Why is A New Launch Housing Project in HCMC Not Being Built According to Schedule? Know All the Legal Issues

Not every new launch housing project in Ho Chi Minh City is being built and constructed according to its schedule committed by real estate developers. In fact, there are a lot of prominent projects that have been launched and deposits collected from buyers, but have not started or stopped construction. There could be a variety of reasons for this problem. But more often than not, it is related to various legal issues afflicting the project. Therefore, this article will look in detail and the aforementioned legal issues.

▸ Legal process for developing housing projects

Before we look at the problems, it is best to have an overview of the legal process that developers have to go through in order to fulfil the requirement of launching a housing project. The basic pre-requisites for a project to be legally considered eligible for sales launch are:

Granting of an investment license

This piece of document is issued by relevant authorities in HCMC to grant a legal entity the rights and permission to invest in the development of the specified project land area.  

Issuance of an approved 1/500 master plan

The legal entity will also need to attain a 1/500 master plan with all the necessary development parameters from the municipal government of HCMC. Parameters such as the population cap, building height limit, construction density, land use zoning, and much more are dictated by the approved 1/500 master plan.

Attaining a Land Use Right Certificate (LURC)

In order to be allowed to use a land in Vietnam for a specific purpose, the developer needs to be issued a Land Use Right Certificate. Land has to be converted for residential use before a housing project can be developed on it. In order to attain a LURC, developers will need to fulfil another set of requirements that include fully compensating any private land ownership, receiving transfer of all ownership certificates for private land, and perform their financial responsibility (paying land tax) to the government.

Getting a construction permit

Many property buyers understand that a construction permit as an all-encompassing procedure. But it is actually made up of many smaller permits. For example, there is a permit for constructing a building’s basement and foundations and there is a separate permit for constructing a building’s superstructure.  

Securing a sales permit

Only after the foundation construction have been surveyed and qualified by authorities, the developer can submit their sample Sale and Purchase Agreement to authorities for approval of use to attain a sales permit for real estate products in a housing project in HCMC.

▸ Dispute over the legality of land transfer to the existing developer

A glaring problem that leads to the delayed construction of a housing project is when the project is temporally halted over questions on the legality of the project or the land-use right. Vietnam has undergone a crackdown on corruption and illegal use of land for commercial housing purpose. A number of land plots with housing projects in HCMC have been red-flagged for not originally being allocated for the purpose of commercial housing. But due to corruption of certain individuals within the municipal government, project approvals have been given to land plots allocated by the government for non-commercial purposes. This have led to projects stalling after its launch. Land assigned to and held by government related companies and municipal departments are mostly affected by this problem. 

The problem with corruption and lobbying in HCMC’s real estate industry is that it takes place in order to take a shortcut around proper procedures or to clear an obstacle standing in the way of executing a project. This means that when the legality of the project is inspected, it is almost certain that the project does not have the necessary legal conditions to be executed, and the developers will have to stop their projects and rectify with outstanding problems with the authorities.

Additionally, there can also be problems related to incomplete compensation over the land to previous owners. A project land can be made up of many smaller land plots that have to be compensated individually before the authorities grant a land-use right certificate to the project developer. A few errant projects were launched in Ho Chi Minh City even before compensation is properly settled.

As part of the crackdown, housing projects are being suspended to serve inspection and investigation work of authorities. In 2019, HCMC People’s Committee has allowed 124 residential real estate projects that were suspended before to resume construction. Housing developers of the suspended real estate projects were able to resume works or implement the next step in the legal process. However, another 30 projects are still unable to be deployed as they are still being inspected.

▸ Project launched ahead of 1/500 approval

In HCMC, majority of its housing projects launched during the 2010 and 2020 period have attained its 1/500 approval based on HCMC’s construction master plan from 2010 to 2025. The master plan is reviewed every 5 years with the current one from 2021 to 2025. HCMC’s construction master plan guides the detailing in the 1/2000 master plan of each specific urban area and neighbourhoods. This could entail changing the land-use components, increased population density, increased building height limit, and construction density, et cetera.

By changing to the 1/2000 of the urban area a housing project is located in, developers have the option to seek approval for a revised 1/500 master plan to change the parameters of a housing project in accordance to the amended 1/2000. Changing the 1/500 master plan usually takes place if is beneficial to the housing developer in business terms. For example, by either increasing building height limits and construction floor area, developers can now increase the quantity of real estate products that can be sold. Therefore, potentially increasing their revenue. 

However due to bureaucratic red tape and how the authorities’ function, the approval of an amendment to a 1/500 master plan can be a time-consuming process. And most of the time, developers usually will try to look for backdoors to bring forward the process in order to launch their project. An “in-principal” approval is good enough for confident developers that can handle the authorities. But, any change in government personnel will reset the whole process again if the proper procedures are not followed. This tends to delay the start of construction even after a project is launched for sale.

As with some other newer projects, some developers even go to the extent of launching their projects even prior to attaining a 1/500 approval. Usually, such developers are too optimistic with their committed project development timeline, and delays to the project’s construction schedule must be expected.  

▸ Design and construction not in accordance with approved parameters

A bigger problem that delays the construction of housing projects is that a lot of developers push their luck by constructing a project not in accordance to the approved 1/500 master plan. Often, this is done to avoid having to face time delays in carrying out the proper approval process.

Such violations include illegal construction encroaching land set aside for public use. This includes extending a project complex’s construction footprint onto land that is supposed to be set aside for internal roads, parks and other forms of set-back. Another serious violation is constructing additional floor levels that exceed the stipulated limit in the 1/500 master plan.

Apart from the above two common violations, the size and layout of real estate products not built according to submitted construction drawings, is also a violation that tends to be spotted easily. This is also a cause for delays in new launch projects not being built according to schedule.

If periodic inspections by authorities identify such violations. A stop work order will be issued and when that happens, a long process of digging up all the prior legal procedural documentation and correspondence will take place. This will result in extensive delays to the new launch project. And chances are this will cause more discrepancies and non-adherence to proper legal procedures to surface.

▸ Project launched prior to completing all necessary legal procedures

More commonly, developers bypass certain necessary steps in the legal process in order to launch projects in accordance with their own business objectives and timeline. Housing developers that are facing financial pressures tend to launch their projects without meeting the necessary legal procedures in order to expedite the collection of monies from buyers to raise capital for the purpose of keeping the project development moving along.

Earlier in this article, we mentioned the necessary legal pre-requisites and procedure that developers have to adhere to, before meeting the requirements for selling a new launch project.  If the housing developer is not able to progress along with the legal process by clearing the pre-requisites to legally sell a project after its early “launch”, this will result in the general project development progress and milestones to be delayed. As a result, construction of the project will not take place until all the necessary pre-requisites are in order.

Housing developers in HCMC usually have various means of launching a project early even before the necessary legal pre-requisites are met. In order to get around the rules, developers usually get creative with the paperwork signed with buyers. Such documentations are called many names: Agreement Letter, Guarantee Agreement, Letter of Intent, to name a few common ones. But one thing is for sure, any such paperwork is based on a willing buyer willing seller basis.

▸ Final note

Most of the time new launch housing projects in HCMC are not being built according to schedule is due to the several legal complications explained in this article. Only when the respective government authorities decide to expedite and finish up the investigations into the mismanagement of land transactions and project construction. And also shorten the project development process to promote efficiency and minimise the need for developers to take shortcuts, only then will new launch projects be able to be completed on schedule.

But for now, in order to manage the situation of construction delays, reputable developers are communicating effectively with buyers on any delays to construction and offer incentives to buyers if the project development falls behind the committed schedule. Such incentives can be the payment of interest on the deposited monies up to the date of executing the Sales and Purchase Agreement, subsidizing the payment of monthly management fees upon handover, allowing to terminate the commitment to purchase with no penalty, et cetera.