Legal provisions on collateral not owned by the mortgagor under vietnamese law

In lending activities and secured transactions, using property as collateral is a common method to secure the performance of obligations. However, in practice, many cases involve property used as collateral that is not actually owned by the mortgagor, resulting in disputes and significant legal risks.

This article by NPLAW analyzes the current legal framework governing such an issue to help parties proactively avoid risks and effectively handle related legal situations.

I. The situation of using property not owned by the mortgagor as collateral

The use of property as collateral not owned by the mortgagor in secured transactions is quite prevalent, especially in banking loans, real estate transactions, or among individuals and households. Typical situations include:

- Mortgaging jointly-owned property without the consent of co-owners;

- Mortgaging property registered under another person’s name (such as spouse or relative) without a valid power of attorney;

- Mortgaging land that has not yet been issued a land use right certificate (red book) or is under State management;

- Using disputed or seized property as security for loans.

This primarily stems from limited legal awareness, short-term financial motives, or intentional violations. The consequences often involve legal disputes, contracts declared invalid, and significant impacts on the rights of the mortgagee.

II. Relevant legal provisions on property not owned by the mortgagor as collateral

1. Concept of mortgage and collateral not owned by the mortgagor 

According to Article 317 of the Civil Code 2015, a mortgage of property means a party (the mortgagor) uses property under its ownership to secure the performance of obligations, without transferring the property to another party (the mortgagee). Thus, a mortgage inherently involves two main parties: the mortgagor and the mortgagee.

Vietnamese law does not explicitly define “property not owned by the mortgagor.” It can be understood as property over which the mortgagor does not have lawful ownership, i.e. not being the legal owner or lacking the right to dispose of the property under the law, yet still attempts to use it to secure obligations.

2. Can property not owned by the mortgagor be mortgaged?

Precedent No. 11/2017/AL, on the recognition of mortgage contracts over land use rights where the land includes assets not owned by the mortgagor (issued under Decision No. 299/QD-CA dated December 28, 2017 of the Chief Justice of the Supreme People’s Court), provides a framework for handling such situations.

According to this precedent:

- If land has multiple attached assets, some owned by the land user and others owned by third parties, and the land user mortgages only the land use rights and the assets attached that are legally theirs, then if the mortgage contract conforms to statutory content and form requirements, it shall be legally valid.

- In cases where the mortgagor and mortgagee agree that the mortgagee may sell the secured asset being the land use rights, while one of assets on the land is owned by another who is not the land user, priority must be given to such owner if they wish to purchase (or receive the transfer).

Thus, if only the land use rights and assets attached to the land are legally owned by the mortgager, the mortgage contract is still valid, even if the land has assets (for example, a house) owned by someone else. This does not invalidate the mortgage contract, as long as the content and form of the contract are in accordance with legal regulations

Property not owned by the mortgagor cannot be directly mortgaged, but if the property is located on the legally mortgaged land, the mortgage contract is still valid, and the third party with ownership of the property is still protected by law. The mortgage is only legal for the part of the property that the mortgagor has the right to own or use legally.

3. Can secured property be disposed of if it includes assets not owned by the mortgagor?

Based on precedent No. 11/2017/AL, it can be affirmed that: Secured assets can be handled in cases where the assets are not entirely owned by the mortgagor, but only the part of the assets to which the mortgagor has legal rights can be handled, while the rights of the legal owner of the non-mortgaged assets must be respected, as follows:

- The mortgagor only has the right to use the land, while the house on the land belongs to someone else.

- The mortgage contract only records the mortgage of the land use rights and assets attached to the land owned by the mortgagor.

- The court declares the mortgage contract valid within the scope of the mortgagor's assets.

Regarding the disposal of assets: If the parties agree that the mortgagee has the right to sell the secured asset which is the land use right, then:

- The disposal is still recognized by law.

- The right of first purchase must be given to the owner of the house on the land, if this person has a need to receive the transfer.

III. Questions on property not owned by the mortgagor as collateral

1. If authorized to manage property, can the authorized person mortgage property not owned by them?

According to Clause 2, Article 187 of the Civil Code 2015, a person authorized to manage property does not become the owner. Therefore, they cannot use such property as collateral, as they do not have ownership or disposal rights. 

2. Is mortgaging property not owned by the mortgagor a violation of law?

Unless there is a valid authorization by the owner, mortgaging property not owned by the mortgagor is a violation of law, and the mortgage contract may be declared null and void.

3. Can property not owned by the mortgagor be mortgaged if there is consent from the owner?

If there is the owner’s written consent, the non-owner can still lawfully use such property as collateral in accordance with civil law.

4. What are the legal consequences if the mortgagor uses property not owned by them as collateral?

If the mortgagor uses property not under their ownership without the owner’s lawful consent:

- The mortgage contract may be fully or partially void under the Civil Code.

- The mortgagee loses the right to enforce the security property and priority payment.

- The parties must restore to the property's original state, returning what was received.

- The mortgagor may be subject to civil liability, or in serious cases, criminal prosecution can be applied (e.g. for fraud if deception is involved).

- The lawful owner can request the court to protect their rights and reclaim the property.                  .

IV. NPLaw’s advisory services on property not owned by the mortgagor as collateral

The above is our comprehensive legal analysis on collateral not owned by the mortgagor. If you have any questions on this matter or other legal issues, please do not hesitate to contact NPLaw for direct consultation and support.