The usufruct in Thailand
USUFRUCT SPOILER WARNING
The following discussion of legal issues of a usufruct in Thailand results in significant aspects in legal conclusions which differ from calming and comforting statements made on the Internet in the last years. To avoid sleepless nights, foreign beneficiaries under a usufruct might decide to stop reading right now.
Usufruct vs. Malpractice
If something sounds too good to be true, then it probably is not true. The usufruct as cheap and easy protection for foreign property investments is a hoax, promoted by certain interested circles. The Top 5 legal misconceptions on usufructs in Thailand are
- A usufruct between a married couple is legally compliant and protected.
- A usufruct for free is not very risky for various reasons.
- A contractual agreement can enhance a usufruct.
- The usufruct of the foreign husband is no marital property.
- A structure with two usufructuaries provides for even better protection.
These and other fatal mistakes are explained in detail below.
Usufruct vs. Roman Law
In Ancient Rome, slaves and women had not been allowed to own land. Due to certain social developments, the legal construct of a usufruct had been developed to give temporary ownership to the beneficiary without transferring ownership. This civil-law concept survived in the law books in Western Europe, although its practical relevance faded.
Thailand adopted the usufruct concept in its law (Sections 1417 – 1428 CCC), but failed to teach their land officers to understand its applicability and particularities in the legal minefield of foreigner legislation, 30 years lease limitation, family legislation, land office registration and ownership rights.
- In the Thai language: See Tee Kep Kin / Sit it gep gin / Sidhi-kep-kin / สิทธิเก็บกิน
Usufruct vs. ownership
Under Thailand’s usufruct legislation, the usufruct entitles the beneficiary (usufructuary) to possession, use, enjoyment, management and, in the case of a forest, mine or quarry, even to exploitation – that is the reason the owner of a “usufructed” land is sometimes named as “naked owner.” The usufructuary must, in the exercise of his rights, take as much care of the property as a person of ordinary prudence would take of his own property and is bound to keep the substance of the property unaltered.
The usufructuary is liable for the destruction of the property unless he proves that his fault did not cause the damage. He must replace anything which he has wrongfully consumed, but he is not bound to give compensation for depreciation in value caused by reasonable use. The owner may object to any unlawful or unreasonable use of the property and may even demand security if his rights are in peril.
There is no limitation regarding the number and size of the usufruct. It is entirely legal to have several usufructs. There is no requirement to live on the usufructed land.
A standard usufruct agreement is provided in Thailand by the local land offices. Such usufruct can be combined with other contracts between the parties. Such second contract may state that the landowner can not sell, transfer or mortgage the land during the usufruct or that the usufructuary will own all improvements.
Such second contract can even be combined with the usufruct agreement and merged into one mixed agreement. However, such additions won’t and can’t change the scope or character of the usufruct. As a real right, the usufruct is not subject to individual design or definition by the parties. The additional clauses, even if integrated with registered usufruct agreements, are just contractual obligations or simple promises between the parties which might be depending on the particularities of the case, not bind the legal successor of the owner.
- Section 1298 CCC: Real rights may be created only by virtue of this Code or other laws.
The real test of the effectiveness of any legal instrument is not how well it appears to have been drawn up but what happens when you try to enforce it. The unhappy event of attempting to enforce an agreement in a Thai civil court may take place years after the instrument was instigated.
The usufruct is a real right (“right in rem”), not a contract like a lease contract. Its scope and character are defined by the law, not by any agreement with the owner. The contractual extension and enlargement of the usufruct is just a marketing myth.
Usufruct terms vs. lease terms
It is the general concept of a usufruct that it is created for the lifetime of the usufructuary only – till death do it part. It is not meant to be inherited after the beneficiary passes away. Instead, the rights fall back to the owner without any compensation.
There is no 30-year-limitation in the usufruct legislation, therefore, it’s duration depends on the health of the beneficiary. In some instances, it is appropriate to grant the usufruct for a limited period of time or till the death of the recipient, whatever comes first.
Co-usufruct vs. co-lessees
It might be a smart concept to invest in Thai property by entering into a lease agreement with two or more lessees. If one of the lessees passes away, the lease agreement survives, if properly drafted, till the last surviving lessee passes away – or after 30 years elapsed, whatever comes first. However, if the co-lessees are a married couple, the legal implications under the family law of Thailand should be considered.
This two-person-concept is typically not used for a dual usufruct. Two or more usufructuaries are (to our knowledge) not accepted by the land offices – for good reasons. If for example, the husband passes away, his right to possession, use, enjoyment, and management would fall back to the owner, who would step into this rights and is entitled to live happily together with the widow in the property.
While a co-lessee structure doubles the chances of the foreign investors to survive the end of the lease terms, a co-usufruct has the opposite effect. It does not end with the death of the last survivors but collapses with the death of the first beneficiary who passes away.
A foreign usufructuary who entered into a usufruct agreement together with his (Thai or foreign) wife should urgently look for professional assistance to repair the investment structure.
Usufruct registration vs. lease registration
A lease agreement for up to 30 years is valid even if it has been concluded orally and even if it is not registered on the backside of the Chanote. However, under Thailand’s lease legislation certain rights are enforceable by action only if specific requirements regarding written form and formal registration are met.
Thailand’s usufruct legislation does not mention any requirement to agree on a usufruct in written form or to have it registered. Even concerning its enforceability, there is no such requirement in the Civil and Commercial Code of Thailand. However, based on Supreme Court decision 6872/2539 it seems to be beyond controversy that a usufruct has to be registered on the backside of the title deed to be valid and/or enforceable.
Whether there is – besides – the legal requirement to have the usufruct in written form, is questionable. Typically the land officer likes to see the land office form with the names of participants, remuneration, limitation of duration if any, and both signatures on one document. But at the end, the usufruct is a real right, not a contract, like a loan or a lease. A convincing argument that the written form is legally required could only be seen in
- Section 1299 CCC: Subject to a provision of this Code or other laws, no acquisition by a juristic act of immovable or of real right appertaining thereto is complete unless the juristic act is made in writing and the competent official registers the acquisition.
The registration of the usufruct is subject to a fee of 1.x% of the contract value. Concerning this, there is generally no differentiation between lease and usufruct. However, in practice a usufruct is quite frequently granted as a donation and, therefore, the contract value is declared as zero. This leaves the land office with a registration fee of THB 75 per Rai – and the foreigner with two legal severe problems: (i) the conflict with foreigner legislation (see below) and (ii) the donation laws of Thailand:
- Section 531 CCC: The donor can claim revocation of a gift for an act of ingratitude … if the donee seriously defamed or insulted the donor. Section 534 CCC: If the gift is revoked, the property shall be returned under the provisions of this Code concerning Undue Enrichment.
It is well-known that any harsh foreigner’s argumentation very easily qualifies as defamation under the Thai criminal code. As a result, any donated usufruct, if seriously contested at a local Thai court, would have to fight an uphill battle to survive an angry Thai landlady when push comes to shove – even if she is not your common-law wife. It is the typical outcome of such cases that the foreigner is happy to waive for all and any usufruct rights if he is in return not convicted for defamation with the legal consequences for his right to remain resident in Thailand. A typical win-lose-situation.
“There is no such thing as a free usufruct in Thailand.”
Usufruct terms vs. lease on usufruct terms
On first sight, no one can grant a right greater than what he holds or has. However, the usufruct entitles the usufructuary to rent out the land to a third party. Such lease agreement survives the cessation of the usufruct by the death of the usufructuary and, therefore, creates a post-usufruct burden for the owner. Although it is not clearly stated in the law, the owner should not be obligated to tolerate a lease registration on his title deed. The often quoted
- Supreme Court ruling 2297/1998: “the lessor does not have to be the owner of the property. Therefore the usufructuary can rent out the land. Although in the event of the death of the usufructuary within the lease term, only the usufruct will be terminated but not also the lease'”
has a limited damage to the owner, because the lease can just be enforced for its first three years. Other questions are (i) whether the lease has a valid argument if he pre-paid the rent to the usufructuary, (ii) whether the usufructuary has to compensate for damage in case he uses the lease to artificially extend a limited usufruct period and (iii) which consequences a bad faith by the lessee has.
- It should be noted that other jurisdictions without lease registration obligation give the owner under such circumstances special lease termination rights (e.g. Section 1056 para 2 German Civil Code).
Usufruct vs. marital property regime
Property of husband and wife is generally marital property (Sin Somros, Section 1470 CCC). I case of a divorce, Sin Somros is equally shared between both spouses (Section 1533 CCC). Property belonging to either spouse before marriage or acquired during the marriage as a gift is qualified as personal property (Sin Suan Tua), which will survive the divorce as personal property (Section 1471 CCC).
A foreigner’s Thai wife is clearly allowed to acquire land in Thailand. However, land offices typically require a statement signed by both couples that the land has been acquired with funds of the wife and, therefore, qualifies as Sin Suan Tua. Even if such paper has not be signed, the financing through the foreigner might be qualified as a donation under Section 1471 Nr. 3 CCC with the same legal result that the foreigner has no claim for such assets under a divorce scenario.
- Land Department Form: “We together confirm that the money which Mrs. Thai shall expend on the purchase of land title deed … is wholly Sin Suan Tua of the personal property of Mrs. Thai alone, not Sin Som Ros or the matrimonial property between husband and wife.”
However, a usufruct on behalf of the foreigner to grant him a life-long right to live in the property could easily be seen as marital property. Since the foreigner provided the financing for the acquisition of the property it is hardly a gift to anyone. In the worst case this might have two unexpected consequences:
- The Thai wife might under Section 1475 CCC be entitled to be registered as co-owner of the usufruct as real right on the backside of the Chanote. This gives her the same use-rights as her husband and she can’t be compelled to vacate the property if the husband demands.
- In case of a divorce, the husband has a compensation obligation for 50% of the value of the usufruct vis-a-vis his ex-wife.
To register a usufruct on the Thai wife’s name without taking care that this real right is clearly qualified as Sin Suan Tua is nothing else than malpractice.
Usufruct vs. Section 1469 CCC
A usufruct does not provide protection against Section 1469 Civil and Commercial Code if the foreigner is legally married to the landowner. The fact that the usufruct is publicly registered at the land office does not protect the husband from a termination by his wife. The law does not distinguish between Thai, foreign and mixed couples.
- Section 1469 CCC: “Any agreement concluded between husband and wife during a marriage may be avoided by either of them at any time during the marriage or within one year from the day of dissolution of marriage; provided that the rights of third persons acting in good faith are not affected thereby.”
It is wishful thinking to argue that this section of the law is not applicable because the usufruct is registered at the land office. There is no such rule that the section is only applicable to non-registered rights and obligations. The clear wording of the law does not give any legroom for the interpretation that real rights are excluded from the applicability of Section 1469 CCC.
The last half sentence of Section 1469 CCC does not restrict the area of applicability between the parties of a usufruct (or any other contract). It just protects third parties’ good faith, not the rights of the parties under the usufruct. Whether such good faith must be directed to the fact that the parties are married or in other aspects, is another question. The line of argument that any registration results in publication and, therefore, effects third parties and, therefore, a usufruct can’t be canceled, is as full of holes as a Swiss cheese and as open as a bank vault.
“In Thailand, the marriage is the game-over for a usufruct.” Or in other words: “Your usufruct is not safe before your Thai wife passes away.”
Usufruct vs. superficies
It is a misconception that a foreigner can always own the house, just because the Land Code prohibits only foreign land ownership. Under Thai laws, the landowner automatically owns all and any buildings on the land and other improvements.
- Section 139 CCC: Immovable property denotes land and things fixed permanently to land or forming a body therewith. It includes real rights connected with the land or things fixed to or forming a body with the land.
As a consequence, the usufruct is extended into such buildings. This legal situation is not changed by any house registration document (Tabian Baan), blue book (Thor.Ror.14) or yellow book (Thor.Ror.13), a building permit or other governmental decree. The only two exceptions which allow a separation of land ownership and house ownership are (i) the provisions of the Condominium Act and (ii) Sections 1410 ff. CCC regarding a superficies.
The landowner may create a right of superficies by giving another person the right to own, upon or under the land, buildings, structures or plantations. Unless otherwise provided in the act creating it, the right of superficies is transferable and transmissible by way of inheritance. A right of superficies may be created either for a period of time or for life of the owner of the land or the superficiary.
“The superficies rules do not apply analogously if there are no superficies in place.”
If the building is already erected, it seems to be an open question, whether the beneficiary under the superficies automatically acquires legal ownership in the building or the landowner has to transfer the house ownership in a separate act. The practice of the land offices is inconsistent.
After a usufruct has been registered, the subsequent granting of a superficies would be possible, but the usufruct will survive and, therefore, it may not make sense in practice to combine both real rights on the same piece of land. After a superficies has been registered, the subsequent granting of a usufruct would be restricted to the land and would not cover the buildings.
“The usufruct gives the foreigner temporary ownership in land and buildings, while the superficies grants unlimited and inheritable house ownership on foreign land.”
Usufruct vs. Land Code
If a usufruct is agreed for general purposes, by which the usufructuary is entitled to the possession, use, and enjoyment of the property, there is no legal reason to decline the registration by the land office. The fact that Section 1417 CCC mentions the usufruct of a forest, mine or quarry and that the exploitation of the forest, mine or quarry is a business activity restricted for foreigners und der Foreign Business Act does not mean that a foreigner is generally not allowed to be usufructuary.
If the foreigner refrains from any activities and acts just as a passive holder of the land, this is perfectly within the scope of his allowed activities as usufructuary and no circumvention of the prohibition to acquire land under the Thailand Land Code.
- Therefore, the discretionary decision of the Land Department official not to register a foreigner’s usufruct is typically unlawful.
Usufruct vs. Thai anti-nominee legislation
In the past, foreign investors, residing far away from Bangkok, did not pay much attention to a sophisticated structuring of their land and house acquisition. They simply put it on the name of the Thai wife or life partner, trusting that they will dominate and control their investment by means of financial power or a weird life concept called love. They may or may not have declared in the infamous “Letter of Confirmation” that the land and house is not matrimonial property (“Sin Som Ros”) but separate or personal property (“Sin Suan Tua”) of the wife under Section 1471 Civil and Commercial Code.
After the relationship cooled down the foreign investor typically realizes pretty late, that it is high time to “secure your place in paradise”. With the registration of a usufruct on the land for the benefit of the foreigner, he expects to have an extensive protection mechanism installed. However, he has to convince (i) the often unwilling local land office to register this right and (ii) the landowner to agree on such right.
While a usufruct can be a perfect asset protection tool, things go south if the foreigner yields to the temptation to invest just the land office fee of THB 75 per Rai for a free usufruct without any remuneration to the landowner. Such remuneration is typically not agreed because the foreigner already donated the land to the Thai and is not interested to throw good money after bad. These THB 75 might turn out to be the most expensive investment the foreigner ever made.
The usufruct grants the beneficiary something like a “temporarily ownership”. Generally, neither the Land Code nor other Thai laws and regulations prohibit a foreigner to acquire a usufruct. However, the granting of a free usufruct comes very near to give away a piece of land for free. In practice, Thai landowners are not famous for granting expensive donations to a foreigner. The obvious answer is: If they give it away for free, they never had it before. They never had it before, because they just acted as a dummy for the real owner behind the legal owner. Such nominee position is a clear contradiction of the foreigner legislation and the crime is even registered at the land office.
- “Foreigners are prohibited to own land in Thailand. No one in their right mind would expect to find a lifetime catch-all solution for this serious legal restriction for the price of a cup of coffee.”
As of today, many land offices are unaware of this issue. But it needs just one court decision or a new regulation to implement a new policy and the crackdown would seize thousands of “usufructed” Chanotes and put to public auction. Therefore, after the donation of the land to the wife or girlfriend has been accomplished, it is definitely too late for a 75 Baht repair. A proper real estate structuring would be that the foreigner invests (more or less) 90% of the property price to acquire a usufruct and the remaining amount is then donated to the wife or life partner to acquire the already “usufructed” piece of land. Not a cheap solution, but bulletproofed.
“When push comes to shove, the free usufruct will eventually destroy your property investment in Thailand.”
Any foreigner should clearly understand, that a usufruct needs a registration to be valid, but such registration does not verify that the usufruct is effective and valid. In fact, it can be expected that hundreds or thousands of registered usufructs are void because they do not follow the Thai legal requirements as describes above. Neither the Thai government nor the legal owner of the land guarantees the validity of a registered usufruct. Given these limitations and traps, it seems not to be unreasonable to qualify the Thai usufruct as poisoned fruit of the forbidden tree. If they are not treated with the utmost precaution, they do more harm than good.
PUGNATORIUS Ltd. is a Bangkok-based specialist provider of bespoke transactional legal and tax advice in the corporate and property legal and taxation industry sectors.