Villa ownership: The superficies makes the difference
Abstract: Under the Civil & Commercial Code, the owner of the land automatically owns the house and other improvements built on the land. When the Land Code of Thailand prohibits that foreigners own land, this includes, as a result, ownership of the house. Villa buyers on leased land have typically no real legal ownership, but just a weird Thai-style pseudo-ownership.
Thai-style house pseudo-ownership is not good enough
It is the misleading street wisdom in Thailand‘s blogs and forums, that foreigners are prohibited from acquiring land, but not banned to own a villa legally. Therefore, it seems to be apparently a smart solution to divide the overall property investment into a “hire of property” for the land (in Thailand typically merchandised as “leasehold”) and a purchase agreement or construction contract for the villa (“freehold”). However, the desired result is achieved in Thai industry practice just in 1 out of 100 cases.
Even if the acquisition of a house is not blocked by Thailand’s Land Code, the second legal hurdle is Thailand’s Civil & Commercial Code which is applicable equally to foreigners and Thais. The villa is a “thing fixed permanently to land or forming a body therewith” under Section 139 CCC, and a legally undivided part of the land as immovable property. The villa ownership is therefore by means of the CCC permanently linked to the land ownership and the anti-foreigner legislation of Thailand has nothing to do with this. The landowner owns the villa – and to own the villa, it is required to own the ground. This is no particularity of Thailand, but an international standard in countless countries.
Only the superficies separates house ownership from land ownership
There are only two exceptions from the rule of unitary ownership in land and villa: One is the condominium under the Condominium Act and the other is the superficies (See-Tee-Nua-Tee-Din) under Section 1410 ff. CCC. The superficies had been established by Roman Law with the explicit purpose to separate land ownership and house ownership.
This concept of separation of land ownership and house ownership has been adopted by Thai laws but is much longer part of, above all, German (“Erbbaurecht”), French and Japanese laws. This shows that the superficies is not an ugly stepchild of Thailand’s foreigner legislation, but a traditional tool and module of international property structuring under civil law principles.
- “The owner of a piece of land may create a right of superficies in favor of another person by giving him the right to own, upon or under the land, buildings, structures or plantations.” (Section 1410 CCC)
Under Thai laws, the superficies strictly requires registration on the backside of the title deed. No registration means no superficies and no separate house ownership. Not for foreigners and not for Thais.
While only the superficies enables building ownership on foreign land, as the converse argument such separate ownership does not exist without the valid agreement and registration of a superficies. The abstinence of a superficies for a particular land plot results in an absence of house ownership, separated from land ownership.
Transfer of house ownership – a Thai-style charade
Since the transfer of the house is relevant for accounting and tax purposes only, there are no strict rules as they are for the ownership transfer. The villa has no ownership deed and no separate ownership. Therefore, the transfer of ownership will not be registered on the backside of the “villa chanote”, which does not exist under the laws of Thailand. Therefore, flimsy elements of the transfer are
- a written villa transfer agreement (private version) and the “sale of a structure document” (land office used version, not a true government document)
- the use of the general land office power of attorney form (Tor.Dor.21) which is nothing specific for the villa transfer
- supporting documents like the Tabian Baan (blue house book), previous villa sales agreements, building permissions, etc.
Under Thai industry practice, a 30 day public announcement period has to elapse before the copy of the Thai script sale of a structure agreement is issued by the land office. Four notices of the intended house transfer are published at the Local Government Office (Or Bor Tor), the District Office, the Sub-district Office (Kamnan), and the building itself.
The villa needs a superficies to be “illusive part of the land” under Section 146 CCC
The concept of the lawmaker to establish a superficies under Thai laws would be futile if the same law provides a simpler, cheaper and quicker solution to the same issue. Section 146 sentence 2 CCC does not foresee a short-cut for a villa on leased land. Instead, a superficies or similar real right is required to qualify the villa as “illusive part of the land”.
- “Things temporarily fixed to land or to a building do not become component parts of the land or building. The same rule applies to a building or other structure which, in the exercise of a right over another person’s land, has been fixed to the land by the person who has such right.” (Section 146 CCC)
It is no secret that the Civil & Commercial Code of Thailand has its roots in the German Civil Code (BGB, Bürgerliches Gesetzbuch). Therefore it is no surprise that Section 95 para 1 sentence 2 of the German Civil Code has a similar clause for such illusive part of the land (“Scheinbestandteil”).
- “The parts of a plot of land do not include things that are connected with the land only for a temporary purpose. The same applies to a building or other structure that is connected with a plot of land belonging to another by a person exercising a right over that land.” (Section 95 para 1 German Civil Code)
“Rights over that land” are superficies, servitudes, easements and real rights under public laws. A typical example is a gas pipeline or a power supply line under the land or a telephone line over the land. The landowner has no rights over such components. They are not part of the land and, therefore, remain in the ownership of the public utility company.
It would be absurd to extend Section 146 sentence 2 CCC and apply it for a non-real right like a lease. The lease does not give the right “over another person’s land” to build a house. This is uncontested under the German archetype legislation and there is no reason to see this differently under the Thai legislation.
The house is built under the construction contract, but that is not a long-term agreement. Section 146 sentence 2 CCC shows – same as Section 95 para 1 German Civil Code – just the mechanism of how the house ownership is separated from the land ownership. It does not create a shortcut but is just one link in the legal chain. The other link is the superficies or another real right under civil or public laws.
Rumors say that lower Thai courts are supposed to consider the Section-146-shortcut. However, a clear jurisdiction, that any contractual agreement like a lease or construction contract separates the house ownership from land ownership is obviously not apparent. To invest millions of Baht for a villa construction on this shaky fundamentals seems not to be a reasonable approach.
Beware of the consequences if a cheaper solution replaces the superficies
Thai property industry regularly offers a substitute and alternative for a legally valid superficies. Not the straight solution provided by the law to fix the problem, but an alternative, a cheap and dirty way for foreign investors in good faith.
Landowner and tenant can agree, that the tenant pays for the villa construction and is treated as if he were its legal owner. Such an explicit agreement is perfectly legal. It is even valid if such pseudo-ownership has been agreed implicitly. This will be always the case when the tenant has acquired the building or the tenant has paid for the construction of the building.
Since such non-superficies solutions do not come with the registration of the foreigner’s house ownership on the backside of the title deed, it is the marketing trick to give the foreigner some other document in his hand with his name inserted. This can be the building permit, any other governmental document, a “building sale and purchase agreement” or even the registration as a resident in the yellow house registration book (“Tabien Baan”).
- Looking for law in all the wrong places: Misguidance can be found in various free forum posts. The I-paid-for-it-and-therefore-I-own-it rule is a naive misconception.
It is a mistaken argument, that the building permit or the house sale and purchase agreement provides clear evidence for the intention, that the foreigner should legally own the building. Such intention is typically never at doubt, but the transfer of legal ownership does not fail because of hidden caveats or a miscommunication, but it fails, because the laws of Thailand require a superficies to make the transfer legally valid.
However, this Thai-style pseudo-ownership is not at all legal ownership as the term is commonly used in Western countries. Even a registration by a „convinced“ land officer will not help to upgrade it into legal ownership by the tenant. It is just a promise of the landowner, not a real right (“right in rem”). If the landowner sells his property, or suddenly passes away, or is illiquid, the new (land and) house owner is not bound by such promise. There is no “absolute protection” which is the core of ownership under civil law principals.
Any registration made at the local land office does not heal, cure, remedy or repair any type of illegality. Just the fact that something has been registered does not protect anyone if the registration is wrong. Neither the Thai government nor the owner nor anyone else guarantees the correctness of a land office record. (The same goes for each and any DBD registration.) Thailand has no It-is-true-because-it-is-registered doctrine.
Civil law does not have the concept of “a little bit of ownership”. A person is an owner or not without several shades of gray in between. Pseudo-ownership is therefore clearly non-ownership. It will not grow and develop to ownership by itself and is just a contractual legal position without sharp borders, subject to changeful court decisions made on case-by-case considerations and social engineering thoughts.
House non-ownership under a distress scenario
Under the laws of Thailand, a tenant has individual protection against a sale of the rented land. However, Section 569 CCC, which constitutes the „sale does not break rent“ rule is only applicable to the registered lease agreement. It does not cover the villa because the value of the dwelling has not been calculated as part of the rent payments and the villa purchase price is paid separately from the lease agreement. The consequence might be that, for example, the resident in a resort could lose his villa in case the resort company goes bust.
The “villa agreement” which does not really result in a transfer of legal ownership might be interpreted as a hidden lease agreement, which should (or might) have the protection mechanism of the lease as well. However, such virtual lease has not been registered at the land office and, as a result, is enforceable for three years only. This is too short for a long-term investment.
The courts of Thailand will sooner or later decide, how such “official” house purchase agreement, which is neither registered as hire of property nor as a transfer of legal ownership, should be legally qualified. Will it infect the land lease with its legal defects, because the total rent payments are not registered? Will the split of the contract be accepted and the land agreement re-qualified as a separate unregistered lease?
The house-nominee, a legal issue still unconsidered
As mentioned above, there is the aggressively published opinion, that the Land Code does not prohibit foreigners from owning a house on Thai-owned land. But this implies, that “land” in the meaning of the Land Code is different from “land” as defined in the Civil & Commercial Code. Since under the CCC the building is dependent part of the land, as long as it is not separated by a superficies, there might be the same principle under the Land Code. The result would be that the pseudo-ownership in a villa, documented by the building permit or a building sale and purchase agreement is not in-line with Thailands foreigner legislation.
If the landowner agrees with the foreigner, that he will act as a straw man and hold the land for the benefit and burden of the foreigner, this would be clearly qualified as prohibited nominee structure. If the landowner rents out the land and, by a construction or purchase agreement, agrees to hold the house ownership for the benefit and burden of the tenants, he might be qualified as house-nominee.
To the extent known the Thai authorities have never raised these problematic arguments. However, it is not possible to just dismiss such thoughts. As a consequence, the investment in a villa without superficies may not be challenged only by Civil Law arguments. The foreigner might be confronted with the accusation that his agreement with the landowner is a circumvention of Thailand’s foreigner legislation, especially the strict prohibition to acquire “land” – whatever is included in this legal term. This is another argument to register a superficies instead to decide on a cheap and dirty solution.
The protected house purchase or villa construction agreement as a reasonable alternative to the superficies
The economic and legal status as a tenant in Thailand is weak. The combination of rented land with pseudo-ownership in the house does not result in a more reliable investment structure. In the contrary, as explained above, the foreigner has to fight to get the same legal rights in his rent agreement also for his house. As a consequence, the decision for a protected lease structure is even more recommendable for a property investment with separated land and house agreement. A proper structure as protected lease gives the investor a legal and economic position as good as legal ownership as possible.
Under the protected lease the tenant is secured like an owner against daily challenges of a tenant, non-cooperative landlords and the risks of lease renewals. If this scheme is extended to the villa, the pseudo-ownership is protected against a transfer of legal ownership and undesirable developments which are unforeseeable during the lifetime of the Thailand investment.
The secured lease structure should be considered if a superficies can for certain reasons not be registered. Secured lease structure and superficies have pros and cons which should be carefully compared before a decision is made. Both protection mechanisms can generally be implemented even after the investment has been done.
Considerations and consequences
The awareness that the “house owner” on leased land has no western-type legal ownership but a weird Thai-style pseudo-ownership only, will in most cases not alarm international residents in Thailands villas and resorts. The circumstance that the investment does not survive if the investor passes away, and the heirs have no claims if the landlord is not cooperative and generous, should be clear enough to characterize the value and character of such type of property investment. However, in some cases, it might be advisable to consider protection mechanisms and risk management to (supplementary) secure the villa in paradise.
A lease or usufruct can be agreed for maximal 30 years or till the lessee passes away – whatever comes first. The superficies can be accepted (i) either for maximal 30 years – than it is inheritable – (ii) or for the lifetime of the superficiary, if he feels fit enough to survive the 30 years period, (iii) or for the lifetime of the owner of the land – if the owner is a natural person (Sections 1412, 1403 para 3 CCC).
The “house ownership on leased land” concept is the ineffectual attempt to substitute “eventually leaving your house to some landowner you don’t know” against “eventually leaving it to someone you once loved.” Secure your villa in paradise!