Long-term leases for foreigners |
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Real Lease rights and Contractual Obligations in lease agreements in Thailand
Foreigners may not buy land freehold in Thailand, they may legally lease land for up to thirty years under aregistered leasehold agreement. Many foreign investors are reluctant to invest money into a leasehold property because the duration of lease cannot exceed thirty years. If the lease term is made for a longer period, such period shall automatically be reduced to thirty years ( section 540 Civil and Commercial Code). The agreement to lease may be renewed upon its expiration, but it must not exceed thirty years from the time of renewal.
As this term is too short for most property buyers you see lease structures aimed at foreigners with longer lease terms stated in the lease agreement, typically a ninety year lease term. This will not be the registered lease term at the Land Department. The suggested longer term is based on a promise in the lease agreement 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. |
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Renewal options in the lease agreement are under Thai law contractual promises between the parties signing to the lease agreement, as opposed to registered real lease rights secured over the property itself. There is no guarantee the renewal of the lease will be granted. If ownership of the land is transferred during the lease the lease itself is not terminated and the new owner takes the land subject to the lease (Section 569 Civil and Commercial Code), however, 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 non-lease rights (e.g. 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 in the lease agreement
Non-lease rights (according to the Thailand Supreme Court) are for example the agreement between the lessor and the lessee to repay rental with interest should the lease not be renewed after 30 years, or the option to transfer the land to a freehold title or the right to purchase the land. Also the agreement to renew the lease agreement upon its expiration is a personal contractual promise and will not follow the lease with the freehold title of the land. If the lessor passes away during the lease term (or in case of a juristic person is dissolved or the land transferred to another company) the Thai inheritor or transferee owner of the property is not bound by contractual obligations between the previous owner and lessee. In this case a lease renewal upon expiration of the first 30 years has to be in accordance with the terms and price as set out by the new owner, at his discretion.
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 (read more about succession of a lease agreement).
Beyond lease agreements
It is important to distinguish real lease rights from contractual promises or non-lease rights in the lease agreement. 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. A ninety year land lease or a thirty year lease agreement with two pre-paid renewal options is generally suggested to generate sales.
Note: The Supreme Court of Thailand has given additional rights to the lessee and his heirs in certain specific situations (beyond the section hire of property in the Civil and Commercial Code), and a correctly drafted 90 year lease should include some of these principles but it is in the end up to a Court or the Thailand Supreme Court to determine the rights of the lessee or the lessee’s heirs under a leasehold purchase beyond 30 years.
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