Crazy little thing called lease
On February 8, 2019, Thailand’s National Legislative Assembly passed a new draft of the Sap-Ing-Sith Act, designed to eliminate certain restrictions and limitations for the ordinary lease of immovable property under the Civil and Commercial Code, and the lease of commercial and industrial real estate under the relevant governing laws.
Real estate leasing needs a protected structure to make sense for the foreign investor – and the developer
Foreigners looking for property investment in Thailand sometimes decide to avoid a corporate structure and, instead, to lease what they can’t individually buy. For such an investment, it is advisable to make educated decisions and not to trust too much in the glossy brochures and the promotion talks of developers, real estate brokers, and agents. The following post describes the basics of foreign leasehold investments which should be undisputed by legal experts.
Under the existing laws, the lessee is just a tenant. Leasehold does not exist in Thailand.
Lease agreements can cover a full parcel of land or just a fraction of a Chanote. The land can be leased to erect a villa by their own, to agree on a bundle of contracts including the agreement for an off-plan villa or they may invest in developed land with an existing villa and other improvements.
Although Thailand has no leasehold legislation, rent agreements are regularly labeled and proudly named as “lease”. This is adequate and raises no objections at all, as long as this does not mislead to the false assumption, that the Thai lease gives the investor the same protection and safety features as a lease under, e.g., English common laws. The Thai lease is just a rental agreement and the tenant’s protection is awfully weak and fragile in Thailand. The Civil & Commercial Code defines this neither as lease nor as rent but as “hire of property.” There is no leasehold investment in the law books.
“Units are sold with 30-year renewable leases.” is nothing than brain washing.
If the lessee is a foreign investor and enters into a fully prepaid 30-year leasehold investment with extension options for additional 30 year periods, the same rules apply as for a short-term agreement. The legal and factual position is substantially weaker than legal ownership. Irrespectively from the terms and conditions of the lease agreement, the lessee is not the “king of the castle” but an unprotected tenant of Thai owned property.
“Traditionally, Thais have viewed present value cost of a 30-year lease as being around at 30% of the freehold value of the site. While this is a general understanding, there are unique sites or sites in very prime areas where the cost of a 30-year lease can command up to 40-50% of the freehold price.” (CBRE Thailand, quoted in Bangkok Post 12/06/18)
In a so-called leasehold investment, the contractual agreements need to have a specific design to mitigate and elevate the disadvantages and downsides of the legal situation. The lessee has to be treated under the contract as an owner as good as it gets because he typically paid the full market price of the property. The obligations of the lessee under the law have to be relaxed as far as possible and any termination rights of the owner have to be restricted as far as possible. Any additional contractual obligations which a landowner would not have is not acceptable for a well-advised lessee.
A strong and protected lease will never qualify as (illegal) foreign land ownership and the lessee should not allow anyone to fool him that a lease weakness is for his own benefit. It is not. Even a usufruct which gives the investor a much better protected “temporary ownership” is provided by the laws as a perfectly legal tool. Details at “The usufruct in Thailand“.
A sublease contract agreed with the head lessee is not appropriate for a villa investment. If the lease is entered into with the non-proprietor, this results in uncontrollable risks of a total loss for the foreigner. Details at “The sublease of property in Thailand“.
The lease registration does not protect the lessee against invalidness
The maximum duration of a property lease agreement amounts to 30 years. Under current jurisdiction (at Phuket courts) a lease is invalid from the beginning if it intentional ignores this legal limit and promises a duration of 30 plus 30 plus 30 years.
A lease can be agreed in any language. It is valid in English, German or Kisuaheli if the parties understand that language. There is no Thai language requirement. Even when the land office requires a Thai translation on the day of the lease registration, the foreigner should not accept to sign a 30-year-lease contract blindly in a language he does not understand.
A lease in written form is valid for maximal 30 years, even if it is not registered. However, the lessor can take back possession of the property after three years lease duration, if the lease is not registered on the land title deed. Therefore, it is highly advisable not to pay any prepaid rent before the lease is registered. However, the lessee should understand that the registration does not protect his interests at all.
The original lease, a Thai version or a Thai translation can be attached to the documents at the land office. However, this makes no difference under the law. The registration of the lease on the backside of the title deed is required to be enforceable after three years, but neither the lease validity not enforceability is dependent on any kind of documents attached to the land office files.
Each party can claim at any time the invalidness of a lease in form or substance. In that case, it makes no difference whether the lease has been registered or not. If the lease agreement for tax fraud or other reasons mentions a wrongly low rent amount, the lease is invalid, even if it is properly registered.
The lease agreement does not survive the death of the lessee
The lease agreement is just a contract. If the lessor passes away, the heir will step into the lease agreement, but not into any promise made by the lessor. If the lessee passes away, the lease is automatically terminated. The lease position is not passed over to the heirs of the lessee. An explicit clause that the lease is effective for the lessee’s heirs, is invalid. If the lessor will quickly refrain from a different legal viewpoint if he is asked to covenant this in the contract.
“Under the current law, the lease rights are exclusive to each lessee named in the lease agreement, with the lease automatically terminated upon the death of the lessee.” (Bangkok Post, 15/06/18)
To avoid this disadvantage, the lease can be agreed by several lessees together or by a corporate lessee.
In 2017, the Supreme Court Judgement No.11058/2559 introduced the concept of a lease inheritance. (Source Bangkok Post)
The agreed extension option is neither registered nor assured
The lessee pays from a business point of view the greatest share of his rent prepayment for the first 30 years. For the first and second extension/renewal period (if any) only a very small portion of the total rent can be allocated. Therefore, any artificial allocation of substantial rent to the far future is illegal. Details at “Void lease schemes in Thailand”
It is doubtful whether the extension option or renewal option survives the transfer of legal ownership by the lessor. It is doubtful as well whether such option is enforceable at court. Only a secured lease scheme gives the lessee practically the same legal and factual protection as a property owner. Details at “Secured property lease structures in Thailand“.
The landowner is automatically the villa owner
The villa and other improvements on the land belong to the landowner. A sale of the villa by a purchase contract does not result in a transfer of legal ownership. The name on the construction license (building permit) and the registration in the house book are irrelevant for legal ownership. Details at “Villa ownership: The superficies makes the difference”
The Thai Leasehold Act 202x – the vague vision of a leasehold legislation
The inconvenient truth is that Thailand has no leasehold structure for private property, but just a weak tenant legislation. The term “lease” is merely a marketing trick than reality. This might be changed in the future under a new Leasehold Act.
The announcements of the legislative agenda highlight what is not possible under the current legislation:
- The lessees are not allowed to sell, transfer, mortgage, rent or pass the property to their heirs for the duration of the rental period.
- The lessees cannot sublease the rented property or sell the remaining term without the permission of the owner.
- The lessees can’t inherit the property. The lease automatically terminates upon the lessee’s demise.
- The lessees are not able to modify or construct other structures on the property regardless of the owner’s wishes.
Whether the draft of the new legislation will at any time be effective, is unforeseeable. Until that uncertain point in time, the traditional unbeloved and often concealed lease restrictions remain in place.
In the doubtful case of a law change, the legal effects on existing contracts are uncertain as well. It is unlikely that Thai landlords would except a devaluation of their current legal position.
The protected leasehold structure – a solid, economic and future-proofed investment opportunity
Developers could structure their leasing offer in a way, which gives the foreign buyer adequate protection. Ask PUGNATORIUS Ltd. for a proposal.
Professional service offer from Bangkok
Assignments on real estate investments are one of the core business activities with a particular competence, long-standing experience, and unique market reputation of the law firm. PUGNATORIUS Ltd. typically provides these seven services:
- Investment structures for foreign property acquisitions
- Property due diligence examination
- Leasing transactions and protected lease schemes
- Industrial estates, resorts, factories
- Hotel and hospitality projects
- Property tax structuring
- Legal opinions and property investment reviews
Details are described at “Legal services and tax planning for real estate acquisitions and property developments.”