Nowadays, along with the development of the economy, the real estate industry has been developing vibrantly and strongly. This industry brings excellent business opportunities and also lots of potential risks.

It is demonstrated by a diverse increase of disputes over property lease contracts. Resolving these disputes becomes more problematic because of transactions’ enormous value and complication, e.g., contractual parties’ leasing and subleasing the property. The signature trait of property is also a burden of dispute resolution.

The law defines property (real estate) as ‘land; houses and works attached to land; assets attached to land, houses, works, or other assets prescribed by law’. Since the property for rent is land or houses, the lease is governed by the Civil Code, the Land Law, the Housing Law, and the Law on Real Estate Business. Therefore, the parties when entering the transaction may not always comply with all the laws. There is quite a common dispute settlement practice that the parties request the Court to declare the contract void.

The 2015 Civil Code stipulates that an invalid civil transaction would not give rise to, change or terminate civil rights, obligations from the time of establishing such transaction. Accordingly, the parties restore the original status and return what they have received to each other.

It is noted that restoration of the original status only applies to the case of a void contract though a contract’s legal consequences being void or revoked following Articles 131 and 427 of the Civil Code 2015 are pretty similar (i.e., the contract would not take effect from the time of conclusion, and the contractual parties return what they have received to each other).

The restoration can only be enforceable if the property has been changed or repaired compared to its original status. Suppose there is a decrease in the property’s value due to the lessee’s use. In that case, the restoration request is reasonable and fair to the parties. The lessee is responsible for repairing and restoring the property to return it to the lessor.

However, what if the parties’ agreement allows the lessee to renovate the property or build additional works? What if the lessee’s renovations or repairs during the lease term increases the property’s value, which is already known and consented to by the lessor? How would the restoration be done? Whether the lessee must dismantle or destroy the additionally built parts or not before returning the property to the lessor?

The law does not address clear answers to the above questions. Based upon the precedents ruled by several Courts, there are some common points of view as follows:

Practices of dispute resolution

For damages related to repairs, renovations, construction to the property

Any void contract of property lease always damages contractual parties at several levels.

The Court considers the fault of each party for making the contract void to determine which party is responsible for compensations or incurred expenses. If both parties are at fault, they will take responsibility in proportion to their degree of fault following the principle regulated in Article 131.4 of the Civil Code 2015: the faulty party which caused damage shall compensate for damage.

Thus, the party’s fault is grounds for the Court to settle the claim for expenses that a party has spent to repair, build, or revive the property.

Where renovations or repairs increase the property’s value, but are necessary or already known and consented to by the lessor, the lessor shall reimburse the lessee for these expenses.

On the other hand, if the lessee intentionally does repairs or renovations to the property regardless of the lessor’s disagreement, the lessee shall incur the arising expenses. The lessee is additionally responsible for dismantlement and incurred costs if the lessor requests the lessee to return the property at the status quo.

Settling the deposit issue

Most lease contracts do require a security deposit. Once the contract is void, in principle, the parties return to each other what they have received. Accordingly, the lessor must return the deposit to the lessee.

However, the Judicial Council of the Supreme People’s Court guides some other deposit settlements. One of which is based on the fault of the parties. The party at fault for the void contract will incur a deposit penalty.

In conclusion, Article 131 of the 2015 Civil Code regulating the principle of returning the property is not applied in all cases of void contracts. The lessee can be subject to a deposit penalty if it is at fault for the void contract. The lessor is not obligated to return the deposit as prescribed in the law.

Precautions against potential disputes

Each contractual party is always on its goodwill and expects harmonious cooperation when concluding a property lease contract. Any dispute or void contract, due to any reason, does benefit neither party because they consequently suffer a certain loss when the transaction is revoked.

Therefore, you should consider the below notable points during the contract negotiation and conclusion. This helps militate against potential risks, losses, or damages when the lease contract is void and cannot continue to be performed in the future.

If you are a lessee, you should carefully check the legal status of the property.

In practice, there are several cases where the lessor is not the legal owner of the leased property. Eventually, if a dispute occurs, the contract would be void due to violation of the law’s prohibition.

The contract’s terms and conditions must comply with relevant laws.

As mentioned above, if leasing the property serves business purposes, the lease is governed by several laws such as the Housing Law, the Law on Real Estate Business, etc.

An example is that the parties mutually agree on a specific payment term of rental upon their free will during contract execution. Then a dispute occurs because the lessee violates the payment term. However, the payment term agreed to in the contract violates the Law on Real Estate Business, making itself invalid. The Court finally decides that no violation by the lessee.

In the above example, neither party is at fault for not acknowledging all the legal regulations. However, the lessor has suffered a severe loss from this incident even though the lessee violated its contractual obligation.

There should have specific agreement on repairs, renovations, construction of additional works on the leased property.

Practically, regardless of your purpose of renting the property, there will be certain activities of renovating, repairing, reconstructing the property to meet usage needs during the lease term. Therefore, to avoid disputes on these, the parties should have specific clauses in the contract or create specific agreements from time to time.

Related Legal Practice: Real Estate Litigation

We hope this legal insight is of help to you. Should you have any questions related to Real Estate Disputes in Vietnam, please contact our Le & Tran lawyers at info@letranlaw.com for further clarification or advice.