The lease will not survive the lessee

ABSTRACT: Like it or not, your 30-year land lease rights are not inherited by your heirs if you pass away. That’s the law in Thailand. And your lawyer should tell you this during your lifetime.

This legal article explains that a “lease inheritance,” the automatic transfer of the lease rights for Thai real estate to the heirs if the lessee passes away, is just as sound and meaningful as to believe in a zombie apocalypse. The lease inheritance is nothing than a legal zombie and to use this absurd construct as a scam to dress-up the lease will result in disappointment on the lessee’s side and legal liability for damage compensation on the landlord’s respectively developer’s side. Therefore, don’t get fooled by the zombie priests who tell you that a contractual inheritance of lease rights is a valid legal option; it is just a zombie scam.

The inheritance clause in the lease agreement to let the lease survive when the lessee passes away is the same trick than to pull yourself out of the swamp by the scruff of your own neck. – Baron Münchhausen (Picture: public domain)

Under Section 537 CCC (Civil and Commercial Code of Thailand), a lease agreement is described as „hire of property“. Long term lease contracts for land and buildings are well known and well-proven investment structures for foreigners to legally circumvent the prohibition in the Thai Land Code to acquire ownership in Thai real estate. The maximum lease term allowed under Thai laws is typically 30 years and may not be extended, but the lease period can be renewed after (or before) it has elapsed. The laws do not provide for a renewal privilege, that means the renewal is just a new lease period and has to comply with the laws and regulation in effect when concluded.

  • The 30-years limitation is not a Thai specialty: “If a lease agreement is signed for more than thirty years, then each of the parties to the contract, after thirty years have passed, may after the surrender of the leased property terminate the lease for cause with the statutory notice period.” Section 544 s. 1 German Civil Code.  

From a commercial point of view the lease typically intends to replace a purchase and, as a consequence, the rent payments for the whole lease period are prepaid in full on the day, the possession and use rights are passed over to the lessee. However, this pre-payment clause does not change the legal character of the lease agreement. Therefore, each and any assumed implication of a leasehold investment should be tested under the scenario that the rent is not pre-paid but made in monthly or yearly installments.

Typically the lessee is an individual or a couple and, therefore, it is not assured that all lessees will survive the 30 year lease period. At the point in time, when the last lessee passes away, the lease agreement is automatically terminated and ends. It depends on the agreement, whether the prepaid rent has to be refunded proportionately by the lessor (landlord) and whether such payment claim will be part of the legal estate and inheritance of the lessee. Under the normal interpretation of the long-term lease, there is no obligation to pay back any rent prepayments in full or pro-rata-temporis. The survival risk is not equally shared between the contractual partners. The lessee dies on his own alone.

A succession clause can’t keep it alive

In most cases, the lease agreement has a so-called „succession clause“ (also called inheritance clause) under which the lease agreement it automatically transferred to the heirs of the lessee and they magically step into all rights and obligations. Such succession clause is from a legal point of view void and useless. A lease right cannot be passed on to an heir because it is an individual right of the lessee and not an inheritable and hereditary asset.

The inclusion of a succession clause base on the ill perception, that the lease contract can resurrect like a zombie from the grave if this is just explicitly written in the deed. Such zombie apocalypse is not real. A mystical reawaken of a terminated and dead agreement has never been considered by the Supreme Court of Thailand. In contrary, the Supreme Court ruled in his judgment 1108/1994 very clearly that

  • “the lessee is the essence of the lease agreement. Therefore, should the lessee pass away, the lease contract will be terminated and the lease rights will not be transferred to the heirs of the lessee“

The Dika ruling 100/2531is a further reference for this legal view. The Supreme Court clarified that

  • “the lease rights terminate upon the decedent’s death and cannot become the estate of the deceased.”

Strange to say but this ruling is misused, twisted and perverted by the zombie rabulists as an unexplained evidence for the legitimation of lease inheritance through the Supreme Court of Thailand. They see no difference between the personal right of the heir to request a new lease agreement and the automatic transfer of the property lease to the next generation. But you can’t hide forever behind a misinterpreted court decision from the light of the truth.

  • German legislation gives the lessee’s family members and heirs under certain conditions an explicit step in right if he passes away (Section 563, 564 German Civil Code). Similar laws can be found in Austria and other European countries – but not in the Thailand CCC.

An unsuitable attempt to bewitch the law

This ruling by the Supreme Court is a confirmation that such lease rights do not fall under the category “rights, duties and liabilities” within the meaning of Section 1600 CCC, which defines the legal estates of a deceased. Therefore, they are not included in the estate of the deceased. And this legal concept has always been recognized and undisputed by the legal community.

There is no clause in the inheritance laws of Thailand that says „deviating from Section 1600 CCC, a contractual right can be made inheritable if the parties just agree so in a contract“. Therefore, it should be obvious that type and scope of the legal estates are defined by the laws and not at the disposal of any contractual party. This seems to be an international legal concept and is not limited to the laws of Thailand. The succession clause is no voodoo kiss of immortality to the lease agreement, not even a nice try.

  • Section 1298 CCC: “Real rights may be created only by virtue of this Code or other laws.”

No need to open the empty grave

The question, whether the laws of Thailand explicitly or implicitly prohibit a leasehold interest to be inherited, would miss its target and is a failure to face reality. The legal conception not only in Thailand is, that the lease rights of the lessee elapse in the eleventh hour of his death and, as a consequence, the legal estates do not contain such lease rights or leasehold interest. Thai laws do not prohibit to pass over the zombie to the heirs – they just realize that the grave is empty.

And this legal conception is consistently implemented in the law: Section 544 CCC provides that the lease can be restructured if this has been agreed in the contract. This does not come as a surprise and cannot be used as a voodoo argument for the survival of the lease if such restructuring has not been taken place before the lessee passes away. Needless to say that Section 569 CCC, which constitutes the „sale does not break lease“ rule is no argument for this either.

Don’t take it purely personally, but the lease inheritance is a zombie myth

It is out of the question that lease rights generally do not qualify as „purely personal right“ in the meaning of the inheritance legislation (Sections 1599, 1600 CCC). The lease is a proven substitute for legal ownership of the foreigner and it would be frivolous to tell the lessee that his lease rights are not fully-fledged but have limited enforceability.

  • Example: The lessee might be a doctor and the lease agreement might, therefore, contain a clause under which he is obliged to medicate the landlord if he gets sick. This is a typical case of a personal right and it will not pass over to an assignee if the lease agreement has been legally transferred under Section 544 CCC. However, even these personal rights will not survive the death of the lessee – the landlord is not even interested to be treated by the doctor’s underaged daughter. To argue that this is an exception and lease rights should normally not be seen as purely personal is self-evident and would mean to knock on an open graveyard door.

The succession clause will not “un-personalize” the land lease. A long-term prepaid lease agreement is economically an (insufficient) replacement for a land transfer agreement – which can’t be done with a foreigner. The lessor typically gets the same payment than the seller under a sale and purchase agreement. Therefore, he has no further personal interest in the lessee than he would have in a buyer. Under a one-year lease agreement lessors may have – or have not – an interest in who leases their property, but this is definitely not the case for a 30 year pre-paid lease. As a result, “purely personal” is not the problem and to “un-personalize” is therefore not the cure.

Reality check in the zombie world

The reality check on the inheritance myth may come as a shock to real estate developers as well as foreign investors in leasehold interest, who have been wrongly advised before. However, now it’s not the time to be nice, and typically it is not too late to change strategy and to repair investment structures before they collapse and crumble under legal pressure. Therefore, the client should request from his legal counsel an explanation why his specific leasehold interest is inheritance protected – this means that the lease rights will automatically transfer and pass over to the heir, even with a non-cooperative landlord.

The blunt statement that any and all contracts or any and all lease agreements (cars, short-term holiday apartments, machinery) can be inheritable has for obvious reasons a very limited creditability. Instead, valid legal arguments have to focus on the peculiarity that (i) the leased asset is real estate and not mobile, (ii) the lease is long-term to the maximum period permitted under Thai laws and (iii) the rent has been prepaid in full. If the counsel’s argumentation fails this test, it is just bokor’s sorcery and enchantment, too light-weighted to be taken seriously and not good enough for a real estate investment.

A renewal right is no magic silver bullet

However, the parties of a lease agreement may agree that the lessor should be obliged to enter into a new lease with a third party, for example, the heirs of the lessee, if and at the point in time the lessee passes away. An obligation to enter into a new lease is a totally different legal concept than a succession clause. A new lease agreement has to be prepared, signed and registered at the local land office. Nothing is accomplished automatically and if the landlord – for good or bad reasons – does not fulfill his promise, the heirs might be forced to start a long-lasting litigation before they are allowed to set a foot on the leased property. This is generally not different from a lease period renewal right, agreed for the second or third 30-year-lease period.

Also, it has to be considered that such a promise is given by a specific person only. If it can’t be fulfilled any longer, because land and property are transferred by sale or inheritance to a third party, even a litigation would be meaningless. Under the legislation of the Supreme Court, this legal analysis would be also unchanged, if such clause has been formally implemented in the original lease agreement. It will not become part of the lessor’s obligations and will not benefit from Section 569 CCC, under which the hire-of-property duties of the landlord have transferred automatically together with the transfer of ownership to a third party and the lease remains in force.

The land officer will not follow the zombie path because he does not believe in the lease inheritance

It is the current industry practice in Thailand that the landlord respectively developer of villas and resort projects as a general marketing policy agree to replace the dead lessee by his heir or any other designated person for a new lease term of 30 years or at least for a new lease with the remaining lease term. Such contractual restructuring should not be misunderstood as a legal effect of the inheritance – it is the same situation as an anticipated succession inter vivo.

While it is out of the question that such new lease registration, explicitly approved and supported by the landlord, is legal and valid, it depends on his voluntary cooperation at the point in time the land office record is made. There is no protection at all against a future (self-opinionated, ungrounded and independent) policy change of the landlord. If the heir has to show up at the land office alone, with nothing in his hand than an heir’s certificate, he will not be successful on the night of the living dead – and is not even successful today under the sun of Thailand. The statement that it is the current policy for the local land offices to accept the concept of inheritance and register the heir accordingly is, therefore, misleading, insincere and does not reflect true reality.

If you like to open muggy old graves, you will find deep down in Siam’s earth the Land Department No: Mor Tor 0608/ Wor 6475: August 15, 1967. It is nearly 50 years old, nearly forgotten by the livings and will definitely – apart from its ambiguity and flabbiness – not be the sufficient basis for any investment decision in Thailand in the 21. century. If this old announcement, written on papyrus, is used to put present-day investors under a zombie spell, you should at least realize that such behavior reflects the simple fact that sufficient evidence is lacking that your land office in charge will believe in that inheritance zombie lease myth.

Apart from these rules, there are certain tools and modules to safeguard the economic position of the lessee under specific scenarios. The courts of Thailand act in these cases more in the role of a social engineer and protector of future foreign investments than as an unbiased and cool applier of the laws. High professional legal drafting can make for the heir the difference between to have and have not. Because there are no zombies in the real world and there are no zombies in the legal world either. The law firm advises on property developments and secure investments in land, villa and resorts project as well as condominium acquisitions.

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