Accepting mortgage of real estate as inheritance - Risk of contract void in Vietnam

In the appellate commercial business judgment No. 07/2017/KDTM-PT dated 07/08/2017 on the dispute over the credit contract and property mortgage contract, the content is as follows:

“In 2006, Mr. Nguyen Thanh H died, the legacy of Mr. H left is the right to use 321m2 of land, in parcel 137, which was granted to his household. When the estate has not yet been inherited, on July 7, 2011 and October 15, 2011, Ms. H (Mr. H's wife) signed a contract to mortgage the land use rights and assets attached to the land with the mortgagee, Bank T - Quang Tri branch, to borrow money without consent from his or her children.

Mr. K (son of Mr. H) believes that Ms. H's mortgage of the above-mentioned property has infringed on Mr. K's right of ownership and use; C (Mr. H's father) has the right to inherit, so Mr. K and Mr. C request the Court to declare the above mortgage contract invalid."

The People's Court of Quang Tri province said: "This is a common property that has not yet been divided into the agreement, including the part of the inheritance that Mr. H left that has not been partially disposed of according to the provisions of the law of Vietnam. The first-instance judgment of the People's Court of D city declaring partial cancellation is not correct because this is the common property of the household without an agreement on the division of parts, and such a declaration is in fact not eligible for enforcement and when the judgment comes into effect will not be enforceable. On the other hand, according to Article 109 of the 2005 Civil Code, the disposition of common property of a household must be agreed upon by all members aged full 15 years or older.

According to the provisions of the Land Law 2013 of Vietnam, the time when the land user can exercise the right to mortgage the land use right is when there is a certificate of land use right or there are conditions to issue a certificate of land use right. Returning to Article 100 of the Land Law, “legal inheritance documents” is one of the documents eligible for issuance of LURCs. When there are legal papers on inheritance such as wills, and written agreements on the division of the estate, and documents on inheritance, the heirs have the right to mortgage the estate as the land use right to a credit institution without waiting for a certificate to be issued.

Accepting mortgage of an inheritance property while the mortgagor has not been granted a certificate is extremely risky for credit institutions because, in fact, the procedure for the division of inheritance is carried out on the basis of self-declaration, agreement, and self-responsibility of the parties involved. If in the process of dividing the inheritance, problems about inheritance rights, inheritance, etc., will arise, which will directly affect the rights of the guarantor and affect the rights of the secured party.

Article 168. Time to exercise the rights of land users

1. Land users may exercise the rights to transfer, lease, sublease, donate and mortgage land use rights and to contribute land use rights as capital upon receipt of a certificate. In case of exchanging agricultural land use rights, land users may exercise their rights upon receipt of a decision on land allocation or land lease. In case of inheritance of land use rights, land users may exercise their rights upon receipt of a certificate or when they are eligible to be granted a certificate.

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In this case, the financial institution that mortgaged the property is legally inherited, notarized and authenticated. Then there was a problem that there was no written agreement on the division of the inheritance, but Ms. H signed a mortgage contract on the land use right with Bank T. The Court declared the mortgage contract invalid because Ms. H had violated the law of common property of the household.

The 2015 Civil Code provides:

Article 133. Protection of the interests of bona fide third parties with regard to invalid civil transactions

1. …

2. In case a civil transaction is invalid but the property has been registered at a competent state agency, then it is transferred by another civil transaction to a bona fide third party and this person, based on If such registration is made and transactions are established and performed, such transactions will not be invalidated.

Therefore, if considering that Bank T is the third person in good faith, the mortgage agreement between the Bank and Ms. T is not void.

In addition, Official Dispatch No. 64/TANDTC-PC reads that “the mortgage of property must be considered as a conditional asset transfer transaction; In order to ensure the interests of the righteous mortgagee, it is necessary to understand that the provision of transfer by another civil transaction in Clause 2, Article 133 of the Civil Code is applicable even in the case of a mortgage transaction...”. However, the Dispatch does not state the scope of application in the case of property inheritance, so the consequences of inheritance disputes have not been resolved, which will affect the mortgage contract with the credit institution. Because the legal regulations are not really strict in this case, there are still many potential risks for credit institutions.

It is thought that, in order to limit the risks in the process of performing mortgage contracts on assets derived from inheritance, credit institutions need to be strict in the appraisal of collateral assets, thereby avoiding unnecessary legal disputes and ensuring the interests of the parties.

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