LEGAL CONSEQUENCES OF THE INVALID LEASE

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Judgment No. 22/2010 / DS-ST dated September 27, 2010 regarding the case: “Dispute of Lease Contract” and Judgment No. 588/2015 / DS-PT dated May 19, 2015 regarding the case: “Dispute of rental contract”).

A premises leasing agreement for business is a type of contract with a long term for 3 to 5 years for suitable to the business plan. However, the lessee usually focuses on location site and price of premises, but do not pay attention to legal aspects of the contract. The consequence is that after a period of business time the lessor requests to regain the ground on the basis that the contract is invalid. The process for dealing with the invalid contract not only causes material damage but also ruining the lessee’s business plan.

We would like to use the following judgment as an example for analysis. Mrs. Xinh rent Mr. Qua a kiosk at GV, HCM to do business. The contract is for a term of five (05) years. The rent is 3,000,000 VND / month. The deposit is 30,000,000 VND. The cost of repairing kiosk Mr. Qua paid is 65,000,000 VND. However, this house is not clear whether it is owned by Mrs. Xinh (or owned by Mr. Dao or jointly owned by Mrs. Xinh and her sister). After the contract had been performed for six (06) months, Mrs. Xinh asked Mr. Qua to return the house, but Mr. Qua did not and requested to continue renting for next three (03) months. Mr. Qua said that Mrs. Xinh suddenly terminated the contract as a violation of the law, so he requested Mrs. Xinh to compensate two times of the deposit and costs he spent to repair the house. Mrs. Xinh sued in court to take the house back on the ground that the contract was invalid, and to force Mr. Qua to pay the rental until returning house.

On general principle, when a civil transaction is invalid, the parties shall restore everything to its original state and shall return to each other what they have received. If the restitution is not able to make in kind, it may pay in money. The party at fault which caused damage must compensate [[1]].

What are the consequences of invalid civil transactions in this judgment? Who is at fault, Mr. Qua or Mrs. Xing or both? Until when Mr. Qua must pay rent? Does Mrs. Xinh have to compensate Mr. Qua for the cost of repairing the house? Is this amount deposited by Mr. Qua charged with interest? Let’s see how the Court applies the law in this case.

Determining the fault of the parties

The fault of the lessor

Under Resolution 01, a party is deemed to be at fault if the party acts in a way of misleading the other party about the house that it is eligible and lawful to buy or sell [[2]].

In this judgment, the Court decides that the Lessor is at fault as he cannot prove that the house is under his lawful ownership for rent [[3]]. In another judgment, the Court judged that a lessor is deemed at fault if he knows that the house is not owned by him or is not eligible for notarization but intentionally rent it [[4]].

The fault of the lessee

Under the Resolution 01, the buyer is deemed to be at fault if he fraudulently acts for the seller to believe that the deposits or properties to fulfill the obligations are under the ownership of the buyer, which has caused the seller to enter into or deliver the house to the buyer [[5]].

In this Judgment No. 22, the Court argued that Mrs. Xinh has not yet been recognized as the lawful owner, but Mrs. Xinh and Mr. Qua still entered into a contract, which caused the contract to be invalid. The result of the invalid contract is at fault of both parties. In another Judgment, the court argued the fault of the lessee is that he has carefully studied the situation of the house upon signing a contract and knew that the house had not been under the ownership and not been notarized but he still deliberately leases it.

In summary, both parties are deemed to be at fault if they know that house owner has not yet been determined but still intentionally enter into a lease contract.

Returning to each other what they have received

Under the provisions of the Civil Code, the parties return to each other what they have received. In case it cannot be returned in kind, the value of money would be refunded. Resolution 01 guides in more detail [[6]], the Court forced the buyer to return the house to the seller, the seller receives the house and returns what was received to the buyer.

In Judgment No. 22, the Court requested “Mr. Qua must pay the rent until the house is returned ...” until “appeal trial“. This decision is in comply with Article 131 of the Civil Code. Accordingly, “if not returned in kind, the value of money must be returned“. In another Judgment No. 588 [[7]], the Court also required the lessee to pay for the pending electricity, water, and rental taxes until the house is returned.

Who must compensate?

Under Resolution 01, the Court must consider the fault level to determine the liability for compensation corresponding to the fault level of each party. If both parties have the same fault which makes the house purchase contract to be invalid, then each party is responsible for half of the damage liability; If their fault level is not the same, then the liability to pay damages is determined corresponding to the fault level of each party.

The judgment No. 22 stipulates differently from Resolution 01. Accordingly, if both parties have the same fault that makes the lease contract to be invalid, the damage of one party is borne by that party and no one has to pay compensation. In Judgment No. 588, the Court calculated the total damage and allocated damages according to fault level of the parties. It seems to be that application of the law in Judgment No. 588 is consistent with Resolution 01.

Determination of the damage

According to Resolution 01, the damages include:

  • The amount the seller has spent on repairing or restoring to its original state the house which has been dismantled or damaged by the buyer;
  • The amount the buyer has spent on renovating and/or repairing the house, thereby increasing the house’s value associated with the land use right, except where the seller objected or the competent authority does not allow it but the buyer still deliberately renovates or repairs.
  • Where a dwelling house purchase/sale contract involves no deposit and the parties thereto have no otherwise agreement on the application of measures to fine contract breaches and on the damage compensation as prescribed in Article 379 of the Civil Code so as to secure the contract performance, the damage shall also comprise the money difference between the house’ value associated with the land use right value as agreed upon by the parties and that at the time of first-instance trial, or other damages, if any. The house’s price and the land use right value shall be determined according to the prices on the transfer market in the locality where exists the house and land in dispute according to each type of house and land at the time of first-instance trial.
  • In judgment 22 specifying the money the lessee/seller to clean the house up to restore the original state. The court applied that if the cleanup was to restore the original state, the lessee would have to compensate the lessor. If the cleanup is intended for the lessor to continue utility, the lessee is not required to indemnify the lessor [[8]].
  • Regarding the amount of money that the buyer / the lessee spent on renovating and repairing, in general, Judges No. 22 and No. 588 consider these as damages and require the lessor to pay the lessee until receipt of the house. Such decision is in accordance with above Resolution 01 [[9]].

The amount of money that the buyer / lessee has deposited to perform the contract

Under Resolution of 01, in case both parties are at fault, no one is penalized for deposit. In the analyzed judgment, due to determination that both parties are at fault, the Court also requires the lessor to return the deposit to the lessee, without any interest or deposit penalty [[10]].

If the Lessor is at fault which causes the contract invalid, the Lessor may be subject to a penalty and interest on the deposit that the Lessee guaranteed to perform the contract. Specifically, Resolution 01 stipulates that if a party at fault which causes the contract not to be signed or to be performed or invalidated, he shall be subject to a fine according to the provisions of Clause 2, Article 363 of the Civil Code.

This decision is in compliance with the spirit of Case No. 09/2016 / AL and the practice of trial. Accordingly, the Court decides that the payer shall be subject to interest on the money received as in the case of the provincial Binh Duong People’s Court [[11]].

Conclusion: As analyzed above, the application of laws in dealing with invalid contracts is relatively complicated, especially in determining fault and damages to calculate compensation levels. This work may delay the Lessee’s business plan. Therefore, in order to avoid risks from beginning, the Lessee should carefully consider the legal documents of the premises and does not hurry to intentionally enter into a contract that becomes invalid after a period

not on a legal basis, so Mrs. Diem shall refund the amount received and pay interest at rate set by the State Bank.

[1] Article 131 of LDS: The legal consequences of invalid civil transactions: 1. An invalid civil transaction shall not give rise to, change or terminate any civil rights and obligations of the parties as from the time the transaction is entered into. 2. When a civil transaction is invalid, the parties shall restore everything to its original state and shall return to each other what they have received. If the restitution is not able to make in kind, it may pay in money. 3. A bona fide person in receiving yield and/or income is not required to return such yield and/or income. 4. The party at fault which caused damage must compensate therefore. 5. The settlement of consequences of invalid civil transactions regarding personal rights shall be prescribed in this Code and relevant laws.

[2] Article 2.4 point a Resolution 01/2003 / NQ-HDTP dated 16/4/2003 [Resolution 01]. Example of cases where the seller is regarded as being at fault : The seller shall be regarded as being at fault if he/she/it makes the buyer to believe that the seller has the dwelling house ownership right and the residential land use right or commits a deceitful act so that a competent State body grants the dwelling house ownership and residential land use right certificates, then uses these papers as proof to convince the buyer to enter into the dwelling house purchase/sale contract.

[3] Judgment No. 22/2010 / DS-ST Date: September 27, 2010 on the case: “Dispute of the Lease Contract” [Judgment 22].

[4] Judgment No. 588/2015 / DS-PT Date: May 19, 2015 on: “Dispute on the rental agreement” [Judgment 88]

[5] Article 2.4-point a1 paragraph 2 Resolution 01

[6] Resolution 01/2003 / NQ-HDTP April 16, 2003 [Resolution 01]

[7] Judgment No. 22/2010 / DS-ST of September 27, 2010 of the People’s Court of Y District, Ho Chi Minh City

[8] However, as mentioned above, in case where the contract is invalid, the parties must restore to the original state. When Mrs. Chi cleaned up and returned the house, its remaining decorations were no longer suitable for use by Mrs. Dinh, so Mrs. Chi must be obliged to restore to its original state, Mrs. Dinh asked Mrs. Chi to carry out this obligation, but Mrs. Chi did not perform. As a result, Mrs. Dinh conducted repairs. However, the repair of Mrs. Dinh was intended to decorate the house to be as business shop, but not to restore the original state. The investment in decoration is at business demand of Mrs. Dinh (with purpose of a coffee shop that opened on July 17, 2009), so Mrs. Dinh had to bear the cost of the materials. In addition, being also at fault, she had to bear the damage by herself. Mrs. Chi was only obliged to refund the remuneration for the specific removal and repair costs

[9] Judgment 588: that forced Mrs. Xinh to pay Mr. Qua and Ms. of deposit of 30,000,000 dong and costs of construction and repair of 30,828,125 VND. Total 60,828,125 VND (Sixty million eight hundred twenty-eight thousand one hundred and twenty-five dong).

[10] Judgment 585: that forced Mrs. Xinh to pay Mr. Qua and Mrs. Tam the deposit of 30,000,000 VND. In Judgment No. 22, deducting the difference between the amount of deposit Mrs. Dinh received and the unpaid amount of Mrs. Chi and the value of remaining assets of Mrs. Chi, Mrs. Dinh must pay to Mrs. Chi amount of … [].

[11] [11] As an example mentioned in the Judgment No. 166/2016 / DSST dated August 12, 2016 of the People’s Court of Binh Duong Province, “the advance confirmation certificate dated February 12, 2015 is the money delivery minutes for performing contract, rather than a deposit. Mrs. Diem’s refusal to enter into and perform the civil contract as agreed is due to Ms. Diem’s fault that makes the contract invalid, so Mrs. Diem must return the money to Mr. Hai and pay compensation for damages in accordance with Article 137 of the Civil Code 2005. Because Mr. Hai’s request for dealing with disputes in the deposit contract was not on a legal basis, so Mrs. Diem shall refund the amount received and pay interest at rate set by the State Bank.

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