The Bank and the status of bona fide third party in real estate disputes in Vietnam

A real estate property has been issued a certificate of land use rights and ownership of assets attached to land (the “Certificate”), a mortgage agreement has been duly executed, and the security interest has been registered. Can a credit institution or foreign bank branch (the “Bank” or “Banks”) therefore be confident that its interests will be protected if a dispute subsequently arises?

Not necessarily. Judicial practice shows that, in certain cases, mortgage transactions may be declared invalid by a court, raising the question of whether the Bank may be protected as a bona fide third party, even where the Bank has completed the procedures for taking the property as security and registering the security interest.

Civil law provides a legal framework for the protection of bona fide third parties. However, the Bank does not automatically qualify for such protection. Whether a Bank is recognized as a bona fide third party may depend on various factors considered on a case-by-case basis, as well as the evolving judicial practice of the courts.

This issue has significant practical implications for the Bank’s credit activities and risk management. Properly identifying the conditions for protection as a bona fide third party may assist Banks in strengthening their due diligence, collateral acceptance and security registration procedures, while mitigating risks arising in the enforcement of security interests.

In this article, Skarlet & Co Vietnam examines the legal framework governing bona fide third parties, relevant judicial practice, and key considerations for Banks seeking to protect their lawful rights and interests in real estate-backed transactions.

1. Legal basis: why the Bank may be protected as bona fide third party

Article 133.2 of the Civil Code [1] provides for the protection of the rights and interests of a bona fide third party where a civil transaction involving real estate is invalid, as follows:

“Where a civil transaction is invalid but the asset has been registered with a competent state authority and is subsequently transferred to a bona fide third party through another civil transaction, and such third party enters into and performs the transaction in reliance on such registration, the transaction shall not be invalid.”

A real estate transfer transaction, whether by way of sale or gift (the “Original Transaction”), is entered into. The relevant real estate is subsequently registered, a Certificate is issued, and the property is mortgaged to a Bank (the “Mortgage Transaction”). However, the Original Transaction is subsequently declared invalid. This raises the question: Is the Mortgage Transaction with the Bank invalid as a consequence of the invalidity of the Original Transaction? Answering this question requires a closer examination of the legal provisions governing bona fide third parties. Vietnamese law does not expressly define the term “bona fide third party”. Instead, the concept of “bona fide possession” is generally relied upon to identify persons who may be regarded as bona fide third parties. Bona fide possession means possession where the possessor has grounds to believe that they have rights over the property in their possession [2]. Accordingly, a “bona fide third party” may be understood as a person who possesses property based on reasonable grounds to believe that they have the right to possess such property, without knowing, and without being legally required to know, that their possession lacks a lawful basis [3]. Under this interpretation, the concept of a bona fide third party would appear to arise primarily in circumstances involving a person who has the right to possess the relevant property.

In the context of a mortgage transaction, however, the Bank is not the owner of the real estate. Can the Bank nevertheless be regarded as a bona fide third party? Vietnamese civil law does not provide detailed provisions addressing this issue. However, the Supreme People’s Court, in its guidance on certain issues arising in adjudication [4], has provided the following interpretation:

A mortgage of property is a security measure. The purpose of a mortgage is for an obligor to use property under its ownership to secure the performance of an obligation owed to the mortgagee. Where such obligation is not performed, or is improperly performed, by the mortgagor, the mortgaged property must be delivered to the mortgagee for enforcement in order to secure the mortgagee’s rights and interests. Therefore, a mortgage of property should be regarded as a conditional transfer transaction. To protect the rights and interests of a bona fide mortgagee, the phrase “transferred through another civil transaction” under Article 133.2 of the Civil Code should be understood as also applying to transactions involving the mortgage of property.

On this basis, it may be understood that, in a mortgage transaction with a Bank, the Bank may qualify as a bona fide third party under Paragraph 2, Article 133 of the Civil Code.

However, Article 133 does not specifically prescribe the obligations that a Bank must fulfill in order to be recognized as a bona fide third party. The provision merely states, in general terms, that where a bona fide third party enters into a transaction in reliance on the fact that the property has been duly registered, such transaction shall not be invalid. In practice, however, there have been numerous cases in which Banks have not been recognized as bona fide third parties, and the Mortgage Transactions have been declared invalid following the invalidation of the Original Transactions.

Why does this happen? The following analysis of judicial practice concerning Banks acting as bona fide third parties will shed light on this important issue.

2. Judicial practice in cases concerning the Bank as bona fide third party

a) Cases where the bank was not recognized as a bona fide third party

Judicial practice shows that courts tend not to recognize a Bank as a bona fide third party where the Bank has failed to conduct adequate inspection, appraisal and verification of the actual status of the property before accepting it as collateral, as illustrated by the following cases:

• Judgment No. 137/2025/DS-PT [5], in which bank S failed to adequately verify the actual condition of the property, failed to clarify the existence of the structures on the land, and failed to consult the persons using the land in order to determine that a house and other structures belonging to Ms. L’s household had existed on the land since before 1977;
• Judgment No. 279/2025/DS-PT [6], in which a house and ancillary structures already existed on the land and were directly managed and occupied by Ms. Q and her family. Although Ms. Q and her family were directly residing on and managing the land, bank V did not conduct adequate verification of the persons actually managing and residing on the property. The bank’s loan and appraisal documents did not record the views or acknowledgment of the persons residing on or managing the relevant land parcels, nor was the inspection witnessed by representatives of the local authorities where the mortgaged property was located;
• Judgment No. 30/2025/DS-PT [7], in which Bank V was unable even to provide documents evidencing its actual inspection and verification of the property. The credit agreement and mortgage agreement did not identify the assets existing on the land; there was no appraisal report or record of the actual inspection and verification of the secured assets; and photographs dated 6 March 2020 and 5 May 2023 did not show Mr. Q and Ms. O, with no documents or other evidence establishing that Mr. Q and Ms. O had been aware of the bank’s appraisal of the mortgaged property.

These cases demonstrate that courts do not assess a Bank’s bona fide status solely by reference to the Certificate. Courts may also examine whether the Bank has properly discharged its due diligence and appraisal obligations and whether the Bank had, or should reasonably have had, the ability to identify the rights and interests of other persons in the property.

Where there are apparent indications that the property is being managed or used by other persons, but the Bank fails to conduct adequate verification or is unable to provide evidence of its actual inspection process, the Bank may not be recognized as a bona fide third party under Article 133.2 of the 2015 Civil Code. As a consequence, the Mortgage Transaction may be declared invalid and the secured property may no longer be available for enforcement by the Bank.

b) Cases where the bank was recognized as a bona fide third party

Conversely, judicial practice also shows cases in which courts have recognized a Bank as a bona fide third party where the court considered that the Bank had conducted verification but was unable to identify the actual legal status of the property, or where certain deficiencies existed in the Bank’s appraisal process. Examples include:

• Judgment No. 76/2025/DS-PT [8], in which the court found that Bank A had not fully discharged its responsibility to verify the property, resulting in the Bank accepting as collateral property that was not legally owned or used by the mortgagor. The Bank was therefore required to bear the risks arising from deficiencies in its appraisal process. Nevertheless, the court recognized Bank A as a bona fide third party because the real estate had been issued a Certificate in the name of the mortgagor, and the mortgage agreement had been duly notarized and legally registered.
• Judgment No. 229/2025/DS-PT [9], in which Bank V2 had directly inspected the actual condition of the property and determined that the land was vacant and contained no construction before accepting it as collateral. The mortgage agreement was also notarized and the security transaction was duly registered. Accordingly, although the preceding transfer transaction was subsequently declared invalid, the court found that V2 had no reasonable basis to know of any restriction affecting the land use rights and therefore granted V2 protection as a bona fide third party.

These cases indicate that the courts’ approach to determining whether a Bank qualifies as a bona fide third party has not been entirely consistent. In some cases, courts have placed greater emphasis on the legal status of the property at the time of the mortgage, particularly the fact that a Certificate had been issued and that the mortgage transaction had been notarized and registered. In other cases, courts have focused more closely on whether the Bank had actually inspected and appraised the property and whether the Bank had reasonable grounds to know, or could not reasonably have known, of any defect affecting the land use rights.

Nevertheless, a common theme can be identified across these cases: a Bank seeking recognition as a bona fide third party should be able to demonstrate, through appropriate evidence and documentary records, that it conducted adequate, prudent and thorough due diligence and appraisal of the secured property before entering into the Mortgage Transaction.

3. Why the Bank must conduct due diligence and appraisal of real estate to qualify as bona fide third parties in real estate disputes

Although Article 133.2 of the Civil Code does not expressly specify the obligations or actions required for a party to qualify as a bona fide third party, judicial practice, as reflected in the judgments discussed above, indicates that a Bank’s failure to conduct thorough, adequate and responsible due diligence and verification of the legal status of the real estate is a key reason why the Bank may not be recognized as a bona fide third party in real estate disputes before the courts.

The underlying rationale for why courts generally require a Bank to carefully verify and ascertain the legal status of real estate before entering into a Mortgage Transaction in order to qualify as a bona fide third party may be considered from the following perspectives:

a) The nature of the concept of a bona fide third party

As discussed above, a bona fide third party must be a person who has no knowledge of the fact that the property acquired through a transaction from the possessor is held without a lawful basis. Such third party neither knows nor could reasonably have known of the defect, despite having made reasonable efforts to examine and ascertain the status of the property acquired through the transaction. It is on this basis that the law affords protection to the third party’s property rights.

Accordingly, where a Bank merely relies on the Certificate without conducting further verification of the actual status of the property when entering into a Mortgage Transaction, this alone does not establish that the Bank did not know and could not reasonably have known that the property being mortgaged was held by a person without a lawful basis.

b) Legal requirements concerning a Bank’s responsibilities when accepting property as collateral

Under banking regulations, a Bank is required to assess whether a customer satisfies the conditions for obtaining a loan, including the customer’s financial capacity to repay the loan [10]. In the case of credit facilities secured by real estate, the collateral serves as an important means of securing the customer’s repayment obligations. Accordingly, the Bank has a responsibility to conduct due diligence and assess the legal status of the real estate in order to ensure the adequacy and enforceability of the security for the customer’s repayment obligations.

Furthermore, the law requires Banks to promulgate internal lending regulations applicable throughout their systems, which must include, among other matters:

• The application of loan security measures; appraisal of loan security assets; and management, supervision and monitoring of loan security assets, in accordance with the relevant security measure, the characteristics of the secured assets and the relevant customer [11];
• Identification of potential risks; mechanisms for monitoring, assessing and controlling risks; and measures for handling risks arising during the lending process, including lending conducted through electronic means [12].

Therefore, where a Bank fails to conduct careful and thorough appraisal and verification of real estate provided as collateral in order to identify potential legal risks, the Bank may be considered not to have fully discharged its obligations and responsibilities under applicable law.

c) Guidance of the Supreme People’s Court

The following scenario illustrates the issue: a house and land are jointly owned by Mr. A and Ms. B. Mr. A forges Ms. B’s signature in order to transfer the house and land to C, with the forgery subsequently established through forensic examination. Following the transfer, Mr. A and Ms. B continue to possess and use the house and land. C then uses the property as collateral for a loan from a Bank.

The Supreme People’s Court has provided the following guidance:

“After receiving the property by transfer, C uses the property as collateral for a loan from the Bank. However, when entering into the mortgage agreement, the Bank fails to conduct appraisal and verification and therefore does not know that Mr. A and Ms. B continue to manage and use the house and land, or, although the Bank has conducted an appraisal, there are no documents or evidence proving that Mr. A and Ms. B were aware of the mortgage of such property. In this case, the mortgagee (the Bank) is not a bona fide third party as prescribed in Paragraph 2, Article 133 of the 2015 Civil Code and Section 1, Part II of Official Letter No. 64/TANDTC-PC. Accordingly, the mortgage agreement is also invalid.” [13]

4. What should the Banks do to qualify as bona fide third party?

As discussed above, whether a Bank is recognized as a “bona fide third party” under Article 133 of the Civil Code may determine the ultimate validity and enforceability of the mortgage agreement where the transaction that established the mortgagor’s ownership of the property is subsequently declared invalid.

The key issue is that bona fide status does not arise automatically. It must be demonstrated through the Bank’s records, procedures and conduct at the time the property is accepted as collateral. The following are measures that Banks should proactively implement to protect their legal position.

a) Conduct thorough due diligence on the origin and legal status of the property

Based on applicable law and judicial practice, this may be regarded as the most important aspect and one of the areas most closely examined when assessing a Bank’s bona fide status.

Banks should consider the following:

• Review the property’s transaction and registration history through information maintained by the relevant land registration office, including the number of previous transfers, the date of issuance of the Certificate, and the date on which the mortgagor was registered as the property holder;
• Cross-check the information stated in the Certificate against the actual condition of the property and information held by the competent land authorities, in order to mitigate the risk of relying on forged, altered or otherwise irregular documents;
• Identify and further investigate any unusual circumstances, such as a Certificate having been re-issued shortly before the mortgage, the property having recently been transferred at a price unreasonably below market value, the registered owner not being the person directly participating in the transaction, or an unusually urgent request for loan disbursement;
• For land use rights or houses under co-ownership, including marital property, property of a household, or inherited property jointly owned by multiple heirs, verify that all relevant co-owners have duly consented to the transaction, rather than relying solely on the signature of one person.

b) Strictly comply with notarization and security registration requirements

Banks should ensure that:

• The mortgage agreement is duly notarized or certified in accordance with applicable law;
• The security interest is registered promptly after execution, within the prescribed time limit and with the competent authority;
• At the time of notarization and registration, the Bank checks whether the property is subject to any restriction, attachment, transaction prohibition or other warning, particularly where such information is publicly available and reasonably accessible to the Bank.

c) Establish and strictly implement a robust internal due diligence process

A well-designed internal appraisal process that is consistently and substantively implemented, not merely maintained as a formality, provides an important basis for ensuring that the Bank’s appraisal and verification of mortgaged property are conducted carefully and thoroughly, thereby mitigating potential legal risks. Banks should therefore consider the following measures:

• Adopt written procedures for collateral appraisal, clearly setting out the mandatory verification steps;
• Require appraisal officers to conduct direct inspections of the actual condition of the property, rather than relying solely on documents and information provided by the customer;
• For high-value transactions or transactions presenting unusual or potentially high-risk circumstances, consider introducing an additional level of independent appraisal or obtaining an independent legal opinion before approval.

d) Maintain complete and systematic records of the due diligence process

This may become a decisive factor if a dispute arises, as the court will rely on these records to determine whether the Bank actually and carefully discharged its obligations in relation to the appraisal and verification of the mortgaged property. Banks should therefore:

• Retain appraisal reports, site inspection records, photographs and results of searches of land-related information as they existed at the time of the transaction;
• Retain all correspondence, confirmations and other records exchanged with relevant authorities or parties, including land registration offices, notarial organizations and local authorities, where applicable;
• Ensure that all records are properly dated, securely maintained and protected against subsequent alteration, so that they can be used as evidence that, at the time the mortgage agreement was executed, the Bank did not know and had no reasonable basis to know of the invalidity of the preceding transaction.

e) Monitor the secured property throughout the term of the loan

To further mitigate risks arising from potential real estate disputes, after entering into the mortgage agreement, Banks should:

• Periodically review the legal status of the secured property, particularly in respect of medium- and long-term loans;
• Where any indication of a dispute, complaint or claim relating to the secured property arises, take timely remedial measures, such as requiring additional collateral, engaging with the customer, and reporting the matter to the relevant authority or internal approval level.

5. Conclusion

Where a Bank is not recognized as a bona fide third party, it may face a chain of significant legal risks: the mortgage agreement may be declared invalid, the Bank may lose its right to enforce the security, and a previously secured loan may effectively become an unsecured debt. In such circumstances, the Bank may have to pursue repayment by the borrower through ordinary civil procedures, while the prospects of debt recovery may be significantly compromised if the borrower no longer has sufficient assets or financial capacity to satisfy its obligations.

Importantly, accepting a real estate property as collateral on the basis that a Certificate has been issued does not, by itself, automatically entitle a Bank to protection as a bona fide third party. Judicial practice indicates that the manner in which a Bank examines, verifies and appraises the actual condition and legal status of the real estate before accepting it as collateral may become a decisive factor when a dispute subsequently arises. Is the Bank’s existing appraisal file sufficient to establish its status as a bona fide third party? What characteristics or warning signs relating to the real estate could jeopardize the Bank’s right to enforce the security? And what steps should the Bank take before entering into a mortgage agreement to mitigate these risks?

If the Client is currently appraising a proposed security asset, reviewing an existing loan secured by real estate, or handling a dispute concerning real estate, Skarlet & Co Vietnam can assist in assessing the legal documentation, due diligence and appraisal process, and risks relating to your right to enforce the security.

Feel free to contact Skarlet & Co Vietnam to discuss your specific case and explore appropriate legal solutions.

Legal References

1. Civil Code No. 91/2015/QH15 dated 24 November 2015 (the “Civil Code”).
2. The Civil Code, Article 180.
3. Bui Huu Toan – Banking Academy of Vietnam, “Protection of credit institutions’ rights and interests as bona fide third parties in security asset disputes”, Banking Journal, 7 September 2022
4. Official Letter No. 64/TANDTC-PC of the Supreme People’s Court dated 3 April 2019, notifying the results of online responses to certain issues arising in criminal, civil and administrative proceedings, Section II.1.
5. Judgment No. 137/2025/DS-PT issued by the High People’s Court in Ho Chi Minh city on 5 March 2025 concerning a dispute over land use rights and requests for cancellation of a certificate of land use rights and partial cancellation of a mortgage agreement. Available at https://congbobanan.toaan.gov.vn/2ta1763072t1cvn/chi-tiet-ban-an.
6. Judgment No. 279/2025/DS-PT dated 6 May 2025 concerning a dispute over a request to declare a notarized document invalid and a credit agreement. Available at: https://congbobanan.toaan.gov.vn/2ta1793808t1cvn/chi-tiet-ban-an
7. Judgment No. 30/2025/DS-PT dated 13 January 2025 concerning disputes over a loan agreement, power of attorney, land use rights transfer agreement and mortgage agreement. Available at: https://thuvienphapluat.vn/banan/ban-an/ban-an-ve-tranh-chap-hop-dong-vay-tai-san-hop-dong-uy-quyen-hop-dong-chuyen-nhuong-quyen-su-dung-d-375605
8. Judgment No. 76/2025/DS-PT dated 13 February 2025 concerning a dispute over division of common property, a credit agreement and a land use rights mortgage agreement. Available at: https://thuvienphapluat.vn/banan/ban-an/ban-an-ve-tranh-chap-chia-tai-san-chung-hop-dong-tin-dung-hop-dong-the-chap-quyen-su-dung-dat-so-7-374854
9. Judgment No. 229/2025/DS-PT dated 9 April 2025 concerning a dispute over a power of attorney relating to land use rights. Available at: https://thuvienphapluat.vn/banan/ban-an/ban-an-ve-tranh-chap-hop-dong-uy-quyen-quyen-su-dung-dat-so-2292025dspt-ngay-09042025-385998
10. Circular No. 39/2016/TT-NHNN dated 30 December 2016 on lending activities of credit institutions and foreign bank branches to customers, as amended and supplemented by Circular No. 06/2023/TT-NHNN, Circular No. 12/2024/TT-NHNN and Circular No. 29/2026/TT-NHNN (“Circular 39”), Article 17.1 and Article 7.4.
11. Circular 39, Article 22.2(d).
12. Circular 39, Article 22.2(e).
13. Guidance No. 02/TANDTC-PC dated 3 August 2021 of the Supreme People’s Court on the resolution of certain issues arising in adjudication, Section III.1.