Than Trong Ly, Senior Associate

Ha Thi Ai My, Paralegal 

DIMAC Law Firm

Auction of public land use right (“LUR”) is one of the statutory forms where the State allocates land with land use fee, leases land, and selects investors to implement investment projects using land. LUR auction plays an important role in view of enhancing publicity and transparency of auctioned assets, finding qualified investors for implementing the project, ensuring the price of the asset according to the market price, thereby creating a significant source of revenue for the state budget[1]. According to the Ho Chi Minh City Real Estate Association, the asset auction method is being carried out popularly in localities, typically in Ho Chi Minh City, the Property Auction Service Centre in the period from 2011 to March 2017, 215 auctions were conducted, with a total starting price of VND 3,211.8 billion; the total value of the auction winning price is VND 4,467.9 billion, an increase of VND 1,256 billion, 1.39 times higher than the starting price of the auction[2]. From July 2014 to May 2021, the People's Committees of districts and cities successfully auctioned total ​​442.97 ha of public land with the total amount of 16,286.5 billion dong[3]. Thus, it is critical to fulfil the legal framework for the LUR auction so as to ensure the proper implementation of asset auctions in general and LUR auctions in particular.

Current practice of land use right auction

Currently, the law has a legal framework for the auction of LUR, which is mainly regulated in the Law on Property Auction 2016, the Land Law 2013, the Law on Investment 2020, and guiding documents such as Decree 43/2014/ND-CP, Decree 31/2021/ND-CP, Joint Circular 14/2015/TTLT-BTNMT-BTP. Based on the aforesaid legal documents, the main steps of the LUR auction process are illustrated in the following flowchart:

Basically, the LUR auction process has been regulated and provided the legal basis for competent authorities and relevant organizations and individuals to implement. However, some legal problems or pitfalls still existed in the current legal system, namely as follows:

First, there are no provisions on cease of the auction when there are abnormal signs happening in the auction, such as pushing the price or blowing the price up too high as compared with the starting price and the real market value of the auctioned assets. Land is an asset of large value and has great socio-economic influences. Therefore, the act of pushing the winning auction price up too high and then withdrawing or refusing to enter into the contract of sale and purchase of the auctioned assets by the auction winner may create many negative impacts on the surrounding land areas and the price of the real estate market in general. Although the Law on Property Auction 2016 has provisions on stopping the auction, most focus on the act of “dumping the price” or “falsifying information about the auctioned asset”, while the act of “blowing price” is only mentioned generally in “other acts as affecting the objectivity and truthfulness of the auction” in Article 62.1 of the Law on Property Auction 2016[4].

Second, the auction participants’ ability to perform auction results has not been specified. The Law on Property Auction 2016 only generally stipulates that auction participants being individuals or organizations must be eligible to participate in auctions to purchase auctioned assets in accordance with this Law and other relevant laws[5]. Current law also sets forth certain requirements and conditions that organizations and individuals must meet when participating in the auction of land use rights[6]. These conditions are necessary so that the auction participants will have sufficient financial capacity to carry out the project according to the approved plan. However, in order to ensure transparency, objectivity, and verify the financial capacity of the auction participants, the law must have a verification mechanism, whereby valid documents and records of the auctioneer's capacity must be verified. The auction participant's finances should be clearly specified and provided at the request of the auction organization.

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In addition, auction participants need to have prestige, experience and ability to implement projects through projects that have been implemented in reality. This can limit the case where the auction winner transfers the land use right or the project to other third parties to get profit, rather than the purpose of developing and implementing the project according to the plan and the demand for the land use right auction. For example, in an auction of land use rights in Da Nang, the auction winner’s unit price was 2,570,000 VND/m², amounting to 88 billion VND (land lot A2: about 25 billion VND, land lot A3 was about 63 billion VND), but only 32 days later, the auction winner transferred the land lot A2 to a third party at the price of more than 133 billion VND, a difference of more than 107 billion VND[7]. The cause of the incident was partly due to the fact that the land price decision of the provincial People’s Committee was not matched with the market price, hence some people took advantage of this matter to get the benefit. According to the Ministry of Construction, the phenomenon of bidding at very high prices for some land lots, then putting down stakes, creating a virtual price to manipulate the market, buying and reselling many winning land lots from auction for illicit profits, is not uncommon in many places, some of which are organized[8].

Therefore, setting out defined conditions on financial capacity and experience in developing land-use projects for auction participants can ensure that the auction winner can implement the project after winning the auction. In fact, some localities have also applied this to some extents. For instance, the People's Committee of Bac Giang province has stipulated that auction participants must have “qualified qualifications and experience according to the approved auction plan”[9], or People's Committee of Thanh Hoa province prescribes more technical and experience conditions for auction participants: “Depending on the nature and size of each project, the conditions for the auction plan shall be specified. Specifically, auction participants must meet technical capacity and experience in management and construction of technical infrastructure and works”[10]. These conditions can facilitate the selection of the proper auction participants, and the purpose of the LURC auction can be more easily achieved.

Third, the regulations on handling auction winners who refuses to perform the land use right auction results are incomplete and not strict enough. According to current regulations, in case the auction winner fails to fulfil or fully fulfil his financial obligations, the People's Committee has the authority to cancel the decision on recognition of the auction winning result, and the auction winner lose the deposit amount according to Law on Property Auction 2016, whereby this amount is remitted to the state budget after deducting the property auction costs.

The above regulations are still “too light” compared to the economic and social consequences that businesses and the real estate market have to be incurred. This was partly reflected in the recent LUR auction in Thu Thiem. Four land plots in the North of Thu Thiem have created a historic auction, not only by attracting many large companies to participate but also in the auction value of LUR. These land lots brought in a total of VND 37,346 billion, 7 times higher than the starting price[11]. In which, two enterprises dropped the deposit and two enterprises delayed paying the land use fee which is the current reality for the four land plots mentioned above. Although the advanced payments of these auction winners belong to the state budget, however, the consequences are enormous. It can be mentioned that winning the auction at a price many times higher than the market price can be as a reference basis for determining land prices in Thu Thiem area and surrounding areas. This can lead to an increase in the price of land, creating a “virtual” price, making it more difficult for businesses investing in real estate as well as for people who really wish to buy residential houses. Also, unreasonably high land prices will affect land purchase and sale prices in the real estate market and make it more difficult for land acquisition, compensation, and resettlement support for some projects in accordance with the law. Thus, blowing the real estate prices and then cancelling auction results can “distort” the real estate market, affecting businesses with reasonable capacity and ability to win auctions, wasting time and money of state agencies to conduct the auction again.

It is noteworthy that two of the four businesses that made up the record auction in Thu Thiem have assets of less than 100 million VND, one has just recorded its loss of trillion of dong, and the other has just been established[12] despite being behind these businesses are investors who have more or less famous in the market. This has led organizations and agencies, including the Ho Chi Minh City Real Estate Association, to propose reviewing and amending a number of articles of the Law on Property Auction 2016 to strictly regulate capacity of investors when participating in the auction, among other recommendations[13]. Realizing that there is a great interest in public opinion, which can create effects on socio-economic development and the housing and real estate market, the Prime Minister issued Official Letter No. 1767/CD-TTg dated 21 December 2021 on the implementation of the auction of land use rights in the recent time. Accordingly, the Ministry of Natural Resources and Environment issued Official Letter No. 413/BTNMT-TCQLDD dated 20 January 2022, requesting the People's Committees of provinces and cities to review the LUR auction following the direction of the Prime Minister.

Concluding remarks

As analysed, the auction of land use right plays an important role for businesses, the state and the real estate market. However, the law on LUR auction needs to be amended and supplemented so as to ensure the principles in accordance with the law, specifically as follows:

a.    Adding specific regulations on stopping the auction and handling consequences accordingly when there are acts of pushing prices or blowing prices affecting the objectivity and results of the auction;

b.    Strictly applying standards and conditions for auction participants’ project implementation capacity, including financial capacity, implementation ability, reputation, experience, plan/option in case of winning the auction. This issue can be referred to Articles 16.2 and 19.2 of the Government's Decree 22/2012/ND-CP dated 26 March 2012 on the auction of mining rights and Article 33.1 of the Investment Law 2020 to apply the conditions for auction participants[14]. When determining the conditions for participation in the LUR auction, competent state agencies should pay attention to comprehensively applying relevant legal provisions, such as the Land Law 2013, the Law on Investment 2020, and other guiding documents so that appropriate and qualified participants can be identified as required by law.

c.    Imposing stricter sanctions for the act of auction winners raising prices abnormally, then failing to fulfil or not fully performing financial obligations, leading to cancellation of auction results. The organization of the LUR auction consumes a lot of time and expense of the parties, including the competent state agencies. The fact that the winning bidder dropped the deposit, causing the state agency to re-auction, affecting businesses that are likely to win the auction, and “disturbing” the real estate market. Therefore, this situation can be mitigated through:

      (i)   Recording auction history record. Accordingly, an auction winner who requests to cancel the auction result or fails to fulfil his/her obligations as prescribed shall be recorded with its auction history. This is one of the measures to make auction participants consider when participating in the auction, in addition, it also helps the auction organization to evaluate and select suitable auction participants;

      (ii)   Restricting the right to participate in asset auctions for a certain period of time. Accordingly, an organization or individual that wins an auction but fails to fulfil its financial obligations as prescribed shall be not allowed to participate in any auction for a period of 3 to 5 years from the end of that auction[15];

      (iii)  Providing additional liability for damage compensation in case the auction winner fails to make the deposit, refuses to enter into a contract of sale and purchase of the auctioned asset, and at the same time increases the current administrative penalty and considers criminal liability against the violator in case of serious consequences for the State, other organizations and individuals; and

      (iv)   In addition, it is possible to research to require auction participants to pay a part of the value of the auction winning asset in advance at an appropriate rate, depending on the value of the auctioned asset, and the payment must be made immediately after the auction results are available and before the parties sign the contract of sale and purchase of the auctioned asset.

In short, in the economic perspective, “raising the price and dropping the deposit” may bring certain profit to the auction winner and some other objects. However, their long-term interests are hard to be ensured since their reputation can be damaged, even businesses and shareholders may be seriously affected when competent authorities investigate and handle wrongdoings in relevant projects of such violators.

In addition to the efforts of competent state agencies in improving the legal provisions on LUR auctions, businesses and auction participants also need to take responsibility and promote the transparency and objectiveness of the auctions, thereby contributing to the healthy development the real estate market./.