Seven characteristics: The acquisition of a condominium unit
Property investments in condominium units – the underestimated complexity
The acquisition of condominium units seems to be simple, but a great portion of buyers are in the long run not happy with the investment. This article describes the seven characteristics of foreign investments in a Thai condo project. The law firm offers, described below, a package of legal services, tailored made-to-measure for the specific condominium acquisition under a flat fee consultancy agreement. For defaulting rental guarantees see “The new normal at the New Nordic Group“.
#1. Three different ownerships: Condominium units are flats in an apartment complex. While the apartment ownership in normal cases is inseparably connected with the land ownership, under Thailand’s Condominium Act, the condo investor obtains full ownership of his condominium unit, plus co-ownership of the common area of the housing development pro-rata to the unit’s quota, but no ownership in the underlying land, which belongs to the developer or the developer’s bank. Typically, separate contractual arrangements govern the relationship between the co-owners, the administration, and the developer.
PUGNATORIUS Ltd. has now won for its international clientele all litigations against a Scandinavian property developer for breach of contract under sale and purchase agreements for an off-plan condominium development in Pattaya. Legal support from Bangkok makes the difference.
— Bangkok Lawyer (@bangkoklawyer) February 2, 2020
#2. The simple deal (if any): The purchase of a condominium unit is a “property investment for beginners” only when the following criteria are met:
- The condominium building is new but already completed and not in a pre-construction phase.
- Title deeds (Condo-Chanote, Or Chor 2) have been issued, and the whole purchase price is paid on the day the legal ownership is transferred to the buyer.
- The acquisition of freehold ownership is made directly from the developer, a highly renowned corporation, listed on the Stock Exchange of Thailand.
- The arrangement does not include a rental guarantee, fractional ownership or other particularities.
- The buyer is familiar with property acquisitions in Thailand, and there are no language barriers.
- The condo investment is small, compared with the buyer’s wealth.
Even when these criteria are not met in total, there is a good chance that the acquisition will result in the long-term satisfaction of the buyer. However, given the typically high value of such a transaction, a risk-averse foreign investor will look for his own trusted legal advice to protect his condo in paradise.
#3. Three legal requirements (CJP+FQ+FET): It is not possible to acquire legal ownership of a unit in a normal apartment complex in Thailand. The house-ownership is linked to the land-ownership, and the landowner automatically owns all houses and other improvements on his land. As an exception from this rule, the Condominium Act separates apartment ownership from house ownership. As a result, it is legally possible to acquire legal ownership in a condominium unit, and co-ownership in the common area of the project, while another legal entity holds the land ownership.
Foreign ownership: Generally speaking, foreigners can acquire and own units in a condominium development under three preconditions: (i) the housing complex has to be licensed by the local land department as a condominium under the Condominium Act with a Condominium Juristic Person (“CJP”) as administrator, (ii) the proportion of foreign-owned condo units must not be higher than forty-nine percent of the total floor area (not by the number of units) of all units in that condominium (“foreign quota”), and, (iii) the purchase price for the unit has to be brought into Thailand (i) by the right person, (ii) with a proper specification, and (iii) by a foreign exchange, evidenced by a “FET Certificate” (formerly known as Thor Tor 3) or withdrawn from a non-resident Baht or a foreign currency deposit account.
Joint-ownership: These condo unit foreigner restrictions do apply also on (i) any co-ownership of Thais and foreigners, as far as possible under Section 12 Condominium Act (“The ownership of the apartment is indivisible.”), and (ii) the condo unit acquisition of a Thai married to a foreign spouse if the condo unit would be the marital property of the couple. Typical issues of mixed Thai-foreign acquisitions are mortgage financing and payment requirements.
The foreign quota: The limitation of foreign ownership to 49% applies to the total area of all condominium units, whether residential or commercial developments. Therefore, by designing a mixed-use development which includes some commercial units, such as retail on the ground floor, restaurants or cafes on the pool level, fitness clubs, etc., the developer can actually sell more than 49% of the residential units calculated by the total area of such units. 49% of the entire saleable area is greater than 49% of the area occupied by residential units. Therefore, the developer can increase the percentage of residential units sold to foreign buyers by implementing commercial units.
Alternatively, (i) the foreign investor can acquire the shares in a Thai corporation which holds the condominium unit, (ii) he can set-up a Thai Co., Ltd. with this purpose, or (iii) invest in a so-called condominium leasehold structure.
#4. The legal framework: The Condominium Act had been introduced in 1979 and substantially modified in 2008. The amendment was intended to address problems by eliminating or modifying certain provisions of the existing law that proved impractical and by introducing new regulations to protect consumers and improve the efficient functioning of condominiums in Thailand.
In a Ministerial Regulation, a standard form of a condominium purchase and sale agreement (Aor Chor 22 form) had published. Any deviation from Aor. Chor. 22 standard form must be for the benefit of the buyer only. Otherwise, it is void and subject to sanctions. Most developers are using standard agreement with additional terms and conditions. If claims arise, the issue may be referred to the consumer protection committee.
Escrow Legislation: Thailand had introduced the Escrow Law. Its intention is to protect both buyers and developers when entering into transactions for the purchase and sale of a property. Escrow agents provide escrow account services by collecting down payments, issuing receipts, and reporting the movement of funds into and out of the escrow account. The payment is limited to transferring the total down payment to the seller or returning the down payment to the buyer. Escrow fees are limited to 0.3% of total down payment. The Escrow Act has in Thailand’s industry practice no relevance.
#5. Types of condominium acquisitions: Each case is different, but experience shows that the acquisition of legal ownership by a foreign buyer typically falls in one of five categories which require an individual size and scope of legal work and carefulness:
- The purchase of a new condo unit from the developer (“base case”)
- The pre-construction acquisition of the unit from an unfinished condominium development (“off-plan case”)
- The purchase of an already sold unit from the developer (“novation case”)
- The acquisition of a rather new unit from the first unit buyer (“resale case”)
- The purchase of an elderly condominium unit (“second-hand case”)
The seller/owner is typically much more familiar with the legal and business aspects, and he will well understand that it is the best for him to take the purchase price with the slimmest contractual agreement, minimal or no guarantees and obligations on his side. The buyer has the exact opposite interest, but might happily agree on the issues mentioned by the seller without consideration of the points which are crucial to him. The non-controversial negotiation of a property deal is an indication of imperfect and asymmetrical information distribution to the disadvantage of the buyer.
#6. The condo purchase workflow: The common steps and tasks to acquire a condo unit are as follows:
- Identification of the condominium and determination of the investment structure. A so-called reservation agreement might have to be signed to obtain the due diligence documents and transaction documents,
- The accomplishment of due diligence of a size and scope as determined by the buyer,
- Design and/or negotiation of the condo unit sales agreement and supporting documents,
- The signing of the documents, the closing of the transaction,
- Payment of the purchase price,
- Payment of transfer taxes and fees,
- Registration at the land office,
- Handing over of the condo title deed to the buyer
- Issuing of the house book,
- Payment of income taxes of the seller, and
- Preparation of reasonable documentation for the whole transaction which facilitates the later resale of the condo unit.
#7. The Investment Visa opportunity: With a purchase price of THB 10 million or more, the buyer should consider applying for an Investment Visa under Thailand’s Immigration Act.
Professional service offer for foreign condominium buyers
PUGNATORIUS Ltd. is the Bangkok-based specialist provider of legal services and tax advice on foreign investments in Thailand’s manufacturing and service industries as well as property acquisitions and developments. Sophisticated solutions in a complex legal environment. For foreign condominium buyers, the law firm offers a flat fee offer for the following legal services:
Each condominium acquisition is different and requires different priorities. Typical elements are the overall structuring of the foreign condominium investment, a possible price negotiation to obtain a discount, certain due diligence tasks, in particular with off-plan acquisitions, a review of rental guarantee and similar clauses, the negotiation of the condo sales and purchase agreement, as well as the closing, payment, ownership transfer and registration.
Flat fee services: Based on the details of the condominium project, PUGNATORIUS Ltd. offers a flat fee, based on a certain time budget. The law firm allocates an appropriate stake to each different step, task, and matter, based on its broad industry experience. From the scope of available due diligence tasks, those are selected which are really relevant for the unit and important for the buyer. Even transaction support might be included in the assignment, for example, if the buyer is not available to sign the contracts by himself and to receive the land title document.
A comprehensive support offer by the Bangkok law firm is available for condominium projects in each stage of completion and all over Thailand. It requires the name of the condominium development and basic data regarding the unit, the offered rental guarantee, if any, or similar arrangements.
Further information and explanations of the law firm’s condominium support services are described at “Professional services for foreign condominium investors and sophisticated condo developments“. Property legal and tax advice and assistance apart from condominium developments are described at “Legal services and tax planning for real estate acquisitions and property developments.”