Lending activities always carry numerous risks due to various reasons, such as borrowers failing to repay, repaying incompletely or late, or losing the ability to pay. To mitigate these risks, lenders often require borrowers to implement security measures such as pledges, mortgages, or third-party guarantees. Among these measures, mortgage is a commonly chosen option by lenders. To implement this measure, the parties must enter into a mortgage contract. In this article, TNTP will outline the key points that parties need to consider when entering into a mortgage contract.

1. Form of the mortgage contract

Article 319.1 of the 2015 Civil Code stipulates that “The mortgage contract takes effect from the time of conclusion, unless otherwise agreed or otherwise provided by law.” Thus, the above regulation implicitly confirms that the mortgage is only recognized if the parties enter into a mortgage contract. If the obligor fails to perform or improperly performs their obligations, the mortgagee has the right to handle the mortgaged asset.

In practice, the content regarding asset mortgage can be separately documented (commonly known as a mortgage contract) or recorded as clauses within the main contract (loan contract). However, for certain types of mortgaged assets, the law requires that the mortgage document be notarized, authenticated, and registered as a secured transaction, so parties usually prioritize creating a mortgage contract. For example, mortgage contracts for land use rights and assets attached to land must be notarized or authenticated.

2. Content of the mortgage contract

Law does not stipulate mandatory contents for a mortgage contract. Therefore, the parties will specify terms suitable to their circumstances and actual conditions. Basic terms that should be included in a mortgage contract are:

• Information of the mortgagor and mortgagee;
• Information on the mortgaged asset, such as type, quantity, and value;
• Information on the loan under the asset loan contract secured by the mortgagor;
• Rights and obligations of the parties;
• Liability for contract breaches;
• Dispute resolution methods;
• Mortgaged asset realisation;
• Cases of contract termination and legal consequences;
• Contract validity, etc.

3. Effectiveness of the mortgage contract and its effectiveness against third parties

Based on Article 319.1 of the 2015 Civil Code and Article 22 of Decree 21/2021/ND-CP, the mortgage contract takes effect from the time of conclusion, unless otherwise agreed or law stipulates otherwise, such as provisions on notarization and authentication. The ineffectiveness of the mortgage against third parties does not alter or terminate the validity of the mortgage contract.

Accordingly, the mortgage measure only takes effect against third parties if the mortgage contract has legal effect. The time of effectiveness against third parties is the time of registration. Decree 99/2022/ND-CP stipulates cases that must be registered and cases registered upon request. Cases that require registration include mortgage of land use rights, mortgage of residential houses, and assets attached to land in cases where ownership rights are certified on the Certificate of ownership, mortgage of aircraft, mortgage of ships, etc. For other types of assets, the parties have the right to agree on whether to register the mortgage measure.

The mortgage contract will cease to be effective upon the occurrence of events such as (i) The obligation secured by the mortgage terminates; (ii) The mortgage is canceled or replaced by another security measure; (iii) The mortgaged asset has been realized; and (iv) Other cases as agreed by the parties.

The above article on “Key considerations when entering into a mortgage contract” is presented by TNTP. Should readers have any issues to discuss with TNTP, please contact us for timely support.

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