.com.
