Understanding Land Use Right Certificates (LURCs) and Their Role in Bank Loans

 

1. Understanding Land Use Right Certificates (LURCs) and Their Role in Bank Loans

In the world of finance, it's not uncommon for family members or acquaintances to use their Land Use Right Certificates (LURCs), often referred to as "red books" or "pink books," as collateral when borrowing money from a bank. But what happens when the borrower defaults on their loan? Does the bank have the authority to liquidate the land use right, especially when the land is still under the ownership of individuals not mentioned in the LURC? This article delves into these intricate questions, shedding light on who takes precedence when it comes to debt recovery.

This scenario is best exemplified in Judgment 04/2017/KDTM-ST, dated August 17, 2017, which revolved around a credit contract dispute in the People's Court of An Duong district, Hai Phong. The parties involved were D Commercial Joint Stock Bank and the defendant, D1 Company Limited, with Mr. T1 serving as the director.

Due to their familial relationship with Mr. T1, Mr. V and Mrs. P1 extended their LURC, allowing D1 Company Limited to use 839m2 of land and its attached assets as collateral for a 500 million VND bank loan. The process entailed the creation of a notarized and legally registered Land Use Right Mortgage Contract.

When D1 Company Limited failed to meet its loan obligations, they requested to liquidate the collateral to settle the debt. However, Mr. V and Mrs. P1 objected to this action, as they hadn't borrowed from the bank, and there were existing constructions on the land. These structures were constructed and utilized by Mr. V's children and Mrs. P1's siblings, namely, T2, Y, T3, N1, and T4.

The court ruled that D1 Company Limited was liable to repay the bank a sum of VND 617,457,523, which included the principal and accrued interest. In the event that D1 Company Limited failed to meet its debt repayment obligations, the bank had the legal right to seek the enforcement of the judgment, involving the seizure and sale of the collateral to settle the debt.

The proceeds from the sale of the assets were prioritized for the benefit of Mr. V and Mrs. P1's children, followed by the bank. Any remaining funds would be returned to the mortgagors, Mr. V and Mrs. P1, provided that D1 Company Limited still had debt repayment obligations to fulfill.

2. The Legal Aspects of Mortgage

To understand this situation better, we must first explore the legal framework governing mortgages, particularly in the context of land use rights in Vietnam.

Mortgage of Property

Article 317 of the Civil Code of 2015 in Vietnam defines the concept of "mortgage of property." It refers to the use of property owned by one party (the mortgagor) as security for the performance of an obligation to another party (the mortgagee), without transferring ownership of the property to the mortgagee.

In the case at hand, Mr. V and Mrs. P1 allowed D1 Company Limited to use their LURC as collateral for the bank loan. They, along with D1 Company Limited and the bank, entered into a mortgage contract. This contract served as a guarantee that D1 Company Limited would repay the bank when the loan fell due.

3. Realization of Collateral

Article 299 of the Civil Code of 2015 in Vietnam outlines the circumstances in which the realization of collateral is permitted. These situations include:

1. When an obligor fails to meet or fails to meet their obligation at the agreed-upon due date.
2. When an obligor must meet the secured obligation ahead of schedule due to their violation of the agreed-upon obligation or legal requirements.
3. Other scenarios as agreed upon by the parties or prescribed by law.

In the case of D1 Company Limited, they were due to repay their debt to the bank but failed to do so, leading to overdue debt. Consequently, the bank had every right to request the realization of the collateral to settle the debt.

4. Prioritizing Beneficiaries

It's essential to address the presence of other properties on the land owned by Mr. V and Mrs. P1. These properties were not included in the collateral since no agreements or contracts were signed to mortgage them. Therefore, when handling collateral, it's crucial to prioritize payments to these individuals to safeguard their interests.

In summary, the lending of LURCs to other parties for bank loans, whether through an authorization or a direct mortgage contract with the bank, must adhere to specific legal conditions to be valid. Both parties involved must fully comprehend the transaction and its legal implications, and the transaction must be established in writing, notarized (particularly for real estate transactions such as land and houses), and registered for secured transactions with the relevant authorities. The transaction must also be established by authorized entities, meaning the owner of the property (in this case, land) and the authorized representative of the business or bank. Additionally, the subjects involved, which in this case are houses and land, must be eligible to participate in transactions as stipulated by the law.

In conclusion, when lending LURCs to other parties for bank loans while ensuring the conditions mentioned above are met, the lender becomes legally liable to the bank for ensuring the borrower's debt repayment. If the borrower defaults on their debt, the bank has the right to request the disposal of the security property to recover the debt. Therefore, anyone considering such a transaction should carefully assess the borrower's ability to meet their repayment obligati

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