Understanding legal regulations on the effectiveness of mortgage contracts

I. Current situation regarding the effectiveness of mortgage contracts

In practice, the effectiveness of mortgage contracts remains an issue causing numerous difficulties in the implementation of secured transactions. In many cases, contracts are duly executed but fail to clearly determine the effective date or are not registered as security interests in accordance with legal requirements, thereby giving rise to legal risks when disputes arise or when the mortgaged assets are subject to enforcement.

In addition, the inconsistent application of regulations among notarization bodies, registration authorities, and enforcement agencies also adversely affect the legal certainty and effectiveness of mortgage contracts, particularly with respect to assets such as land use rights or future-formed assets.

II. Legal regulations on the effectiveness of mortgage contracts

1. Definition of the effectiveness of a mortgage contract

The effectiveness of a mortgage contract refers to the point in time at which the contract generates legal validity, resulting in the rights and obligations of the parties in the mortgage relationship.

Pursuant to Clauses 1 and 2, Article 319 of the Civil Code 2015, a mortgage contract becomes effective from the time of its execution, unless otherwise agreed by the parties or otherwise provided by law. However, in order to be enforceable against third parties, the mortgage over assets only takes effect from the time it is duly registered in accordance with the law.

2. From which point in time does a mortgage contract take effect?

Article 319 of the Civil Code 2015 regulates the effectiveness of asset mortgages as follows:

• A mortgage contract takes effect from the time of its execution, unless otherwise agreed by the parties or otherwise provided by law.
• An asset mortgage becomes enforceable against third parties from the time of registration.

Accordingly, a mortgage contract becomes effective from the time it is executed, unless otherwise agreed or otherwise prescribed by law. The mortgage is enforceable against third parties only from the time of registration.

3. Is registration of the security interest required for the mortgage contract to take effect?

The effective time of a mortgage contract requiring registration of the security interest is stated in accordance with Article 5 of Decree No. 102/2017/ND-CP. Specifically:

• For land use rights, assets attached to land, aircraft, and seagoing vessels: The registration of the security interest takes effect from the time the registered contents are recorded in the registry book of the competent registration authority.
• For other movable assets: The effective time of registration is when the registered contents are updated in the Security Interests Database.

In addition, where the parties supplement secured assets or obligations without executing a new contract, the effective duration shall be calculated from the time the registration authority records the amended registration contents in the registry book or database.

The registration of a security interest remains legally effective from the time of registration until deregistration, thereby ensuring priority of payment and protecting the secured party against third parties.

III. Common questions related to the effectiveness of mortgage contracts

1. From which point in time does a mortgage contract over land use rights take effect?

A mortgage contract over land use rights is a contract securing the execution of an obligation. Pursuant to Clauses 1 and 2, Article 22 of Decree No. 21/2021/ND-CP:

• A security contract that is notarized or authenticated in accordance with the Civil Code, other relevant laws, or at the request of the parties shall take effect from the time of notarization or authentication.
• A security contract not falling under Clause 1 of this Article shall take effect at the time agreed upon by the parties; if there is no such agreement, it shall take effect from the time of signing the contract.

In addition, according to Clause 1, Article 319 of the Civil Code 2015, a mortgage contract takes effect from the time of execution, unless otherwise agreed or otherwise provided by law.

Accordingly, a mortgage contract over land use rights takes effect from the time of execution of the contract, or, where required, from the time of notarization or authentication.

2. Is notarization required for a mortgage contract to be effective?

Article 319 of the Civil Code 2015 provides as follows:

• A mortgage contract takes effect from the time of execution, unless otherwise agreed or otherwise provided by law.
• An asset mortgage becomes enforceable against third parties from the time of registration.

Thus, under the above provisions, a mortgage contract is not required to be notarized or authenticated in order to take effect. Accordingly, the effectiveness of a mortgage contract arises from the time of execution, without notarization being a mandatory condition.

3. Is the effectiveness of a mortgage contract affected if the mortgaged asset is unlawfully dissipated?

Pursuant to Articles 317 and 320 of the Civil Code 2015, mortgaged assets remain under the ownership of the mortgagor but are bound by the secured obligation. During the mortgage period, the mortgagor may not sell, transfer, donate, or dissipate the asset without the consent of the mortgagee.

Accordingly, if the asset is unlawfully dissipated, the effectiveness of the mortgage contract remains preserved; however:

• Such dissipation may impair the execution of the secured obligation, resulting in the mortgagee unable to enforce the asset.
• In such cases, the mortgagee has the right to request the court to declare the transfer transaction invalid and recover the asset, or to claim damages from the mortgagor.
• The act of dissipation may constitute a breach of the mortgagor’s obligations and may lead to civil, administrative, or criminal liability, depending on the severity of the violation.

Therefore, the mortgage contract remains effective, but if the asset is unlawfully dissipated, the mortgagee is entitled to initiate legal proceedings to protect its lawful rights and enforce the asset in accordance with the law.

4. Does the effectiveness of a mortgage contract change if the credit contract is declared invalid?

Under legal principles, a credit contract is considered the principal contract, while a mortgage contract is an ancillary contract established to secure the execution of obligations under the principal contract. Accordingly, the relationship between these two contracts is inherently dependent.

Pursuant to Clause 1, Article 131 of the Civil Code 2015, an invalid civil transaction does not change or terminate civil rights and obligations of the parties from the time of its establishment. Furthermore, if a credit contract is declared invalid due to a violation of prohibitory provisions, the accompanying mortgage contract may also be declared invalid according to Clause 1, Article 123.

Accordingly, in most cases, if the credit contract is declared invalid, the mortgage contract will also lose its effectiveness due to the absence of a principal obligation to be secured. Nevertheless, each case must be assessed individually, based on the nature of the contracts and relevant legal provisions.

IV. Legal consulting services related to the effectiveness of mortgage contracts

NP Law’s legal consulting services on the effectiveness of mortgage contracts assist clients in understanding legal regulations concerning the time at which contracts take effect, conditions for effectiveness, and procedures for registering security interests. We provide consulting services, draft and review mortgage contracts, accompany clients in dispute resolution, and protect their lawful rights and interests in secured transactions.