By Lawyer Luu Thi Hue – UniLaw LLC

LEGAL CONSEQUENCES OF THE INVALID LEASE

Entering into a real estate lease or asset transfer agreement in Vietnam requires a high level of legal scrutiny. Many businesses, especially foreign investors, find themselves entangled in disputes where contracts are declared void due to a failure to meet strict legal conditions. As a vietnam litigation lawyer, I have observed that “invalidity” is not just a theoretical concept; it has immediate, heavy financial and operational impacts. This article explores the legal landscape of invalid leases and transactions through real-world case law and the provisions of vietnam real estate law.

The Case of XL Group and BMX: A Stark Reminder of Legal Conditions

To understand the gravity of an invalid transaction, let us look at the dispute between XL Group (the Seller/Lessor) and BMX Company (the Buyer/Lessee). In 2017, XL Group entered into a contract to sell a “Service House” built on land leased from the State with annual rental payments. BMX paid 2.6 billion VND and was even granted a Certificate of Land Use Rights (LURC) for the asset,.

However, the transaction was challenged. The court found that at the time of the agreement, the house was not yet completed, there was no construction permit, no design dossier, and the investment project had not been formally approved by the provincial People’s Committee. Under Article 189 of the Land Law 2013, an economic organization is only permitted to sell assets attached to land leased with annual payments if the assets were legally created and construction was completed according to approved plans.

The vietnam real estate lawyer representing the parties had to navigate a complex fallout. The Court declared the contract invalid (void). The consequences were as follows:

1. XL Group was forced to return the 2.6 billion VND it had received.

2. BMX was ordered to return the entire service house structure to XL Group.

3. The LURC issued in BMX’s name was canceled because it was based on an invalid transaction,.

4. Regarding damages, the court determined that both parties were 50% at fault because both were professional entities that should have known the legal requirements but proceeded anyway. Consequently, XL Group had to pay half of the interest (calculated at 10% per year) on the 2.6 billion VND for the period it held the money.

This case highlights that even if a state authority (like the Department of Natural Resources and Environment) mistakenly issues a certificate, the court can still void the transaction and the certificate if the underlying legal conditions were not met.

Understanding the Legal Grounds for Invalidity

The foundation of contract validity in Vietnam rests on the Civil Code. If a lease or real estate transaction fails to meet specific criteria, it is considered void from the beginning. Vietnam real estate law specifically focuses on the object of the contract and the authority of the parties.

Article 123 of the Civil Code 2015:

“Civil transactions which have objects or contents which violate a prohibition by a law or which contravene social ethics shall be invalid. Prohibitions by a law mean provisions of the law which do not permit a subject to perform certain acts. Social ethics are common standards of conduct as between persons in social life, which are recognized and respected by the community.”

Plain English Explanation: This rule means that if you sign a lease for something that is illegal (like land the landlord doesn’t actually own or have the right to lease), the whole contract is legally “nothing” from the start. You cannot enforce a deal that goes against what the law says you must not do.

In the real estate context, “prohibitions” often include leasing land that hasn’t been properly cleared, or leasing “annual rental land” without meeting the asset-creation requirements. As a vietnam litigation lawyer, I often see cases where parties ignore these prohibitions to “save time,” only to lose years in court later.

Restoration of the Original State: The Primary Consequence

When a lease is declared invalid, the law aims to put the parties back where they started. This is known as “restoring the status quo ante.”

Article 131 of the Civil Code 2015:

“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 established.

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 it cannot be returned in kind, it shall be returned in money.”,

Plain English Explanation: If a judge says your lease is void, it’s like the lease never happened. You have to give the building back to the landlord, and the landlord has to give the rent and deposit back to you. If you already used up some value (like electricity or services), you pay the equivalent in cash.

This was seen in the case of Shin Sung and BL Tech. They signed a “Principle Agreement” for a land sub-lease in an industrial cluster. The court found the agreement void because Shin Sung, holding annual rental land with no assets on it, had no legal right to sub-lease it. Shin Sung was ordered to return 5,001,264,000 VND to BL Tech immediately,.

The Fault Factor and Compensation for Damages

While returning money is straightforward, the “loss” incurred by a tenant who spent money on renovations or missed business opportunities is harder to resolve. This depends on who was “at fault” for the contract being invalid.

Article 131(4) of the Civil Code 2015:

“The party at fault which caused the damage must provide compensation.”

Plain English Explanation: If the landlord lied to you about having a permit, they are “at fault” and must pay for your losses. If you both knew the permit was missing but signed anyway, you might both be at fault and get less or no compensation.

In the case of Company N and Doanh Nghiep N, the court found that Company N had concealed a government decision that affected the lease’s feasibility. This violation of the “duty to provide information” (Article 387 of the Civil Code) meant Company N had to compensate the tenant for the specialized cold storage units they had installed. However, because the tenant installed a “stone ice production line” which was outside the agreed purpose of a “warehouse,” the court limited the compensation. This shows why a vietnam real estate law expert is necessary to define the “purpose of use” clearly in every lease.

Restrictions on Sub-leasing and Annual Rental Land

A very common trap in Vietnam involves “annual rental land” (đất thuê trả tiền hàng năm). Under the Land Law 2013, users of such land have fewer rights than those who pay a “one-time lump sum” (đất thuê trả tiền một lần).

Article 175 of the Land Law 2013:

“1. Economic organizations… being leased land by the State with annual land rent payment have the following rights and obligations: …

d) To sublease the land use rights with the form of annual land rent payment for the land with built infrastructure in the case they are permitted to invest in construction and business of infrastructure in industrial parks, industrial clusters, export processing zones, hi-tech zones or economic zones.”,

Plain English Explanation: If a company rents land from the government and pays the rent every year (rather than all at once for 50 years), they generally cannot rent that land out to someone else unless they have built proper infrastructure on it and are an official “infrastructure developer.”

In the Shin Sung case mentioned earlier, Shin Sung tried to sub-lease “raw land” to BL Tech. Because Shin Sung had not invested in any assets or infrastructure on that specific plot, the sub-lease was a violation of Article 175. Even though the parties called it a “Principle Agreement,” the court looked at the substance—which included price, area, and term—and ruled it a void land lease.

The Requirement for Investment Licenses

Leases for commercial or industrial projects are often contingent on the tenant obtaining an Investment Registration Certificate (IRC). If the lease doesn’t properly account for this, it can lead to invalidity.

Consider the dispute between HIDICO and Company Y. HIDICO leased land in an industrial park to Company Y. A specific condition in the contract (Article 11) stated the lease would terminate if the state refused to grant Company Y an investment permit. Company Y used the land for years but never actually applied for the permit. The Court declared the lease invalid because the “binding condition” of being a licensed investor was never met. Company Y was forced to return the 30,104 m2 of land and pay 616 million VND in usage fees,.

A vietnam real estate lawyer must ensure that lease agreements include “conditions precedent” related to licensing. If a tenant operates without a license, the lease is not only a private dispute but a violation of administrative law, which courts use as a basis for declaring contracts void.

Handling Unauthorized Transfers of Lease Rights

Lease agreements almost always contain a clause saying “no sub-leasing without written consent.” In Vietnam, violating this isn’t just a breach of contract; it can lead to the sub-lease being declared invalid against the head landlord.

In a case involving the District 7 Labor Union, they leased a canteen space to a Mr. A. The contract explicitly prohibited transfer. However, Mr. A signed a “Joint Venture” agreement with a Ms. L. In reality, Ms. L ran the canteen alone and paid all the rent. The court looked past the “Joint Venture” label and saw it as an unauthorized transfer of lease rights. Because Mr. A had no right to transfer the lease, the agreement between him and Ms. L was declared invalid. Mr. A was ordered to return Ms. L’s deposit and payment for meals.

Consequences for Deposits in Invalid Contracts

What happens to the deposit (tiền đặt cọc) when a lease is voided? Usually, if a contract is invalid, the deposit must be returned. However, if the contract is valid but terminated due to a breach, the deposit is forfeited or doubled.

Article 328 of the Civil Code 2015:

“2. Where a contract is entered into or performed, the deposit shall be returned to the depositor or deducted from the payment of an obligation. If the depositor refuses to enter into or perform the contract, the deposit shall belong to the recipient. If the recipient refuses to enter into or perform the contract, such person must pay the depositor the deposit plus an amount equivalent to the value of the deposit, unless otherwise agreed.”,

Plain English Explanation: A deposit is a “promise” to follow through. If you back out, you lose the money. If the landlord backs out, they give you yours back PLUS an equal amount as a penalty. But, if the whole deal was illegal from the start, the judge usually just orders the landlord to give the original money back, with no extra penalty, because the “promise” wasn’t legally valid.

In a dispute between Furniture Company Đ1 and Company N, the tenant failed to take over the workshop despite the landlord being ready. The court found that because the tenant voluntarily signed a handover minute but then simply stopped communicating (claiming COVID-19 delays that weren’t proven), the tenant was at fault. The court applied Article 328 and allowed the landlord to keep the multi-billion VND deposit.

Invalidity Due to False Representation or Confusion

A lease can be declared invalid if one party was deceived or if there was a major misunderstanding. This is a common claim in vietnam real estate law disputes, though it is difficult to prove.

Article 126 of the Civil Code 2015:

“Where a transaction is established by way of a misunderstanding about the contents of the transaction which causes one or more parties not to achieve the objective of the establishment of the transaction, the mistaken party has the right to request a court to declare the civil transaction invalid…”

Plain English Explanation: If you signed a lease thinking it was for a 5-story office but it turns out the top 4 floors are illegal and can’t be used, you can ask the court to cancel the lease because you were mistaken about what you were actually getting.

In one case involving a Bank and Mr. B, the court noted that if a stronger party (like a bank or a large developer) writes confusing or disadvantageous terms into a contract, those terms must be interpreted “in favor of the weaker party”. If the confusion is fundamental, the contract is void.

Protection of “Bona Fide” Third Parties

A complex issue arises when a lease or sale is declared invalid, but the asset has already been mortgaged to a bank or sold to someone else. Does the second person lose their rights too?

Article 133 of the Civil Code 2015:

“2. In cases where a civil transaction is invalid but the property has been registered with a competent state authority, and then it is transferred by another civil transaction to a bona fide third party who has relied on such registration to establish and perform a transaction, such transaction shall not be invalid.”,,

Plain English Explanation: If you buy a house from someone who (unbeknownst to you) got it through a fake contract, but the government had already put that person’s name on the official “Red Book” (Title), the law protects you. You get to keep the house because you trusted the official government record.

In the case of Mr. P and Mr. H2, a house was transferred through a series of owners. Even though one of the earlier transfers was technically invalid, Mr. H2 was a “bona fide” (honest) buyer who relied on the registered title. The court protected his ownership and refused the Bank’s request to seize the property for a previous owner’s debt. However, this protection does not apply if the third party knew (or should have known) about the dispute. For example, if a bank accepts a mortgage on a house where the original owners are still living and claiming they never sold it, the bank is not “bona fide” because it failed to properly inspect the property.

Operational Consequences: Moving Out and Tearing Down

The most painful consequence for a business tenant in an invalid lease is the “forcible relocation.” If the court declares the lease void, the tenant has no legal right to be there. Vietnam real estate law is strict about returning “clean” land.

In the Company Q and Company S dispute, the court ordered Company S and an associated individual, Mr. X, to move all movable property out and return the land to Company Q. In even harsher cases, such as the XL Group and BMX dispute, the court may order the “return of assets in kind,” which can involve complex handovers of buildings that were renovated by the tenant.

Determining Damages: The “Market Value” Approach

When a lease is voided after many years, simply returning the original rent is unfair because money loses value and property prices rise. Courts often look at “actual loss.”

In a dispute over factory rent between Company D and Company P, the lease had expired, and they couldn’t agree on a new price, but the tenant kept using the space. The court decided that since the factory was built 20 years ago, it had depreciated. Therefore, the court could not just apply the old 1992 price. It had to order a “valuation” (định giá) to determine the fair market rental value for the period of unauthorized use,.

For a vietnam litigation lawyer, the valuation stage is often the most critical part of the trial, as it determines whether the client pays millions or billions of VND in restitution.

The Impact of Government “Policy Changes”

Sometimes, a lease becomes invalid or impossible to perform because the government changes the law or takes the land back for a public project. This is often treated as “Force Majeure” or “fundamental change in circumstances.”

In the case of Company S and Company Z, Company S had to terminate a lease early because the provincial authorities changed the “zoning” of the land. The parties signed a “Liquidation Minute” where the landlord agreed to pay 4.1 billion VND in compensation for the tenant’s relocation. However, when the tenant was slow to move out and the landlord didn’t pay, they ended up in court. The court ruled that the “Liquidation Minute” was a standalone contract. Even though the original lease was terminated due to a government policy, the landlord still had to pay the promised relocation support because they had signed a separate agreement to do so,.

Article 420 of the Civil Code 2015:

“1. A fundamental change of circumstances is when the following conditions are fully satisfied:

a) The change of circumstances is due to objective reasons occurring after the entry into the contract;

b) At the time of the entry into the contract, the parties could not foresee the change of circumstances…”

Plain English Explanation: If the rules change so much that the contract becomes a disaster for one side (and no one could have guessed this would happen), you have the right to ask the other side to renegotiate. If they refuse, you can go to a judge to end or change the contract.

Administrative Violations Leading to Civil Invalidity

In Vietnam, the line between “administrative law” (permits, taxes) and “civil law” (the lease agreement) is very thin. An administrative failure often voids the civil contract.

In the case of Shin Sung and BL Tech, one of the reasons the contract was invalid was that the parties quoted the price in US Dollars (USD). Under Vietnamese foreign exchange regulations, transactions between two Vietnamese entities (including foreign-invested companies in Vietnam) must be priced and paid in Vietnamese Dong (VND).

Circular 32/2013/TT-NHNN: Prohibits the use of foreign currency for quoting, pricing, or paying within the territory of Vietnam,.

If a lease is priced in USD and has no “equivalent in VND” clause, or if payment is made in USD, the contract can be declared invalid for violating a prohibition of the law (Article 123). A smart vietnam real estate lawyer will always ensure that even if the parties think in dollars, the contract speaks in VND.

Strategies for Mitigating Risk

As a vietnam litigation lawyer, my goal is to keep clients out of court. To avoid the disastrous legal consequences of an invalid lease, businesses should:

1. Verify Land Origin: Is it annual rental or lump sum? If it’s annual, does the landlord have the right to sub-lease? (Land Law Art 175)
2. Check Asset Status: If you are leasing a building, does it have a completion certificate (hoàn công)? Is it on the “Red Book”?
3. Licensing Contingencies: Ensure the lease allows for termination without penalty if you can’t get your IRC or business license.
4. Currency Compliance: Always quote prices in VND.
5. Inspection of Title: Never rely on a copy of a title. Check the original and check for registered “disputes” or “mortgages” at the Land Registration Office.,

Conclusion

The legal consequences of an invalid lease in Vietnam are severe: the total loss of the right to use the property, the mandatory return of assets, and complex litigation over who is “at fault” for the financial mess. Whether you are a landlord or a tenant, the “cost” of a vietnam real estate lawyer conducting due diligence is a fraction of the cost of a decade-long lawsuit. The court system, as seen in the BMX and Shin Sung cases, will not hesitate to void a multi-billion VND deal if the underlying land use rights or construction permits are not in order. In the world of Vietnamese real estate, “Better safe than sorry” is not just a cliché—it is a mandatory business strategy.