Legality of reservation deposit contract for purchase of real estate

In the real estate sector, it has become common for customers to spend a sum of money to make a deposit, reserve a desired location and receive incentives from investors and distributors.

In fact, the Real Estate Business Law does not regulate deposit and reservation contracts, but deposit contracts are mentioned in the Civil Code.

Specifically, Clause 1, Article 328, Civil Code 2015 (“Civil Code 2015”) stipulates: “Deposit is the act of one party (hereinafter referred to as the depositing party) delivering to the other party (hereinafter referred to as the deposit receiving party) a sum of money or precious metals, gemstones or other valuable objects (hereinafter collectively referred to as deposited assets) for a period to ensure the conclusion or performance of a contract.”

Clause 2, Article 328 of the Civil Code 2015 stipulates: “In case a contract is concluded and performed, the deposited property will be returned to the depositor or deducted to fulfill the payment obligation; If the depositing party refuses to enter into and perform the contract, the deposited property belongs to the deposit receiving party; If the deposit receiving party refuses to enter into and perform the contract, it must return to the depositing party the deposited assets and an amount equivalent to the value of the deposited assets unless otherwise agreed”

In essence, a deposit is a civil security transaction to enter into a contract, which here is to ensure the transfer of real estate. From a legal perspective, if it is determined that the agreement to place a deposit to buy real estate is a deposit transaction, then the object of the deposit contract, the real estate, does not exist at all and does not meet the legal conditions for sale according to the law at the time of signing the deposit agreement. Therefore, this deposit agreement will be legally invalid.

Pursuant to Clause 5, Article 8 of the 2014 Real Estate Business Law, regulations on prohibited acts, including “Illegal mobilization and appropriation of capital; Using capital mobilized from organizations and individuals and advances from buyers, lessees, and lessees to purchase real estate to be formed in the future for improper purposes as committed”.

Pursuant to Point a, Clause 2, Article 19 of Decree No. 99/2015/ND-CP, there are also regulations prohibiting investors from applying capital mobilization to prioritize registration, deposits, and benefits to buy a house or to divide land use rights in the project, specifically:

“2. Signing a contract to mobilize capital for commercial housing development must comply with the following regulations:

1. In case of signing a capital mobilization contract according to the provisions of Clause 2, Article 69 of the Housing Law, the forms and conditions must be met as prescribed in the Housing Law and the provisions of Clause 3 of this Article.

Parties participating in capital contribution, investment cooperation, business cooperation, joint venture, or association specified in this Point may only divide profits (in money or shares) based on the capital contribution ratio as agreed in the contract; Investors are not allowed to apply the form of capital mobilization specified in this Point or other forms of capital mobilization to divide housing products or to prioritize registration, deposit, enjoy the right to buy houses or to distribute housing products in the project to the party receiving capital, except in the case of contributing capital to establish a new legal entity to be assigned by the State to be the investor of a housing construction project;”

Thus, the reservation deposit contract is an illegal form of capital mobilization by the investor to swap legal concepts, leading to misunderstandings for customers and investors who sign capital mobilization contracts for Housing development by way of agreement to deposit money to purchase real estate is completely not recognized by law, the investor may be subject to administrative sanctions according to the provisions of law and must compensate for damages for capital contributors (if any).

Recommendations of LS Law Firm

Above are the basic contents about the legality of reservation deposit contracts for purchase of real estate based on the provisions of law at the time of writing. If you need advice on the above issue or are interested in other legal services, please contact LS Law Firm immediately via Email: lslawfirm2014@gmail.com for timely support.

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