Question: What legal risks may arise if a property developer uses deposit funds received from customers to finance a real estate project?
Answer
Under Article 328 of the Civil Code 2015, a deposit is a security measure intended to secure the conclusion or performance of a future contract. In principle, deposit funds are not intended to finance investment or business activities.
However, if a developer uses deposit funds to construct infrastructure, pay project costs, or finance project implementation, the competent authorities may assess the substance of the transaction rather than relying solely on the title of the Deposit Agreement.
Where the funds are effectively used to finance a project before the project satisfies the statutory conditions for being put on the market, the transaction may be regarded as an unlawful capital-raising activity. Under Point d, Clause 4, Article 58 of Decree No. 16/2022/ND-CP, the developer may be subject to an administrative fine ranging from VND 800 million to VND 1 billion.
In addition to administrative penalties, the enterprise may also face inspections by competent authorities and potential legal issues relating to taxation, accounting, cash flow management, and the legal characterization of the transaction.
Conclusion
The legal risk does not arise merely from entering into a Deposit Agreement, but primarily from how the deposit funds are managed and used in practice. Developers should therefore structure deposit arrangements carefully and ensure that deposit funds are not used in a manner that could be recharacterized as advance payments or unlawful project financing.
If you require legal advice on Deposit Agreements, project financing, or other real estate legal matters in Vietnam, please contact SB Law. Our experienced lawyers are ready to provide practical and commercially focused legal solutions tailored to your business needs.
