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Tuesday, May 21, 2024

Risks on corporate leaseholders

By An Nhien

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The draft amendments to the Land Law are intended to limit options for one-time payment of land rent, and encourage annual rent payments instead. Such a change would ensure stable income and avoid losses for the State budget, but it poses risks to enterprises.

In implementing the 2013 Land Law, many cities and provinces have opted for enterprises making one-off land rent payments for the entire lifespan of their projects. This collection method allows tenants easily calculate a fixed amount of land rent, which is an important part of a business plan while local authorities can have a big sum of money for budget planning. However, it is difficult for local authorities to work out an accurate one-time payment over a long period of 50 years, while revenues surge in a short span of time only and cannot be sustained.

Therefore, Resolution 18/NQ-TU on reforming land use and management policies has been issued, emphasizing the method of annual land rent payment, while the one-time payment method applies to a limited number of projects meeting the particular requirements of land use. This regime aims to sustain the revenue stream and to avoid losses for the State budget.

In codifying Resolution 18, the draft of the amended Land Law has narrowed down types of projects subject to one-time land rent payment. Accordingly, only farming and industrial zone development projects are given the incentive, while all other projects are subject to the annual rent payment. The draft law also specifies “the leasehold title for the annual payment contract”, under which the leaseholder can sell, transfer, lease or mortgage this title.

Apparently, the law drafters have sought to meet the diverse demands of enterprises and to balance the rights and interests of the two groups: the annual payment lessee and one-time payment lessee. In reality, not all enterprises are financially capable to make one-time payment, especially developers of industrial zones or export processing zones who tend to make annual payment. Under the current Land Law, the annual payment lessee has rights and interests more restrictive than the one-time payment lessee, having no right to mortgage the leasing contract for loans for instance. The introduction of the leasehold title for annual payment lessee, therefore, is a positive change to narrow the gap in rights and interests between the two groups.

However, as suggested by the National Assembly’s Economic Committee, the leasehold title is a new concept that needs to be clarified. Allowing the leaseholder to transfer or mortgage the title can cause problems for State management agencies in ensuring full collection of annual rents, especially when the mortgagee becomes insolvent. Therefore, it is suggested that the law drafters fully consider the impacts of those rights in such respects as economy, society, the business performance of the enterprise in question, as well as the assessment, management and settlement of the mortgaged title on the part of banks.

Notably, although the draft law gives more rights to the leaseholder, risks on enterprises have not been addressed. Dau Anh Tuan, vice general secretary and head of the Legislation Department of the Vietnam Chamber of Commerce and Industry, has noted that there remains a discrepancy in calculating land rents, and the risk of land rents being hiked in the ensuing years. In reality, due to the pressure to increase revenues for the State budget, and given the property fevers that spur real estate prices, certain cities and provinces have raised land rents sharply, adversely affecting business plans of annual rent payment lessees. A slaughterhouse operator in HCMC’s Nha Be District has complained that the land rent has been revised up 13 times within ten years, and it is unknown how the land rent will change in the next 40 years.

According to Dau Anh Tuan, Resolution 18 aims at safeguarding the State budget revenue. However, such an approach poses risks to enterprises as any sharp hike of rent will disrupt an enterprise’s business plan. Such an unstable business environment will hinder enterprises from committing large-scale investment to develop business and create jobs.

To deal with the issue, according to Dau Anh Tuan, there should be regulations checking the increase of annual rents. For example, localities can hike the annual rent within a prescribed range, but the rise should not be more than twice the inflation rate. As such, the State can still increase land rents when necessary, but it will not expose enterprises to huge risks, while enterprises can still anticipate the land rent in their investment plans.

Speaking at an NA sitting, Deputy Phan Van Hoa of Dong Thap Province suggested that enterprises be given the right to choose between annual or one-time rent payments. “It is not agreeable to guarantee benefits for the State while putting enterprises in harm’s way,” he said.

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