Under Land Law 2013, a foreign lender (Foreign Lender) is not permitted to take mortgage over land use right (LUR) from a Vietnamese borrower. However, a foreign lender with the support of a Vietnamese bank may consider the following the structure to allow a Vietnamese company (Borrower) to use its LUR as security for a foreign lender. The structure could be summarized as follows:

• A Vietnamese bank (Vietnam Bank) will lend a loan (Domestic Loan) to the Borrower. The Borrower will mortgage to the Vietnam Bank its LUR as security for the Domestic Loan (such mortgage, the LUR Mortgage). Under the Land Law 2013, a company in Vietnam can mortgage its LUR to a bank licensed to operate in Vietnam.

• Under Vietnamese law, upon enforcement of LUR Mortgage by the Vietnam Bank, the Borrower has the right to receive the remaining proceeds after payment of the Domestic Loan (Right to LUR Mortgage). If the value of the Domestic Loan is less than the value of the LUR then the Right to LUR Mortgage could have substantial value. The Right to LUR Mortgage is usually recorded in the mortgage agreement between the Borrower and the Vietnam Bank. Accordingly, Right to LUR Mortgage is a type of contractual property right, which can be used to secure performance of obligation under Article 14 of Decree 21/2021.

• Accordingly, the Borrower could mortgage the Right to LUR Mortgage to a foreign lender (Foreign Lender) as a mortgage of contractual rights (Rights Mortgage) in order to secure a loan extended by the Foreign Lender (Foreign Loan) to the Borrower. Under Article 33 of Decree 21/2021, the Foreign Lender will need to notify the Vietnam Bank of the Rights Mortgage before the Vietnam Bank pays the remaining proceeds to the Borrower. To facilitate the enforcement of the Rights Mortgage and on the ground of Article 54.2 of Decree 21/2021, the Foreign Lender should have an agreement with the Vietnam Bank as obligor regarding the Right to LUR Mortgage to the Borrower (as obligee) that after the enforcement of the LUR Mortgage by the Vietnam Bank, the Vietnam Bank will pay the remaining proceeds directly to the Foreign Lender after settlement for the Domestic Loan.

• If the Borrower defaults under the Foreign Loan, the Domestic Loan will be cross-defaulted, and the Vietnam Bank will enforce the LUR Mortgage by transferring the LUR or taking over the LUR, then the Vietnam Bank will settle the Domestic Loan and pay the remaining proceeds to the Foreign Lender.

The inability to take mortgage over LUR from Vietnamese borrower has been a long-term issue for structuring a security package acceptable to foreign lenders for large infrastructure projects. The above structure provides the Foreign Lender with a direct and registrable mortgage over a type of asset different from LUR, but closely linked with LUR. In particular,

• The structure has the same commercial effect as in the case where the Foreign Lender can take mortgage over LUR. Since a foreign lender is not entitled to be a land user, even if the Foreign Lender can take mortgage over the LUR, upon enforcement of the LUR mortgage, the Foreign Lender can only transfer the LUR to get money, rather than taking the LUR in lieu of the repayment of the Foreign Loan;

• The LUR Mortgage can effectively prevent the Borrower from mortgaging the LUR to a third party; and

• Technically, the structure will not involve a security agent to take the LUR Mortgage, thus, it does not raise the concern whether the security agent scheme can be used to take the LUR Mortgage under Vietnamese law. So far, borrowers in large infrastructure project often obtained special approval from the Prime Minister and Ministry of Justice for the mortgage of LUR to a Vietnam Bank as agent for foreign lenders.

There is a concern that the Borrower can “escape” the above security arrangement with the Foreign Lender by way of repaying the Domestic Loan, and using such repayment as the basis for the termination of the LUR Mortgage. Once the LUR Mortgage is terminated then the Rights Mortgage is also terminated. This risk could potentially be mitigated by having appropriate undertaking between the Borrower, Vietnam Bank and Foreign Lender.

The structure can be described in the below diagram: