The real estate legal guide 2016
In the grand scheme of things, Thailand remains to be one of the most attractive locations for foreign property investments. This real estate guide provides you with the deal experiences and professional know-how of an independent international law firm in Bangkok. It gives you an often inconvenient truth which is badly required to sustainably protect your place in paradise.
In an international context: What is the same and what makes Thailands real estate industry different?
Following the civil law system, Thailand’s Civil & Commercial Code, as well as its Land Code, mainly mirror legal principles which are well known and time-tested in Europe. The main differences between, e.g., German and Thai property legislation are the two disparities,
- that Thailand has an anti-foreigner legislation, which Germany does not has and – maybe even more important –
- that Germany’s real estate transactions are strictly supervised and handled by a well insured and licensed notary public who passed law school with high honors and has a profound wealth of experiences, while this role is carried out in Thailand by anyone who is not disqualified under Thai laws as “person of unsound mind”.
These two issues have to be carefully implemented in each and every property and corporate investment design and require a sophisticated contractual arrangement to efficiently deviate from the disadvantageous legal structures predetermined in the laws of Thailand.
No foreign land ownership?
As a general rule, a foreigner, a foreign company or a foreigner owned Thai company is not allowed to acquire and own land in Thailand. Special regulations for commercial and industrial sites apply. The use of “nominees”, that means Thais to hold the legal ownership on behalf of a foreigner, is strictly prohibited and subject to criminal fines. This is not a particularity of Thailand, but common sense throughout Southeast Asia:
The key to understanding Thai property laws lies in Thai culture. For several centuries Thailand preserves and reserves Thai land for Thai people only. As a consequence, it has never been allowed – and no change appears on the horizon – to give away the land to a foreigner forever. Instead, acquisition structures are offered which give the first appearance of a real estate investment, but are in practice limited in time:
- That is the long-term lease, which suddenly ends when the foreigner passes away and the Thai owner not only gets back land possession but also keeps the rent payments made in advance for a period of time after the death of the foreigner – an excellent deal, but not for the foreigner.
- And it is a company structure in which the Thai spouse holds 51% of the shares in a Thai limited company and grabs the other 49% rather sooner than later from the foreigner by inheritance.
- In addition, there are various other schemes on the market, which sound good, but give no solid protection to the foreign investor. As a rule of thumb, it can be said, that the more easy and cheap such solution is, the less solid and legal such structure will be. If it does not help at all, it most likely will be 100% legal.
It is in practice a different ball game to set-up an acquisition structure which guarantees a sustainable foreign property investment. Such sophisticated structure is not easily agreed with the land office, not with the Thai parties and is generally considered irritating and intrusive. However, a well-advised investor will do the extra mile to protect his wealth for future generations.
Property investment through formation of a foreigner-dominated Thai Company Limited – trustworthy, solid, legal
Foreigners are allowed to invest in a land owning company with (i) no more foreign than Thai shareholders (number of persons) and (ii) a 51% Thai shareholding (percentage of shares). Such Co., Ltd. does not need to generate taxable profits, does not need any additional (side-)business other than land owning and can be set-up solely for this purpose. Allegations that a Thai Co., Ltd. has to be set-up to make profits, are simply wrong.
If the corporate structure of such company follows the general guidelines of the Thai Civil & Commercial Code, the investment scheme violates the strict foreigner legislation of Thailand. Even worse, a company set-up in such cheap and easy structure exposes the foreigner to the high risk to lose his investment sooner or later to the Thai shareholders. There are tons of cases where a foreigner has been expropriated with a cold smile by his loved Thai spouse because his corporate structure was cheap and weak. However, a sophisticated structure, which is described here, efficiently protects the foreign investment and fulfills the requirements of Thailands foreigner legislation.
Property investment through land acquisition needs a comprehensive due diligence examination
Property can be acquired by a land purchase agreement or indirectly by a purchase of the shares in a land holding company. Both requires legally valid agreements in written forms. That sounds simple, but the devil is in the details. The use of blank share transfer agreements makes the deal absolutely invalid and the tax avoiding scheme to mention a lower land purchase price makes the transaction void as well. Many foreigners are not aware that their Thailand investment would not pass any professional legal examination and they have spent millions of baht for “a handful of nothing”.
If the share transfers are dubious and the paper works have been prepared neglectful in the past, there is a very small chance to obtain share ownership by the scheme of “adverse possession” under the squatter’s rights provision. Although such concept is primarily existing for real estate transactions, it is possible to acquire shares in a limited company by adverse possession. However, our experience shows that in such cases of weak corporate governance the very strict requirements of adverse possession are hardly met.
When acquiring property in Thailand the investor has to be clearly aware that neither the company register at the Ministry of Commerce (DBD) nor the land register at the local land office has any legal presumption to be correct. Neither the government nor the owner or any other party guarantees the correctness of any entry. It is not even guaranteed that a title deed (“Chanote”) does really exist. And our experience shows that there is a substantial percentage of wrong registrations and tons of title deeds are incorrect and subject to be struck off from the register on any given day in the future.
The answer to the obvious question is: Due Diligence. A comprehensive due diligence examination gives the investor comfort and factual protection to secure his place in paradise. For any substantial investment, a “Phase 3 Due Diligence” is recommendable.
Property investment through leasehold – a second class protection, if not properly secured
Investing in a leasehold interest is a common and tested acquisition scheme – in England. An investor in Thailand should be aware of the inconvenient truth that Thailand’s laws have no leasehold legislation at all. In the law books, there is no lease in Thailand – just a “hiring of property” which gives the tenant a weak position as a second-class investor. However, let’s use this misleading false term, the name itself does not harm.
The lease is just a contractual agreement between two parties. It is no right in rem, no real right as a usufruct. If the lessee passes away, the lease is immediately terminated. It is not transferred to the heirs. And it is especially not transferred to anyone named in the lease contract as successor. The inheritance clause in the lease agreement to let the lease survive when the lessee passes away is just a dishonest marketing trick. And if the heirs will ask for a pro-rata-temporis refund of the advance lease payments, they will not earn much sympathy for such idea.
If the written lease agreement indicates for tax planning reasons a lower price than actually paid, it is void. The formal correct registration at the land office does not heal or cure the invalidness. The landlord can at any time request to struck off the lease registration from his title deed. Under a litigation scenario, it has to be decided whether such claim has to be enforced in a civil law case against the lessee or directly against the land register which is obligated to correct any untrue registration immediately.
The properly written property lease agreement is valid between the lessee and the lessor without registration – even for thirty years. The registration requirement after three years makes the valid lease enforceable. The difference is significant from the legal point of view as explained here. The registration of the lease in the land register seems to be a protection mechanism for the lessee – but it is not. There is surprisingly no benefit at all in the legal registration requirement for the lessee.
The lessee is generally protected under an insolvency scenario of the landlord. The lessee survives the death of the landlord and is not terminated if the landlord goes bust. If the lessee uses the property just under a sub-lease and has no direct contractual relationship with the landlord, his insolvency protection depends on the details of the given case, which should be carefully examined.
The lease is under Section 569 CCC not extinguished by the transfer of ownership of the property. The new owner is entitled to the rights and is subjected to the duties of the previous owner towards the lessee.
All the weaknesses of a property lease can be avoided by a protected lease also known as secured leasing structure. This is a legally valid and in industry practice well tested investment scheme which puts the lessee in the shoes of the lessor. Any lease investor should carefully consider to use this highly advisable investment structure as explained here. The article also explains why the ill-advised „lease-mortgage scheme“ base on a milkmaid calculation and would end in a disaster.
Property investment through superficies and usufruct – not the magic bullet for everyone
It is the misleading street wisdom in Thailand‘s blogs and forums, that foreigners are prohibited from acquiring land, but not banned to legally own a villa. Therefore, it seems to be apparently a smart solution to divide the overall property investment into a “leasehold” and a purchase agreement or construction contract for the villa (“freehold”).
However, the desired result is typically not achieved in Thai industry practice because it would require a so-called superficies, which a neglectful investment structure avoids for no good reason. Villa buyers on leased land have typically no real legal ownership, but just a weird Thai-style pseudo-ownership. Their investment is, therefore, more at risk as they think.
The usufruct is marketed as the magic bullet to solve ownership and foreigner legislation issues. In reality, the usufruct is a dangerous instrument which should be used by experts only – or after carefully studying this post.
Property investments in condominium units – the underestimated complexity
Condominium units are often misunderstood as “property investment for beginners”. In fact, it is not obviously unreasonable to buy a condo without a lawyer if certain prerequisites are met. Equal to not hiring a lawyer is the decision to pick from the developer’s list of law firms which never ever impeded, slowed-down or complicated one of his property deals. Both parties are aware of the rules of that game.
Such easy deal fulfills all of the following criteria: The condominium building is new but already completed. Title deeds (Chanote) have been issued. The acquisition of freehold ownership is done directly from the developer, a highly renowned corporation, listed on the Stock Exchange of Thailand. The buyer is generally familiar with property acquisitions in Thailand and there are no language barriers.
Even when these criteria are not met in total, there is a good chance that the acquisition will result in a long-term satisfaction of the buyer. However, given the typically high value of such transaction, a risk-averse foreign investor will look for own trusted legal advice to protect his place in paradise.
There are obvious problem cases where the acquisition is made off-plan, which means the building is not completed and the title deeds have not been issued. There are second-hand acquisitions from a previous buyer. There are condo leasehold structures. And there are various other particularities which obviously require a comprehensive due diligence, a careful design, and negotiation of the agreements and a close monitoring of the signing, payment and registration. We will highlight certain pitfalls and condo specific risks in a separate LinkedIn post.
Use restrictions of condominium units
The rights of the condominium unit owner are strongly protected by the Civil & Commercial Code. The ownership rights are only restricted
- by a formal law (Section 1336 CCC) and
- regarding the common area consisting of corridors, swimming pool and so on, by the rights of the other co-owners (Section 1360 CCC).
The right to rent out the condo unit can, therefore, not be restricted by a majority resolution of the other condo owners, by the bylaws of the juristic person (CJP). Therefore, any attempt to limit the owner’s rights, including use rights by a board decision or owners resolution is illegal and invalid.
The Thailand Hotel Act requires a hotel business license in certain cases. This law validly limits the use of the condo ownership. However, its requirements are in normal cases not fulfilled.
Property tax planning aspects
The acquisition of land – whether directly, through a company, as a lease or by a complex acquisition structure – has several tax aspects. A comprehensive tax planning is essential to secure a tax efficient acquisition structure.
Sophisticated solutions in a complex legal environment. Serious legal and tax advice in the land of smile. Secure your place in paradise.