Crazy little thing called lease
Leasehold investments in Thailand – an often misunderstood concept
No ownership through lease: Foreigners looking for property investment in Thailand sometimes decide to avoid a corporate structure and, instead, to lease what they can’t individually buy. To acquire real estate in Thailand requires the purchase of Chanote land. A lease structure does neither provide ownership in the land, nor in the villa on the land. It is neither a leasehold nor a real investment.
No lease legislation in Thailand: The lessee is just a tenant. Leasehold does not exist in Thailand. Although Thailand has no leasehold legislation, rent agreements are regularly labeled and proudly named as “lease”. This should not mislead to the false assumption, that the Thai lease gives the investor a similar 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 Thai law books. “Units are sold with 30-year renewable leases.” is nothing than brainwashing.
No transfer by contract or inheritance: The lease agreement does not survive the death of the lesse and can’t be sold and purchased. The lease agreement is just a contract. If the lessor (= landlord) 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. “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) However, lessee, lessor and third party can enter into a novation agreement to replace the existing lease by a new lease.
No mortgage, no restructuring: The lessee can’t use his investment to secure a loan by a mortgage. And substantial restructurings and changes of the leased asset requires the consent of the landlord.
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”
No protection under lease arrangement: 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 any short-term rent agreement. 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.
Leaseholds are worth just 30-50% of the money for ownership: “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)
Bad and good lease agreements: 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 that a landowner would not have, is not acceptable for a well-advised lessee.
The sublease is even worse than the lease: 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
30 + 30 + 30 = invalid: 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. 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”
Lease validity does not require a registration: 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.
Additional land office documents are meaningless: 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.
Registration does not protect the lease: 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.
Secured lease: 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 an 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“.
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