The Thai government and media regularly discuss whether or not to increase the maximum land lease period from 30 to 50 years.
by McEvily & Collins Law Office
By Fabian Doppler, Jerrold Kippen of McEvily & Collins Law Offices
In regular intervals, the Thai government and the media discuss the question whether or not to increase the maximum land lease period in Thailand from thirty to fifty years. A recent statement of Finance Minister Surapong Suebwonglee, mentioning internal discussions in the government about such increase, once again attracted the interest of the public. However, until now such discussions have not led to a formal legislative procedure regarding a change of the law in this regard.
What does long term lease mean exactly, how is it used in practice and are there any risks?
General Characteristics
Leasehold is a frequent choice of property developers and foreign buyers. It means renting property and is regarded as an alternative to freehold ownership. Land can be leased on short or long term contracts up to thirty years. Leases for industrial or commercial purposes can be registered for a term of up to fifty years. Property leases are governed by the Thai Civil and Commercial Code (CCC) in Sect. 537-571. Whereas, with a few limited exceptions, land ownership is prohibited to foreigners, land lease is not. In a typical situation, the land owner and the foreign lessee would normally prefer entering into a sale and purchase agreement but chose leasehold to comply with Thai property law. In such cases, the land owner offers a lease agreement which is clearly biased for the benefit of the lessee and gives the lessee as many rights and options as possible in an effort to make it resemble a freehold ownership. Obviously, this effort can only be successful to a certain extent.
Leases are relatively uncomplicated and easy to set up. In order for the lease to be enforceable for any term beyond three years it must be registered on the title document for the land at the competent land office. The lease is recorded on and becomes an encumbrance upon the title deed. It serves as notice to anyone who would attempt to purchase the underlying land, or loan money against it, that they would do so subject to the existing lease.
When a lease is registered on the title document of the land plot by the registrar at the land office, a Thai version of the lease agreement is attached to the title document in the register of the land office. This agreement in Thai language is the official lease agreement and it is not only binding between the lessee and the lessor, but for any third parties, i.e. it provides notice for third parties.
Upon registration a registration fee and stamp duty of 1.1% of the total rental for the term being registered is payable.
The rules for lease of land apply equally to land lease and to other kinds of property, i.e. apartment lease and house lease.
House Ownership and Superficies
According to Thai law, ownership of a land plot and ownership of a house situated on such land plot can be separated under certain conditions. This enables foreigners to own the house on land which they lease.
The Thai CCC sets forth a clear procedure of separating land and house ownership through registering a “superficies” (Sect. 1410-1416 CCC), which creates the right to own a house on a land plot that one does not own. The superficies is registered on the title deed, which evidences the ownership of the respective house and provides notice to third parties.
Buildings (except condominium units) do not have any form of title document. The House Registration Book (Tabien Baan) does not serve as evidence for house ownership.
According to the rulings of some Thai courts and administrative practice, house ownership can also be established, pursuant to Section 146 sentence 2 CCC which distinguishes and separates the land from a house built thereon where the house is built “in the exercise of a right over [the land owner’s] land.” Thai courts consider leasehold to be a “right to another person’s land” and current administrative practice in Thailand takes the same position. However, current administrative practice may also require additional documentation that it deems to be evidence of house ownership such as:
a. the building permit for the house. Administrative practice considers the permit relevant indicia of house ownership (for first owner of the house only) purportedly because the land owner must consent in writing to the issuance of the permit and because the permit form calls the grantee the “owner” of the house to be built; and/or
b. the documented history of the house sale(s) by e.g. all official “House Sale Agreements”. This is relevant for the second and any later owner of the house. The official agreements are issued by and are part of the file of the land office. And, thereby, ownership of the house in the name of the owner from the second owner on is officially registered at the relevant land office. A duplicate of the latest agreement is given to a new owner of the house.
In our opinion these Thai court rulings and the common administrative practices unnecessarily cloud the legal clarity that the lawmakers provided with the procedure of separating land and house ownership through a superficies. Instead, the registered superficies foreseen by the CCC is replaced by a lease, reference to CCC Sect. 146, evidencing ownership through a building permit, the official house SPA, etc. which were not designed to serve as the basis and evidence for house ownership. This is not sound legal ruling nor practice and for the purpose of legal clarity and security we recommend that clients always have a superficies registered on the title deed of the underlying land to establish their legal ownership of the house.
The government fees for the registration of a superficies without rental payment are THB 50.00 and therefore only nominal.
If the house ownership is transferred separately from the land ownership, a 30-days public notice is required before the transfer of house ownership can be registered. During this notice period, objections against the house ownership transfer can be filed. If land and house are sold jointly, no public notice is required.
Transfer of the Lease
Lease can be transferred on the side of the lessee or through ownership transfer of the underlying land on the side of the lessor.
a. Transfer on the side of the lessee
According to Thai law, the lessee may not assign the leasehold to a third party without the lessor’s permission being provided for in the lease agreement.
The lessee of a property generally can dispose of his leasehold interest in the property by disposing of the remaining lease period. Legally this is done by assigning his leasehold rights to a new lessee. As an alternative, it is advisable that lease agreements include a term obligating the land owner to enter into new lease agreements with third party “buyers”, which would then start with a new lease term of thirty years.
The property may also not be sublet by the lessee without the lessor’s consent being provided for in the lease agreement.
The above applies accordingly for a transfer through inheritance. It is however required that the registered lease agreement includes an inheritance clause setting forth that the lease will be transferred to the heirs of the lessee in case of his demise. A lease without the aforementioned term will expire upon the demise of the lessee.
b. Transfer on the side of the lessor
In the case of an ownership transfer of the land from the lessor to a third party, the lease will by law be transferred to the new owner, i.e. the new owner will then be bound by the registered lease agreement for the remaining lease term, Section 569 CCC. In other words, despite new ownership the lease will continue existing.
In the case of bankruptcy of the lessor, the liquidator will have a right to terminate the lease and the lessee will have a compensation claim toward the previous owner, making him part of the group of creditors and the quota distribution of assets.
It is possible for the lessee to contractually inhibit an ownership transfer to a third party by including a clause in the lease agreement setting forth that the property shall not be disposed of by the lessor. As a security for this, the title deed may be handed over to the lessee at the occasion of the lease registration, in order to safeguard that a transfer registration at a later stage can physically not be made. In case the lessor would obtain a substitute title deed and effect a conveyance with it, such conduct may be subject to criminal prosecution.
Renewal Option
It is common practice in Thailand to enter into long term lease agreements which include renewal options of two terms with thirty years each, in an attempt to make the duration of the lease ninety years in total. For commercial lease, the renewal terms accordingly have durations of fifty years.
Although widespread, it is a misconception that Thai law provides for a third term of thirty years and that it would be enforceable. Even though it is common to include such term as a standard clause and it can be found in practically all long term lease agreements, in fact Thai law provides only for one renewal. There is no confirmation whatsoever by court rulings that a third term would be valid, only confirmation regarding the second term of thirty years actually exists. Put simply: 30+30+30 is by no means certain or secure.
The maximum registration period for the first term of a lease is thirty years and not more. The renewal option does not mean that a second or third term of thirty years can be registered on the title deed right away or that they would be automatically registered on the title deed after the expiration of the previous period. The lessor or his representative must physically attend the registration of the first extension and if he refuses to do so, the foreign lessee has to go to court to enforce the contract.
However, theoretically such does not prohibit the registration of one term of thirty years followed by the registration of a second thirty year term to the same lessee with a gap of at least one day between the two registered terms with both terms being registered contemporaneously; or the registration of a first thirty year term followed immediately by another thirty year term with each term being registered to different lessees, (e.g. two separate company lessees); both of which we are reliably informed have been recently allowed by at least two different land offices.
A forthright renewal clause in the lease agreement is not valid as it will be seen as avoidance of the maximum duration prescribed by the CCC and it will not be enforceable. According to the Thai Supreme Court, the renewal is only a “promise” by the lessor and the lessor must still make a binding “offer” regarding a renewal. A binding renewal agreement is then considered an addendum (side letter) to the lease agreement. Such addendum can be entered into after the expiration of the lease, but it is debatable if it can be entered into at an earlier stage. If the lessor should pass away, the promise will not be binding for his heirs. Then, also the renewal option would not exist anymore. The same problem applies for bankruptcy or dissolution otherwise of the lessor in case it is a company.
The so-called “perpetual lease” involves shareholding in a land owning company in addition to registering a lease. Such land holding company will be set up strictly for the purpose of owning and leasing out the land and will have the self-imposed obligation to renew existing leases after their expiration. The company typically is controlled by a group of owners which are the lessees in a housing development or apartment building and the company is “ring-fenced” in the sense that no business activity besides leasing the land and or building(s) will be allowed.
Purchase Option
Apart from the renewal option, another standard contractual option in a long term lease agreement is the so-called “purchase option”. This option will provide the lessee with the possibility at any time during the lease to have the ownership of the property transferred by the lessor to the lessee himself or to a third party.
If the lessee is a foreigner, with a few exceptions at present only the latter possibility is legal under Thai law. However, over the course of thirty years it is not impossible that freehold land ownership may become more accessible to foreigners, in which case the purchase option would allow the lessee to become the owner of the land. In any event, such an option would also allow the lessee to “sell” the freehold to any lawful owner at anytime during the lease, since they have the right to designate any such transferee of their choice during the lease term. Both of these benefits make the purchase option a highly advisable lessee asset in any long term land lease.
A third party transferee can be any lawful purchaser of Thai nationality. This gives the lessee the possibility, either as a well planned measure or as a short notice “emergency break”, to have the land transferred into the name of a Thai natural or juristic person of his confidence. Thus, the purchase option provides effective protection for the lessee.
In this context again the question arises: What happens if the lessor should pass away or (if a company) be dissolved? The answer is in our opinion in favor of the lessee, as the purchase option must be transferable both on the side of the lessee and the lessor if the lease agreement in general is transferable.
Taxation Issues
There are two kinds of property tax in Thailand: “House and Land Tax” and “Local Development Tax”. Both are imposed only on the owner of a land plot. The lessee has no obligation to pay such taxes, but it is commonly made the lessee’s burden in the lease agreement.
In the case of a transfer of the lease on the side of the lessee, Value Added Tax (VAT) is collected at a rate of 7% of the remuneration of the transfer of lease rights, i.e. of the direct payment from the transferee to the transferor that is made as consideration for the assignment, not, however, for the amount of the lease value itself. The transferor is responsible to collect this tax and pay it to the Revenue Department (it applies only if the transferor has a VAT-liability of more than 1.8 Million THB in the calendar year and for the amount exceeding it).
In the case of renewal terms, if the lease agreement includes in total three thirty-year terms, it is, in order to comply with tax law requirements, advisable to remunerate the lease of the land with a rental that is split into three equal parts, one for each term. The Revenue Departments in the urban and more developed parts of Thailand will not accept unrealistic rent allocation with, e.g., only nominal amounts for the two consecutive terms, and reassessment by the Revenue Department at the time of the renewal registration should certainly be avoided. The aforementioned practice also reduces the registration fees and stamp duty payable on registration to one third.
In the case that the purchase option is exercised, it is advisable for the lessor and the lessee to declare to the land office that the purchase price of the property is equivalent to the pro-rata rent during the remainder of the lease term. Otherwise, the likelihood of complicated taxation issues arising (that might also lead to taxation based on assessment by the Revenue Department) is significantly increased.
Conclusion
The long term lease as an alternative to freehold ownership is not without its legal complexities. Nevertheless, it is for good reason a standard choice for property acquisitions in Thailand. Important is that a lease agreement is thoroughly drafted and all standard terms are included. Such lease then offers sufficient security for thirty years and contractual options for the time thereafter. Through such options one can avoid bumps and potholes that could otherwise pose significant problems further down the road.