Void lease schemes
The illegality of a guaranteed 30+30+30 year lease agreement
In Thailand’s industry practice, the tenant typically pays the same rent amount for his 30-year lease than a property buyer. If he is well advised, he is aware that the extension or renewal option for one or more additional 30 year periods is unsecured and more hope than an expectation. However, it is out of question that it is legally compliant to implement such extension/renewal option clause in the lease agreement. Therefore, it make sense to implement such option, although this does not result in a binding lease obligation but is just a promise of the current lessor.
However, the legality is deeply in danger if the lease extension or renewal is economically guaranteed by the economics of the agreement. This would be the case if the lessee pays less rent for the registered lease period than for the unregistered future lease periods. As a result, a lease agreement is under current legislation (as ruled by courts in Phuket) void if the lease payments are not mainly allocated for the first thirty years, but equally to all 30+30+30 = 90 years. Illegality means that the lease is invalid starting from the first day. The registration of the lease at the land office does not change this. It remains void and illegal. even if fully prepaid.
Unreliable sources rumor that each long-term property lease with two 30 year lease extension or renewal options is judged by Phuket courts to be void. Such reports are in this clumsiness simply not true. Fake news.
The ill-advised so-called lease-mortgage scheme
Things are getting worse if a mortgage is registered as collateral for the pre-payment under the future lease agreement(s). The inventors of this „lease-mortgage scheme“ or “mortgage-based security structure” instruct to re-qualify 66% or even 80% of the payments under the lease as loan amount to be offset against the two lease period renewal agreements in the years 30-60 and 60-90. If the renewal is not accomplished – for whatever reason – the land owner or developer would have to repay 66% or 80% of the money received under the lease including high-interest payments. This financial fiasco scenario – so the line of thought of its investors – will (illegally) force the land owner to renew the lease period.
First of all, it is evident that the recommended split of the rent payments into 20% for the first 30 years and 80% for the later 60 years, is flimsy fabricated. Even 33% to 66% would be the result of a milk maid calculation only. A resident investing in his second home in Phuket will sharply focus on the first 30 years of his residence on the tropical island. He will not spend any significant amount for the time when he reaches a three digits age.
- No one would invest a substantial amount of money for inheritable use rights in a far future. Therefore, the pre-paid amount for a 30 plus 30 plus 30 years lease is mostly paid for the lessee’s use rights in the first 30 years. It would be a milk maid calculation to equally allocate 1/90th of the investment to each and any year. At least 90+% belong commercially to the first 30 years.
Besides, it is a severe error in reasoning to re-evaluate the reasonable rent amount again in the years 30 and again in the year 60. Decisive is only the day on which the lease had been agreed. It would be even a crime if such naively wrong accounting would be the basis for the calculation of the registration fees and transfer taxes, leaving the fake loan amount unconsidered and untaxed.
- Developer, do not accept a mortgage on your land for a high-risk mortgage-based security structure!
Apart from this, if an ill-advised developer allows such lease-mortgage scheme, he seriously risks that the lessee terminates the loan and asks for an immediate repayment of 66 or 80% of the money paid. Therefore, such financial nightmare structuring of a resort development could easily result in a bankruptcy scenario or an endless chain of litigations with the fake mortgage lenders. You have been warned.