Unreasonable land lease policies affecting industrial zones

Saigon Investment
(Saigon Investment) - More than two decades back, Ho Chi Minh City converted uncultivated agricultural land to set up the Tan Binh Industrial Zone (IZ), with the purpose of increasing land value, attracting more foreign investment, and creating plentiful jobs.  

Tan Binh Industrial Park.

Tan Binh Industrial Park.

In 1997, the Tan Binh Import-Export Joint Stock Corporation (Tanimex) was one of the first state-owned enterprises (SOEs) to be assigned land in Tan Binh Industrial Zone. Since then, many enterprises have moved here and taken advantage of the stable land rental price that was agreed upon by the State and the industrial zone investors. The agreement called for a stable rate for first five years, and after five years an increase of not more than 15%. This agreement kept many enterprises to take initiatives to lease land in Tan Binh Industrial Zone over the years.

By 2002, the Tanimex Company expanded their industrial park area towards Binh Tan district, and adjusted land rent according to market value, which created many risks for investors as well as land subleasing enterprises. Specifically, land rental prices were to remain stable for first five years, but at the end of the five-year term, land rental rates were to be recalculated at market price, based on residential land prices in adjacent areas. This would lead to increase in input costs because land prices are rapidly increasing, while land for production and businesses cannot adjust at same rate of return as residential land.

Mr. Tran Quang Truong, General Director of the Tanimex Company, said that for expanding their Tan Binh Industrial Zone, the company complied with State land rent rate, and paid the land rent at the request of the tax authority. However, there have been disputes that have led to a lawsuit between Tanimex Company and a number of companies leasing land in Tan Binh Industrial Zone. For example, due to the urgent need to expand production, the Xuan Huong Company proposed to lease more land in the expanded Tan Binh Industrial Zone.

On 9 August 2010, the parties signed a memorandum of understanding for the lease of two areas, one about 5,200 sq. meters and the other about 20,000 sq. meters, at an annual land rent of VND 1,740 per sq. m. Then according to the current law provisions at that time, the land rental unit price was changed. On 16 October 2014, the State adjusted the land rental price, and the Tanimex Company signed with the Department of Natural Resources and Environment to append the land lease contract with the new unit price of VND 10,440 per sq. meter, but the Xuan Huong Company did not accept this new unit price, which then compelled the Tanimex Company to take them to court.

However, the understanding of the current legal proceedings is not consistent. The Appellate Trial Panel of the People's Court of Ho Chi Minh City says that the Tanimex Company has correctly implemented the agreement under their land sublease contract, but the People’s High Court in Ho Chi Minh City says that the responsibility to pay an additional land rent belongs to the investor only. As of now, the contracts between the lessor and the lessee are strictly bound and the land rent must be adjusted according to State regulations from time to time, and the lessee must pay this additional rent.

If the legal proceedings do not carefully review or deny the transparent signed land sublease contract, there is a risk that the subleasing companies will use legal proceedings to appeal against the developers of industrial zones for their rights, which could possibly lead to mass bankruptcy, destabilize the investment environment, and affect State policies that encourage enterprises to invest more and more in industrial zones.

The high land rental rate in industrial zones affects investors who can turn away from making further investments. Although rental rates in industrial zones are decided by government authorities, they must also remain stable and transparent to assure investors and create an attractive investment environment to attract more and more businesses. Therefore, by applying a new unit rate for enterprises leasing land in industrial zones, based on real estate rates in adjacent areas, it makes it difficult for the lessee to make any further development plans. The irrationalities in the land lease and sublease policies in industrial zones creates unfavorable conditions for both investors and enterprises.

Do Tra Giang

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