This article will (i) explore a unique situation faced by land users who sub-leased parcels from industrial infrastructure developers (“Infrastructure Developers”) before the 2013 Land Law was enacted, (ii) analyze a common deal structure involving the “transfer” of annual-payment land use rights in industrial zones, and (iii) highlight key changes in the 2024 Land Law that could significantly impact these transactions.

1. Lump-sum payment land sub-lesees with the rights of annual-payment land user?

Imagine sub-leasing a piece of land with the expectation of full lumpsum-payment-land-user rights, only to find out your rights are limited by the payment method of the original lease. This is the reality for many sub-lessees who sub-lease land parcels from Infrastructure Developers. If the Infrastructure Developers paid the State a one-time lump sum for the land and sub-leases it under the same terms, the sub-lessee enjoys full land user rights, including the ability to transfer land use rights. However, if the Infrastructure Developers pays the State annually, the sub-lessee’s rights are restricted to those of an annual-payment land user, even if they paid a lump sum to the Infrastructure Developers.

Before the 2013 Land Law came into effect, Infrastructure Developers seemed to have the flexibility to sub-lease land with a one-time payment for the entire lease period, regardless of their own annual payment arrangement with the State.[1]

The landscape changed with the introduction of the 2013 Land Law and the subsequent 2024 Land Law. These laws mandated that Infrastructure Developers who lease land from the State with annual payments but sub-lease it with a one-time payment must deposit the collected rent into the state budget. Despite this regulation, compliance has been inconsistent, leaving many sub-lessees in a precarious position. They find their rights limited, despite having paid a lump sum, due to the Infrastructure Developers’ non-compliance with the law.

2. Unpacking the Puzzle: A Popular Transaction Structure and its Practical Risks

According to Cushman & Wakefield, from 2020 to September 2024, the total value of real estate M&A transactions reached $2.94 billion, with industrial real estate leading the charge at 40% (approximately $1.18 billion). In the first nine months of 2024 alone, industrial real estate accounted for a staggering 91% of the total transaction value of $178 million.[2]

Given the high demand for land in industrial zones, many sub-lessees are eager to transfer all or part of their unused land areas (and/or assets attached to the land) to third parties for various benefits.

To navigate the restrictions on the rights of sub-lessees in industrial zones, as mentioned in Section 1, the “transfer” of (annual lease) land use rights in industrial zones is often executed through a tripartite agreement involving the Infrastructure Developers, the current lessee/seller, and the new lessee/buyer. The basic contents of such an agreement typically include:

• Termination or amendment of sub-lease contract: The current sub-lessee/seller will either terminate the sub-lease contract (if transferring the entire area) or amend it (if transferring part of the area) with the Infrastructure Developer. It will return all or part of the land to the Infrastructure Developer and receive a refund for the unused portion of the land use fee and infrastructure fee already paid for the remaining lease period.
• New sub-lease contract: The Infrastructure Developer and the new sub-lessee/buyer will sign a new sub-lease contract for the land returned by the seller.
• Transfer of land-attached assets: The current sub-lessee/seller and the new lessee/buyer will sign a contract to transfer any assets attached to the land, if applicable.
• Payment arrangements: The new sub-lessee/buyer will pay the Infrastructure Developer the rent as stipulated in the new sub-lease contract. Additionally, they will pay the seller (i) the purchase price for any land-attached assets, if applicable, and (ii) a “fee” or premium for agreeing to return the land.
• Refunds: The Infrastructure Enterprise will refund the land rent and infrastructure fee (already paid but not yet used) to the seller.

At first glance, each step in this transaction structure may seem legally sound when considered separately. However, from a practical perspective and when viewed as a whole, this transaction structure may present several risks:

• First, this structure is only feasible with the cooperation of the Infrastructure Developer. Specifically, the seller and the buyer must perform several steps, such as terminating the sub-lease contract, signing a new sub-lease contract (typically with similar terms to the old one), and refunding the paid and unused land rent and infrastructure fees to the seller or deducting these amounts from the new lessee’s payment obligations. Therefore, without the support and cooperation of the Infrastructure Developer, this structure is not feasible.
• Second, while this transactional structure may require the parties to perform many steps and sign various documents, the completion of these steps often depends on the approval of competent state agencies. This may include investment registration procedures to establish a new legal entity, registration of changes to the land or land-attached assets, and issuance of new land use right certificates. These requirements can prolong the transaction completion time and may prevent the parties from meeting the conditions precedent before the long-stop date, potentially jeopardizing the deal.

For instance, in Judgement No. 50/2020/KDTM dated August 12, 2022, by the High People’s Court in Ho Chi Minh City regarding the dispute over the deposit contract for transferring land-attached assets and land use rights between Company K and Company L (“Case 1”), one of the reasons for the dispute was the significant increase in land rent, infrastructure fees, and land use right value during the prolonged transactional steps. As a result, the seller changed their mind and was unwilling to proceed with the transaction under the agreed terms, leading to the dispute.

• Third, typically under this structure, the Infrastructure Developer only agrees to refund the land rent and infrastructure fee (already paid but not yet used) to the current sublessee/seller when they have received the corresponding rent from the new lessee under the new lease contract. Therefore, the seller may bear the risks if the buyer/new sublessee violates the payment obligations under the new lease contract with the Infrastructure Developer.
• Fourth, if the transaction fails midway, restoring the original state (before the parties executed the transaction) will be very difficult, time-consuming, and costly.
• Last but not least, while there is no provision under the land laws clearly and sufficiently supporting for this deal structure, its practical feasibility and legal validity could be questioned and challenged in practice. Specifically, the transaction this structure could be considered as a “land-use-right transfer”, making it being deemed legally invalid due to violating the statutory prohibitions or being a sham transaction

For example, in Case 1, the High People’s Court in Ho Chi Minh City (and the competent authority) determined that the transaction of transferring “rights and obligations” under the sub-lease contract, based on the tripartite agreement dated November 28, 2018, between Company K, Company L (seller), and Company N (the Infrastructure Developer), was not feasible. The court held that Company L only had the right to transfer “the investment capital being the value of the land use rights” (vốn đầu tư là giá trị quyền sử dụng đất). Consequently, the court declared both the deposit agreement and the tripartite agreement legally invalid.

Similarly, in Judgement No. 17/2022/KDTM-PT dated 13 September 2022 of People’s Court of Dong Nai Province (“Case 2”), the court considered as the in-principle agreement regarding the “transfer of sub-lease contract” between Company A and Company C in terms of the land subleased from Company B (the Infrastructure Developer), as the land-use right-transfer and declared that the transaction due to the violation of the statutory prohibitions.[3]

3. 2024 Land Law: Key Enhancements for Industrial Zone Land Transfers

The Land Law 2024 introduces pivotal changes that could transform land transactions in industrial zones, making them more flexible and attractive. Here’s a closer look at the key updates:

Opening Doors for Foreign-Invested Companies

The 2024 Land Law now explicitly allows economic organizations with foreign investment (tổ chức kinh tế có vốn đầu tư nước ngoài) to receive land-use rights in industrial zones. This is a significant shift from the 2013 Land Law, which lacked clear provisions on this matter, leading to legal uncertainties. For instance, the Case 1 above saw the High People’s Court in Ho Chi Minh City invalidate a land transfer agreement involving a Taiwanese company and its Vietnamese subsidiary due to the absence of legal support under the 2013 Land Law. Now, Article 28.1.c of the 2024 Land Law clearly states that foreign-invested organizations can acquire land-use rights in industrial zones, industrial clusters, and high-tech zones. This change opens up new opportunities for global investors to tap into Vietnam’s booming industrial sector.

Flexible Land-Rent Payment Options

The new law provides Infrastructure Developers with greater flexibility in land-rent payment methods. Previously, the 2013 Land Law did not allow the Infrastructure Developers to switch from annual to one-time payments for parts of their leased land. However, the 2024 Land Law permits land users to change the land rent payment from lump-sum payments to annual ones and vice versa. Notably, Article 202.3 of the 2024 Land Law now allows this switch for the entire lease period for any part of the business land area. This change enables parties to consider altering the land rent payment method for some sub-lessees (who have leased land with a one-time payment for the entire lease period) to remove restrictions related to the transfer of land use rights.

Also, the timeline for paying collected lump-sum land rent has been extended. Under the 2013 Land Law, the Infrastructure Developers faced stringent deadlines, leading to widespread delays. Article 52.1(d) of Decree 103/2024/ND-CP now provides these enterprises with over two years (calculated from 1 August 2024) to complete their payment obligations, reducing financial pressure and allowing for better planning.

Selling Assets and Lease Rights

The 2024 Land Law also allows the sale of assets attached to land and “lease rights in lease contracts.” Specifically, Article 46.2 of the 2024 Land Law permits various entities, including foreign-invested organizations, to sell assets on leased land along with the leasing rights, provided they meet specific conditions: (i) the assets are legally established and registered; (ii) the construction complies with detailed planning and approved projects; and (iii) compensation and resettlement costs have been advanced but not fully deducted from the land rent.

However, the law remains unclear on whether foreign companies can receive the transfer of “leasing rights under land lease contracts”. This ambiguity could pose practical challenges in ensuring the legal validity of such transfers, but it also presents an area ripe for future legal clarification and potential business opportunities.

In conclusion, the evolving landscape of land use rights in industrial zones, particularly concerning sub-leased parcels with annual payments, presents both challenges and opportunities. The introduction of the 2024 Land Law marks a significant shift, offering greater flexibility and clarity for land transactions. However, the practical implementation of these changes requires careful navigation of legal and procedural complexities.

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[1] Article 210.2 of 2013 Land Law

[2] https://www.cushmanwakefield.com/vi-vn/vietnam/insights/the-strong-development-of-industrial-real-estate-in-vietnam

[3] In Case 2, although the parties structured the transaction as the transfer of the land sub-lease contract, most of the steps were similar to the structure discussed in Section 2.3. Additionally, while the court concluded that the transaction violated statutory prohibitions, it referred to Article 124 of the 2015 Civil Code regarding sham transactions (giao dịch dân sự giả tạo).