Seven requirements: The prudent real estate due diligence in Thailand
“That’s the Way We Do Things Around Here”
DD report scams: Thailand’s property industry is not only famous for sunny beach properties, but also for its scams in the property acquisition phase. For decades, foreign investors trusted on due diligence reports which are limited to a description of the current land document, without stating that the validity and enforceability of such documents have not been examined. A translation of the property transfers as they are written on the land document is attached, without mentioning that each transfer requires an agreement which has not been examined. Another bleeding wound is the ignoring of previous land documents, land mergers and plot sub-divisions, without disclosing that their validity is essential for the current purchaser.
The fake report: Such fake reports give stones to the investor instead of bread. A true real estate due diligence is much more than the broken translation of doubtful documents into the English language. It constitutes an in-depth examination of the legal and factual circumstances of the land and buildings. If a foreigner expects a true due diligence before investing in Thai property, he will experience resistance not only from the seller’s side. He will be sweet-talked that this is not necessary, pointless, a waste of time and (small) money, that it shows mistrust in the integrity of Thai officials. Closed-eyes investments – that’s the way we do things around here.
Seven requirements for a proper due diligence report
Prudent due diligence of undeveloped land consists of the seven steps (i) review of the land documents (title deeds or else), (ii) review of the full chain of (ownership) transfers of the land, (iii) review of the encumbrances on the target land, (iv) review of the various land title upgrades till the current status, (v) examination of the building restrictions, (vi) accomplishment of a site visit and walk-through, as well as (vii) suspicious findings in the whole process. If the land is to be acquired after the villa has been built, this will require further steps and tasks.
#1. Chanote review: The Chanote is the legal documents on which the land-related tasks are registered. The cover page shows the descriptions of the land, the backside lists the registration of land transfers, encumbrances, and others. The Chanote is issued in two copies, one for the landowner, the other is kept at the land office. The due diligence report has to confirm that both versions have been reviewed as an original. As the initial step of a prudent examination, the content in the Chanote has to be translated, explained and commented.
#2. Chain of ownership: The land office observes only the formal correctness of a registration process, not its legality and correctness. Since the registrations on the Chanote are neither guaranteed by the land office nor the landowner, the actual ownership situation has to be verified. For this, each previous land transfer and each previous subdivision or merger of the land plot has to be examined. Thailands title system operates on the principle of “registration of title” rather than “title by registration”.
Thailand’s family laws and its inheritance legislation might result in a differentiation between registered and real landowner. By this, foreigners can validly hold legal ownership in the property, although they have the legal obligation to sell the land in a given period of time. Subdivisions and mergers of plots might be invalid or voidable, with the result that the chain of ownership can’t be verified. The complex legal requirements are often underestimated.
For any gaps in the documentation, the due diligence report has to provide a risk assessment, whether the missing document results in a missing link in the chain of ownership and whether such default will be claimed and proven by anyone. In certain cases, Thailand’s adverse possession rules might be applicable to close and bridge missing land transfers of the past. A due diligence report without a precise explanation and validation of the full chain of ownership is worthless for a property buyer.
#3. Review of encumbrances: The land might be encumbrances with a lease, a usufruct, superficies, servitudes, mortgages, or other rights. Apart from civil rights, encumbrances under public law are possible. The creation of these rights might or might not require registration on the backside of the land document. The encumbrance might change its character, size, and scope after it has been registered. Depending on the case, the cancelation on the land document might be the evidence or just an indication for its termination. Thailand’s family and inheritance laws might have an impact on this as well. If the due diligence report just mentions that a previous registration has been marked as struck-off, this tells just the half story. A clear statement that the land is free of any encumbrances is required for the buyer. Other aspects in this section are legal considerations whether a usufruct, a superficies or other elements of the investment structure, can be validly registered.
#4. Land document upgrades: As a general rule, Thai land belongs to HM the King and neither a foreign nor a Thai individual or company can acquire legal ownership. The offering of a land title (Chanote) to own land requires a highly complex governmental procedure, involving several steps and a long time. In large areas of Thailand, this upgrade process has already been completed for years or even some decades. Especially in rural areas and some islands, this process has just started or is in the middle with a soft land document that does not grant legal ownership to the buyer.
The Chanote title deed accrues by an upgrade from a previous, lower land document. The full due diligence has to follow all steps back to the very first land document and examine the validity of the upgrade process. Typical supporting documents are the completed “certificate of investigation (bai tai suan)” showing the inquiry made for the purpose of issuing a title deed, and a plot identification slip (bai nam). The upgrade process had in the past be the opportunity for fraud, corruption, land grabbing, and other scams. Currently, more and more Chanotes are revoked, because of an illegal upgrade process in the past. To hold the Chanote, a house book, to pay taxes and have a proper investment structure does not prevent the withdrawal of the Chanote and the seizure of the land without any compensation.
As a result, the due diligence has to exactly examine the birth of the Chanote as the most critical time in the lifecycle of the property. If this remains undone because of gross negligence or lack of available documents, this creates a huge risk for the buyer. For obvious reasons, this risk is greater in the forest, agricultural and rural areas than in the central business district of Thailand’s big cities. “Like musical chairs, whoever is holding the Chanote when the music stops is the loser.”
#5. Building restrictions: Undeveloped land is typically acquired to construct a villa or other type of building. Therefore, the due diligence has to examine which type and scope of buildings are allowed. This requires the examination of Thailand’s national building legislation as well as local and regional rules and regulations, especially the zoning regulation. Building restrictions come in various flavors, including building area, building height, clearance spaces, etc.
#6. Walk-through and field research: A visit to the local land office offers the opportunity to an intensive discussion with the authorities regarding the current status, legislation, and policy, as well as foreseeable law and policy changes. A walk-through on the site provides input through a physical inspection covering access to the public road, public utilities and grid connection, review of boundaries and boundary stones. Additional tasks cover the search for ongoing litigations, environmental procedures, tax issues, and other government actions.
#7. Suspicious findings: Typically any due diligence of the land history has some uncertainties, limitations and missing information. Therefore, it is important to mention in the due diligence reports facts, considerations and other findings that are classified as unusual, abnormal, or uncommon.
To give the buyer a better understanding of the risk profile of his investment, it is worth mentioning whether the plot has been unusually ofter transferred and subdivided, whether it had an unusual pre-owner (e.g., a factory company), whether developments have been abandoned in the past, and everything else which is unexplainable for the business point of view.
The informative value of the property due diligence report
A due diligence report can be voluminous, correct in substance, but highly inconclusively. This makes the document not incorrect, but meaningless and valueless. It is not uncommon that the title search – one of the main parts of a comprehensive due diligence report – is not more than a translation and narrative summary of the formal Thai wording.
Apart from the ten-year period of the adverse possession rule, there is no prescription or statute of limitations. Any legal defects might be identified and highlighted in a later sales process by other, more careful acting lawyers and block the investor from de-investing “his place in paradise”. Comprehensive due diligence is, therefore, a long-lasting safeguarding of a Thailand investment.
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.”