The lease registration will not protect the lessee
ABSTRACT: In Thailand, the registration of a real estate lease at the local land office is often marketed as a special lessee protection scheme to nicely compensate the foreign investor for the legal restriction to acquire land ownership. The inconvenient truth is that the land office registration does not at all benefit the tenant. It does not provide him with any additional protection against invalidity, insolvency, default, fraud, loss or other risks.
In Thailand, a long-term land lease is a popular mode of investing in real estate and a frequent choice of property developers and foreign investors. Leases seem to be relatively uncomplicated and easy to set up – for those who are unwilling to take a look behind the scenes. They are regulated by the CCC (“Thai Civil and Commercial Code”) as a hire of (immovable) property.
The validity of a lease does not require a written agreement.
The lease agreement is valid even when it is made orally only. Thai legislation does not require any written paper to constitute a valid lease agreement – not for the first three years and not for the years beyond. The existence of such oral lease might be evidenced in front of a Thai court by witnesses and the practical handling – use of the land by the lessee and his regular rent payments – might be a strong indication for an oral legal agreement as well.
Under Section 538 sentence 1 CCC neither the landlord’s nor the tenant’s rights are enforceable by action if there is not some written evidence signed by the liable party. This requirement of “some written evidence” for a land lease falls below the legal requirement of a written lease agreement. Anyway, this is a question of enforceability, not validity of the agreement.
The lease registration requires a written lease.
However, the same clause of the law states in its second sentence additional enforceability requirements in case of a long-term property lease. This is the case if the lease duration is agreed (i) for more than three years, (ii) for the lifetime of the individual tenant or (iii) for the lifetime of the individual landlord. The wording of Section 541 CCC seems to allow both latter cases. Anyway, there are some reasons for the legal viewpoint that this clause is not applicable in the case of a lease of an immovable property. Otherwise, the parties of the contract should add their whole family as co-lessees and the lease would not be terminated before the last co-lessee passes away – this could be the case after 90 years.
The additional requirements for such long-term real estate lease are (i) it needs to be in written form and, in addition, (ii) it has to be registered by the competent land office. It should be clearly understood that these requirements are equal for foreign and Thai parties of the lease agreement. The factual difference is only the circumstance, that foreign investors are typically forced to use the leasehold investment structure as a replacement for a land purchase because they are prohibited from acquiring legal ownership in the land of Thailand.
These legal requirements should not come as a surprise. Not only lease agreements over three years, but also all sales of immovable property and creation, modification, extinction, and revival of real rights (servitude, habitation, superficies, usufruct, charge on immovable property including mortgages) must be in writing and must be registered with the competent official (Sections 1298, 1299,1301, 456, 538, 714 CCC).
The validity of a long-term lease does not require a registration
It is certainly a good advice to register your lease in paradise. However, even a 30-year property lease agreement which has never been registered at the land office remains valid for the whole duration of 30 years. If it is not registered, this does not mean it is invalid. During the first three years, both parties can enforce their contractual rights without any limitation. For the remaining 27 years, the landlord remains responsible for granting the use right in the property to the tenant. The tenant remains responsible for paying rent as agreed in the contract. If both rights are not enforceable under Thai laws, that does not mean they are not existing. This makes an important difference for the questions (i) whether the landlord has to refund prepaid rent amounts if he defaults under his obligations and (ii) whether the tenant has an enforceable right against the landlord to properly register the lease agreement at the land office, potentially enforced under Section 213 of the CCC by requesting the court for a ‘compulsory performance’ of such registration obligation.
If the lessor transfers ownership in the property to a third party, this party steps into the shoes of the previous owner with respect to the lease. The lease remains valid, even it is not registered. However, as far as the tenant’s rights are not enforceable, the new owner can throw the tenant out.
Thousands of land lease agreements are unenforceable – and nobody seems to care.
If a contract has to be in written form, this means under the laws of Thailand that it must bear the genuine signatures of both parties. A fingerprint, cross, seal or other such mark affixed to a document is equivalent to a signature only if it is certified by the signature of two witnesses (Section 9 CCC). An oral lease agreement, mentioned in a letter or another written piece of evidence is, therefore, enforceable only for a period of not more than three years.
The same is true for a sham written agreement – this means a document which does not contain the substantial elements of the deal correctly. Main coverage for such sham agreement is a lease agreement where the parties indicate the falsified (i.e. too low) rent amount in an attempt to evade Thai taxes. The rent payments are an essential part of the lease agreement. Therefore, such sham document does not qualify to have „written form“ and, as a consequence, it is not unenforceable. Such negative impact on real estate agreements as result of a manipulated price quotation is a legal concept familiar all over the world.
- Section 155 CCC: A declaration of intention made with the connivance of the other party which is fictitious is void, but its invalidity cannot be set up against third persons injured by the fictitious declaration of intention and acting in good faith. If a declaration of fictitious intention under paragraph one is made to conceal another juristic act, the provisions of law relating to the concealed act shall apply.
Unlawful lease agreements are not healed by time or registration.
Apart from this, any Thai land office registration caused by fraud, bribery or corruption might be revoked and should not expect a generous grandfathering or other survival protection means. It qualifies – as any other governmental permission, approval, appeal decision, and certification which creates, suspends, transfers, modifies the legal relations of one or more persons – as “administrative order” under the Administrative Procedures Act (APA) of 1996. Although such administrative order is not subject to a time condition and has, therefore, no limited life duration, it can be revoked under Section 40 APA by the authority issuing the decision or its supervisory authority.
- Section 137 Criminal Code: Whoever, giving any false information to any official, and is likely to cause injury to any person or the public, shall be punished with imprisonment not exceeding six months or fine not exceeding one thousand Baht, or both.
- Section 267 Criminal Code: Whoever, notifying the official doing oneself’s duty to make any false entry in the public or official document for the aims to be used as evidence, shall be imprisoned not out of three years or fined not out of six thousand Baht, or both.
If it is evident that the administrative order is unlawful, it has to be revoked ex officio (by own motion) without an explicit appeal process. The lessee as the beneficiary of the registration has under Section 51 APA no claim for compensation when (a) the registration based on false statements, threats or corruption and (b) he had knowledge of such illegality or he is accountable for other reasons.
It would not be improper or unreasonable for the landlord to make use of the fact of a non-enforceability of the lease agreement – even some years after the deal has been sealed. This might make especially sense from a business point of view (i) after the statutory period of criminal limitation has elapsed, (ii) after the land has been transferred to a new landlord by inheritance or sale under Section 569 CCC, (iii) in case of an insolvency of the landlord or (iv) in case that the real estate enjoyed in the meantime a significant increase in value, compared with the rent amount.
Not enforceable vs. not valid – what makes the difference?
If just the use right obligation is not enforceable but the lease remains valid, the contractual obligations are still existing. As a consequence of an invalidity, there would be in general the obligation to refund the rent payments already made by the lessee under the undue enrichment provisions of the law. However, under Section 407 CCC the lessee is not entitled to restitution if he made the rent payment knowing that he was not bound to effect the performance. In addition, it should be noted that no action on account of undue enrichment can be entered later than one year from the time when the injured party became aware of his right to restitution or later than ten years from the time when the right accrued (Section 419 CCC).
As a result of these legal considerations, it should be evident that the lessee has a paramount interest that his right of possession under the land lease agreement is enforceable. When investing tens of millions of Baht – or less – you should not accept gray areas and unknown risks. And this is the point, where the signature magic trick, the registration at the local land office comes into play.
The registration requirement is the lessee’s burden, not his benefit.
There is no doubt, that a proper registration of the 3y+ land lease is essential and the lease agreement has to be registered at the back side of the title deed (Chanote). This is a binding formal requirement which protects both parties from non-enforceability and needs to be done within the first three years – the sooner the better. To maximize the allowed lease duration it is even advisable to agree in the lease contract that the 30 year period starts on the day the registration is made. There is no further magic in the lease registration.
But the magic goes far beyond the simple validity of the deed. The ability to transform the registration requirement into a protective mechanism for the benefit of the leasehold investor is an illusion. However, when the lights turn on again, such statement is misleading at best – or at worst is simply incorrect.
The registration does not upgrade the quality or solidity of the lease in comparison with a non-registered loan or service agreement. The lease is just a lease. The registration does not provide the lessee with additional protection against insolvency, default, fraud, loss or other risks. Even a non-registered land lease for three years survives the insolvency or dead of the landlord. There is no additional benefit at all. The registration does not give the lessee any ownership-like legal rights, no right-in-rem, no pledge, no usufruct, no advanced good faith protection – nothing.
Lease invalidity is not healed or legally cured by the registration.
And, as most important consideration for the investor, any invalidity of the lease will not be healed or legally cured by the registration. Thai legislation does not guarantee the correctness of its land office registration. There is just cold comfort that the civil law gives compensation claims against the land office as a juristic person for negligence.
- Section 76 CCC: “A juristic person is bound to make compensation for any damage done to other persons by its representatives or the person empowered to act on behalf of the juristic person in the exercise of their functions, saving its right of recourse against the causers of the damage.”
If the lease does not meet the written form because e.g. the so-called land-office-version declares too low rent payments, the registration is wrong and the landlord can kindly request that the lease is struck off from the backside of his Chanote. The official registration does not have the qualification of an administrative deed which makes the invalid lease valid. And there is no room for a safeguarding of good faith of the parties involved in the validity of a registered lease.
The registration is of no help even with respect to a renewal of the lease after 30 years. It is no secret that during the last years some strange registrations have been allowed by ill-motivated land offices, mostly on the Thai islands which trust they can permanently ignore the law. However, everything unlawful just results in an incorrect registration, not in a privilege above the laws. Houdini was an impressive illusionist and was able to perform insane tricks – but could not outsmart reality.
At the end, for the tenant, the registration has no magic at all. However, there is one party who effectively benefits from the registration and this is neither the landlord nor the lessee. It is a potential buyer of the leased land – or a creditor to loan money against the land. He can carry out a legal due diligence and can be assured, that the lease will not go beyond the key data registered at the local land office. The registration is not deemed to help the lessee and has no positive effect for the lessee. But it protects the land buyer‘s interest to have unlimited use rights to the land and the mortgage of a bank, as far as the registration does not declare anything else.
- Section 569 CCC: A contract of hire of immovable property is not extinguished by the transfer of ownership of the property hired. The transferee is entitled to the rights and is subjected to the duties of the transferor towards the hirer.
If the landlord transfers legal ownership to a third party, the new owner steps under Section 569 CCC in all rights and obligations under an existing lease agreement, independent from a lease registration. The lease remains valid for its full contractual term, be it two, three or twenty years. However, the buyer is to a certain extent protected by the Thai laws: He has to respect the lease just for three years only if it is not registered at the land office. As a result, when acquiring real estate in Thailand, the acquirer’s risk of a non-disclosed and non-registered lease is limited to the three-year period under Section 538 CCC. This clearly shows that this clause protects the buyer only, not the lessee.
The chain lease contract is too easy to be true.
A lease agreement, which is renewed at the end of each term, provides the lessee with a valid and enforceable lease right, regardless if the total lease period of three years is exceeded without land office registration or even when the legal maximal lease term of 30 years has elapsed. Each agreement has to be seen on its own, because each renewal requires the new consent of both parties. However, this easy legal analysis becomes more tricky if the parties sign a chain of consecutive lease agreements on day 1 as a package.
It is rather obvious, that the signing of 20 consecutive non-registered lease agreements, each with a term of three years, does not result in enforceable 60-year lease rights without any need for registration. There is even a huge risk that a 10 times 3-year arrangement would be qualified as void without registration because it creates an economic package and unity. However, it is bad industry practice to divide a nine-year lease arrangement formally into three non-registered contracts to avoid registration fees and to better hide rental income from the tax inspector. Even if the contractual clauses, the rent payment, and other lease elements slightly differ, the significant invalidity risk should be taken into consideration.
Résumé: If the registration of a land lease would be voluntarily under the laws of Thailand, neither the landlord nor the (well informed) tenant would be interested in having the lease registered. However, it is not voluntarily, because the law intends to protect the potential property buyer and, as a result, facilitates land purchases in Thailand. Sorry, but the law does not care about tenants.