Lease, hire and rental of Thai real estate property

Whether called hire, lease or rental of immovable property, the legal agreement whereby rent is paid in order to use another man's real estate property in Thailand is governed by the chapter 'Hire of Property' in the Civil and Commercial Code.

There are no specific laws governing hire of property by foreigners therefore the law is applied in the same manner if the hirer is a Thai or foreign national. As foreigners are prohibited from owning land in Thailand a LAND LEASE agreement is often used as part of a property (land and house) purchase.

Content:

• Lease (hire of property) basics
• Long term lease structures
• Termination upon death of the hirer
• Short term rentals

In this page we refer to a hire of immovable property contract exceeding 3 years as a lease agreement and we refer to the parties in such a lease agreement as lessee and lessor.

Hire Basics: registration of the lease agreement

Any lease agreement of real estate property (land, house, apartment) exceeding 3 years must be registered with the local land office where the property is located to be enforceable by action over a 3 year period. The lease may be bilingual but the land offices in Thailand require a Thai script version of the lease, even the foreigner's name in the contract must be written in Thai script. The lease agreement will be noted on the backside of the land title deed copy of the owner and on the original land title deed as kept by the local land office. An original copy of the lease agreement will be kept at the local land office and by both parties.

A lease exceeding 3 years of a condominium unit registered under the Condominium Act must be registered with the local land office where the condominium is located and will be noted on the condominium unit title deed. An apartment building NOT registered under the Condominium Act does not have unit title deeds but any lease over such an apartment must be registered as a lease over part of the building together with the land title deed to be enforceable over 3 years.

It is only possible to register a lease over titled property (i.e. condominiums and properly titled land and buildings upon titled land).

A lease registration fee shall be collected by the land office at the rate of 1% of the total rental throughout the lease term. Rental shall include the remuneration for the lease, the remuneration during the construction, the key money, the fee for the land's survey, the construction cost contribution or other amount of money paid by the lessee to the lessor for the lease benefits. Stamp duty shall be collected on the registration of the lease at the rate of 0.1% of the total rental throughout the lease term.

Lease Agreement Basics: Term in the lease agreement:

The maximum registered lease term is 30 years (section 540 Civil and Commercial Code). Any lease of immovable property for a longer period than 30 years can only be made by renewal of the lease contract upon its expiration. A valid enforceable renewal (meaning a new signed lease agreement) can only be made within a period of not more than 3 years prior to the expiration of the first lease term and registration of the new lease term.

A 90 year lease does not exist

Also the common used but legally not recognized 90 year lease agreement is subject to Section 540 of the Thailand Civil and Commercial Code and registered and enforceable as a 30 year lease agreement only containing 2 personal promises for renewal. The 90 year lease structure is not based on hire of property laws. These long term arrangements are simply private contract structures between the parties suggesting a longer lease period. As it is not recognized by law or deemed registered lease rights there is no guarantee a new lease will be granted after 30 years or that renewal is enforceable by action.

Leasehold Basics: renewal option in the lease agreement

If the leased land or real estate property is transferred during the lease term the lease is not terminated and the the new owner takes the property subject to the lease.

Section 569 refers only to true lease or hire of property rights. Only real hire of property rights as included in the section hire of property in the Civil and Commercial Code are protected and transfer by law with the property to the new owner. Not the various contractual terms and conditions which are not in essence hire of property rights (referred to as non-lease rights). Third parties are not bound by an agreement between 2 parties unless they agree to the agreement. Non-lease rights do not automatically transfer to the new owner of the property.

Real lease rights are for example the right to sublease, the right to assign, the payment of rent, the lease term, termination, purpose of the lease, responsibilities for defects during the lease term. These rights and obligations remain enforceable against a new owner.

Non-lease rights are for example a promise by the lessor to purchase the building or a penalty should the lease not be renewed upon expiration after 30 years, or the option to purchase the land by the lessee should this become permissible under Thai law. These options are typical contractual promises between the parties to the lease agreement and are in principle NOT enforceable if ownership of the land is transferred.

The common used renewal clause in a lease is clearly deemed a contractual non-lease right by the Supreme Court of Thailand and NOT a lease right therefore will not be enforceable against a new owner under the section hire of property unless the new owner specifically agrees to the renewal. For example an accepted and paid renewal option made with the previous owner is not enforceable against the new owner. He will only be bound by the registered lease term.

The new owner of the property would have to accept the contractual options in the lease or he will not be bound by non-lease clauses in the lease. This could be effected in a sale and purchase agreement between the original lessor and future owner of the property.

In any long term leasehold interest in a real estate property it is essential that ownership over the land is separated from ownership over the building. The lessee obtains ownership over the house without obtaining ownership over the land. It is recommended to combine a land lease with separate right of superficies.

The combination of a land lease agreement and a registered right of superficies gives the best protection under Thai law.

Hire Basics: paying a reasonable rent

Paying rent is an essential element of a lease or hire of property contract. Without paying rent in would not be hire of property but a right of habitation which has a different set of rules. The lease price or rental price must be considered a reasonable rent or payment of fees and any taxes (e.g. registration, income, land and house tax) will be based on the government assessed lease or rental value.

A pre-paid 90 year lease is under hire of property laws not possible as:

• any lease term made for a longer period than 30 years will by law be reduced to 30 years;
• a valid renewal can only be made 3 years or less prior to the expiration of the first 30 year term, and at that time the lease must be registered with a reasonable rent.

A clause in the lease, 'It is hereby agreed that there shall be no further payments due for any renewals as the price shall cover the entire lease term however long it may be' is not possible under hire of property laws in Thailand. To renew the lease the new lease agreement with a 30 year term must be registered by the parties at the Land Office upon expiration of the first term and paying a reasonable rent for the new term is required.

If after 30-years the original parties are still the lessor and lessee the renewal could be enforceable in court, however, this is not guaranteed and the renewal could be difficult to enforce after 30 years without the lessor wanting it. There are several defenses under contract law the lessor could take not to grant a renewal option or on the terms he gave you 30-years ago. In a court decision granting the lessee the right to renew the decision will likely include the condition that the lease price must be for the market value (at that time), irrespective what is agreed in the lease agreement 30-years ago.

If the lease is not renewed upon expiration of the first 30 year lease term the owner may regain possession of the property.

If the lessee(s) remain in the possession of the property after the expiration of the initial 30 year lease, and the lessor knowing thereof, parties are deemed to have renewed the contract for a indefinite period (this is not 30-years). In this situation either party may terminate the lease at any time, provided that notice of at least one rent period is given, but no more than two months notice need be given (section 566).

Leasehold Basics: Termination of the lease agreement in Thailand upon death

Lease (hire, rental) is a personal right of the lessee (tenant, hirer). Lease in Thailand is basically a rental contract between 2 parties and in the event the lessee dies during the lease term the lease is terminated according to Thai hire of property laws and the Thailand Supreme Court. A property lease in Thailand is not an inheritable right and the law offers no protection for the heirs in case the lessee dies. If a valid succession clause is included in the lease agreement such a clause is enforceable by the heirs of the lessee against the original lessor but in principle requires assignment and registration at the land office where the property is located.

A succession clause is under hire of property laws a personal promise of the party to the lease agreement and will like a renewal option not transfer automatically if ownership of the property is transferred.

It is possible to include more than 1 person as the lessee in the lease agreement. The lease is not terminated upon death if additional protection is created based on Supreme Court judgments regarding special reciprocity contracts, which basically can be created if the lessee made an agreed substantial investment in the improvement of the property that will upon expiration benefit the owner of the property (e.g. if the improvements (house) on the land will revert to the owner upon expiration of the lease).

One could use an (offshore) company as the lessee or include others as co-lessees or party in the lease agreement who each could independently continue to lease. This would prevent the necessity of re-registering or transferring the lease in the event of death of one of the lessees.

Note again, contractual options like renewal and succession clause are personal to the original lessor and lessee(s). These options in the contract do not follow ownership of the land but are on a 'person-to-person' basis (it follows only the parties to the agreement).

Hire Basics: Sub-lease and assignment of the lease agreement

The right to transfer lease rights or sublease must be included in the lease.

Section 544 Civil and Commercial Code: 'Unless otherwise provided by the contract of hire, a hirer cannot sublet or transfer his rights in the whole or part of the property hired to a third person'.

Sub-lease:

1. The lease remains binding upon the original lessee,
2. The lessee has execute a new lease with the sub-lessee,
3. does not have to be in writing or have written evidence

Transfer of lease rights:

1. The transferee lessee takes the place of the original lessee,
2. The lease rights will transfer subject to the lease,
3. Must be in writing section 306 Civil and Commercial Code

Example;

Should the lessee lease undeveloped land and not be allowed to sub-lease the land and then build a house on the land and rent out the house, this will not be seen a sub-lease or breach of the land lease contract (Scj. 2237/1981). Should the lease contract state that the lessee is not allowed to let someone else use the land, then in the same situation, it will be seen as breach of the lease contract (Scj. 6843/ 1998). Sub-lease is generally not subject to permission of the owner/ lessor.

Rental Basics: Short term rent or hire of commercial or residential property

In case of commercial or residential property often a lease term of 5 years is offered. To avoid registration and taxes this in practice means a 3 year lease with an option for another two years. However any lease to be enforceable over 3 years must be registered at the Land Office.

This will be deemed an avoidance of 538 CCC and therefore not enforceable. If a lease over 3 years is not registered with the competent official only the first 3 years is enforceable by action. Should the lessor sell the property within the first 3 years or just does not want to give you the option to renew for the extra 2 years is generally not enforceable, unless the lease is deemed a special reciprocal contract. This type of contract is not specified in the Civil and Commercial Code but created by the Supreme Court, however has limited application and in principle only applies in the case the lessee made an agreed substantial investment in the improvement of the property that will upon expiration benefit the owner of the property.

Hire immovable property for commerce and industry by foreigners has an additional special act, the 'Hire of Immovable Property for Commerce and Industry Act B.E. 2542'. This Act provides specific conditions e.g. duration of hire may exceed 30 years but not over 50 years and remittance into Thailand shall be over 100 million THB.

Other taxes and fees

Income derived from lease is personal income according to section 40 (5) (Kor). An individual Thai citizen or foreigner who lives in Thailand for one or more periods totaling at least 180 days in any tax (calendar) year is, for tax purposes, deemed a resident of Thailand and subject to tax on all assessable income derived from sources within the country, whether paid within or outside Thailand, and on assessable income derived from foreign sources to the extent that it is brought into Thailand in a year in which income is received. A non-resident individual is subject to tax only on assessable income from Thai sources, regardless of payment location.

Building a Land Tax

The current Land and housing tax will be replace by a new approved Land and Housing Tax, however it is not yet known when this new tax law will be issued. under the current Land and House tax Act B.E. 2475: For individual land owners if they lease out their property Building and Land Tax shall be collected at the rate of 12.5% of the yearly rental according to the lease agreement or the annual value assessed by the Land Department, whichever is higher.