Secured property lease structures in Thailand
Under a conventional lease structure, the tenant obtains a pretty vulnerable legal position. He is no property owner, his use rights are limited to 30 years, and through this rent period, he is the first to suffer under various aspects at the whim of the landlord. This unsatisfying situation makes the so-called leasehold structure a shabby alternative for a risk-averse foreign investor.
Therefore, when the lessee accepts to enter into a long-term lease agreement instead of obtaining full legal ownership, it is in his crucial interest to enhance his legal position by additional means – as good as it gets. Such enhancements are called secured lease structures or – imprecisely – collective leasehold or protected leasehold.
The obvious need for a secured lease
In Thailand‘s property industry practice, protected leases or secured lease structures are typically used to provide the tenant with protection in the case of four events:
- The termination of the lease agreement for an important reason, which is allowed under Thai legislation and easily misused by the landlord especially when the contract is fully prepaid.
- The return of the property to the legal owner after 30 years, because the extension or renewal for additional 30 year periods is not at all guarantee.
- The transfer of the property investment to the tenant’s heirs or successors, which requires the amicable consent and active cooperation of the landlord.
- Each other case that requires a change, modification or flexibility in the restructuring of the investment.
Simplified, the secured lease protection should restrict the lessor concerning all and any acts which the lessee would not have to fear if he had full legal ownership.
The compliance of the secured lease scheme under Thailand’s foreigner legislation
The basic idea of a secured lease is as follows: The tenant pays the full market value of the property as an advanced rent prepayment. From a business point of view, the landlord, a Thai Co., Ltd., has no well-founded economic interest in the property any more. Therefore, the land owner hands over the landlord’s rights in the property to the tenant.
The accomplishment of this concept has to take into consideration Thailand’s foreigner legislation. This requires that a Thai majority shareholders structure is retained. However, the minority shareholder, an offshore entity, obtains special rights as allowed under Thai legislation. The tenants’ influence is predominant, although it is limited to the acts and decisions of his offshore company.
It is important to understand that the lease agreement and the overall handling of the investment in Thailand are not affected by the secured lease structure. The lessor does not guarantee in any way a 30 plus 30 plus 30 year lease structure. The extension option clauses have just to follow conventional standards of the property industry. The Thai structure is neither special nor suspicious.
The overall structure to protect the tenant’s investment
As a stakeholder in the offshore company, the tenant can use his shareholder influence abroad to protect his lease in Thailand. He has for example his say when it comes to the lease renewal option, the landlord’s consent in a restructuring and other issues. This requires a carefully drafted and established corporate governance system, but it works in practice very efficiently and without a huge overhead.
However, protection comes in different flavors and sizes. When a collective leasehold or a secured lease structure is promoted, it is worth to have a look behind the glossy brochures. Just a direct or indirect minority shareholding will not give any efficient protection of the lease agreement. To simply use the term “protected” is not enough, the size matters. How is the structure implemented in Thailand, how in the offshore jurisdiction? Which specific influence will the individual lessee have on the lessor’s side?
Summarized it can be stated that the lease agreement, protected by a shareholding in the lessor entity, provides for an investment structure as good as it gets without disrespecting the laws of Thailand. This is not only welcome by the foreign investor in Thai property. It is also a clever marketing tool for a property developer who can provide his customers with the best investment structure Thailand has to offer. Or maybe the second-best solution, because legal ownership through a corporation is still the king-size format of international property investments.
Secured lease structures have advantages for developers, landlords, and lessees. Therefore, for existing and new property developments a protected leasehold should be high on the agenda.
Secure your lease in paradise
PUGNATORIUS Ltd. assists and supports project developers in the design, negotiation, and implementation of secured lease structures for property developments. The law firm provides professional advice on the restructuring of existing unsecured leases into advanced structures of protected leasehold interests. Based on comprehensive experiences, the law firm analyzes existing protected leaseholds regarding legal efficiency and advises how to upgrade to superior protection standards.
PUGNATORIUS advises on various property developments and has an extensive work-product archive for each type of private and commercial real estate project. The law firm developed special knowledge, know-how, and experiences regarding the proper licensing of new, but also of existing illegal property developments.