Real Estate agents in Thailand looking to regulate, great news. We’ve been advocating for this for years in this industry. It really should be basic. Good to hear steps in the right direction are being taken.

Story here:

http://www.thephuketnews.com/property-agents-club-looks-for-phuket-members-46278.php?utm_source=twitterfeed&utm_medium=twitter

In this blog will examine the Land Office’s appraised value of condominium units.

The appraised value of a condominium unit is of significant importance for the calculation of fees and taxes upon transfer of such unit. Like land and other general buildings/structures, a condominium unit is transferred by a written registration at the authorized Land Office. The current fee and taxes applicable to and payable upon the registration of ownership thereof are the: (1) transfer fee; (2) income tax (payable as withholding tax); and (3) stamp duty or specific business tax/local development tax.

The transfer fee and the (individual) seller’s income withholding tax that is required to be deducted and paid to the authorities upon transfer are calculated based on the Land Office’s appraised value of the condominium unit. The stamp duty or specific business tax/local development tax are calculated based on the Land Office’s appraised value of the condominium unit or the sales price of the unit, whichever is higher.

Section 30 of the Condominium Act (1979) (“CA”) provides that the provisions of the Land Code (1954) (“LC”) regarding land registration and the Ministerial Regulations issued under said provision shall be applied to the registration of rights and juristic acts of the condominium unit mutatis mutandis. In addition, Section 62 of the CA provides that the relevant provisions of the LC regarding fees, such as Sections 104, 105 and 106 shall be applied to the fees under the CA mutatis mutandis.

The assessment of the appraised value of a condominium unit is made periodically by the “Valuation Committee” in accordance with Sections 105 and 105 quinque of the LC.

Pursuant to Chapter 3 of the Valuation Committee’s Regulations for Determining the Criteria and Procedures for Valuing the Immovable Properties for Purposes of Levying Fees for Registering the Rights and Juristic Acts (1992) (amended in 1998) issued under Section 105 quinque of the LC, the criteria to be taken into account by the Valuation Committee in determining the appraised value of a condominium unit can be summarized as follows:

(1)  Sale and purchase price, terms and conditions of the sale and purchase agreement or rental amount of unit(s) in each floor of that particular condominium and of other same/similar style condominiums nearby;

(2)  Quantity and quality of the common property of the condominium;

(3)  Facilities and services provided in the condominium;

(4)  Quality of the materials and built-in decorations of the unit;

(5)  Purpose of use of the unit e.g. for commercial, residential or office space, etc;

(6)  Style of the unit and it is located in that particular condominium;

(7)  Common property management system of the condominium; and

(8)  Market price of land upon which the condominium is located, which is the common property of the condominium, and construction costs as of the date of condominium registration.

After the Valuation Committee has gathered such information, it then determines the official appraised value of a condominium unit by using one more of the following methods:

1)    Comparing it with the market price of the same/similar style condominium unit nearby; or

2)    Comparing it with the rental amount of the same/similar style condominium unit nearby; or in case (1) and (2) are insufficient or incomparable

3)    Using the construction costs and the depreciation of the unit for the determination.

Usually the appraised value is designated floor by floor or, alternatively, unit by unit. But note, if the condominium comprises of several buildings, the appraised value of the floors and units in each building may well be different.

Thus, each condominium in Thailand has its own official appraised value. Herein below are two examples of the current appraised values applicable to the transfer of ownership of two specific condominiums in Phuket Town and in Rawai, Phuket Province (which for purposes of this article and not providing their actual names we shall call “X” and “Y”):

In general, the appraised value of each condominium must be re-evaluated by the Valuation Committee every four years. The current appraised value of Condominium X was announced in 2009 and that of Condominium Y was announced in 2010. Therefore, the next re-evaluation and announcement of the appraised value will be in 2012 and 2013 respectively.

The higher the appraised value is, the more expensive the fee applicable to and payable upon the registration of ownership of the condominium unit at the authorized Land Office will be. By way of example, the highest appraised value of a residential condominium unit in Phuket at the moment is 91,000 THB/m². Taking such appraised amount into account, the registration fee payable upon of ownership of a 200 m² unit would be THB 364,000 [91,000 x 200 = 18,200,000 x 2% = 364,000].

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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

Ownership of land, house and/or a condominium unit is legally transferred by a written registration at the relevant authorized Land Office. In general, the current fee and taxes applicable to and payable upon the registration of such change of ownership of an immovable property are the: 1) transfer fee; 2) income tax (payable as withholding tax); and 3) stamp duty or specific business tax/local development tax. The transfer fee and (individual) seller’s income withholding tax which are required to be deducted and paid to the authorities upon transfer are calculated based on the Land Office’s Official Value of the property. The stamp duty or specific business tax/local development tax which is also required to be deducted and paid to the authorities upon transfer and both are calculated based on the Official Value of the property or the actual transaction value of the property, whichever is higher. Thus, because the Land Office’s appraised value of the property is one of the key elements used for the calculation of the fee and taxes applicable to and payable upon the registration of ownership of immovable property, you might wish to know more about this Official Value.

An immovable property’s Official Value is an assessed or appraised value which is generated periodically by the Valuation Committee in accordance with Sections 105 and 105 quinque of the Land Code (1954) (“LC”). However the process to determine the Official Value of the various type of immovable property i.e., e.g. land, non-condominium building and condominium are all different. Since non-Thais may generally only own buildings and condominiums in Thailand, we will have a look at how the Official Value of non-condominium building is determined in this, part 1 of this article and in part of 2 of this article we will see how the Official Value of condominiums are determined.

Pursuant to Chapter 2 of the Valuation Committee’s Regulations for Determining the Criteria and Procedures for Valuating Immovable Properties for the Purposes of Levying Fees for the Registration of Rights and Juristic Acts (1992) (and as amended in 1998) issued under the LC, the criteria to be taken into account by the Valuation Committee in determining the Official Value of a non-condominium building are, for example: 1) the price of the construction materials; 2) the wages of the construction workers; 3) the administration costs for the construction in that particular province; and 4) what the is the type or purpose of the building.

Each province in Thailand has its own Official Value for buildings that are not condominiums. For example, the following are some of the Official Values for the provinces of Phuket and Suratthani (in which Koh Samui is located) applicable to the transfer of ownership of non-condominiums buildings during the period from 2008 to 2011:

Once the Official Values in any particular province are announced, they are applicable to all such buildings in the province regardless of where the buildings is located in that province, for example, the appraised value per square meter of a one-storey concrete villa in the vibrant heart of Patong will be the same as that in the most un-developed part of Phuket.

In general, the appraised value must be re-evaluated every four years and all provinces generally do so concurrently. The current appraised value for each province is applicable from the beginning of 2008 to the end of 2011. The next cycle of appraised values will be applicable from the beginning of 2012 to the end of 2015.

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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

You might have heard something like the following all too common assertion: “in Thailand the party named in a building permit is considered to be the owner of that building.” To have heard such may have been particularly disturbing to many foreigners who are allowed to legally own buildings in Thailand. Some of you may have wondered: is the contractor who applied for the building permit to build and who then built my house “legally considered” to be its owner? But is such an assertion accurate? In order for the statement in question to be correct, there must be some legal basis for a building permit to create ownership rights in a building. We begin then by investigating the legal nature of a building permit.

The issuance of a building permit is legally an “administrative order”. An administrative order is defined as “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.” ^[1]

The relevant law for the issuance of a building permit administrative order is the Building Control Act B.E. (“BCA”). What power does the competent officer exercise under the BCA in issuing a building permit and to what effect? The administrative procedure is as follows. The applicant submits the application documents to the local administrative office. After a site visit and a verification of the application documents (e.g. construction drawings and specifications, etc.) and review of whether or not the contemplated structure is legally permissible, the local administrative office must either issue the building permit, or deny the issuance thereof and inform the applicant in writing with the reasons for the non-issuance, within forty-five days from the date of the application.^[2] Thus, the legal effect of this administrative order is merely the legal permission to a person to build a certain structure on a defined plot of land and that is all it is.

What then is the relevant law that actually does create ownership rights? And more particularly, how does one actually legally own a building? Ownership rights are created through the Civil and Commercial Code (“CCC”). Sections 137ff and 1308ff of the CCC describe what ownership rights exist and how ownership rights can be acquired by law. In the case immovable property, Section 139 CCC states that it is “land and things fixed permanently to land or forming a body therewith…[i.e., e.g. buildings]”. The CCC therefore provides that the land owner “automatically” by law becomes the owner of any structure permanently affixed to his land. However, it is also legally possible to own a structure on another person’s land. Preferably, this is accomplished by the registration of a “superficies”^[3] which is the legal right of ownership of a structure on land owned by someone else and it is the legal instrument intended by the Code to create such a right of ownership.

Note however, that even though property ownership is generally established and detailed in the CCC, the building permit is not mentioned. It is understood that on a practical level, it is recommended to receive the building permit in one’s name. The land department currently refuses to register certain rights if the applicant does not have the building permit in his name. Which is, in our opinion, an historical accident^[4] that has, unfortunately, developed into an administrative practice and which is a practical reality for the time being but which is equally without legal foundation. Therefore, no building owner who has established legal ownership rights of a building through the construction of a structure on land under a superficies arrangement should be concerned if another person’s name is in the relevant building permit. Such person will not be able to establish any ownership rights to such structure through that building permit. Even if current land department practice might be an obstacle to a future sale or lease registration, the courts will follow the CCC and decide the ownership independent from the building permit.

Thus, what does the building permit have to do with legal ownership of a building?

Answer: nothing and to think it does is a fundamental misunderstand of the law.

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[1] Section 5 (1) of the Administrative Procedures Act B.E. 2539 (1996).

[2] Note however, the BCA also allows the local administrative office to extend the forty-five day deadline for up to two additional forty-five day periods for any reasonable cause; if so, the local administrative office is required to notify the applicant in writing of the cause for the extension(s).

[3] See Section 1410 ff

[4] The confusion of the land department might also result from unfortunate wording in the building permit form itself. The building permit form labels the applicant as “the owner” of the building. However, the BCA itself never uses this language only and ever referring instead to the “permit grantee”.

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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

Ownership of land, house, or condominium unit is transferred by a written registration at the authorized Land Department Office in Thailand. The transaction is recorded on the title deed in the case of land and condominiums and other documents, in the case of a house. All supporting documents are kept in official records. In general, the current fee and taxes applicable to and payable upon the registration of ownership of all such immovable property are as follows:

(1) TRANSFER FEE

The transfer fee not really a “tax”. It not collected under the Revenue Code of Thailand; rather it is an administrative fee pursuant to Thailand’s Land Code. It is payable upon transfer of immovable property at a rate of 2% of the Land Department’s appraised value of the property. The assessment of this value is made periodically by a Valuation Committee in accordance with the Land Code. Each land plot, house, and condominium unit in Thailand has such an official appraised value. However, the Land Office’s appraised value is usually much lower than any actual market value/sale price of such properties. Notably, the same valuation is also used as the basis for calculating the personal income tax payable upon transfer of immovable property.

(2) INCOME TAX (PAYABLE AS WITHHOLDING TAX)

(a) Company

When a corporate entity sells an immovable property, a “withholding tax” at the rate 1% of the sale price is required to be “deducted” from the sale price and paid to the authorities on transfer. This is a prepayment of the corporate seller’s income tax for that tax year, it will be credited to any tax owed for that year. However, both parties, the seller and any buyer jointly bear the legal duty to withhold and pay this tax. A surcharge on any late or inadequate payment of the withholding tax at a rate of 1.5% per month of the late paid amount is applicable.

(b) Individual

When an individual sells an immovable property the withholding tax is generally calculated based on the appraised value of such property, in accordance with Section 49bis of the Revenue Code, less certain deductions. The deductions depend on the length of ownership of the property to be transferred. The calculation is done through a specific formula created by the legislature which takes into account how long the property has been owned and the progressive tax rates applicable to individuals, but (if the seller chooses so) without including any other taxable income of the seller.

Please note that even if the transfer of immovable property is without consideration (i.e. a “gift”) by an individual, it will be deemed a “sale” subject to personal income tax.

(3) STAMP DUTY OR SPECIFIC BUSINESS TAX + LOCAL DEVELOPMENT TAX

(a) Stamp Duty

In general for individuals a Stamp Duty will apply if the property has not been transferred within the last five years. In such cases the Stamp Duty will be an amount equal to 0.5% of  the Land Office appraised or the actual transaction value of the property (whichever is higher) and is payable by the seller upon transfer.

(b) Specific Business Tax + Local Development Tax

If a seller does not qualify for Stamp Duty, then Specific Business Tax + Local Development Tax will apply instead. The rate of the Specific Business Tax is 3%. A Local Development tax at a rate of 10% of the value of the Specific Business Tax amount is further payable. Therefore, Specific Business Tax + Local Development Tax is payable by the seller at a rate of 3.3% of the Land Office’s appraised or the actual transaction value of the property (whichever is higher).

***

Finally, please also note that the above summarizes the government fee and taxes payable upon the day of transfer of an immovable property in Thailand. It does not include any other tax liability incurred as the result of such transfer.

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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

On 6 July 2011 the Ministerial Regulation Regarding City Planning of Phuket Province (2011) (the “MR”) was issued and went into effect pursuant to the Town and City Planning Act (1975) (the “Act”). The MR divides the land in Phuket Province into sixteen different land use zones. Each such zone has a designated principal purpose for which the land is to be used and then further regulates such intended use with regard to, for example, the percentage of each plot of land in that zone that may be used for that purpose versus how much of that plot must be left as “open space.” It should also be noted that when a zone is cut off or separated from another part of that same zone by another different zone type divided parts of the principal zone are designated as sub-zones.

The MR replaced the Ministerial Regulation Regarding City Planning of Phuket Province (2005) (the “Previous MR”). The most significant changes to the Previous MR effected by the MR we summarize here as follows:

1) For the first time all of Phuket Province is now under the Act and therefore the use of Phuket’s coastal waters and off-shore islands is now regulated by the MR, the Previous MR did not do this. Phuket Province extends to just few meters off-shore to the north of the island, approximately ten kilometers off-shore to the east, approximately twenty kilometers off-shore to the west, and to as far away as approximately fifty-five kilometers to the south.

2) The amount of land zoned principally for “residential” purposes has increased slightly, as has land for “rural and agricultural” and “forestry reservation” and environmental preservation purposes.

3) The MR includes three new additional zones that were not among the Previous MR’s thirteen zones. The principal intend purposes of these three new zones are as follows:

a) “open spaces for environment protection, tourism and fisheries”;

b) “open spaces for recreation and coastline environment protection”; and

c) “natural resources and coastline environment conservation“

4) And finally, in the Previous MR the use of land for any other permitted purpose other than the principal intended purpose was limited to a percentage of each plot of land within that zone. However, under the MR this limitation is now a percentage of the total amount of land within each sub-zone within each zone and there is no longer any limitation of such use on any given plot of land. Please note that in the three newly added zones mentioned in (3) above, there is no allowance at all for any other use other than the primary uses for which those areas are zoned.

Thus, for example, under the Previous MR land in the “Forestry Reservation” zone (a zone which covers a very significant percentage of Phuket) was to be used primarily for the purposes of the purpose of agriculture or agriculture related activities, residence, tourism, government offices and public utilities. But, with some qualification, up to 50% of each land plot in that zone could be used for “other permissible purposes.”

Under the MR land in the “Forestry Reservation” zone is still to be used primarily for the purposes of the purpose of agriculture or agriculture related activities, residence, tourism, government offices and public utilities. However, it is now that case that only up to 5% of all the land in any sub-zone of this zone may be used for any other lawful purpose.

Thus, under the MR a land owner or lessee could potentially use up to 100% of their land plot(s) located in the “Forestry Preservation” zone. However, this also means that once 5% of the land in any “Forestry Reservation” sub-zone has been used for all “other permissible purposes”, no land owner or lessee will be allowed to use any of their land located within the “Forestry Reservation” zone for any purpose other than for the purpose of agriculture or agriculture related activities, residence, tourism, government offices and public utilities.

Obviously this new way of limiting the use of land for other than what it is primarily zoned means that such other use in each sub-zone will be on “first come first served” basis and as it opens the possibility to use most if not all of one’s land for said other purpose this may create a rush to obtain building permission for such other use in some areas

In part one of this blog we addressed several legal errors in a recently published Article in an English language news publication in Thailand. Now we turn to what the Article’s substance, the commonly marketed “collective leasehold” structure. The Article claims that:

“Collective leasehold structures provide owners in villa developments the legal means to have a greater say in their villa projects. Importantly, this means that owners have increased control over the renewal of their leases, thus mitigating a major risk associated with long-term leases in villa developments.”

We disagree. In our opinion, this structure creates a false sense of security for the investor—and, therefore, a poor “product” for the developer. A “collective leasehold” will not meaningfully mitigate the risk that your lease will not be renewed. To understand why, we need to cover a bit of background.

Long-term leaseholds are a popular mode of investing in Thai real estate for foreigners. This is largely due to the fact that the law, with some limited exceptions, prohibits foreign freehold ownership of land in Thailand. 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 terms. Usually, the rent for all three terms is “pre-paid” (i.e. before or on registration of the first term) and the lease agreement provides that almost all of the rent is paid for the first 30-year term with the parties agreeing to some nominal amount e.g. THB 100,000 for the rent for the second 30-year term and e.g. THB 100,000 for the rent for the third 30-year term. However, as provided by Section 540 of the Civil and Commercial Code (“CCC”) any such additional term is not an “extension” of the lease—rather it is merely a “renewal” of the lease. This means 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. This is because the new owner never offered to renew the lease and the law does not oblige the new owner to honor an offer made by the original owner and lessor.

As mentioned, in an effort to address this insecurity many developers offer you a “secured leasehold” structure or as the Article referred to it, a “collective leasehold” structure. You are promised not only a lease but also acquisition of a shareholding ownership interest in the Thai limited company that owns the land that you will lease. The other development purchasers would then do the same. And then, “collectively”, you all will control the land owning/lessor company. Purportedly, this would then ensure that all of these lessees would have their leases renewed for the two successive 30-year terms—“guaranteeing” the full 90 years. But this structure does nothing to address the most significant risks that your lease will not be renewed.

Perhaps the biggest reason why the said structure is not truly secure is the potential tax liability that the land owning/lessor company will incur. For discussion purposes let us assume that you paid THB 10 M for the first 30-year lease term and that your lease contract provides for a rent of THB 100,000 for the second 30-year term.

Section 40(5) of the Revenue Code of Thailand (“RC”) authorizes the Revenue Department (“RD”) to assess any lessor for what it considers to be the reasonable value for the rent of immovable property in Thailand. There is of course an appeals process when a taxpayer is so assessed. However, under Section 31 of the RC, this appeal does not allow the assessed taxpayer to defer payment of the additional tax resulting from the assessment. Any amount not paid within the short window provided in the assessment notice, is deemed an “arrears of taxes”. Under Section 12 of the RC the RD can then immediately—i.e. without a court order—seize and sell by auction any property belonging to the delinquent taxpayer in order to satisfy the arrears tax and applicable penalty and surcharge.

Coming back to our example it is obvious that if your current rental value for 30 years is THB 10 M, then THB 100,000 for a second 30-year term beginning 30 years thereafter is highly unlikely to be considered a “reasonable” amount. In fact, it is also very unlikely that even the original THB 10 M you paid for the first 30-year term would be considered reasonable 30 years from now. Thus, for the purpose of our example, we will assume a RD assessed rental value assessment for that second 30-year term of THB 20 M. The tax payable on this amount would be approximately THB 5 M. Let’s further assume that you leased in a medium size development with 20 land plots leased using the Article’s “collective leasehold” structure. The land owning/lessor company—the one that you and the other lessees obtained an interest/shares in—would then face a total rental value assessment of: 20 x THB 5 M = THB 100 MILLION. If the corporate income tax on this amount—approximately THB 25 M or almost USD 1 M—was not paid in a timely manner, the scenario above unfolds. If tax is owed, the RD can seize and sell the property by auction to a new landowner to satisfy the debt. And please note—this could easily happen well before the end of your first 30-year term if one or more plots were leased a tax year or more before you leased your plot.

No doubt some would argue that the “collective lease” provides for handover of control of the landowner/lessor company and that the lessee could then address the company’s proper maintenance and its legal—including tax—compliance requirements. Any assertion that you and the other lessees in your “collective leasehold” structure development could avert such a catastrophe—by knowing about and, albeit unfortunately, paying this additional tax liability for the company—is highly suspect. Once your developer transfers such control/ownership to you all then he loses, not only control of his development, but also the right to any dividends payable to your shares. Thus, this handover is very unlikely to happen until the development is completely sold—if ever.

Furthermore, even if the said handover to you occurs, one can never know for sure what legal liabilities a company has unless one has full legal control of the company during the company’s entire existence. As noted above, you may inherit a landowning/lessor company with significant lease income tax liabilities. But—the company might also have any number of legal obligations and liabilities incurred prior to your takeover—the ones you don’t know about?

Another very significant issue with the “collective leasehold” is the shareholding structure itself. The Land Code requires that any land owning Thai company must have at least as many Thai shareholders as foreign shareholders. The Thais must own over 50% of the company’s total share capital. If the company’s Thai shareholders are not actual investing shareholders, then they are considered “nominee” shareholders under the law. Thai nominees are unlawful under the Land Code. Thus, to lawfully own— and, therefore, to lease—land, such a company’s Thai shareholders must be actual investing shareholders and they must maintain their shareholding for the entire length of the lease including any renewals. If the company does not have such Thai shareholders, it can be divested of the land it owns. If it were divested, the new owner would not have to honor your option to renew your lease, as detailed above. The “collective leasehold” structure does nothing to address this very significant issue.

What is more, in our example the lessees’ direct share investment in the land owning/lessor company would then require at least 20 actual Thai shareholding investors. This requirement is why a “collective leasehold” structure typically—and as the Article proposes—offers you an “indirect shareholding” in the land owning/lessor company. You become a shareholder in an offshore company that owns the non-Thai shares of the land owning/lessor Thai company. Usually this offshore company is a company registered in a country, which provides flexibility with regard to corporate structuring and a low tax jurisdiction. In our example 20-plot development, the use of such an offshore vehicle would provide you with an indirect control of 5% of 49% of the land owning/lessor company. That means that you would have no direct shareholder rights under Thai law and perhaps even less than “5%” control of the Thai landowning/lessor company. The Article touts your ability to “give your opinion” as such a shareholder—but it must be said, this can be done regardless of any such shareholding. The ability to “give your opinion” to the landowning/lessor company does not provide any security that your lease will actually be renewed. Furthermore, even if you and others acquire shares in this offshore company, any disputes with them or any issues regarding “absentee” or deceased shareholders would be governed by and would have to be dealt with under the laws of and in the courts of the offshore company—e.g. the British Virgin Islands. You would have to go there and resolve any such issues in that country’s courts.

Unfortunately the “collective leasehold” does little if anything to address the very real insecurity that your long-term lease will not be renewed. Fortunately, however, there are far better legal means than the “collective leasehold” 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. But you should first engage competent legal and tax counsel in order to successfully implement this lease security structure.

You may have read a recent Article in a Thailand news publication which stated:

“Collective leasehold structures provide owners in villa developments the legal means to have a greater say in their villa projects. Importantly, this means that owners have increased control over the renewal of their leases, thus mitigating a major risk associated with long-term leases in villa developments.”

The so-called “collective leasehold” structure is quite commonly marketed to foreigners wishing to invest in a villa or apartment here in Thailand. However, the Article’s main assertion—that the structure mitigates the risk that your 30-year lease may not be renewed should be treated with extreme caution. Furthermore, the Article contained several errors with regard to applicable Thai law. Accordingly, in part one of this two part article, we will first address and correct the Article’s incorrect statements regarding applicable Thai law. In the second part we will explain why the Article’s contention that “collective leasehold” structures “mitigate a major risk associated with long-term leases” is misleading at best—or is simply incorrect.

Long-term leaseholds are a popular mode of investing 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 in Thailand. 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 terms. Furthermore, as provided by Section 540 of the Civil and Commercial Code (“CCC”) any such additional term is not an “extension” of the lease—rather it is merely a “renewal” of the lease. This means 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. This is because the new owner never offered to renew the lease and the law does not oblige the new owner to honor an offer made by the original owner and lessor.

As mentioned above, in an effort to address this insecurity many developers offer a “secured leasehold” structure or as the Article referred to it, a “collective leasehold” structure. We will look into what that is and why it usually does not succeed in doing so in part two of this article. However, in order to understand the legal issues surrounding this lease structure we first need to address some fundamental legal errors in the Article.

The Article states that a “lease may be renewed together by the lessor (the landowner) and lessee (the buyer). . .” That is correct. However, the Article completes that same sentence by saying “but such a renewal agreement is by contract only not pre-registration at the land office.” The Article then concludes that this means that your lease may not be renewed because the lessor may not honor its contract. The implication—that if you had pre-registered your renewal term “at the land office” you would have something more than a mere contract with your lessor and your renewal term would then be enforceable regardless of your agreement with the lessor—misunderstands the law and is, therefore, incorrect. We have explained why this is so in an earlier article, which you can find here: (http://www.thephuketnews.com/jfcc-drive-for-longer-leases-going-down-the-wrong-road-29916.php). In summary, if your original owner changes during your first lease term, the new owner is not bound by the original owner’s promise to renew your lease—registration of that promise does not contractually bind the new owner to a promise the new owner never made.

The Article’s second legal fallacy regarding leases is contained in its following statement:

“The likelihood of a lessor breaking a contractual promise to renew a lease increases when the land is transferred to a third party, as is likely during a 30-year term, since such a third party may (incorrectly) conclude that it is not under the same obligations as its predecessor.”

It is true that a lease contract is not terminated by a change in lessor as provided by Section 568 of the CCC. However, an option to renew the lease is legally a one-sided promise, or “offer”, to renew the lease upon expiration of the prior term; it does not form a new lease contract for the additional term. Thus, the original lessor’s promise does not bind the new owner. Again, this is the main insecurity issue with regard to lease renewals in Thailand. Accordingly, the Articles’ new owner would correctly—not incorrectly—conclude that he is not under any obligation to honor his predecessor lessor’s promise to renew the lease.

You will find the last major legal fallacy contained in the Article’s following statement:

“What is more, a lessee’s remedies are limited in the event of a lessor’s breach of a contractual obligation to renew a lease term. To compel renewal, a court action must be initiated. However, the damages that are available regarding a breach of a renewal clause are restricted to damages, and a lessee cannot “force” a renewal.”

The Article states that if your contractual lessor fails to honor you renewal option, your only remedy would be to obtain monetary compensation for this damage in court. This is incorrect. Under Section 213 of the CCC such a lessee can request the court to order “compulsory performance” of such obligation. And, in fact, our firm has sought and received such orders for our clients. Thus, we can confirm that not only as a legal matter, but also as a “practical matter” this remedy is available under Thai law.

Unfortunately the reality is that the “collective leasehold” does little if anything to address the very real insecurity that your long-term lease will not be renewed—we will explain why in part two of this article. Fortunately, however, there are far better legal means than the “collective leasehold” 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. But, you should first engage competent legal and tax counsel in order to successfully implement this long-term leasehold security structure.