The sublease of property in Thailand
To invest in Thai land through the “leasehold structure” simply means to lease property for 30 years on a typically fully pre-paid basis with one or more options for additional 30 years each. Despite certain weaknesses, this is for foreigners a standard industry practice to invest in Thai real estate. However, if the foreign investor’s contractual party is not the legal owner, but just the lessee under a head lease with the property owner, the investment protection should be carefully analyzed.
Sublease approval and registration requirements
To lease out real estate, it is not required that the lessor is the legal owner of the property. It is perfectly legal if the lessor under a sublease is the lessee under a head lease and does not hold legal ownership of the land by himself. Another structure would be to transfer the rights under a lease to a new lessee – this assignment structure is not further discussed in this post.
Under Section 544 Civil & Commercial Code (CCC), a tenant needs the explicit approval of the owner to sublease the leased property to a third party. Such approval to sublease has to be inserted in the original lease agreement. A subsequent approval or an approval in a side letter does not fulfill this legal requirement.
However, even if the owner provides his approval in an unlawful and invalid form, he will typically not request a termination of the head lease or the sublease. Therefore, without carefully reviewing the head lease, the sublessee will not know, whether the approval has been granted validly or not.
The void sublease approval might be later contested and the valid sublease approval might be voluntarily terminated between owner and head lessor, both without the influence of the sublessee. The “license to sublease” might be given even under complex or vague conditions and covenants and this might be fully out of control and knowledge of the sublessee.
Depending on the lease terms, a sublease registration is required or at least highly advisable to avoid non-enforceability after a certain period of time. Whether such sublease registration is easily done with the friendly support of the local land department, depends on various aspects and parameters. The officer at the land department might – or might not – check whether the sublease approval has been given by the owner in an appropriate form.
PUGNATORIUS Ltd. is a Bangkok-headquartered specialist provider of bespoke transactional legal and tax advice in the corporate and property legal and taxation industry sectors.
Dependencies between sublease and head lease
The validity and existence of the sublease do not depend on the validity and existence of the head lease. The termination of the head lease by the owner does not give the sublessor a right to terminate the sublease.
However, under Section 545 CCC, the sublessee is directly liable to the owner. If the rent has been paid in advance by the sublessee to the sublessor, such pre-payment cannot be set up against the owner. Alternatively, the owner can exercise his contractual rights against the head lessee.
Therefore, the overall situation of a “sub-leasehold investment” results in the following additional risks:
- If the sublessor goes bust, the sublessee is liable for the rent payments vis-a-vis the owner, even if the sublease rent had been fully pre-paid (Section 545 CCC).
- If the head lessee is in (payment) default under the head lease, the owner can terminate the head lease (Section 560 CCC) and request the return of the property from the sublessee.
- If the head lease is invalid, the owner can request the return of the property from the sublessee, even if the sublease has been duly registered.
- If the owner and the head lessee mutually terminate the head lease, the sublessee is requested to return the land, even after he has built a villa.
- If the sublessee has to return the land to the owner, his damage claims against the sublessor might be worthless. Typically, the sublessee has no damage claims against the owner.
As a result, the investment in a property sublease is typical “out of control” of the (mostly foreign) investor. He does not know whether the head lease is valid, he does not control its continuance, he has no contract with the owner, although he is liable to him and – the biggest imponderability at all – he risks his whole property investment in case the sublessor goes bankrupt – as an unexpected or prearranged event.
With a direct lease by the property owner, the lessee is protected against his insolvency (Section 569 CCC) and does not have to bear the risk of a third party. However, all the sublessee risks can be reasonably managed in the case of a secured sublease.