Monthly Archives: June 2014

Investing in Thailand – Real Estate Law Basics

Foreign Ownership

Thai Law basically restricts foreigners from buying or owning land under freehold title, however there are exceptions that male it possible for foreigners to own land in the following circumstances:

  • The Board of Investment (BOI) and the Industrial Estates Authority has power to permit promoted companies to own land for the purpose of the promoted business.
  • Permission can be granted under the Petroleum Act for use in approved projects.
  • Banks and financial institutes that have become foreign owned.
  • A foreigner who invests at least 40 million Baht in authorized securities in Thailand may buy up to 1 rai (1600 sq. m.) for residential purposes only of the owner and their family.

This obviously does not cater for the majority of foreign investors. The following are legitimate ways for a foreigner to purchase a property interest in Thailand.

Leasehold Property

Foreigners can lease land and/or structures on short or long term contracts. Leases may be registered at the appropriate land office for up to 30 years and often have a renewal clause for additional periods of 30 years, however it should be noted that Thai law provides for only one such renewal. Leases for industrial or commercial purposes have a term of up to 50 years. This again is renewable for periods of 50 years. The majority of authorities agree that any such renewal clause is enforceable as against the original lessor; not, however, as against a transferee lessor. Any lease of 3 years or more must be registered on the title to the land at the appropriate land office in order for the lease to be enforceable for any term beyond 3 years.

Company Ownership of Freehold Property

A Thai Limited Company can purchase land as a juristic person. The company must be allowed to own land and invest in land in accordance with its objectives and Articles of Association. Foreigners can hold a maximum of 49% of the shares in such a Thai Limited Company, the balance must be owned by Thai actual investors.

It is also vitally important that annual accounts are completed and taxes paid on time.

Land Title Documents

The preferred land title in Thailand is the Chanote (which literally translates to “Title Deed”) issued in accordance with the Land Act of 1954. Chanotes issued under the provisions of this Act are registered with the Land Department and state the ownership, boundaries, area measurements and encumbrances (such as mortgages or servitudes) with particularity. The purchaser of a Chanote is registered as the owner of the land with the Land Department at the time of transfer.

Chanotes are issued by the Land Department by application from the holder of a possessory right document for the land. There are three basic types of possessory right documents all of which are still in existence and many of which have yet to be upgraded to a Chanote. They are the Nor Sor 3 Gor, the Nor Sor 3, and the Sor Kor 1, however, occasionally other forms of possessory documents may be encountered as part of the historical record of a plot of land.

Of the three, the Nor Sor 3 Gor is the preferred. This document contains an accurate measurement of the land and boundaries (but not as accurate as a Chanote), along with verification of the utilization of the land in the past. A Nor Sor 3 is similar to the Nor Sor 3 Gor except that the measurements and boundaries of the Nor Sor 3 Gor are more accurate. Further, a Nor Sor 3 requires a 30-day public notice period before the transfer whereas these changes can be registered with a Nor Sor 3 Gor immediately.

The least preferable is the Sor Kor 1. This document is an unregistered form stating a claim by an occupant of land that the land belongs to him or her. The measurements are vague or missing and can be easily disputed. Yet, even a simple Sor Kor 1 can be purchased from its holder and upgraded to a Chanote. Also, a Sor Kor 1 requires a 30-day public notice period before the transfer

The application process to upgrade a Nor Sor 3, or Nor Sor 3 Gor or Sor Kor 1, to a Chanote title can take anywhere from three months up to one and half years depending on the District Land Department.

Additionally, although far less common, there are several other types of legally recognized Chanotes in existence. These other types of Chanotes may not contain boundaries and measurements as accurate as a Land Act Chanote but they are treated the same by the Land Department as far as transfer and registration of ownership is concerned.

In brief, the many varying land title documents encountered in Thailand stem from the complex, and sometimes conflicting, history of land development and ownership documentation. Even a properly issued Chanote can be subject to legal attack. With this in mind, it is advisable to conduct a thorough search of the history of the land in question and the title documents associated with it. The purchaser of land acquires any defects in the title and potential claims against it along with the land itself.

Legal Due Diligence by qualified and experienced attorneys familiar with the history of land documents and procedures of the Land Department should always be conducted prior to purchasing any land. This process will generally include a complete review of the title history of the land, encumbrance search, land site inspection, and verification of land use and zoning regulations.

Ownership of Condominiums

The rules concerning the ownership of condominiums are similar to those concerning land. Condominium units have a form of freehold title deed and ownership is transferred at the Land Department. Foreigners, both natural persons and foreign owned companies can own up to 49% of the area of a condominium project. For those who do not have resident permits there must be proof that foreign money was brought into Thailand to purchase the unit. Condominium units may also be leased by foreigners in the same way that they may lease land or structures.

Ownership of Structures

Structures may also be owned outright by foreigners in their own name. They should have a “superficies” (i.e. the right to own structures on land they do not own) over the land registered in their name on the title deed to the land the structure is on. If they are the first owner of the structure they should also have evidence that they built the structure such as payment records to the builder, a building contract and their name on the building permit. If they are a transferee owner of the structure, the transfer is registered in their own name at the relevant land office and requires a 30-day public notice period before the transfer.

Transfer of Ownership

Ownership of land and/or structure is transferred by a written registration at the authorized Land Department. The transaction is recorded on the title deed and/or other documents. 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 immovable property are as follows:

1) Transfer fee:

2% of the land office appraised value.

2) Income Tax (payable as withholding tax):

1% of the land office appraised or the actual transaction value of the property (whichever is higher) if the Seller is a juristic person. This is a withholding tax and it is credited to (i.e. deducted from) the company’s income tax payable for that year.

An incrementally applied personal income tax sliding scale from 0% – 35% based on the land office appraised value of the property and a rather complicated calculation or based on the actual profit margin, if the seller is an individual.

3) Stamp Duty or Specific Business Tax/Local Development Tax:

Stamp Duty: 0.5% of the land office appraised or the actual transaction value of the property (whichever is higher).

or **

Specific Business Tax/Local Development Tax: 3.3% of the land office appraised or the actual transaction value of the property (whichever is higher).

**in general, the Stamp Duty will apply if the land has not been transferred within the last five years, otherwise the Specific Business Tax/Local Development Tax will apply.

Leases

For leases that are registered, there is a registration fee and stamp duty of 1.1% of the total rental amount of the term actually being registered (i.e. not including any renewal terms).

Mortgages

A mortgage over land and/or structure can be granted to secure the performance of any obligation, including foreign individuals.

The fee and stamp duty for registering a mortgage is 1.05 % of the amount declared in the mortgage agreement (with maximum total fee and duty of Baht 200,000.00) if the property is:

Property Taxation

House and Land Tax is imposed on the owners of a house, building, structure and/or land except for the first residential place. The tax rate is 12.5% of actual or assessed annual rental value of the property. The annual value is the amount a property may reasonably gain in rent for one year, if the property is offered for lease.

A Local Development Tax is imposed upon any person who either owns or is in possession of land. The tax rates vary according to the appraised value of the property being determined by the local authorities. There is an allowance granted for land utilized for personal dwellings. This allowance differs according to the location of the land.

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Having a building permit in Thailand does not guarantee it will be built or stay built…here’s why

Recent media reports have cited certain development projects, which are not progressing and are currently stalled purportedly due to legal issues relating to their building permits. Although these projects have obtained a building permit for the construction of the project, they are still facing challenges. Why? To answer that, we must first understand the legal status of a building permit in Thailand.

The issuance of a building permit is legally an “administrative order”. An administrative order is defined in Section 5 (1) of the The Administrative Procedures Act (1996)(“APA”) 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.

The relevant law for the issuance of a building permit administrative order is the Building Control Act (1979)(“BCA”). If a person wishes to construct, modify or move a structure, such person requires permission to do so. The administrative procedure is as follows. The applicant submits the application documents to the local administrative office. The responsible officer schedules a site visit. He will also verify the application documents (e.g. construction drawings and specifications, etc.). Then he will review if the contemplated structure is legally permissible by law. In certain areas of Thailand, like Phuket the land use restrictions are basically under three laws: (1) 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 the building permit. If the documents are insufficient the administrative office will deny the issuance of the building permit and inform the applicant in writing with the reasons for the non-issuance, within forty-five days from the date of the application. 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.

How can it now be that a person that already received a building permit can be stopped from exercising his right under the permit? The answer is: he can not. As long as the building permit is in effect, the applicant has the right to construct the building as permitted. Section 42 APA states that “an administrative order shall be valid so long as it is not revoked or terminated by time condition (…)”.

It should be noted that such “time condition” does pertain to building permits. The temporal validity of a building permit depends on the size of the building to be constructed. Licenses of one year are issued for buildings with 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 licenses are issued for buildings exceeding 100,000 square meters. Such licenses 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 applicant has the duty to report the progress and invite the official to inspect the progress of the construction every ninety days.

Can a building permit be revoked after its issuance and prior to its expiration? Yes, it can. Legally. a building permit is merely an administrative order and administrative orders can basically be revoked through an appeal or by action of the relevant government administration itself. The revocation can be initiated through an appeal by “a party”. Note that such “party” is not necessarily the person subject to the administrative order. It can also be any third party affected by such administrative order. Such person could be the adjacent neighbour of a development project that received a building permit. If the officer agrees that there is a problem of facts, the point of law or suitability he might revoke or amend the order.

Furthermore, Section 49 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 and administrative order without appeal are strict. The relevant regulations, treatment and outcome of a revocation of an administrative order depends on whethr or not original order was a lawful or an unlawful one. Expressed in simplified terms, the revocation of a lawful administrative order is subject to compensation 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 was not aware of the unlawfulness of the order. Section 51 APA explicitly states that if:

(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.”

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 the 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 an appeal and it can also be revoked by the administration itself. To mitigate the harsh consequences of revocation it is strongly advised to perform a strict and comprehensive due diligence on the legality of the project prior to applying for the permit.

 

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A Thai government official’s opinion about the law does NOT mean that it is legally correct

In Thailand government officials are generally considered much more authoritative than in western countries. Thai culture also considers non-conflict to be a virtue of particularly high regard. Thus, government officials’ opinions are also given, what others might consider to be a peculiarly high degree of deference. This can sometimes lead to difficulties for potential investors if such official’s opinion is not consistent with the law (or logic). To illustrate, we offer here below examples drawn from our several years of practice in Thailand actual experiences.

1. Building permit:

Suppose your investment was a villa. Imagine you hired a construction company, your “contractor”, to build one for you. For convenience purposes the contractor then applied for the building permit so that the construction would legally compliance with land use and building laws. Now you intend to register certain rights on your villa at the land department. In our consistent experience, the official will refuse to do so since you do not have the building permit in your name. Why? Good question! But the official’s reasoning is that because you did not receive the administrative permission to build, they do not consider you the owner of your villa even though the law very clearly states otherwise; having legal permission to conduct an activity does create ownership rights of the property used in the activity!

2. Land registrations:

Long-term land leases are a common investment component for foreigners in Thailand and points of discrepancy between the relevant law and officials’ interpretation are common. For example, even though the law clearly provides for an optional renewal of up to and including the 30 year maximum lease term, current administrative practice generally refuses to allow any clause providing for such to be included if you want your lease registered (and you must register it in Thailand in order for the lease to be enforceable beyond the first three years). Similarly, it is generally not possible to register a lease with a clause providing for an option to purchase the land even though Thai Supreme Court precedent has clearly ruled that a foreigner may enter a stand-alone legally enforceable land purchase contact.

In any event, the Land Code specifically provides that the land officials are not allowed to refuse such registrations based merely on their concern that the that the action might later be challenged and voided. In such case, the law provides that the official must proceed with the registration. The reasoning for this is clear. It is supposed to be the role of the courts, not the role of the administrative officials to rule on issues of law. In Thailand however, we find the role of the former is often usurped by the latter.

Obviously, allowing the official’s interpretation to “win the day” in these case is not at all ideal or even acceptable for the potential investor. But in Thai culture the official is often considered almost omniscient and contradicting an official is virtually taboo, including even for many Thai lawyers. However, such difficulties are not always or even usually insurmountable. In many cases, through patient, culturally sensitive and legally knowledgeable negotiations, the officials can be convinced of what the law says even if that is something different than what the official thought prior to such discussions. This is an indispensable role of competent legal counsel for the investor and the investor should keep firmly in forefront of mind that having such competent counsel is perhaps all the more paramount when the investment is abroad.

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What is the “official value” of a BUILDING in Thailand and why does it matter?

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:

Phuket Suratthani
Appraised Value (THB/m2) Appraised Value (THB/m2)
one-storey concrete house 6,050 5,850
two-storey concrete duplex 5,900 5,800
office 6,200 6,100
apartment 5,950 5,800
hotel 8,150 7,700

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.

In part two of this article we will have a closer look at the Official Value of condominiums in Thailand.

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Public Land Encroachment in Thailand: what does the law say? – a recent example in Phuket

For a law firm that includes real estate matters among its core specializations, it is fascinating to follow the executive branch of the Thai state in its effort to implement the law. We are referring to the latest investigations by the Department of National Parks, Wildlife and Plant Conservation (the “DNPWPC”) and particularly those you may have recently heard about in Phuket.

It should be noted that this firm is not directly involved in this matter that caused the recent headlines in Phuket. Therefore, we can not provide any statement on the accuracy of the claims and actions of the DNPWPC. However, herein below we offer an overview of the general legal framework under which the investigations are currently taking place and some comments on how the owners of the suspect land plots could have avoided their current circumstances.

From our review of the latest news publications on this matter we understand that the DPNWPC is investigating several properties that the DPNWPC believes are located in a “National Park”. What legally constitutes a National Park is defined by the National Park Act (1961) (the “National Park Act”). According to Section 6 of the National Park Act: “When it is deemed appropriate to determine any area of land, the natural feature of which is of interest, to be maintained with a view to preserving it for the benefit of public education and amenity, the Government shall have the power to do so by a Royal Decree with a map annexed thereto showing the boundary lines of the determined area. The determined area shall be called the “National Park.”

The areas currently in question on Phuket are in an area which was made a National Park by the Royal Decree Determining the area of Sontalay Forest, Khaoruag Forest, Khaomuang Forest and Nai Yang Beach in Maikhao Sub-District, Sakoo Sub-District and Cherngtalay Sub-District, Thalang District, Phuket to be a National Park (1981) (the “Royal Decree”).

In this context it is important to understand that the location of a property within such a National Park is not per se an indication of any illegality. According to Section 6 paragraph 2 of the National Park Act: “The land to be determined as national park must not be owned or legally possessed by any person other than a public body” or in other words: if land was privately owned prior to the establishment of a National Park through Royal Decree, such land is not considered a part of the National Park.

In this case, as we understand, it has been alleged that certain relevant areas within the boundaries of the relevant National Park might have been owned or possessed by the local population at the time of the Royal Decree. However, if such alleged prior ownership or possession is not proven, Section 16 of the National Park Act requires that: “Within a national park no person shall: (1) hold or possess land, nor clear or burn the forest; (…)”. Furthermore, in accordance with Section 21 National Park Act: “The competent official shall have the power to order the person committing the offence under Section 16 to vacate the national park or to refrain from doing any act therein”. And Section 22 of the National Park Act provides that: “In the case where any violation of this Act has added to or changed the condition to anything in a national park, the competent official shall have the power to order the offender to demolish or remove such thing from the national park, or restore such thing to its former condition, as the case may be. If the offender fails to comply therewith or the offender is unknown, or for the purpose of prevention or alleviation of the national park from damage, the competent official himself may take any of the said actions as may be appropriate. The expenses incurred thereby shall be borne by the offender.”

However, with regard to the land ownership or use itself, any revocation of an improperly issued land title or a land utilisation certificate in a National Park is not under the jurisdiction of the DNPWPC; such would fall to the Land Department. Section 61 of the Land Code confers the power to decide on and revoke a land title to the issuing administrative body: “In a case where there appears an inaccuracy or illegality in connection with the issuance of the Title Deed or the Utilization Certificate, (…), the Director-General or either the Deputy Director-General or the Inspector of the Department of Land authorized thereby shall have power to order the annulment or amendment thereof.” It should be noted, however, that the Land Code goes on to stipulate a detailed procedure involving a “Committee of Enquiry” before any revocation can be effected.

But subjection to any such eviction or revocation as outlined above can be avoided if potential owners or lessees first perform a comprehensive due diligence into the property prior to their investment. Many well advised investors actually do ask their competent legal counsel to perform such a due diligence and generally follow their counsel’s advice. However, far too often, many other ill-advised investors follow incompetent and/or non-legal “counsel” (who often have a financial interest in the contemplated transaction). And then there are those who engage and hear the legal facts presented by the former but even then chose to follow the latter. These latter will tell the investor that “the law in Thailand does not matter” because either “no such relevant law exists here” or “enforcement will never take place”. However, as we see above and as we are now reminded of in the recent media reports, this is simply not true.

In order to avoid being caught up in an official land title investigation certain issues must be checked prior to any investment in real estate in Thailand. It should be noted that for such a comprehensive title investigation it is not sufficient to merely have a look at the title document itself. In fact, all of land plots at issue in Phuket purportedly have what appear to be legally issued title deeds. A proper examination of a title document is only the first step of a multi-step investigation process informed by skilled legal competency.

An investigation of the title document itself will provide information regarding the land owner and, therefore, the potential seller or the lessor of the property. It further provides information about the type of title and encumbrances, if any. Mortgages, charges and other real rights must to be recorded on the title deed to be enforceable. Leases, exceeding a three year term, must also be recorded on the document to be enforceable. And the title document provides a small outline of the shape and size of the land plot itself.

What cannot be found through merely reviewing the title document, however, is the title history or how the title was “upgraded” to its current title status. This investigation needs to be done at the respective land department by someone with particular competence and knowledge on what to look for and what to do if something unexpected is found. The investigation is conducted by reviewing the entire relevant title file(s) of the land plot.

Issues such as: an improper underlying document such as a “flying Sor. Kor. 1”; other flaws in the title issuance (besides any issue with regard to a National Park and to say that there are several such potential issues would be an understatement) such as the land owner did not possess the land early enough to be qualified for the title to the land; or that the area of the land in prior records does not accord with the area in later records, etc. can be (and unfortunately, all to often are) identified through such investigation.

Even if the land title is valid, an investor should also first confirm that the target land can serve its anticipated purpose. Thus, other important issues that need to be investigated, but that do not necessarily involve the legality of the title itself are the legal status of physical and utilities access to the land and the relevant land use laws.

Another common oversight of property buyers is the failure check that the property is not currently subject to pending court proceedings. If so it is possible that the sale could be revoked depending on the outcome of such proceedings.

Finally, since a purchaser of land is jointly liable with the seller of such land for unpaid local maintenance taxes for a maximum of five years, any professional title due diligence should include findings on this issue.

Any investment in real estate is usually a long-term and generally significant investment. Slow to enforce does not mean no enforcement. What cannot be repeated often enough is that there is law in Thailand and it does, sooner or later, matter as the National Park land investigations in Phuket illustrate.

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MISPLACED HOPES FOR LONGER LEASE TERMS IN THAILAND: the JFCC is heading down the wrong road

It is well known that ownership of land by foreigners in Thailand is restricted. Thus, a long term leasehold is often the best option for a foreigner to invest in real estate. However, the duration of leasehold in Thailand is limited to thirty years by Section 540 of the Civil and Commercial Code (the “CCC“). It is generally agreed that thirty years is rather short when one is making an investment of any significance and in order to “overcome” this limitation a typical long-term lease agreement in Thailand will provide for two additional successive periods of 30 years each; this despite the fact that current Thai law provides for only one such renewal. However, we will not discuss the issue of a second renewal here.

Due to such restrictions, for many years now, developers and consumers have been calling for an extension of the maximum lease term. However, extending the current maximum lease term and/or renewal periods under Section 540 of the CCC would require a change of law and, therefore, parliamentary approval. However, for various reasons, achieving more favourable long-term lease conditions at this level of the legislative process has been infeasible.

Thus, quite understandably and admirably, the Joint Foreign Chambers of Commerce (the “JFCC“) has been working on a proposal to extend the maximum lease term. In March 2010 the JFCC’s Property Committee finalized and submitted a white paper to the Thai government entitled “Proposal for Leasehold Extension” (the “JFCC Proposal”). The JFCC Proposal articulates many well founded reasons why the legally enforceable lease-term in Thailand should be longer than it currently is. The authors of this article agree with the JFCC’s position and reasoning in such regard. The JFCC Proposal then states that its objective is to “identify an appropriate and feasible solution to the legal disadvantages that are hindering the growth and development of Thailand’s property market . . . the key solution would be the increase of the legal leasehold term” (JFCC Proposal, page 5). We agree. The whitepaper’s introduction then recognizes that changing the law itself would be difficult and so it is asserted that the JFCC’s Proposal will “focus instead on a fast-track solution that is available under existing law.” (JFCC Proposal, page 5). We also agree that such an easy “solution” would be preferable if it existed, but unfortunately it does not. It is our position here that, however well intended, the JFCC Proposal fails to understand the relevant law and that its core proposals are not workable under existing law. The JFCC should withdraw the JFCC Proposal and focus its efforts in this regard instead on advocating for a change to Section 540 of the CCC such that it would allow for a longer maximum lease term.

The first “more achievable and sensible solution” according to the JFCC’s Proposal would be “the revision of the Land Department regulations to ensure that two lease agreements can be registered and enforced in accordance with the CCC, on a back-to-back basis, allowing for a clear, definite 60-year term.” (JFCC Proposal, page 5). Clearly the JFCC recognizes that the CCC currently limits the maximum lease term to thirty years. However, the JFCC also appears to believe that a lease is enforceable merely through registration. In fact, the JFCC bemoans: “with the current practice of Land Officers, in most cases, [a] second lease agreement can only be registered [and therefore] binding only after the first lease term has ended . . . [however] the second lease term is not binding until it is registered . . .” (JFCC Proposal, page 8). “The regulation should state clearly that the Land Department will register and enforce back-to-back leases of 30 years each, in accordance with the CCC, allowing the 60-year consecutive lease term.” (JFCC Proposal, page 13).

To the unfortunate detriment of all of those who would like to see a reliable longer lease term here in Thailand, the JFCC’s efforts are based on fundamental misunderstandings of the relevant law, and therefore are misguided. Obviously the Land Department does not “enforce” land leases. The Land Department is charged with the duty, among others, to register land leases. However, since it bears directly on their white paper’s core recommendation to the Thai government, the more profound of the JFCC’s misunderstandings has to do with the legal effect of a lease registration.

The registration of a land lease and its legal effect seems to be one of the common mysteries in Thai real estate law. The common misunderstanding is that the “registration” somehow makes all elements of a lease contract enforceable and unassailable. The registration of the lease is, however, merely an administrative act. To the extent that the registration does trigger any legal rights between contract parties, e.g. a lessor and lessee, such rights come from the law itself and not from the administrative act of registration. For example, it is true that under Section 538 of the CCC any lease over three years must be registered or it will not be enforceable beyond three years. Obviously, this is why parties register long-term leases. Nonetheless, registration itself triggers no further legal relations or obligations between the lessor and lessee than those outlined in such Section 538 of the CCC. The only legal effect of lease registration beyond Section 538 is that it makes the lease agreement a matter of public record but it does not make an otherwise unenforceable lease, enforceable.

In other words, simultaneous registration of a second 30 year lease term does not make that second term automatically enforceable; thinking it would, is a fundamental misconception of the current law. Current Thai law does not provide for an “extension” of a lease term; rather and only it provides for a “renewal”. For example, if during the first 30 year land lease term, the lessor changes (i.e. the land ownership transfers to a new owner for whatever reason) and such initial term ends, the new lessor would be under no obligation to enter into a new lease with the lessee. Such would be the case even if the original lessor had already “registered” a renewal term. Thus, the relevant legal question is: “who is the owner of the land at the beginning of the new lease term?” Only the owner at the time of renewal, at the beginning of the new term, can act as the lessor and at that time enter into a lease agreement with the lessee. Therefore, merely registering the second 30 year renewal term would not itself make that renewal term enforceable.

Apparently the source of the JFCC’s confusion is also as a result of its misunderstanding of Section 569 of the CCC. “Based on Section 569 of the CCC, only the contractual rights and obligations under an immovable property lease agreement are transferred and binding on the transferee to the land title. Meanwhile, the ‘renewal option’ in the agreement is only considered as a ‘promise’ made by and between the lessor to the lessee, and will not be transferred to the successor/transferee, unless such transferee has accepted to be bound by such promise . . . regardless as to whether the lease agreement has specifically stipulated for the renewal option to also be binding on the successor of the lessor.” (JFCC Proposal, page 8).

It is true under Section 569 of the CCC if land is leased for e.g. thirty years and the ownership changes during that thirty years, the new lessor is bound by that lease. It is however also true that the same said new land owner would not be bound by an option/promise to renew the said lease made by the prior land owner. The reason is that the option/promise is not a part of the first thirty year lease by which the new land owner is bound under Section 569. Therefore, if the promise to renew is not a part of the first lease and not binding on the new land owner then most certainly neither is a second “new” lease made by the first land owner. Any such second lease is definitely no more a part of the first lease than is an option to renew the first lease. It can be concluded that: (i) Section 569 of the CCC only binds a new land owner to a lease that is currently exists; and (ii) a second lease to be renewed does not at that point legally exist and the mere act of registration does not make it a currently existing lease.

The second core idea of the JFCC Proposal is to extend the applicability of the Lease of Immovable Property for Commercial and Industrial Purposes Act (1999) (the “Act“). “[T]he scope of this Act is limited. Our recommendation is that it should extend to ‘residential purposes’.” (JFCC Proposal, page 13). Apparently the JFCC focuses on the Act because it does provide for a maximum lease term of fifty years. However, Section 3 of the Act and the legislative comments to the Act make it very clear that the only permissible purposes of any lease under the Act are commercial or industrial. It is, therefore, not permissible for someone to use the Act for a fifty year lease for residential or recreational purposes.

Thus, “extending” the application of the Act to residential activities would require amending a law, i.e. the Act, itself. Of course that means that this proposal is no more attractive than amending the CCC itself. And in fact, considering that the Act is the “Lease of Immovable Property for Commercial and Industrial Purposes Act”, amending the CCC instead must certainly be more reasonable and likely.

Thus, what is needed are not legally ineffective administrative acts or a change to a law intended for commercial and industrial purposed as currently proposed by the JFCC. The only way forward is an amendment to the relevant law i.e. to Section 540 of the CCC itself, to provide for a lease term of more than 30 years. Pushing for such a measure would undoubtedly make JFCC’s efforts more efficient and would perhaps provide a real opportunity to hope for all the benefits that would accrue to Thailand and those investing here by way of a longer maximum lease term.

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TIME TO REGULATE ESTATE AGENCY IN THAILAND? – PART TWO

What happens if an estate agent in Thailand lies, double deals, cheats or misrepresents…? “Can you count on and trust every single estate agent in Thailand?”

In part one of this article we explained that because estate agency is treated as a profession in other parts of the world, many people believe that estate agents in Thailand are also guided by and subject to a professional code of conduct. We then covered how, unfortunately, this is not case. Regulation of the conduct of estate agents in Thailand is currently virtually non-existent.

We concluded that article by noting that internationally estate agency is oftenregulated by either what can be called “internal” or self regulation—in other words, by way of a recognized, respected and fully functional estate agency association(s) or by “external” or government regulation (i.e., legislation). Both of these approaches are commonplace in the developed world and, in fact, are slowly and inevitably taking root here in Southeast Asia. This part two of our article will provide one example of each. It must be noted that there are other examples available and the following have been chosen randomly.

The National Association of Realtors (the “NAR”) is an estate agency trade association based in the United Sates with over one million members and affiliates in over 50 countries. The NAR provides a good example of self-regulation of estate agency practice and doing so is among the NAR’s core purposes. The NAR’s “Code of Ethics and Standards of Practice” (the “NAR Code”) by which all NAR members must abide is over 100 years old. The current 2013 version of the Code is broken down into 17 sections covering approximately 100 pages.

Approximately half of the NAR Code is dedicated to regulating the conduct of estate agents with regard to their clients. These require the estate agent to be honest in all regards to the client regarding the transaction, negotiation with the other party, the property, its valuation, and even the value of their own services to the client. The estate agent must also care for the interests of the client first, before his own—this is sometimes referred to as the role of a “fiduciary”, a trusted caretaker. Related to this role is the estate agent’s duty not to act in any way which conflicts with the interests of the client. Such conflict is represented, for example, in taking a commission from the buyer where the buyer engaged the estate agent without the buyer client being first fully advised of this. If such double representation compromises the buyer’s interests it is strictly forbidden. Estate agents are also required to have and maintain an acceptable level of professional competence. This means, for example, when questions or issue affecting the client’s interests arise, which are outside of the estate agent’s competence, the estate agent must refer the client to the appropriate source to address them—to a lawyer for legal questions or an accountant on accounting issues, for example.

The NAR Code further regulates the estate agents conduct with regard to the public in general. One may ask, “Why is it necessary to regulate what an estate agent does with his clients?” We think the NAR would say “everything…if ours is truly a profession.” In other words, if the industry wants people to trust it and ultimately use it, its member must conduct themselves ethically, not only towards their own clients but also towards their non-client public. This means that estate agents must conduct themselves professionally and ethically such that they do not bring disgrace to—in this case—the rest of the NAR membership. They will not be dishonest in their advertising or give advice outside of their competence to potential clients or the public at large.

Finally, the NAR Code deals with the conduct between estate agents. This may initially seem even stranger than regulating the conduct towards the general public. However, if one stops for a moment and thinks about this, it makes sense that true professionals would not make false statements about or file false complaints against their estate agent colleagues. It also makes sense that if any disputes arise between such colleagues, they would agree to a civil, speedy, efficient and professional dispute resolution process—as such the NAR Code provides and requires.

The NAR Code binds all its members. In case a member does not follow the NAR Code,a detailed procedure is outlined for parties to file complaints regarding any such violation. In significant and disputed cases the NAR provides an arbitration process within its own rules. Final findings of any violation will and do result in sanctions including suspension or even expulsion of NAR membership.

The other means of estate agency regulation is legislative. A good example of this option is Singapore’s Estate Agents Act (2010) (the “Act”). The Act is comprised of 75 sections. The first third of the Act sets up and details the governmental agency in charge with overseeing the Act. Most of what follows deals with regulating estate agency itself.

Section 28 of the Act outlines that all “estate agents” must be licensed and Section 29 of the Act provides that “sales persons”, must work only for licensed estate agents and that such sales person must further be registered. Any violation of Section 28 is punishable by up to one year in jail and/or a fine of up to approximately Thai Baht 1,900,000 plus Thai Baht 190,000 for every day that the offense continues after conviction. Any violation of Section 29 is punishable by up to one year in jail and/or a fine of up to approximately Thai Baht 600,000.

The next few sections of the Act detail certain duties and liabilities of estate agents (and sales persons) under the Act such as a registered address and what is required in a contract with the client. But perhaps the most important duty is required under Section 42 of the Act. Section 42 requires both estate agents and their sales persons to adhere to a code of “practice, ethics and conduct” (the “Act’s Code”).

The current version of the Act’s Code is comprised of 16 sections covering some 75 pages. Among others, the Act’s Code requires the estate agents to be honest, competent, maintain a professional duty of care for their client (dual representation of buyer and seller is not allowed even if consent is provided by the client and any violation of this rule is subject to one year in jail or a fine of up to approximately Thai Baht 600,000 or both). With some minor exceptions, estate agents/sales persons may not handle or hold any money involved in any estate transaction—even if it does not involve a client of theirs. Estate agents must also carry insurance to cover any wrongful acts by themselves or their sales persons or employees. Finally, estate agents must complete a certain number of approved continuing professional education hours every year.

Under Section 52 of the Act, any violation of the Act’s Code is punishable by a fine of up to over approximately Thai Baht 1,900,000 and/or suspension and/or revocation of an estate agent’s license or sales person’s registration.

In conclusion, what can be seen by way of reviewing these two examples of regulations relating to estate agency outside of Thailand is what we believe is needed for Thailand:

a. protect sellers;

b. protect purchasers; and

c. to enhance the quality and professionalism of the of estate agency in Thailand; so that

d. sellers, purchasers, professional estate agents, and therefore, Thailand will benefit.

In our opinion some version of either meaningful self-regulation or governmental regulation of estate agency or both is what will help the real estate industry in Thailand to regain the confidence of the real estate investor that it deserves.

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TIME TO REGULATE ESTATE AGENCY IN THAILAND? – PART ONE

What happens if an estate agent in Thailand lies, double deals, cheats or misrepresents…?

“Can you count on and trust estate agents in Thailand?” This is a question that, in one form or another, our firm has received countless times. It is an important question. Many buyers use a significant part of their wealth to purchase real estate in Thailand. It seems worthwhile to receive professional advice before making such a significant decision.

The role of an estate agent is, in the public eye, one of a “fiduciary” (like a doctor, a lawyer or an accountant) someone in whom one puts trust in their competence, loyalty, diligence and honesty to tend to their interests—in short someone who should be a “professional”. Thus, in most western countries, estate agencies, as with most professions, are regulated. Society expects a certain minimum level of professionalism from estate agents and sanctioning of those who do not live up to that. Clients are often confused because they assume that, like back home, estate agents are “professional” by definition; and they assume that they are regulated here in Thailand. Such belief often leads to a “blind” trust on the side of the client. The unfortunate truth is, however, estate agents are not regulated in Thailand.

Of course, a given estate agent could act professionally without being regulated, but “can you count on [such professionalism from] estate agents in Thailand . . . ?” We believe that due to the absence of an effective regulation the answer is “no”. The situation is, therefore , not good for clients, not good for the reputable estate agents and, from an investment and economic standpoint, not good for Thailand.

Recently you may have read a legal article in a South-East Asia property magazine, which stated: “Lawyers don’t like agents [. . .], and agents don’t like lawyers much either.” This may be true where one or both of them is unprofessional/concerned more about their own interests than their client’s. But, it is quite odd that one would think that estate agents and lawyers would not like each other if both regularly conduct themselves professionally. Where that is the case and both recognize their fiduciary duty to the client, then their duties and interests are actually in sync–not conflict.

The article then asserts that estate agents are regulated under Thai law provisions governing the conduct of “agency” or “brokerage” or both. It is further concluded that this leads to confusion among clients and estate agents. The alleged confusion is surprising when reviewing the law.

Under Section 797 of the Thai Civil and Commercial Code (“CCC”) “Agency is a contract whereby a person, called the agent, has authority to act for another person, called the principal, and agrees so to act. . . .”. This means that an “agent” has legal authority to act on behalf of, as if the agent is the principal (i.e., the client) himself or herself. Think—“power of attorney”, what you give to your lawyer to act for you and to legally bind you. This firm is not aware of any estate agent concluding an agreement by which the estate agent and client agree that the estate agent has the power to legally bind the client. In short, estate agents in Thailand are not legal agents as defined by Thai law.

Rather, legally speaking, estate agents are “brokers”. Section 845 of the CCC provides that a “broker” is someone you pay if they give you information or provide performance that leads to a third party entering a contract with you. That is what estate agents basically do, not only in Thailand, but worldwide. Any confusion is clarified, once the relevant law is consulted and understood.

It should be noted that under Section 847 of the CCC, estate agents may be liable if they improperly represent both the buyer and the seller. However, this is far from addressing and requiring the very real professional responsibilities that an estate agent wields. What is needed is to:

a. protect sellers;

b. protect purchasers; and

c. to enhance the quality and professionalism of the of estate agency in Thailand; so that. sellers, purchasers, professional estate agents, and therefore, Thailand will benefit.

d. sellers, purchasers, professional estate agents, and therefore, Thailand will benefit.

This can be done by either what can be called “internal” regulation, i.e., by way of a recognized, respected and fully functional estate agency association(s) in Thailand or by “external” regulation (i.e., legislation). Both of these approaches are common place in the developed world and, in fact, are slowly and inevitably taking root here in Southeast Asia.

This can be done by either what can be called “internal” regulation, i.e., by way of a recognized, respected and fully functional estate agency association(s) in Thailand or by “external” regulation (i.e., legislation). Both of these approaches are common place in the developed world and, in fact, are slowly and inevitably taking root here in Southeast Asia.

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