Buying a Condominium in Phuket – The Pitfalls of Buying a Leasehold Unit

Anyone looking to purchase a condominium in Phuket, will be faced with the choice of a freehold or a leasehold unit?

So which is better? The answer to this question depends on the individual situation of the buyer.  Unfortunately, buyers are often led to believe that there is virtually no difference between leasehold and freehold.

This article attempts to clarify the differences and explain the pitfalls of buying a leasehold condo unit.

Most people are fully aware of the land ownership rules in Thailand. Foreigners are not permitted to own land. However, they are allowed to own freehold condominium units. 

As long as foreigners only make up 49% of the total unit area of a resort, it is possible for you to own the freehold Chanote title for a unit there. The title is registered at the local Land Department, thus further authenticating your ownership.

And as with any condominium, your full freehold title gives you fractional ownership of the entire development, including all common areas such as gardens, car parks, hallways, bars, restaurants, gymnasiums, swimming pools, etc.

Ownership also gives you voting rights proportional to the size of your condo.

Can a Foreigner Own a Unit Composing the “Other 51%”?

While 49% may be owned by foreigners, the other 51% of any condominium may only be owned by Thais.

Many affluent Thais do buy condos for investment purposes. However, they usually only buy in prime locations and/or from developers which are well known and respected throughout Thailand.

For the most part, developers, especially foreign ones, struggle to sell their 51% Thai condo quota. In fact, most developments have very few Thai owners and some have none at all.

A trend emerged a few years ago whereby developers, especially foreign ones, would retain the 51% proportion of Thai owned units for themselves for holiday rental purposes.

They were able to do this because while the directors or parent company may come from overseas, their development firm in Thailand must be a Thai entity.  And so these condos were 51% Thai owned.

Because of the booming tourist industry, this became extremely profitable for most of these developers.

But Thailand’s Civil and Commercial Code offers another potential way for the developers to profit from the 51%.  Namely, foreigners are allowed to enter into a leasehold contract for these units.

So although a foreigner cannot own one of these “Thai units”, they can sign a 30-year lease, with possible renewals after that period.

The freehold ownership of these units remains with the developer, which (as mentioned above) is a Thai entity.  In this way, there is no infringement on the 49% cap placed on foreign ownership.

Obviously, developers are eager to lease the 51% to foreigners if they can, especially if they have found it difficult to attract Thai buyers.

With the condominium sector in Thailand flourishing, this trend does not appear to be slowing.

This means we will doubtless see thousands of these leasehold units being pushed on to foreigners in the years ahead.

Are Leaseholds Cheaper Than Freeholds? 

There is an argument to be made whether leaseholds are really cheaper than freeholds.

Early birds buying off-plan are more than likely to benefit from pre-construction discounts. Any discerning buyers at this stage would always choose freehold.

To start with, freehold units are actually available at that early stage of the process.  And because off-plan discounts mean a good price is already available, people don’t mind paying for the additional charges associated with freehold registration.

There is, of course, a difference in the fees and taxes required for registering a freehold and a leasehold, which is part of what makes leasehold units less expensive than freehold.

The taxes to register a freehold are 6.3% (usually split between the buyer and the developer). The cost of registering a leasehold, however, is only 1.1%, and this is usually covered entirely by the buyer/lessee.

But unless the developer is offering a huge discount on leasehold units, these lower taxes do not compensate for the all the other problems a leasehold tenant may face in the years ahead.

When You Buy a Lease, You Don’t Technically Own Anything

A lease agreement is not real ownership. It is more like a long-term tenancy agreement. The laws of Thailand state that this long-term tenancy cannot exceed 30 years.

You will not be able to obtain a title deed for your unit because you are effectively only renting.

One option many buyers take to overcome this is to set up a Thai company which owns the unit as a Thai freehold in perpetuity. You can read more about this here: 

Using a Thai Company Limited to Purchase a Leasehold Condo Unit

Can a Renewal After 30 Years Be Relied On? 

The original 30-year lease, once registered, is protected, and the property is your home until the expiry of the lease. Further renewals, however, are no more than promises made by an individual owner or a developer, and may or may not be enforceable.

Judges in Thailand have already ruled that any agreement stating that a 30-year lease will be contractually renewed is an attempt at ownership. Guaranteed contractual renewals are unenforceable under Thai law, and must instead be written as an addendum. If stated in a contract, they may be deemed illegal and this may void the entire lease.

So you may (or may not) receive renewals after 30 years – it is far from guaranteed.   Of course, many developers have every intention of upholding this promise, but it comes back to the question of enforceability and whether they may even be around in 30 years.

What happens if the lessor/landlord dies and ownership reverts to a family member?  Or what if they decide to sell the property?  Or in the case of a development company, what if the company is sold or the company files for bankruptcy?

In any of the cases above, the new owner is not legally obliged to keep the promises of the original owner, and can therefore not be held to any renewal clause.

Leasing from companies generally offers a higher degree of safety than leasing from individuals, but it is certainly not fool proof.

The relative “safety” stems from the fact that, when an individual owner dies, whoever inherits the property may decide (as the new landlord/lessor) whether to renew the lease.

Companies, on the other hand, do not die. As long as the same corporate entity continues to be the landlord, the prospect of your lease renewal is much safer. And in many cases in Phuket, sound and reputable developers and managers on luxury condo developments have renewed leases for new buyers after 15 or even 20 years.

So Why Do People Buy Leasehold Condos?

The only conclusions to draw from someone making the decision to purchase a leasehold condo contract are:

1: They honestly don’t care. They picked up an absolute bargain with a huge discount and have a goal of living in a nice unit for the next 30 years. This usually makes a leasehold  purchase well worthwhile. 

2: They have no interest in selling in the future and if they manage to get a renewal after 30 years then that is a bonus. They are already in their late 60’s and feel they are unlikely to outlive the original lease anyway.

3: They are 100% confident that the developer will still be around in 60 years, and will come through on the promise to renew the lease for additional 30 years (followed by another 30 years) when the time arises.

4: They are completely reassured that the developer will also reset the lease period back to zero for a new 30+30+30 if they wish to sell to a new buyer at any time in the future.

5: They have been completely and undeniably misled, or given poor advice by their agent, the developer or an inexperienced advisor.

6: They have a Thai wife and so can purchase the unit as a Thai freehold in their wife’s name.

7: They never sought legal advice from an experienced and ethical lawyer so never had the pitfalls of buying a leasehold unit explained to them.  

It is also possible that people enter into leasehold contracts at a particular development because they feel as if they have no other choice. In all likelihood, those individuals were latecomers to the party, after all freehold units were sold out.

And Why Would You “Choose” a Leasehold Over a Freehold Condo?

There are many benefits and advantages to owning a freehold condominium in Thailand. We can’t stress this point enough.

Buyers should ask themselves this extremely relevant question: why would you possibly choose a leasehold unit over a freehold unit? It makes no sense.

Even if the resort you are looking at has no more freeholds available there are still dozens of other developments on the island to choose from.

With roughly 49 of every 100 units at every condominium development in Phuket being freehold, it is virtually impossible that you would not find a freehold unit that is perfect for you.

Why on earth would you opt for something you don’t own when you can easily go for a freehold unit?

Leasehold Condos are Not Protected Under the Condominium Act

If you take out a 30-year lease on a unit which is part of the 51% allocated by the condominium development to Thai nationals, your rights as a lessor do not fall under The Condominium Act.

Because a lease is classified as “hire of immovable property” it is governed instead by the Civil and Commercial Code.

As mentioned above, if you lease you do not own.

You Don’t Own, You Don’t Have a Say

Because “buying a leasehold” is technically just a taking out a 30-year tenancy agreement, you do not receive a title of ownership.

The Condominium Act in Thailand divides up a resort proportionately among the owners, with each owner’s voting rights dictated by how much of the condominium development they own. If there are 100 units of equal size, and someone owns 5 units, they would have 5% of the vote.

When you lease a condo unit those voting rights are retained by the owner, whether the developer or an individual.

That means, while you may plan to live there for 30 years, you will never have any say in how things are run at your resort.

So Who Pays the Common Property Expenses i.e. Maintenance Fee and Sinking Fund?

So if you don’t own your condo, and don’t have a say in how it is run, surely that means you don’t have to pay the same fees as the freehold owners in the condominium?

Unfortunately, you do.

After paying into a condominium sinking fund at the time of purchase, every condo owner is also responsible for paying certain ongoing fees to their management body or condominium juristic person. These include not just the common area fees, but sometimes owners are also asked to contribute additional money for major common area upgrades and repair work.

Such contributions might be extraordinary expenses and take the form of a “top up” to the sinking fund. Someone has to pay this expense, and incredibly these top up costs fall not on the freehold owner, but instead on the resident lessee.

Even worse, let’s assume the owner’s committee votes to commence a huge refurbishment of your condo years into the future. All owners and lessees will be required to chip in according to their fractional ownership (or lease) of the common area.

But it does not matter whether you are in year 2 or year 29 of your 30-year lease, as the lessee, the responsibility for paying the owner’s share falls squarely on your shoulders.

This is also not a type of “advance” that you can claim back from the owner at the end of the lease term – these expenses are not refundable.

In fact, failure to make this payment to the condominium juristic person could result in your lease being terminated. And you may even find yourself faced with paying this additional contribution just one or two years before you are told that your lease will not be renewed for a second term.

Lessees Also Get Left Holding the (Tax) Bill

Being a lessee in Thailand is sometimes like being in restaurant when all your friends do a runner – you’re the one left holding the bill.

There are so many expenses which fall on lessees, it sometimes doesn’t seem fair (except to the owners, of course).

Any owner who lives in their freehold condo, or leaves it empty for most of the year, is spared Thailand’s 12.5% rental tax. But if they rent their property out, they are subject to this tax, which is assessed on annual rental income or assessed rental income, whichever is higher.

If they lease out their condominium, however, it is the leaseholder (lessee) who must pay the 12.5% rental tax – in addition to the cost of their lease. Because the rental contract is replaced by a long-term lease, the tax is based on the higher of the actual annual lease contract amount, or the amount at which the Thai authorities assess the lease price to be.

If you take out a 30-year lease on a THB 10 million condo, the annual lease expense would be THB 333,333. As long as this is also the assessed lease value, that would mean a tax bill of roughly THB 42,000 each year – over and above the cost of the lease.

Responsibility for this tax falling to the lessee is always written into a lease agreement – there is no avoiding it.

Like your mates sticking you with the bill, it hardly seems fair. But unlike the dinner check, you’re not going to get your money back the next day.

The Problems With Selling a Leasehold Condominium Unit

You only have to ask someone who is trying to sell their leasehold unit in a condominium whether they wish they had purchased a freehold.

Selling a leasehold unit is far more difficult than selling a freehold condominium. Depending on the specific circumstances, it may even be impossible.

The Problems With Inheriting a Leasehold Condominium Unit

Another problem with buying a leasehold unit is that the inheritance laws are certainly less favourable than those with a freehold unit.

Unfortunately, a lease is not automatically an inheritable right. This means a lease contract is typically terminated upon the death of the lessee, and without a provision for a succession clause the remaining lease period cannot be passed on to your heirs.

This is another reason why freehold makes sense over leasehold, as many developers fail to include such a clause in the contract.

Summary

Potential buyers should be aware that when entering into a lease agreement they do not own anything. They are only renting the condo unit for 30-years.

The prospect of three consecutive 30-year terms (i.e. 30+30+30) makes a leasehold sound more attractive, but the two extensions are only promises which can never be contractually enforced in a court of law.

Some leaseholds can be picked up at fantastic bargain prices, but buyers being offered a leasehold condominium should consider their options carefully.

Unlike freehold buyers, lessees have no say in how the condominium development is run because the owner retains the voting rights.

A leasehold unit is also harder to inherit. Buyers of leaseholds must ensure that a succession clause exists in the lease contract.

Furthermore, leasehold units are also much harder to sell. The reality is that your condo is being rented, so you don’t really have much of anything to sell.  A leasehold is not an asset under Thai law, only a tenancy agreement.

If the lease can’t be renewed for a new buyer, the value of the lease will diminish as the lease period reduces.

You can read some of our related Phuket condominium articles here:

Condominiums Explained – What is a Condominium?

Owning a Freehold Condominium through an Offshore Company

Owning a Freehold Hotel-Licensed Condominium in Thailand

Using a Thai Company Limited to Purchase a Leasehold Condo Unit

What is a Condominium Sinking Fund?

What is the Common Area and the Common Area Fee?

The Importance of Sound Legal Advice When Buying Property in Phuket

The Different Types of Property in Phuket

Conducting the Necessary Due Diligence When Buying Real Estate in Phuket

Is Thailand Alone? How Many Countries in the World Prohibit Foreign Ownership of Land?