Long-term leases for foreigners

Real Lease rights and Contractual Obligations in lease agreements in Thailand

Foreigners may not buy land in Thailand, they may legally lease land for up to thirty years. Many foreign investors are reluctant to invest money into a leasehold property because the duration of a lease cannot exceed thirty years. If it is made for a longer period, such period shall automatically be reduced to thirty years (hire of immovable property section 540 Civil and Commercial Code). The lease may be renewed upon its expiration, but it must not exceed thirty years from the time of renewal.

As this term for most property investors is simply too short you see leasehold structures aimed at foreigners with longer lease terms, typically a ninety year lease term. This will not be the registered lease term at the Land Department. The registered lease term cannot exceed thirty years from the date of registration. The suggested longer term is based on a promise in the lease to renew the lease after thirty years, and a ninety years lease term is based on a second renewal upon the expiration of the second term, however, these renewal options in the lease are not registered rights or guaranteed under Thai law. The lease must be renewed and registered and there is no guarantee the renewal of the lease will be granted. Renewal 'options' are merely personal contractual promises between the parties signing to the lease agreement and not registered or real lease rights. If the land has changed hands during the lease the promise in the lease agreement to grant a second term is not binding upon the new owner.

If the land is transferred during the lease term the lease itself is not terminated and the new owner takes the land subject to the lease (Section 569 Civil and Commercial Code). In this case the Supreme Court has clearly ruled that only real lease rights transfer and follow the freehold title of the land and will be binding upon the new owner. Contractual rights or option obligations that are non-lease rights in the lease (like the renewal option) will not transfer to the new onwer. Non-lease rights are promises and obligations included in the lease agreement but which are not by nature lease rights.

Non-lease rights (Thailand Supreme Court) are for example the promise by the lessor in the lease to purchase the house upon expiration of the lease, or part repayment of rental with interest should the lease not be renewed, or the option to purchase the land by the lessee should this become permissible under Thai law and/ or the promise to renew the lease upon its expiration. These contractual non-lease rights do not follow the lease with the freehold title of the land and are effective between the original parties to the lease agreement only. If during the lease term the land is transferred the transferee owner has the full right to reject these non-lease rights, even though these are written in the lease registered at the Land Department (Supreme Court).

Should the lessor pass away (or in case of a juristic person is dissolved or the land tranferred to another company) the Thai inheritor or successor of the property is not obliged to sign a second lease term with the lessee upon expiration the lease, irrespective what the lease agreement states different. If granted the lease renewal would simply have to be in accordance with terms and price as set out by the new owner, at his discretion.

It is possible to include a clause in the lease that the lessor must include a clause in his will stating that if he dies a designated heir of the land must honor and accept the land subject to the lease and subject to all the terms and conditions contained therein or forfeit his inheritance rights. However, this is an uncertain protection and compliance with such a clause would be more a moral duty upon the lessor rather than a legal obligation.

Should the lessee pass away during the lease term the lease and options are terminated (as the lessee is the essence of the lease agreement (Supreme Court)) and the remaining term and lease rights will not pass automatically to the heirs of the lessee. The transfer of the lease to the heirs is generally subject to the lease agreement and to agreement by the land owner and requires registering of the remaining lease term in the name of the heir(s). The heirs have the right to claim such performance directly from the lessor (Section 374 Civil and Commercial Code), however, this right must be properly included in the lease. Note that this option is primarily a contractual right and not a real lease right and will generally be lost with the transfer of ownership of the land. To prevent this situation one could include others in the lease as co-lessees who can each continue to lease in the event of death of one of the lessees. It is important that the lease agreement is drafted correctly. Many mistakes are made by unqualified real estate and legal professionals or the lease may be terminated upon the death of the lessee.

Despite the complicated lengths some will go to guarantee lease renewals it is important to distinguish in the lease agreement real lease rights from contractual non-lease rights. Property professionals may say you are protected to the fullest extent possible under Thai law, however, in practice leasehold structures are guaranteed for thirty years only and it is important to be aware of the limits and the personal nature of contractual structures in the lease. Nothing protects the lessee against a lessor going bankrupt, departing this life or even breaching his contractual obligations. Lease structures beyond thirty years are set up to generate sales to foreign investors, rather than offering sound guarantees.

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