Recently local authorities have promised to “crack-down” on illegal hotels. If you are a homeowner in Thailand you may think this is not a concern of yours. However, if you are renting your house or condo out – or if you are using a company to own it and are staying it yourself – this does indeed concern you. Local authorities are empowered under two laws to regulate and tax you in such cases: 1) the Hotel Act; and 2) the House and Land Tax Act.

Hotel Act

The Hotel Act (2008) requires any place that provides accommodation for less than a period of one month in exchange for payment is defined as a “Hotel”, regulated by the Hotel Act, and requires a hotel license.

There is a limited exception to this if:

1) the said place has less than five rooms; and

2) cannot accommodate over twenty guests at a time; and

3) the income being earned for such is merely “additional income”,

a license is not required. However, even in that case the owner must report to such accommodation activity to the relevant local authorities.

Anyone who operates Hotel without a license is liable for:

a) a fine of up to THB 20,000; plus

b) a fine of up to THB 10,000 per day of such illicit operation; and

c) imprisonment for up to one year (in the case of a company the person subject to such imprisonment would be director).

House and Land Tax Act

If you or your company own a condominium unit or villa here in Thailand that was used, even if only for one day, by someone other than its legal owner (with or without you having received rental income), then you or your company have incurred liability under the House and Land Tax Act (1932) (“HLT“). The HLT tax is imposed on the owner of such structures, if they receive or should have received, rental income. And the HTL tax is one of the few taxes that localities, rather than the national revenue authorities, are empowered to collect. An important exemption from the HLT tax applies to “houses or other structures inhabited by the owners thereof (…). The amount of HLT tax is 12.5% of an amount equal to the annual “rental value.”  It is calculated based on the total annual rental value of the foregoing year. The annual “rental value” is defined as the “sum for which the property might reasonably be expected to let from year to year. When there is a lease, the rent is the basis of the annual value (…)”.

Thus, for example, if you allow an acquaintance stay a few days in your villa or condominium without you, the authorities have the discretion to determine that you did, or should have, charged rent. They may then charge you an amount equivalent to 12.5% of total amount of money that they think you did, or could have, earned by renting it during the entire preceding year. Thus again, if your property is subject to assessable rental income for even one day, then the HLT tax is payable in an amount of 12.5% of the total rental value for the entire year.

Any owner of property subject to HLT tax is required to submit their official declaration of the annual rental value of the property for the foregoing year within 30 days after having received notice from the relevant authorities (or within the time frame outlined in the same notification). The relevant local authorities may then use this information to determine the annual rental value of the property and the amount of tax to be paid.

However, if the local authorities do not agree with the rental value figures submitted, or if no figures are submitted, they are empowered to assess and assign the rental value themselves. Such assessment may be appealed if the owner submitted their official declaration. But not doing means the right to appeal the assessment is waived. Failure to file the official declaration or providing false information, or doing so in order to evade the proper calculation of the annual value, is punishable by fines, imprisonment, or both.

Liability when Using a Company

There are exemptions from the tax under the HLT. The most common is found under Section 10 and is applicable if the houses or condo is inhabited by either:

a) an agent (of the company) to protect the place; or

b) the owners thereof.

One might suppose that one or both of these exemptions must apply where the director of the company is the one staying in the house or condo. After all, isn’t it the director of a company legally obliged to protect the company’s property?

Unfortunately, however, in 2006 the Supreme Court did not concur with this reasoning (ruling no. 1410/2549). Instead, the Supreme Court held that an “agent to protect the place” requires that the agent be actually assigned to protect the building and not just allowed to live there. Thus, according to the Supreme Court a company owning a structure and having its legal representative residing in the building for dwelling purposes is not eligible to that part of the Section 10 exemption.

Alternatively, one might suppose that the other Section 10 exemption should apply to a company’s director. After all, isn’t the director basically the company itself with regard to interacting with third parties—in other words, isn’t the director staying in the building owned by the company the same thing as the owner of the building staying there itself? Unfortunately however in 2007 the Supreme Court said “no” (ruling no. 689/2550). The Supreme Court reasoned that a company can use a structure it owns as a registered address or in the course of its business and therefore it does not need its director to stay there. Moreover, said the Court, since the director is a distinct legal entity from the company, the director living in the building is not the same as the company living in the building. Therefore, the “owner” exemption provided under Section 10 of the HLT also does not apply to such a case.

Thus, if any company—whether Thai or off-shore—owns a house or condo in Thailand and someone, including the director, stays there even for one day, that company will be liable to pay HLT tax.

In closing, it should also be noted that the HLT tax is not the only tax applicable to such use of a building owned by a company. Rental income tax is also payable and assessable by the Revenue Department under the Revenue Code.

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DUENSING KIPPEN is an international law firm specializing in business transaction and dispute resolution matters, with offices in Bangkok and Phuket, Thailand and affiliated offices in 45 other countries. Visit them at: duensingkippen.com

The relevant details of the three regulations providing for the fee reductions are as follows:

1. UNREGULATED LAND AND BUILDINGS: Ministry of Interior Regulation Regarding Registration Fee under the Land Code for Housing (published in the Royal Gazette on 28 October 2015)

To boost sale and purchase of immovable property in Thailand, the Cabinet on 13 October 2015 has resolved to set registration fee under the Land Code for the transfer and mortgage of housing property as follows:

Clause 1: Registration fee for the transfer of residential: detached house; twin house; row house, and commercial building, and any of these buildings with land where the building is located and such land is NOT under Land Allocation Act or under any development by the government, and mortgage of the said transferred property, would be at the rate of 0.01%.

Clause 2: This regulation is effective from 29 October 2015 to 28 April 2016.

Note: 0.01% applies to:
– Transfer of any of these buildings;
– Transfer of any of these buildings + land that is not under Land Allocation Act or government’s land development;
– Mortgage of any of the above (if for example Mr. A receives a house by gift or inheritance then he mortgages, he will not get this reduced rate);
– Not applicable to raw land (that is not in the licensed development);
– Not applicable to land that is not the location of the building even though such extra land is transferred (and mortgaged) at the same time as the house + land.

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2. LAND AND BUILDINGS WITHIN A LICENSED DEVELOPMENT: Ministry of Interior Regulation Regarding Registration Fee under the Land Code for Immovable Property Licensed under the Land Allocation Act (published in the Royal Gazette on 28 October 2015)

To boost sale and purchase of immovable property in Thailand, the Cabinet on 13 October 2015 has resolved to set registration fee under the Land Code for the transfer and mortgage of immovable property that is in licensed development under the Land Allocation Act as follows:

Clause 1: Registration fee for the transfer of land, land and residential building: detached house; twin house; row house, and commercial building, under Land Allocation Act or under any development by the government, and mortgage of the said transferred property, would be at the rate of 0.01%.

Clause 2: This regulation is effective from 29 October 2015 to 28 April 2016.

Note: 0.01% applies to:
– Transfer of land only, or land and any of these buildings in the licensed development project or the government’s development project;
– Mortgage of any of the above (if for example Mr. A receives a developed raw land by gift or inheritance then he mortgages, he will not get this reduced rate);
– both first hand and resale.

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3. CONDOMINIUMS: Ministry of Interior Regulation Regarding Registration Fee under the Condominium Act (published in the Royal Gazette on 28 October 2015)

To boost sale and purchase of immovable property in Thailand, the Cabinet on 13 October 2015 has resolved to set registration fee under the Land Code for the transfer and mortgage of condominium unit(s) under the Condominium Act as follows:

Clause 1: Registration fee for the transfer of the following condominium unit under the Condominium Act and mortgage of such transferred unit, would be at the rate of 0.01%:
(1) Transfer, and mortgage of all units at once in any licensed condominium under the Condominium Act;
(2) Transfer, and mortgage of any condominium unit in any licensed condominium under the Condominium Act.

Clause 2: This regulation is effective from 29 October 2015 to 28 April 2016.

Note: 0.01% applies to:
– Transfer of the whole condominium building or individual unit;
– Mortgage of the above (if for example Mr. A receives a condominium unit by gift or inheritance then he mortgages, he will not get this reduced rate);
– both first hand and resale.

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DUENSING KIPPEN is an international law firm specializing in business transaction and dispute resolution matters, with offices in Bangkok and Phuket, Thailand and affiliated offices in 45 other countries. Visit them at: duensingkippen.com

One of the most significant land use laws in Thailand is the Building Control Act (1979) (the “Act“). The Act regulates what and where can build in Thailand. To that end it empowers the Minister of the Interior to issue ministerial regulations (“MR“). These MR dictate:

-what the shape, size, and site of building can be;

-how far apart buildings must be;

-how much space can be built on;

-how close a building can be to a public road, the seaside, or other public place; and many others.

Each MR is generally effective within a specific geographic location, commonly within one of Thailand’s 77 provinces. But what if the MR that is effective where you want to build is either unclear as to whether you can build what you would like to or clearly prohibits it? Are you just out of luck and should forget such plans? Not necessarily.

Let’s look at the first situation. Say you want to build your dream house on your seaside plot of land but the relevant MR says: “Nothing may be built within 25 meters of the sea.” But the MR does not define where the “sea” begins. Your problem is you do not know exactly where the “sea” is. Is it the low tide line, the high tide line, perhaps the middle line between the two, or something else? You could just choose one of those and even get your building permit issued on the basis of your plans showing that your house will be “25 meters from the sea”. But if it turns out later you chose the wrong sea location, your house would be illegal (again even with the building permit issued) and could face demolition (as we have previously explained HERE). However, in such a case you could seek assistance from your relevant local government administration (“Local Administration“).

Section 10(1) of the Act allows a Local Administrations to issue a Consistent Bye-Law which further details any applicable MR as long as such bye-law is not contrary to the MR. A Consistent Bye-Law is effective once it is published in the Government Gazette. It can only be revoked or revised if the Minister, with advice from the Building Control Committee, later determines that in fact it is contrary to the relevant MR. Thus, if a building permit is issued under the Consistent Bye-Law while it is in effect, that building will be consider legally constructed.

Thus, returning to our hypothetical, say your Local Administration issued Consistent Bye-Law, which defined “sea” as “where the lowest tide line is”. You then applied for a building permit and built your dream house 25 meters from the lowest tide line. Later the Minister finds this Consistent Bye-Law to be contrary to the MR and orders it to be revoked. This would NOT affect the legality of your dream home.

Let’s look at the second situation, say your relevant MR clearly prohibits what you want to build. Staying with our hypothetical, say this time “sea” is defined as “25 meters from the highest natural tide line”. You want to build within 25 meters of the highest tide line, but more than 25 meters from a permanent sea wall that was recently erected to prevent erosion in that locality including in front of your property. The permanent sea wall well after the relevant MR was issued and clearly the “highest natural high tide line” is well past this manmade obstruction.

Section 10(2) of the Act allows a Local Administration to issue an Inconsistent Bye-Law, which is contrary to an applicable MR “owing to special necessity or special reasons for such locality.” An Inconsistent Bye-Law must first be submitted to the Building Control Committee, which has 60 days to approve or reject it. If the Building Control Committee does not act with 60 days the Inconsistent Bye-Law is considered approved and must then be sent to the Minister for consideration. If the Minister does not approve or reject it within 30 days, the Inconsistent Bye-Law is deemed approved by the Minister as well and will be effective upon publication in the Government Gazette. However, if the Minister, with advice from the Building Control Committee, later determines that the Inconsistent Bye-Law causes an excessive burden on the public or is a public health risk, the Minister may order the revocation or revision of the Inconsistent Bye-Law. But if a building permit is issued under and Inconsistent Bye-Law while it is effect, that building will be considered legally constructed.

Thus, in our second hypothetical, say your Local Administration were to have an Inconsistent Bye-Law approved perhaps due to the “special reason” in your locality that the permanent sea wall was there for the public good and since it is permanent its location was the highest point the tide would ever reach. You then obtain a building permit and build as planned less than 25 meters from the highest natural tide line but more than 25 meters from the manmade permanent sea wall. Your dream home would be legal regardless of whether or not that Inconsistent Bye-Law remains effective thereafter.

In closing it should be noted that the Act is not the only land use law to be considered in Thailand when deciding what and where to build. There are other laws to consider particularly those related to environmental protection and town and city planning. And, in fact, the Act itself stipulates that any bye-law whether “consistent” or “inconsistent”, as we have termed them, contrary to the law governing town and city planning will be superseded by the latter.

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DUENSING KIPPEN is an international law firm specializing in business transaction and dispute resolution matters, with offices in Bangkok and Phuket, Thailand and affiliated offices in 45 other countries. Visit them at: duensingkippen.com

 

 

Recent Thai court rulings which have held the so-called “collective leasehold” or “secured leasehold” (“Collective Lease”) to be void, have created quite a stir among Thai real estate developers and investors. This is because many developers who sell to foreign investors have been marketing and selling the Collective Lease for several years now in Thailand. Thus, the implications of these rulings could affect a significant segment of the real estate market in Thailand.

A long-term lease is a common means for a foreigner to invest in Thai real estate. This is due largely to the fact that Thai law, with some limited exceptions, prohibits foreign freehold ownership of real estate. However, under current Thai law, the maximum lease term is a mere 30 years. Thus, it has become rather common for developers, who are marketing to foreigners, to offer a long-term lease of 30 years with two additional successive 30-year term renewals.

Under Thai law, however, any such additional term is not an “extension” of the lease; rather it is merely a “renewal” of the lease. This means that the new term is essentially a new contract. The result is that if the owner of the property changes during the first lease term, the new owner will not be obliged to honor the renewal of the lease, even if the lessee has already pre- paid the original owner for the renewal term.

In an effort to address this insecurity, many developers offer the Collective Lease. They promise not only a lease but also acquisition of shares in a Thai limited company that owns the land that will be leased to the investor. Other investors in that same development would then do the same–lease their land and also become one of the owners of the land owning and land leasing Thai limited company. The idea is that eventually all of the investors in the development would “collectively” control the land owning and land leasing Thai company. Purportedly, this would then in turn ensure that the Thai company would renew all of the investors’ leases for the two successive 30-year terms—“guaranteeing” or “securing” the investors’ full 90 years.

We have already detailed in previous articles here and here why the Collective Lease does not achieve the security for the foreign real estate investors in Thailand that it advertises. Now added to that, we have the holdings of two Thai Trial Court and three Thai Appellate Court judges who have held the Collective Lease legally “void”, in other words, legally invalid. We have explained those rulings here. We wish to emphasize that this law firm does not agree with the legal holdings of these five judges. However, given that the Collective Lease fails to provide any real security and that Thai judges are not bound to agree with the legal opinions of this law firm, it is not surprising that real estate developers and investors in Thailand are looking for an alternative to truly secure real leasehold investments.

Any alternative must avoid the issues that might be created and which are not dealt with by the Collective Lease. It must address: (1) the risk that the lease may not be renewed for a second or third 30-year term, (2) the tax issues created by a lease renewal in light of the pre-payment for the commonly marketed 30+30+30 years lease; and (3) issues relating to the use of illegal Thai shareholding “nominees”. The only alternative that does all of this is what I will refer to here as the “Lease-Mortgage”. It is not only a simple structure; it reflects what is already actually happening in most of these common 30+30+30 year lease agreements in Thailand.

As alluded to above, these lease agreements are almost always “pre-paid” in full. However, the two additional 30-year renewal terms can only be granted and effected at the end of each prior 30-year term. Thus, the current landowner has merely promised he will give these additional terms to the lessee in the future, yet he has already received money for them. This is “money for nothing” in return or, legally speaking, a “loan”. Until such money is paid for something that is actually provided, under the law it is merely a loan. Thus, in all of these common structures where a single lease payment covers all 90 years, two-thirds of the payment is, from a legal standpoint, merely a loan. And what is the simplest and best way to secure loaned money? Do exactly what banks do — subject the loan to interest and register a mortgage against the land to secure the loan and applicable interest.

The Lease-Mortgage does exactly this and thereby simply provides the accurate legal structure for what is already happening as a practical matter (the lease for the first 30 years plus a loan for the next two 30 year terms) by adding what should happen in such cases (interest on the loan and a mortgage securing the loan for the next two 30 year terms) through the combination of: (1) the 30+30+30 year lease agreement with, (2) a loan and mortgage agreement. Once the agreements are finalized, the first 30-year lease term is registered on the land and a mortgage securing the loan of the rent for the two additional 30-year renewal terms is also registered on the same land.

If the lease is renewed, for the second 30 years, that portion of the loan is, again in non- technical language, “forgiven” because the parties agree that it then becomes rent for the second 30-year term. In other words, since the second term is actually provided at that time, it is no longer a loan but a rent payment — and the mortgage covering that portion of the loan is also then automatically removed from the land. The same would then hold true for the loan of the rent for the third 30-year term and the mortgage securing it.

However, if at the end of the first or second 30 years the lease is not renewed for any reason, then the investor will be able to immediately foreclose on the property, have it sold, and recoup his investment.

Let’s return to our points above.

(1) Does the Lease-Mortgage address the risk that the lease may not be renewed for a second or third 30-year term?

YES.

As outlined above, the investor’s prepaid investment and interest is secured by a registered mortgage on the land title deed. Thus, the investor’s security, the mortgage, “remains with the title deed” regardless of whether or not the land is ever transferred to a new owner. If the lease is not renewed as required, the investor may have the land sold and receive the sale price to cover his original investment and interest. However, even if the land were transferred, the more likely scenario would be that the new owner would be willing to honor the renewal term and await its end, rather than lose the land by a forced sale.

(2) Does the Lease-Mortgage address the tax issues created by a lease renewal in light of the pre-payment for the commonly marketed 30+30+30 year lease?

YES.

As explained above, the Lease-Mortgage reflects what is actually agreed upon between the parties: a total pre-payment for 90 years of lease, which shall be payment for three successive 30-year terms.

Under the Collective Lease, this is a major problem for the land owning and leasing Thai company. The Thai tax regimen will interpret full payment only for something actually provided. And as we explained, only the first 30-year lease term can be actually provided. Absent any other legal explanation for the payment, all of it will be considered income for that Thai land owning and leasing company for the first 30 years and it will all be taxed accordingly in the first 30 years. Thus, the Thai company will unfortunately have all of its lease income taxed 30 to 60 years in advance of when it should have been.

Furthermore, the Thai land owning and leasing company will not be able to account for income from the lease in the second and third 30-year terms. The Revenue Department will expect income for those later terms and may assess factious rental income and tax it; if not paid, the land will be seized and sold to a new owner. In such case, any lease renewal terms will be unenforceable.

However, none of this horror story is the case with the Lease-Mortgage.

The land owning and leasing company, the developer’s company, is not financially affected at all. It still receives the exact same amount as under the common pre-paid lease with two renewals. But under the Lease-Mortgage, the payment will be booked differently to accurately reflect the 1/3 rental income for the first 30-year term and the remaining 2/3 balance, as a loan. Loans are not taxed and, therefore, the Thai land owning and leasing company/developer thereby also benefits under the Lease- Mortgage structure by having (1) the rental income properly taxed over the correct 90- year period, as well as, (2) the liquidity of as yet untaxed loan cash available during the first and second 30-year terms.

(3) Does the Lease-Mortgage address the issues relating to the use of illegal Thai shareholding “nominees”?

YES.

A Thai company limited cannot own land and lease it if there are not at least two individual Thais who own shares directly or indirectly in that company. However, it is illegal for Thais to hold shares in a Thai company as “nominees” to benefit a foreigner. Thais cannot lawfully hold such shares “in name only” without actually having invested in that company. Unlike the Collective Lease, the Lease-Mortgage does not require an investor to risk using such Thai nominees because the Lease- Mortgage investor is not forced to become a part owner of any Thai company in order to purportedly secure his lease in Thailand. The Lease-Mortgage investor is, therefore, at no risk of losing his lease investment due to the use of any such Thai nominees.

Thus, the Lease-Mortgage is a much better alternative to the Collective Lease. Obviously, it is at best implemented in the beginning of a development before the first leases are entered into and that is the context in which we have discussed and detailed the Lease-Mortgage above.

However, it should be noted that existing developments and their investors may also benefit from the use of a mortgage as a security for the renewal of a lease. This is what we will refer to as a “Penalty-Mortgage”.

A Penalty-Mortgage can be implemented in an existing development to provide its investors with an additional layer of security in relation to the renewal of their leases. And it is quite easy to implement. The lessor and the lessee simply enter into a Penalty Agreement, which provides that lessor will be subject to a significant Thai Baht penalty in the event that the lease is not renewed as required under the lease agreement. That penalty is then secured with a registered mortgage on the leased land.

As with the Loan-Mortgage, the security provided to the investor by the Penalty-Mortgage also “travels with” the land title deed. Regardless of whether or not the land is ever transferred to a new owner, if the lease is not renewed as required, the investor may have the land sold. The investor is then entitled to receive the sales price to cover his original investment and interest as provided under the Penalty Agreement. However, even if the land were transferred, the more likely scenario would be that the new owner would be willing to honor the renewal term and await its end, rather than lose the land by a forced sale.

The simple elegance and accuracy of the Lease-Mortgage and Penalty-Mortgage provide uncomplicated security and enhanced resale value for investors, as well as, greater marketability and other financial benefits for developers.

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DUENSING KIPPEN is an international law firm specializing in business transaction and dispute resolution matters, with offices in Bangkok and Phuket, Thailand and affiliated offices in 45 other countries. Visit them at: duensingkippen.com

Some real estate development structures that are marketed to foreigners in Thailand are commonly referred to as a “collective lease” or a “secured lease”. For simplicity’s sake we will refer to it in this article as a “Secured” Lease.

As a general rule foreigners cannot own land and apartment units, but it is possible for foreigners to lease them and that is the reason why these are commonly marketed to foreign buyers on a leasehold basis. Under Thai law the maximum lease term is thirty years, which may be renewed upon expiration of that term. And the leases marketed to foreigners typically provide for an initial thirty-year term plus two additional successive thirty-year renewal terms. However, for reasons we will not explore in this article, the renewal of a lease in Thailand is by no means assured even if it is provided for in the original lease agreement. To overcome this issue the “Secured” Lease is marketed to foreigners. It is meant to secure the lessee’s renewal terms and insure that the lease is renewed as originally agreed. Purportedly, the way this “security” is provided is by the buyer not only entering into a lease agreement with the developer’s land/apartment owning Thai company but also entering into a share sale and purchase agreement for shares that control the developer’s land/apartment owning Thai company.

In a previous two-part article (here: http://www.thephuketnews.com/phuket-law-does-going-collective-fix-your-lease-renewal-problem-38440.php and here: http://www.thephuketnews.com/phuket-legal-the-hidden-dangers-lurking-in-collective-leasehold-contracts-39265.php) we have detailed why we believe that “Secured” Lease actually does not in fact provide any significant assurance that your lease will be renewed. However, beyond our own legal opinion on the subject, two different Thai courts have recently concluded that the “Secured” Lease is “void” as a matter of law. A contract that is found to be void is considered to have never existed. If other courts confirm these courts’ opinions, then not only will any renewal term of “Secured” Leases be invalid but also their current lease terms. It should be noted that this would be the case regardless of whether or not such a lease was already registered. Why? Because a finding that a lease is void means that it never legally existed and, therefore, as far as the law is concerned a void lease cannot be, nor ever could have been, registered. Even if the legally void lease went through the land office formalities of registration, with registration fees paid, papers signed and stamped by the land officials, it simply does not change the legal non-existence of the void lease, as legally, nothing happened by such acts.

In the abovementioned court cases the buyers entered into the project’s “Secured” Lease structure. Leases, in this case for apartments, were registered several years ago. The lessees filed a civil case against the developer of the project in the Civil Court to protect their leasehold rights. Neither the buyers nor the developer argued that the leases were not valid. Quite the contrary: they both relied on provisions of the leases to support their arguments. However, the court deemed on its own that the leases — when considered in light of the share sale and purchase agreement for the shares that control the developer’s land/apartment owning Thai company — were actually fictitious agreements made to conceal what the parties actually agreed, to sell and purchase the relevant real estate.

Section 155 of the Civil and Commercial Code of Thailand (the “CCC“) provides that if two parties enter a fictitious agreement in order to conceal their real agreement, the fictitious agreement is void. Section 155 goes on to state that although the fictitious agreement is void, the hidden agreement that the parties actually made must then be evaluated under the provisions applicable to it.

In this case, the court deemed that the parties had entered into fictitious lease agreements through the “Secured” Lease structure and had done so in order to hide their actual agreement to sell and purchase the properties. According to the court, this meant that the leases were void and that the provisions of Section 456 of the CCC applied to the “real” sale and purchase agreements. Section 456 provides, in pertinent part, that “a sale of immovable property is void unless it is made in writing and registered by the competent official.” The court then concluded that since these sales were not made in writing nor registered with the competent official and that, therefore, they were void.

This ruling, by two trial court judges, was then appealed to a three-judge appeal court panel. The appellate court confirmed the trial court on the very same factual and legal grounds as the trial court outlined above:

a) the “Secured” Leases with their leases + share sale purchase agreements were fictitious agreements meant to conceal actual sale and purchase agreements for the real estate; thus

b) the leases and share sale purchase agreements were void; as were

c) the actual concealed real estate sale and purchase agreements because they were not made in writing and registered with the competent official.

Taking these new decisions into account the “Secured” Lease not only does little if anything to address the very real insecurity that your long-term lease will not be renewed, but it also could have the disastrous consequence that your current lease could be considered legally void. And by these courts’ analysis, anyone who has already or is considering investing in such a structure is facing the immediate loss of the investment. Fortunately, however, there are far better legal means than the “Secured” Lease that do provide actual long-term lease security and without any downside to the developer. This can be achieved by securing the pre-paid renewal terms with a mortgage over the land plot in question. It is a simple and straightforward legal structure that provides security for the investor and, therefore, a marketing opportunity for the developer. And in some circumstances a current “Secured” Lease can be restructured into this better and actually secure alternative, before it is too late. But, as always, you should first engage competent legal and tax counsel in order to successfully implement this preferred lease security structure.

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DUENSING KIPPEN is an international law firm specializing in business transaction and dispute resolution matters, with offices in Bangkok and Phuket, Thailand and affiliated offices in 45 other countries. Visit us at: duensingkippen.com

 

A high-end mixed use residential Complex consisting of a twenty-four storey hotel and an eighteen storey apartment in the heart of Bangkok, which was only recently completed with a construction cost price tag of approximately three billion Thai Baht (almost one hundred million USD) — has just been ordered demolished by the Supreme Administrative Court in Thailand; there is no further appeal available, the order is final.

Media reports on this can be read here:

http://www.bangkokpost.com/news/general/446805/court-orders-demolition-of-aetas-hotel

http://www.nationmultimedia.com/national/BMA-ready-to-order-Aetas-hotel-demolition-30249099.html

At issue here was the width of the public road next to the Complex. In order for the Complex to be built the law required that the public road be at least ten meters wide. The Complex’s owner argued that it complied with all legal requirements for the construction. And, with regard to the road width, the owner cited a document issued by the Public Works Department, which among other details, opined that the width of the road adjacent to the complex would allow for the construction of Complex’s high-rise buildings. However, after residents living nearby the Complex filed an administrative court case claiming that the Complex construction was unlawful, the Public Works Department re-measured the road and found it to be less than the required ten meters in width.

Given the facts of this case that we do know and for purposes of what follows, we will assume that the Complex’s developer was allowed to a build based on the initial measurement of the Public Works Department which satisfied the legal requirements of adjacent public road width for the construction of high-rise buildings.

Why would the Supreme Administrative Court order an existing building to be demolished even though the developer believed it had, and indeed may have, obtained a building permit for the construction of the project? Such questions are particularly relevant for villa and other structure owners in Phuket where, for example, construction in violation of of the eighty-meter elevation and proximity to the sea restrictions are rampant. To answer we must first understand the legal status of a building permit in Thailand.

From a legal perspective, the issuance of a building permit is an “administrative order”. An administrative order is defined in Section 5(1) of the Administrative Procedures Act (1996)(“APA”) as follows:

An exercising of powers under the law by the competent officers with an effect of creating legal relations between persons in such a way to create, change, transfer, reserve, suspend, or which renders an effect to the status of rights or duties of a person, whether it be permanent or temporary, such as, ordering, permission, approval, decision of appeal, certification, and acceptance of registration, but excluding an issuance of rules.

The relevant law that provides for the issuance of a building permit administrative order is the Building Control Act (1979)(“BCA”). And if you want to construct, modify or move a structure in Thailand you need this administrative order under the BCA, a building permit. The administrative procedure to obtain it is as follows. The applicant submits an application and relevant accompanying documents to the relevant local administrative office. That office then verifies the application documents (e.g. construction drawings and specifications, etc.) and finding all such in order, then schedules a construction site visit. This process includes review of relevant law to determine if the contemplated building is legally permissible. In certain areas of Thailand, like Phuket, the land use is primarily regulated by three laws: (1) the BCA; (2) the City Planning Act (1975); and (3) the National Environmental Control and Maintenance Act (1992).

If all the application documents are in order and the building is legally permissible at the applied for location, the local administrative office must issue a building permit. Thus, the legal effect of this administrative order is the legal permission to a person to build a certain structure on a defined plot of land. Once a party has received a building permit then cannot be stopped from exercising their rights under the permit. As long as the building permit is in effect, the applicant has the right to construct the building as permitted. Section 42 of the APA makes this clear: “an administrative order shall be valid so long as it is not revoked or terminated by time condition (…)“.

It should be noted that building permission is not open-ended — it does expire. The temporal validity of a building permit depends on the size of the building to be constructed. Permits of one year are issued for buildings of less than 10,000 square meters, two years for buildings exceeding 10,000 square meters, but not exceeding 100,000 square meters, and three year permits are issued for buildings exceeding 100,000 square meters. These permits are renewable up to four times. The first renewal will be for same period of time as the initial term for which it was granted. However, the second, third, and fourth renewal term will be for a period of one year each. A little known fact in relation to building permits is that the permit holder has the duty to report the progress of construction and invite inspection of the same to the government every ninety days.

But can a building permit be revoked after its issuance and prior to its expiration? Yes, it can. Again, legally speaking, a building permit is merely an administrative order and administrative orders can be revoked by government administrative measures or court action. A relevant and interested “party”, in other words, any third party affected by such an administrative order (for example, an adjacent neighbour of a development that received a building permit) can initiate a revocation. If the relevant government office or court agrees that there is a factual or legal problem with that permit, the permit may be revoked or amended.

Building permit applicants and holders should take careful note that the relevant government office does not need to wait for the court to have any say. Section 49 of the APA states:

The competent officer or the supervisor of the competent officer may revoke an administrative order according to the bases in Section 51, Section 52 and Section 53, whether or not it has passed the steps of appeal or protest under this law or other laws.

The conditions for revoking an administrative order (without appeal) are strict and if revoked the consequences of such revocation depend on whether or not the original order was lawful or unlawful. The revocation of a lawful administrative order/permit is subject to compensation by the government for damages arising out of the revocation. Whereas the revocation of an unlawful administrative order is only subject to compensation if the recipient of the administrative order/permit was not aware of the unlawfulness of the order. Section 51 of the APA makes the latter clear:

(1) The said person has produced false statements or has concealed facts which should have been reported, or has made a threat or a persuasion by offering property or providing any other benefits illegitimately; or

(2)The said person has produced statements which are incorrect or incomplete in the material part thereof; or

(3)The said person has known of the unlawfulness of the administrative order at the time of receiving administrative order, or his/her not knowing of such is due to his/her serious negligence

then such person will not be entitled to any compensation. Thus, an illegal building permit obtained through means of corruption, for example, is revocable without any compensation.

Therefore, once a building permit is received, that alone is no guarantee that the applicant will be able to complete the project to which the permit applies. A building permit can “expire”, be revoked after a court appeal, or be revoked by the relevant administrative government itself. To avoid the harsh consequences of a building permit revocation, it is strongly advised to perform a competent and comprehensive due diligence into the legality of the project prior to applying for the permit and to be certain that the project complies with law, regardless of the permit; no doubt the Complex owners now wish they had.

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DUENSING KIPPEN is an international law firm specializing in business transaction and dispute resolution matters, with offices in Bangkok and Phuket, Thailand and over 100 affiliated offices in more than 50 other countries. Visit them at: duensingkippen.com

Prior to the summer of 2014, many foreigners in Thailand who did not qualify for a long-term visa would achieve the same by entering, exiting, and re-entering Thailand on a short-term tourist visa. Thailand’s 2014 post-coup military government enacted regulations that ended this practice.

However, the good news is that there are other options, one of which is the “Investment Visa“. The Investment Visa provides a way for eligible foreigners to stay in Thailand without the need to leave on a regular basis and stay in Thailand on a long-term basis. This option might also provide an alternative that does not involve the annual proof of funds required to renew a “retirement visa” for retirees over the age of 50 who meet the other requirements for that visa.

The relevant regulations for obtaining an Investment Visa under Thailand’s Immigration Act are:

1. Royal Thai Police Bureau Order No. 327/2557 Regarding Criteria and Conditions for Consideration of Alien’s Application for Temporary Stay in Thailand, dated 30 June 2014, effective 29 August 2014 (the “Police Order“); and
2. Immigration Bureau Order No. 138/2557, dated 7 July 2014, effective 29 August 2014, issued under the Police Order.

Pursuant to the Police Order, a foreigner is eligible for a renewable Investment Visa if such a foreigner has invested in Thailand and:

1) holds a non-immigrant visa (in other words, not a tourist visa); and

2) has evidence of transferring at least ten million Thai Baht into Thailand; and

3(a) has evidence — obtained from a relevant authority — showing investment in a legally defined condominium unit (either freehold or a 3-year or more leasehold) at a purchase price or a rent of at least ten million Thai Baht; or

3(b) has at least ten million Thai Baht in a fixed deposit account at a Thai bank whose share capital is majority Thai owned; or

3(c) has purchased and owns Thai government or Thai state enterprise bonds worth at least ten million Thai Baht.

Interestingly the different investment options outlined above can be combined. Therefore it is, for example, possible to qualify for the Investment Visa by purchasing a condominium unit for less than ten million Thai Baht and in addition deposit the balance of ten million Thai Baht to a fixed deposit account at a qualified Thai bank. The main criterion to be eligible for an Investment Visa is that the total combined investment is at least ten million Thai Baht.

Once all the eligibility criteria for the Investment Visa are satisfied, it can be renewed annually as long as a qualifying ten million Thai Baht investment is maintained.

Another significant benefit of the Investment Visa to note is that it provides not only investing party’s long-term stay in Thailand but also for family members of the investor such as parents, spouse, child(ren), adopted child(ren), spouse’s child(ren). Such family members of the Investment Visa holder must:

1) be granted a Non-Immigrant visa;

2) have proof of the family relationship;

3) in case of a spouse, the spouses must be both legally married and co-habitating; and

4) in case of a child, an adopted child, or a spouse’s child, he or she must not be married, must live with the Investment Visa holder as family, and must not be older than 20 years of age unless he or she is ill or disabled and cannot live without the support of a father or mother.

With regard to limitations, it should be noted that an Investment Visa does not relive its holder, nor family member visa holder, of the same 90-day reporting rule applicable most other long-term Thai visa holders. And the Investment Visa does not entitle the holder, or his or her family member, to work in Thailand. In order to work in Thailand, it is required for the foreigner to obtain a work permit in addition to the visa. It should be noted that the definition of “working” is very broad. It is defined as “engaging in work by exerting energy or using knowledge whether or not in consideration of wages or other benefit”.

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DUENSING KIPPEN is an international law firm specializing in business transaction and dispute resolution matters, with offices in Bangkok and Phuket, Thailand and affiliated offices in 45 other countries. Visit them at: duensingkippen.com