In the context of an expanding economy and increasingly diverse commercial transactions, the use of future-formed assets as collateral has become more common. The following article by NPLaw provides an overview of the current legal regulations governing future-formed collateral.

I. Current status of future-formed collateral

At present, the use of future-formed assets to secure obligations is becoming increasingly widespread and plays an important role in many transactions, particularly in real estate, manufacturing, and investment.

Such a method enables individuals and enterprises to access loans without necessarily possessing existing assets. A clear understanding of the legal framework and an accurate application of the rules governing future-formed collateral are essential to protect the rights and interests of parties in transactions and in the case of disputes.

II. Legal regulations governing future-formed collateral

1. What constitutes future-formed collateral?

Under Clause 2 Article 108 of the Civil Code 2015, future-formed assets include: (i) assets that have not yet been formed; and (ii) assets that have been formed but over which ownership will be established after the time of entering into the transaction. Pursuant to Article 295 of the Civil Code 2015, future-formed assets may be used as security for the performance of obligations.

Accordingly, future-formed collateral refers to assets that either do not yet exist or have already been formed but whose ownership has not been established at the time of contract execution and are used to secure the performance of obligations.

Clause 1 Article 296 of the 2015 Civil Code provides that: An asset may be used to secure the performance of multiple obligations if, at the time of entering into the security transaction, its value exceeds the total value of the secured obligations, unless otherwise agreed or otherwise provided by law.

Thus, an asset may secure multiple obligations where the conditions under this provision are satisfied.

2. When does the secured party establish its rights over future-formed collateral?

Pursuant to Clause 1 Article 24 of Decree 21/2021/ND-CP on securing obligations with future-formed assets: The secured party shall establish its rights over part or all of the future-formed collateral from the time such part or all of the collateral is formed.

Accordingly, the secured party establishes its rights over future-formed collateral from the moment such asset (in whole or in part) comes into existence.

3. May future-formed assets be used as mortgaged property to secure obligations? 

Under Clause 2 Article 292 of the Civil Code 2015, mortgage of property is one of the security measures for the performance of obligations. Pursuant to Clause 3 Article 295 of the Civil Code and guided by Chapter II of Decree 21/2021/ND-CP, collateral may consist of existing assets or future-formed assets.

Thus, future-formed assets may be used as mortgaged property to secure obligations, except where such assets fall under categories prohibited from purchase, transfer, or other forms of ownership transfer at the time the security contract or security measure is established.

III. Questions regarding future-formed collateral

1. Is revaluation required once the future-formed collateral has been completed?

Current regulations do not require mandatory revaluation of future-formed collateral once the asset has been formed. However, in the context of securing obligations, the value of the collateral is an important factor. If the value of the future-formed asset changes after formation, the parties may request a new valuation to determine its current value. Revaluation may be necessary to reflect the asset’s actual value, thereby determining the adequacy of the collateral in relation to the secured obligation.

2. How is the handling of future-formed collateral conducted when the Certificate of Ownership has not been issued?

Clause 1 Article 55 of Decree 21/2021/ND-CP provides: The handling of collateral that is future-formed shall be conducted in accordance with the parties’ agreement. Such agreement may include the following:

  • Where the collateral has not been formed or has been formed but has not been issued the Certificate of Ownership in cases where registration is required by law, the secured party may assign the sale contract or other agreements establishing rights over the future-formed asset, accept the asset itself in substitution for the performance of the secured obligation, or sell the future-formed asset in accordance with the law.

Accordingly, the handling of future-formed collateral without a Certificate of Ownership shall be carried out based on the parties’ agreement. The secured party may assign the relevant contract, accept the asset itself, or sell the future-formed asset pursuant to the above regulations.

3. How is future-formed collateral handled once ownership has been established?

Clause 2 Article 55 of Decree 21/2021/ND-CP provides: The handling of collateral that is future-formed shall be conducted in accordance with the parties’ agreement. Such agreement may include the following:

  •  Where the collateral has been formed and ownership has been established by the securing party, the secured party may accept the asset in substitution for the performance of the secured obligation or handle it in accordance with the general regulations applicable to the handling of existing collateral.

Thus, the parties may agree on how to handle future-formed collateral. For assets that have already been formed, the secured party may accept the asset or handle it in accordance with the general rules applicable to existing collateral.

4. What are the conditions for mortgaging future-formed collateral?

To mortgage future-formed collateral, the following basic conditions must be satisfied:

  • The mortgaged asset must be owned by the mortgagor.
  • The asset must not fall into any category prohibited from purchase, transfer, or other forms of ownership transfer at the time the security contract or measure is established.
  • The security measure must be registered where required by law to ensure the validity of the security transaction.

5. What must a mortgage contract involving future-formed collateral contain?

Under current regulations, parties are free to agree on the contents of a mortgage contract.

A mortgage contract involving future-formed collateral may include the following basic elements:

  • Information on the parties;
  • Detailed description of the future-formed collateral;
  • Value of the collateral;
  • The secured obligation;
  • Time and conditions for establishing rights over the asset;
  • Rights and obligations of the parties;
  • Liability for breach of contract;
  • Methods of handling the collateral in case of dispute.

The parties may agree on appropriate terms based on their specific circumstances when entering into a mortgage contract in accordance with the law.

6. May future-formed land use rights be used to secure obligations?

Clause 4 Article 10 of Decree 21/2021/ND-CP provides for collateral as land use rights and property attached to land: Future-formed assets may not be used to secure obligations where the asset is land use rights.

Accordingly, future-formed land use rights may not be used as collateral to secure obligations.

IV. Legal advisory services related to future-formed collateral

The above is an overview by NPLaw regarding current regulations on future-formed collateral. With a team of experienced lawyers and legal specialists, NPLaw provides reputable and professional legal services, ensuring the best protection of Clients’ lawful rights and interests. For legal support, you may contact NPLaw for advice and assistance.