Lease renewal option in a lease agreement

LAND LEASE agreements are commonly used in Thailand to transfer an interest in land to foreigners. The most common clause in a 30 year lease agreement aimed at foreign property investors is the lease renewal option, either included as 1, 2 (the 90-year lease) or even more renewal terms.

What is the legal status of a renewal option in a 30 year lease

The renewal option in a 30 year lease agreement is not a lease right or option given under Thai property laws to create a longer lease term but a simple promise of the current owner to give a new lease when the registered 30 year term of the lease runs out. Including a renewal option (or any number of renewal options) in a lease agreement is based on the freedom of contract between the parties but says nothing about the enforceability of this promise or options when the registered 30 year lease term actually finishes. At that time the first 30 year lease is terminated and the parties must enter into a new lease which again must be registered with the Land Registry.

A renewal option is according to Thailand Supreme Court judgement in any case not considered a true lease right protected by section 569 of the Civil and Commercial Code, meaning death of the lessor as contract party or transfer of ownership does not terminate the lease but terminates all options which are under Thai law considered personal to the lessor (as opposed to true lease rights).

First of all, legally it is only a promise of the owner and therefore not automatically binding upon third parties. A renewal promise is not attached to the property nor does it automatically follow the lease when ownership is transferred (note section 569). Should ownership of the leased property transfer during the lease term this option must be separately assigned as a contract obligation and accepted by the new owner before it would have effect upon him (contract promises in the lease have no effect on third parties, including a transferree owner). Transfer of ownership of the property hired does not break the lease (section 569) but transfer of ownership does under Thai contract law break parts of the lease that are under Thai contract law not considered true hire of property rights, like the renewal option in the lease agreement (supreme court). It does actually not make much difference if a renewal option is given in a separate document (separate from the lease agreement registered with the land office in Thailand) or in the actual lease agreement. It is a mere contract promise to do something in 30 years.

Secondly a renewal option as a mere personal promise of the contract party to renew the lease in the future is not enforceable by legal action as a contract because of the length of time between the promise was given and the execution of the promise (irrespective if there is a form of consideration paid). If the owner of the land changes his mind 30 years later and he is not willing to give a renewal you won't get it. The lease is extinguished at the end of the the 30 year term (section 564). A renewal in a 30 year lease is a promise that is easy to break, especially when the owner of the land values money more than his word. The best description for a renewal option in a 30 year lease agreement is that it is from a lease of property perspective a moral obligation upon the owner of the land who gave the lease and not a lease right enforceable by legal action as a right of renewal.

Note: the land offices in Thailand will also not accept any lease registration with a nominal lease amount.

Thai law strictly limits the term of a registered leasehold to 30 years. Any longer period than that can only be made by renewal of the lease upon expiration of the 30 year lease. If the lease is made for a longer period it will by law reduced to 30 years. Any signed consecutive lease agreements are considered void.

Answer to the question

The answer to the question 'is a renewal of a 30 year lease possible under Thai law?' is yes, but a renewal is only possible upon expiration of the first term and the owner willing to give the renewal and upon his terms or the negotiated terms at that time. A renewal option is not an instrument to create a longer lease than the legally set maximum term of 30 years. Section 540. 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.

(continue: real estate laws in Thailand)

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Termination of a lease upon death of the lessee