Lease and an agreed investment in land or real estate that will benefit the owner upon expiration of the lease term
Special Reciprocal Contract
SPECIAL TYPE OF (LEASE) CONTRACT CREATED BY THE SUPREME COURT
Contrary to a lease agreement governed by normal hire of property laws this type of special lease contract is not specified in the Civil and Commercial Code but created by the Thailand Supreme Court. In some specific situations where the lessee has made an agreed substantial investment in the improvement of the leased property that upon expiration of the contract will benefit the owner the lease could be deemed a special reciprocal contract. When there is mutual agreement between the parties of making the investment by the lessee and the benefit for the owner upon expiration of the contract term the hire of property contract could be consider a special reciprocal contract and (based on Supreme Court Judgments) a different set of rules would apply on the contract (beyond hire of property laws). This type of special contract is not specified in the Civil and Commercial Code but is created by the Supreme Court but has limited application.
Agreed investment in the improvement
If the lessee and the lessor have agreed in the contract that the lessee shall have more burden by an additional investment in the property that will benefit the owner upon expiration of the term in the contract the agreement between the parties could be considered a special reciprocity contract (more than a normal lease contract). In this type of contract the parties must have some common objective (possession of the property for a fixed term of the lessee vs benefit of the improvement for the owner upon expiration). In all such contracts the consent of the parties must be expressed. If a contract between the parties is deemed a special type of lease contract (special reciprocal contract) the contract is for example enforceable by action for a term exceeding 3 years even without registration of the agreement with the Land Department (for example Supreme Court judgment 1135/1963Essence of the court judgment: The lessee agreed with the lessor to pay for the construction costs of the building that would become ownership of the lessor upon expiration. The lease had a term of 6 years and 10 months. The contract was considered a special reciprocity contract and therefore the total term of 6 years and 10 months was legally binding even without registration of the lease with the Land Office. The lessor could not terminate the contract and could not evict the lessee). In a normal lease for a period over 3 years the agreement MUST be registered with the land office and written in Thai to be enforceable. If the agreement is considered a special reciprocity contract the rental or lease agreement is enforceable even if the lease is not registered with the competent authority. It may technically not even have to be in writing!
It will not be considered a special reciprocal contract if the lessee has put more burden upon himself, meaning, if the extra burden is not as such agreed between the lessor and lessee, but the lessee, say, chooses himself to imporve the land or real estate. This will not be considered a special reciprocity contract as there is no consent from the lessor expressed.
Samples of differences of a normal lease and special reciprocity contract
- In a normal hire of property the lessee is the essence of the lease contract, therefore the lease rights will not automatically transfer to the lessee's heirs
- If the contract is considered a special reciprocity contract the lessee is not the essence of the agreement, therefore the rights under the contract will transfer to the lessee's heirs.
- In a normal hire of property any lease agreement over three years must be registered with the Land Department. If the lessor has agreed in the contract to register the lease the lessee can sue the lessor within the first 3 years to register the lease agreement. If registration is not agreed in the contract the lessee cannot sue the lessor;
- The lessee can sue the lessor even if the lease contract did not specify that the lessor shall register the lease
The benefit of a special reciprocity contract lies in the fact that certain legal requirements (drawbacks) that apply in a normal hire of property do not govern a special reciprocity contract. The legal theory behind this special type of lease contract could be used in land lease agreements for foreigners but cannot extent the period beyond the maximum term of 30 years. In this type of contract the lessee finds protection in supreme court rulings that he would normally not have in normal hire of property. The main elements of such special contract is the agreed investment and extra burden for the lessee and the benefit for the owner upon expiration of the term. Not a special reciprocal agreement is considered where the lessee invests a large amount in the improvement of a property without agreement with the lessor (e.g. supreme court judgment 7858/1999Scj 7858/ 1999 : In the lease agreement the lessee and lessor have not agreed that the lessee had to modify the building and/ or build on the leased land. By investing a large amount in the leased property the lessee brought more burden upon himself, however, as this was not agreed between the parties this cannot be considered a special reciprocity contract. The lessee did it without consent from the lessor.)
Some creative lawyers in Thailand have included supreme court judgments and theory behind this tye of special lease in a 90 year lease agreement to extent the maximum term in section 540 Civil and Commercial Code or to suggest enforceable renewal options in a lease (e.g. the investment by the lessee in the construction of the house and the lessor becoming the owner of the house upon expiration of the third term after 90 years). This is unlikely as this type of contract cannot repair or include under Thai hire of property laws voidable or void clauses. Recommended is a land lease combined with a right of superficies.