What to Look Out For With Leaseholds

Most villa developers understand that offering strategies to assist foreigners in prolonging the initial lease period is in their best interests, but any decision to renew the lease after 30 years is purely at the discretion of the landlord (or freeholder).

As mentioned above, lease contracts do typically offer an option to renew (or extend) the lease after 30 years. But in an effort to offer a greater degree of permanence from day one, some developers offer “30+30+30 Leases” (or even 30+30+30+30), meaning they are effectively promising upfront that a lessee can stay in a villa for 90 or 120 years.

This is fine as an addendum, but any effort to make the lease contractual/binding for 90 or 120 years could be deemed to violate the spirit of the law, and would almost certainly be voided by the courts.

Section 540 of the Civil and Commercial Code does allow a lease to be renewed after 30 years, and the letter of the law does not differentiate between foreign and Thai lessees. But section 540 is also very clear on both the maximum term of a lease, as well as lease renewal.

Judges are the arbiters of the spirit of the law, and courts have already ruled that extensions “written in stone” within a lease agreement are attempts at de facto foreigner ownership. Extensions for foreigners must instead be an option—no more than a promise—and one which is only enforceable against the original lessor of the property.

This is a fact that every foreigner must appreciate if they plan to lease a property from a private individual. If the individual owner were to die, and his wife, children or grandchildren inherit the property, the foreign lessee could find themselves homeless and out of pocket at the end of the lease if the heirs are not amenable to an extension.

But this does not mean foreigners should automatically trust a developer over an individual. If a company is sold, or even changes directors, the management of the new company may decide not to honour a previously agreed extension/renewal, and the lessee will have to move out. But an extension is not the only thing to be concerned with, it is the underlying ownership of the land itself.

In 2016, on the island of Koh Samui, a number of foreigners were evicted (after only 20 years) from the luxury villas they had built. The developers were not the freehold owners of the land, and the legal owners decided not to renew its lease. They had further agreed that anything built on the land was the property of the landlord. This further emphasises the importance of investigating the Chanote title – and of hiring a good lawyer!

SOMETHING ELSE TO LOOK OUT FOR: MAKE SURE THE TAXES ARE PAID

There is a tax which is often ignored by property owners in Thailand, and if you are leasing you really need to be aware of it. The House and Land Tax is payable yearly to the local government at a rate of 12.5% p.a. on any property being used for commercial purposes (i.e. a rental or lease). The tax should be self-assessed by each property owner, and is based on the annual rental value of the lease agreement.

The form “Por Ror Dor 2” must be filed each year with the District Office, and the tax must be paid before the end of February on the previous year’s lease value. But even if the owner states the accurate annual lease value and pays the tax, the local authorities have the right to question the value and change the assessment, which of course increases the tax burden.

It is possible to file an appeal against the assessment with the District Office within 15 days. And an appeal with the Courts can be filed within 30 days. If the owner has failed to file the Por Ror Dor 2, however, no appeal is possible, and the higher assessment will be the basis of the tax burden.

Why is this especially concerning for someone leasing their property? Because the burden of this House and Land Tax is quite often passed on to the lessee in the lease agreement.

This tax is due to change to a conventional property tax on 1 January, 2020. The new tax is to be 0.3% of the assessed value of the entire property, not merely the rental value of the lease. This may or may not increase the tax burden on the property, but it will mean a careful reading of any lease agreement is necessary to ensure that you are stuck with a big property tax bill under the new law.

Please be sure your lawyer confirms exactly where this tax burden should lie each year, and if it has already been accounted for in the prepaid lease payment.

Purchase Option

If the land owner or estate manager agrees, it is advisable to have a “Purchase Option” written into the lease for the villa. This is normally written as an addendum, and enables the lessee to purchase the land at a later date if they wish.

This option can be exercised at any time during the lease period. For example, the lessee may have gotten married and want to place the property in their spouse’s name.

It is important to note that, in the event of the freeholder’s death, a Purchase Option is not nullified. If the landlord is an individual, the foreign lessee has one year from the time of death to exercise the purchase option.

Although the chances are slim, there is always the possibility that Thailand’s landownership laws could change one day.

If that were to happen, a foreigner could one day assume the Chanote title in their own name. It would be foolhardy not to include the relevant clause in the lease contract, however unlikely this outcome may be.

Cancellation Clause

Insisting on a clause to allow the cancellation of the lease may sound strange, but there’s a very good reason for it.

Imagine a foreigner has held a lease on a villa for 15 years, then decides to move. Any prospective buyer of that lease would have only 15 years to use the property before requesting an extension or renewal. What would happen to the value of that property? Clearly the price would drop because the lease period has been cut in half.

A clause allowing the lease to be broken, and a new lease to be written, will protect the value of the home. Any prospective buyer can look forward to the full 30-year lease, meaning the lease on the villa is sold at market value.

A cancellation clause is only enforceable against the original lessor – whether an individual or a corporation – so if the freehold ownership changes hands, the new owner does not have to honour the clause.

There is a fee for re-issuing a lease, but this may be shared by both the current lessee and the new buyer. There may also be an additional tax burden on the developer in the event a new lease is generated (owing to a further 15 years of income being added), and this could form part of the terms of any cancellation clause.

Furthermore, if the House and Land Tax mentioned previously has not been paid, it will not be possible to re-register the lease at all. And whether or not the lease ever does get registered in the name of a new owner, the local district office will be thanking someone for the back taxes.

Sub-Leasing Clause

If a lessee would like to sublet their property, there is nothing wrong with this. In fact, many foreigners who take out a 30-year lease on a villa – or who lease the land, then build the villa – do so with the intention of subleasing the villa for investment income.

If that is the intention, however, it does require the cooperation of the lessor, and must be included in the original agreement.

Two thousand years ago, Roman law stated that the building and land were inseparable. Any person with the right to use the land also had the right to use any buildings, irrespective of the fact they didn’t own the land. This is the origin of the right of superficies.

This is a concept which is still used around the world. In Thailand, however, the right of superficies separates the ownership of the land from the buildings on the land. Here the law has universality in that it applies equally to foreigners and Thai nationals (unlike the land ownership laws).

Contrary to popular opinion, a lessee in Thailand has no automatic right to ownership of any villa or house sitting upon that land. The legal ownership of any house or villa often comes with a right of superficies. But if a foreigner has a lease without also being a superficiary, they own nothing.

For the right of superficies to carry any significance (i.e. to be legally enforceable) it is a strict requirement that it appear on the title deed. A person who has been granted the right of superficies can then obtain ownership of any building constructed on the land, without having to own the land itself. Should a foreign national lease a plot of land, with a view to building a villa on the land, the right of superficies should be obtained prior to construction. If it is left until after building the home, technically a transfer of ownership would be required. And that would involve paying transfer tax.

Every lessee almost certainly receives reams of documentation and shiny brochures before they agree to a lease contract. Inmost cases, neither the literature nor the lease agreement mentions a right of superficies, thus contradicting the most attractive marketing claims regarding“ownership”. Superficies is usually not mentioned unless the lessee brings it up themselves.

If a foreign buyer is granted superficies, the right could be limited to 30 years, but may extend to the lifetime of the rights giver or the rights receiver. Upon expiration of the superficies, the landlord may offer to purchase the house which the foreigner built. The foreigner may also barter the house against an extension of the lease, i.e. use the added value of a nice villa on the land as payment for a further 30-year lease.*

But there is no guarantee that a foreign buyer will be granted the right in the first place. Although the registration of superficies by foreigners in Thailand is perfectly legal, the decision rests with the Land Department. It is practically at the sole discretion of this government office whether a superficies is granted or not.

*Even without a superficies, this strategy of using the house built by a foreigner as a means of enforcing an additional 30-year lease period, may also standup in a court of law. A competent lawyer is absolutely essential to make sure this is even an option when the initial 30-year lease ends.

The Secured Lease

A structure known as a “Secured Lease” (also known as a Collective Lease or Protected Lease) is a novel ownership vehicle in Thailand. The tenant is essentially committing to a lease agreement, while at the same time entering into a sale and purchase agreement in the developer’s Thai company.

For all intents and purposes, it is a corporate ownership arrangement which – while respecting Thai majority shareholding rules – positions the tenants to use their (minority) shareholder influence to protect their interests. It accomplishes this because the foreign shareholders of the business (usually through an offshore company) actually have superior voting rights, even if their preference share holdings are limited to 49%.

There are dozens of resorts now structured like this, and still more are being set up today. It is a wonderful concept in theory, and it has been working well for most developments for many years. There are versions of this structure which have been struck down by the Thai courts, so it really depends on how well a specific development handles its owners

The risk a buyer runs is that an interested party (which could be anyone with knowledge of the underlying structure or with a grievance against one of the owners) files a complaint with any official department. If the authorities are able to see through the sale and purchase agreement, and recognise which parties ultimately have control of the land upon which the development was built, that is where a problem may arise.

For the most part, as long as all parties are happy, and no issues with the structure ever find their way to court, these secured lease developments are likely to continue.

But if one is challenged, what happens in the end can depend on the specific case in court, the motion filed, the judge on the day, or the political winds blowing at that time.

Another newer form of leasehold now appearing in Thailand is the “Lease Mortgage” or “Mortgage Leasehold”. You can read more about this new foreign ownership structure here:

Understanding How the Lease-Mortgage for Phuket or Thailand Property Works 

The Spirit of the Law

There are a multitude of opinions and recommendations for how a foreigner may get around “the letter” of the law to own landed property. The problem with such schemes is that, if challenged in court, the foreign ownership scheme is unlikely to be upheld.

It is interesting to note what the letter of the law in Thailand actual says about foreign land ownership. Rather than expressly prohibiting foreigners from owning land, the law actually states that foreigners (aliens) are allowed to own land. Section 86 of the Land Code Promulgating Act states that: “Aliens may acquire land by virtue of the provisions of a treaty giving the right to own immovable properties…” What the Act fails to mention is that the last such treaty was terminated in 1970.

In the absence of any treaty, “the spirit of the law” is clearly to forbid foreign ownership of land in Thailand. Regardless of the ingenuity of the supposed loophole, it is clear from court rulings, that this “spirit” of the law is invariably upheld.

When a case goes to court whereby land is deemed either to be owned or controlled by a foreigner, the same verdict is returned pretty much every time. Whether before a local trial court or an appellate court (such as the Supreme Court in Bangkok), schemes which have helped foreigners circumnavigate the law are regularly shot down by judges.

If a foreigner is the owner of the building, and the dispute is merely over use or rights to the land, which they duly lease, it is fairly common for judges to side with the foreigner. It becomes an issue when it involves ownership or control over the physical land.