Lease, rental and hire of land real estate contract structures property law in Thailand

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. The law is applied in the same manner if the hirer is a Thai or foreign national. 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.

As foreigners are prohibited from owning land a lease agreement is often used to secure a long term interest in land. In a long term lease agreement it is recommended to structure a LAND LEASE with ownership over the buildings upon the land in the foreigner's name. In case of undeveloped land the land lease could for this purpose include a separate right of superficies, or in case of an existing house a separate sale and purchase agreement for the house in addition to the land lease.

Content:

Hire Basics: registration of the lease agreement

Any lease agreement of real estate property exceeding 3 years must be registered with the local land office where the property is located. 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 long term 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 with the original land title deed at the local land office. If the lease is not registered with the Land Department the lease is enforceable by action for 3 years only.

A lease exceeding 3 years of a condominium unit must be registered with the local land office where the condominiuim is located and will be noted on the condominium unit title deed. The lease of a unit in an apartment building not registered under the Condominium Act will be registered as a lease over a part of the building which also must be registered at the local land office to be enforceable.

Section 538 Civil and Commercial Code: 'A hire of immovable property is not enforceable by action unless there be some written evidence signed by the party liable. If the hire is for more than three years or for the life of the letter or hirer, it is enforceable only for three years unless it is made in writing and registered by the competent official'.

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

Lease Basics: lease term

The maximum lease term in Thailand is 30 years (section 540). Any lease of immovable property for a longer period than 30 years in Thailand may only be made by renewal of the lease contract upon its expiration. A valid enforceable renewal can only be made within a period of 3 years prior to the expiration of the first lease term.

Section 540 Civil and Commercial Code: 'The duration of a hire of immovable property cannot exceed thirty years. If it is made for a longer period, such period shall be reduced to thirty years. The aforesaid period may be renewed, but it must not exceed thirty years from the time of renewal'.
Section 564 Civil and Commercial Code: 'A contract of hire is extinguished at the end of the agreed period without notice'.

Also the common used controversial 90 year lease is subject to Section 540 of the Thailand Civil and Commercial Code and registered and enforceable as a 30 year lease agreement containing 2 personal promises for renewal. The 90 year lease structure is not illegal but also not recognized under Thai law. There are a few theories behind a 90 year lease however these are not based on hire of property according to the Civil Code. These long term arrangements are contract structures and as an alternative contractual structure for a longer interest than 30 years in the land not tested in a Court. The various conditions such as a renewal terms, purchase or freehold option and even a succession clause in the lease agreement are under hire of property laws personal promises between the parties to the agreement only. Essential in this structure, as in any long term leasehold interest in a real estate property, is that ownership over the land is separated from ownership over the building. The lessee obtains ownership over the house and a leasehold interest in the land without obtaining ownership over the land. LEARN MORE about options in a lease agreement.

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 Civil and Commercial Code; 'A contract of hire of immovable property is not extinguished by the transfer of ownership of the property hired. The transferee is entitled to the rights and is subjected to the duties of the transferor towards the hirer'.

Section 569 refers to true lease or hire of property rights, and only real hire of property rights transfer with the property according to this section (read the chapter hire of property). Various contractual terms and conditions in the lease agreement which are not in essence hire of property rights (referred to as non-lease rights) do not transfer to the new owner of the property, even though included in the lease registered at the land department. 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. 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. Also the common used renewal clause in a lease is 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. 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.

Supreme Court Judgment 6763/ 1998; 'In case the lessor promises in the lease agreement to extent or renew the lease term, but has sold the leased land before the lessee was entitled to accept, the contractual rights are not binding upon the new owner and only lease rights that are 'real lease rights' will transfer to the new owner'.

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 principle contractual promises which are not in essence lease or hire of property rights do not transfer with ownership of the property.

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 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 for registration 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 defences 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.

'Market value' is the probable open market price agreed on by a willing and knowledgeable buyer and seller with no prior relationship with each other where the transaction is not a forced sale. The market value is the probable price on the date of the collateral asset valuation or appraisal under normal market conditions with no transaction costs (nor taxes).

If the lease is not renewed the owner may in principle 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). Meaning, without registration of a new lease term after 30-years the land owner could order you to leave the premises within 2 months.

Section 570 Civil and Commercial Code: 'If, at the end of the agreed period, the hirer remains in possession of the property and the lessor knowing thereof does not object, the parties are deemed to have renewed the contract for an indefinite period'.
Section 566: 'If no period is agreed upon or presumed, either party may terminate the contract of hire at the end of each period for the payment of rent, provided that notice of at least one rent period is given, but no more than two months notice need be given'.

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

Lease (hire, rental) is a personal right of the lessee (tenant, hirer). In the event of death of the lessee during the lease term the lease is terminated according to Thai hire of property laws. Lease (hire) is not an inheritable right in Thailand. 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 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).

Supreme Court Judgment 1108/ 1994; 'The lessee is the essence of the lease agreement. Therefore, should the lessee die, the lease contract will be terminated and the lease rights WILL NOT transfer to the heirs of the lessee'.

Long term lease agreements generally include a clause that in the event of death of the lessee prior to the expiration of the lease term, his or her heirs shall be allowed to continue to lease and that the lease will be transferred to the heirs. LEARN MORE about inheritance and succession of lease rights

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 the lessee. Note again, contractual options like renewal are personal to the original lessor and lessee(s), and not absolute or real rights. The non-lease contractual obligations do not follow the freehold title of the land, but are on a 'person-to-person' basis.

Hire Basics: Sub-lease and assignment of the lease

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'.

Example; Should the lessee lease raw 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 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.

Section 538; 'A hire of immovable property is not enforceable by action unless there be some written evidence signed by the party liable. If the hire is for more than three years or for the life of the letter or hirer, it is enforceable only for three years unless it is made in writing and registered by the competent official'.

Supreme Court Judgment 6451/ 1995; 'Should both parties have made 10 lease agreements at the same time, each contract has a three year term and pre-specified dates of execution consecutively for 30 years, it will only be enforceable for the first three years'. This will be seen as an avoidance of 538 CCC and therefore not enforceable.

If a lease over 3 years is not registered with the competent official (the Land Department) 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.

Lease registration fee at the Land Department shall be collected 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 register of the lease at the rate of 0.1% of the total rental throughout the lease term.

The 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 totalling 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.

The current Land and housing tax will be replace by a new approved Land and ousing 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 (read under owning a house).

Lease, hire and rental of Thai real estate property