Guide to Buying and Leasing Property in Thailand

AN INCONVENIENT TRUTH

Anyone buying a property in Thailand must ensure that their purchase is done according to the laws of the Kingdom. In certain respects these laws are not dissimilar to those in most western countries. There is, however, one major hurdle that foreigners must contend with: they are prohibited from owning land.

For the sake of clarity, this also refers to any villa, estate house, shop house or townhouse, the ownership of which is inextricably tied to the land. Foreigners are allowed to own such homes, but only the physical building itself. It is a common arrangement for foreigners that they own building, but lease the land on which it sits. While there are properties that have been explicitly legally structured for foreign freehold ownership, these are not yet commonplace. There are extremely limited and exceptional circumstances under which a foreigner can purchase land, and these are covered below.

Embedded in Thai culture is the intrinsic belief that Thailand be, first and foremost, a country for the Thai people. Thai property law reflects this sentiment, and it protects land ownership for Thai people.

Land ownership laws in many countries are influenced by a cultural bias, in this case Thai culture and Thai laws. The authorities have always worked to preserve this element of Thai culture, irrespective of how many foreigners live here.

Over the years, there have been countless rumours of pending changes to land ownership laws, but there has never been any true indication that the law will ever actually change. It is safe to say that nearly every non-Thai would at least like to see the laws on foreign ownership be relaxed a little. Someone interested in Thailand property deserves help understanding both the letter and the spirit of the law today. The reality is that Thai law leaves almost no clear and direct path to land ownership for foreigners.

This is an inconvenient truth for the multitude of villa developments across the island being marketed to foreigners as freehold property. Foreign buyers are encouraged to get around the law by using Thai company structures. But a considerable percentage of these arrangements are mere holding vehicles to purchase landed property, employing nominee shareholders. And these holding companies are unlikely to stand up to legal scrutiny should this ever become an issue.

It is possible to use a Thai company that operates as a legitimate tax-paying business. But any foreign buyer should be wary of putting their faith (or their money) in other supposed “loopholes” – technicalities of law lacking any recent legal precedent, which are unlikely to survive a legal challenge.

A number of the “foreign ownership” arrangements addressed in the pages to follow have been struck down by Thai courts – some quite recently – and buyers/investors deserve clear explanations as to why these may not be as rock solid as certain individuals may lead them to believe.

In fact, when it comes to landed property, a leasehold contract is the easiest way to secure a house or villa for the long-term. If done correctly, covering all legal angles, a leasehold can even prove to be a sound investment, too.

There is always the risk that any attempt by a foreigner to violate either the letter or the spirit of Thai law will not end well. If a foreigner wants to stay in Thailand, and have a home here, there are still a number of ways to go about it. Not titled land ownership, but certainly the right to live in a property for as long as they wish, provided they follow Thai law.

Owning and Leasing Property in Thailand

The Letter of the Law vs. The Spirit of the Law

HAVE YOU HEARD THE EXPRESSION “THE SPIRIT OF THE LAW”, AND WERE WONDERING WHAT IT MEANT?

If you’ve ever watched an American courtroom drama you will have seen criminals going free because of technicalities or loopholes. The clever lawyers always find a way to get around the letter of the law, and the judges begrudgingly have no choice but to agree with them. It seems that lawyers getting around the law is as much a part of American culture as baseball and apple pie.

The law is deeply ingrained in every culture, and we can no sooner discard law as a cultural belief than we can the rituals and traditions of our ancestors. In Thailand, cultural attitudes are the basis for the “Spirit of the Law’’, which judges enforce as readily as they do the letter of the law.

Whereas discrepancies in other countries create loopholes, in a Thai court the judges are fully aware of the lawmaker’s intent, and this intent can and does form the basis of some decisions. The intent of the law where property is concerned is that foreigners may not own land or permanently possess landed property (e.g. a villa). This may not necessarily be the literal wording of the law, but the cultural connection of  Thai land to Thailand is understood by every judge in every court.

Thai judges are empowered to make rulings based on the Spirit of the Law, and when it comes to foreign land ownership, the spirit of the law will trump the letter of the law every time. And no foreigners should be under the illusion that a supposed loophole, or even the best legal defence, will be able to protect them in defence of ownership or control of physical land.

THE IMPORTANCE OF SOUND LEGAL ADVICE FOR FOREIGNERS IN THAILAND

Finding a Good Lawyer

This is touched on above, and it cannot be stressed enough—the first step when undertaking any property transaction in Thailand should be to enlist the help of a very good lawyer.

What is meant by “first step”? If someone is contemplating a real estate investment in Thailand, they should seek legal representation before they even start viewing properties. But what constitutes a “good lawyer”?

Many times it is not only their knowledge of Thai law, but their ability to explain the law in their customers’ own language. Good lawyer swill be fluent in Thai and English, but if another mother tongue is needed, it might only be the biggest firms which have the resources to help. Not surprisingly, these are likely to be the more expensive law firms.

Crucially, professional individuals don’t have time to waste. If they are flying to Thailand specifically to find the perfect property, then their limited time on the island is especially precious. Without the right lawyer, a buyer could waste their time looking at properties which don’t offer the legal ownership guarantees they want. Sound legal representation will protect their interests, save time, and ultimately save money.

 

real estate investment in Thailand

WHAT OLAF SAYS ABOUT FINDING THE RIGHT LAWYER

Here Olaf Duensing of Duensing Kippen explains what buyers should be looking for in their legal counsel:
Real estate in Thailand can, for the most part, be a very good investment. Sadly, we have encountered horror stories, and they are not as rare as one might hope. If you are thinking of taking this investment plunge, here are a few tips.

When making a real estate investment in Thailand, one of the best ways you can protect yourself is by hiring a competent lawyer. This is imperative, and you should obtain the right legal counsel right at the beginning of the process (i.e. prior to signing any agent’s or seller’s agreement).

The key word here really is “competent”. We often find ourselves dumbfounded when people relate to us what law firms in Thailand have told them. Thailand has a well-developed system of laws, which are in many respects quite similar to laws in the West. For the most part, as in the majority of fully developed nations, the laws in Thailand logically fit together. Furthermore, something which is very convenient for foreigners in Thailand, the English translations of most relevant laws are readily available.

So if something you are hearing from another Thai law firm is seemingly illogical and makes no sense, there is every chance that your skepticism is warranted. If you are uncertain, request a copy of the law so that you may read it yourself. If, with a translation of the law on the table, they are still incapable of explaining their point – or worse yet, if they actually refuse to offer a greater understanding – it would advisable to seek out new legal counsel to help you.

But there is more to “competent” advice than just knowledge of the law—a competent legal advisor will also be ethical. That is to say, they will be compliant with recognised international standards which all lawyers should follow. Every law firm has a fiduciary duty to its clients, meaning your interests are put ahead of those of both the individual lawyer and the firm. This includes putting your financial interests ahead of their own, and ensuring that the firm never has a conflict of interest when it comes to representing you.

That is why your legal representatives should never refer you to real estate developers or agents, and they should certainly not accept commissions from such parties. Your lawyers should never represent both sides in any transaction because to do so is a conflict of interests. You should be able to reasonably expect that the firm will never advance any interest which is detrimental to your interests.

It is simple enough to evaluate any prospective counsel. For starters, ask to see their legal credentials. Then enquire as to their professional code of ethics. Ask to see both, and verify their legal credentials before reading through their code of ethics. If they can’t produce one or the other, or if you are just uncomfortable with their response to your query, then you would be well advised to seek new legal counsel.

As a final point, you should not assume that Thai government officials will provide you with simple or accurate legal advice. While they may be responsible for administering the law, they are not necessarily well-versed in the law’s intricacies.

Doing the Necessary Due Diligence When Buying Property

Someone new to Thailand is usually enamoured with the “Land of Smiles”. What could possibly go wrong in a country full of wonderful smiling people, right?

Unfortunately things can and do wrong, but this is true the world over. That is why every buyer must have an understanding of due diligence and makes sure it is conducted to ensure a property is a viable and sound investment, and that the seller is legitimate and reputable.

Stock market investors often spend hours pouring over balance sheets and fundamentals before investing a few hundred Dollars, Pounds or Euros. Why then do some of the same people fail to exercise comparable caution when spending millions of Baht in Thailand?

Due diligence is where the right lawyer is invaluable. If buying from a developer, especially off-plan, it is important to make sure that the title deed for the plot of land is in the name of the actual development – the corporate entity, as opposed to an individual’s name – and that it definitely is not in the name of an unrelated third party. If the land title is in the name of a third party, he/she has the legal right to sell the land whenever they wish, even after you have paid a deposit, installments or the full value of the unit. If that third party were to die, the fate of the land (and with it your property investment) lies with the new owner.

A representative of the developer might claim that such an ownership structure made it easier to title the land, and that ownership will be transferred to the development company when construction is finished. But if the true owner decides to sell the land, or encumber it by taking out a mortgage or loan against it, every investor could find themselves out of pocket. Furthermore, if the land is encumbered, the mortgage could be foreclosed upon, or taxes might not be paid, in which case the revenue department could stake their claim to what people thought was their property. This caution should be taken with any purchase, not just a condominium, except with condos hundreds of individuals could be affected by a single title.

Buyers of condominiums, especially ones sold off-plan, should always ask for a copy of the title. This should be the Chanote title of land for the entire development, not merely a segment related to the unit in question. The full Chanote title will show any liens, mortgages or loans against property.

The same information can be obtained from an individual title deed, but these are only issued upon completion of the condominium’s construction. Purchasing a resale unit is therefore relatively safe, and a completed development (or one that is nearly finished) might also be a consideration for a foreign investor.

Let us turn once again to Olaf Duensing to find out more about what constitutes the necessary due diligence.

WHAT OLAF SAYS ABOUT DUE DILIGENCE

Due diligence basically means doing your homework – identifying any potential legal issues which could adversely affect the purchase the property you would like to buy. The reason this is so critical is that you are not only acquiring a property, but you are also assuming any legal liabilities which may be attached to it. Due diligence is essential no matter where you are buying, but when you are investing in property overseas (e.g. in Thailand) it is especially important.

We have heard from property owners with “buyer’s remorse” on more than one occasion, and they all insist that due diligence was conducted. Their definition of this is: “My lawyer requested the title deed from the Land Office. He had it translated, and it confirmed the ownership in the name of the seller, and that the property had no mortgage against it.”

While that may be a good first step, it is not real due diligence.

When buying real estate, due diligence should comprise the following (at the very least) :

  • A comprehensive title search, including the validity of the deed itself, as well as the full history. The fact that a title deed was issued does not confirm that it was issued legally. It is possible for a title deed to appear in order, only later to be deemed invalid;
  • The legal rights of access to the property must be verified;
  • A detailed report of the laws governing land use and the regulations covering any construction on said land (if the property is a plot of land on which you plan to build);
  • If the land has an extant building (e.g. a villa), the building permit for the structure must be examined to confirm it is legally valid. The existence of a building permit is not evidence that the building is legal. If it is deemed to be illegal, it is possible that it could be ordered to be torn down;
  • If any particular licensing is required by the property you plan to buy (such as a condominium license or an additional hotel license if the development will function in both capacities), verification of said licenses is imperative. It is occasionally overlooked that a project must be built in a certain way, to qualify for condo or hotel licensing. Higher-end developments are surprisingly not immune from this oversight. A seaside development in Phuket was once sold as a condominium – even winning “best condominium” awards – only for everyone to be“shocked” later when it was revealed it did not qualify for its condominium license because the access road was too narrow. The development instead became a hotel; and
  • If you are acquiring a property by means of taking over the company which owns said property (a practice not typically recommended), it is advisable to conduct a thorough examination of all company records – legal, accounting, and corporate.

FOREIGN FREEHOLD PROPERTY OWNERSHIP

Condominiums

Freehold condo ownership is fairly clear-cut, and is the best way for foreigners to own property in Thailand. Thai law states that a condominium complex may have up to 49% foreign ownership, meaning at least 51% of any complex must be owned by Thai nationals.

A condominium title includes part of the building, meaning every owner has a “fractional interest” in the building. This includes the common area such as the swimming pool, gymnasium, gardens, car park and the reception area. A condominium title should specify not only the size of the unit itself, but also the total common area (and what percentage is owned by the unit). That fractional interest also represents the voting interest the owner will hold within the residents or owners association.

One of the many benefits and advantages of a freehold condominium is that it can be fully and legally owned by a foreigner. The ownership is permanent and in perpetuity until the owner decides to sell it.

Another benefit of a freehold condominium is the favourable legislation governing inheritance, i.e. foreigners are able to pass their Thai condominium on to their heirs. But while the inheritance laws are more beneficial than those for leasehold villas, they are neither perfect, nor perfectly clear.

There is competing legislation at work here. The Condominium Act states that any foreigner who inherits a condominium must notify the relevant Land Office within 60 days of the inheritance. Failing to meet specific criteria for ownership, the foreign heir may then be compelled to sell the unit within 1 year of the death of the owner.

The Thai Civil and Commercial Code (CCC), however, indicates that the inheritor of the property would also inherit the right to own the property, and this has been the formal legal opinion of the Land Department – that the right of the deceased owner to acquire property and retain ownership passes to his/her heir upon death.

But the Land Department’s interpretation of inheritance law under the CCC is not yet backed by sufficient case law for an heir to be 100% certain of receiving permanent ownership rights. One of the five requirements for condo ownership stipulated by the Condominium Act is a Foreign Exchange Transaction Form (FETF) issued in the name of the condo owner.

One way to make any future inheritance easier is for the buyer to have their overseas bank put multiple names on the telegraphic transfer instruction when wiring the money to Thailand for the property purchase. The Thai receiving bank will then be able to list all of those names on the FETF.

The names on the FETF must then be recorded as co-owners of the condo, which secures inheritance in the event of the death of the principle buyer of the property. (Making an offshore company the registered owner of the property is another way to ensure an easier succession, as the FETF will be in the company name.)

However, if a strict interpretation of the Condominium Act is applied to an inheritance— rather than the more favourable CCC interpretation — things get a little more complicated. Anyone who inherits a property (should they choose to keep it) may be required to transfer into Thailand the amount necessary to buy the unit. It may sound counter intuitive, but it is possible that someone must effectively buy the very condo they have just inherited. FETF requirements will be discussed in greater depth, but for more information about the five requirements (or “Doors”) to foreign ownership of a condo in Thailand see below from Sam Fauma of ILO.

If you are seriously thinking of buying a condominium in Phuket, then you may want to read our comprehensive guide on how to do things correctly and what to expect throughout the entire process: 

How to Buy a Condo in Phuket:  The Complete Guide

sam-faumaWHAT SAM SAYS ABOUT “THE FIVE DOORS”

Section 19 of the Condominium Act has “Five Doors” to ownership of a Thai condo by a foreigner. If any one of the following conditions are met, the foreigner may proceed to purchase a condo in their own name, provided not more than 49% of that development is already foreign owned.

Section 19 An alien person or a juristic person deemed alien by law may have an ownership in a unit if it satisfies the following conditions:

  1. The person obtains a residence permit in accordance with immigration law;
  2. The person obtains a permit to enter the country in accordance with the law on investment promotion;
  3. The person is a juristic person under section 97 and section 98 of the Land Code, registered as a juristic person under Thai law.
  4. The person is a alien juristic person under the Announcement of the Revolutionary Council No. 281, dated the 24th November B.E. 2515 (1972), and obtains an investment promotion certificate in accordance with the law on investment promotion.
  5. The person is an alien person or a juristic person deemed alien by law, bringing foreign currency into the country, withdrawing fund from a Thai Baht account of a person having a place of residence outside of the country, or withdrawing fund from a foreign currency-based deposit account.

Number 5 is obviously the FETF, which is the most common “door” foreigners use to buy a condo, but satisfying any one of the five is enough to qualify for freehold foreign ownership of a condominium in Thailand.

Foreigners Guide to owning and leasing Thailand Properties

A British Virgin Islands (BVI) Company

For any foreigner concerned with succession planning, it may be worthwhile buying a condominium through an offshore company. This could be a company registered in the Seychelles, Mauritius, Turks and Caicos or other offshore jurisdiction, but BVI companies are generally preferred as property holding companies because they are one of the most established offshore centres, and have competitive annual running costs.

It is important to draw a distinction between using an offshore company to buy a condominium, and using a Thai company to circumvent landed property ownership rules. (The latter practice is discussed in greater detail under “Phuket Villas, Houses and Landed Property” on page 37.) Here we are referring to the legal purchase of a freehold condominium, not by a foreign individual, but by a foreign company. Offshore company ownership solves the inheritance issue because companies do not die.

Through a BVI company, the foreigner can control the ownership of the condo by controlling the shareholding of the company. In addition, should they wish to sell the condo, they need only to sell the BVI company. By transferring the company share ownership, the new buyer owns the company and the condo, but this may not be cost effective with lower-priced condos.

To begin with, establishing a BVI company costs a few thousand dollars. After that, the annual running costs are a little over $1,000 per year. For a $100,000 studio condo, this may be more than someone is willing to pay. For an $800,000 sea view penthouse, however, it may be a no-brainer.

There is also the question of what corporate ownership entails under Thai law. If an offshore company owns the property, there are potential tax consequences. Even though audited accounts are not a statutory requirement in the BVI, the company must file a balance sheet in Thailand detailing the rental income. Furthermore, if the foreign occupant is a director of the offshore company, their “free rent” is deemed to be a benefit in kind from the company. The individual must then pay income tax on the fair market value of the annual rent.

Finally, if the condo is sold, the BVI company must pay corporate tax in Thailand on any capital gain. If the purpose of the company is ease of inheritance, this last one can obviously be avoided by transferring ownership of the company.

When the property is ultimately sold, however many years in the future that maybe, the freehold title will be transferred away from the BVI company. When that happens, the ultimate seller (the final owner of the company) will have to pay income tax based on the total capital gains earned on the property.

Condotel and Hotel-Licensed Condominiums

A Condotel is a hybrid species of Phuket real estate combining the services of a hotel and a condominium. It is a common concept in other parts of the world, which permits individual units to be privately purchased, and then rented as hotel accommodation. In short, this type of ownership is for anyone purely interested in investment, not for someone seeking a second home.

The owner of a Condotel unit may rent it out on a monthly, weekly, or even daily basis. (For anyone who has followed the restrictions being placed on Airbnb by cities and countries around the world, this is a huge advantage for any property investor.)

A hotel management company is typically employed to run the resort, and these companies all have attractive rental programs.

The owner is usually allocated a fixed number of days per year to use their unit, but for the remainder of the time the management company treats the unit as a normal hotel room. Under most arrangements, they also take care of maintenance and repairs to the unit.

Most Condotel developments offer either a guaranteed return or the option to enter into a “rental pool,” which requires the owner to make their unit available for rental (together with the other participating owners). The owners then “pool” the rental income, and share together in the profits.

The attraction of a Condotel investment for a foreigner is obvious. Firstly, they are permitted to own a freehold condominium unit in perpetuity. Secondly, they are legally allowed to have the rental of their unit managed for them by a professional hotel management company. They can therefore take advantage of Thailand’s flourishing real estate sector, while simultaneously capitalising on Phuket’s booming tourism industry. At the same time, they can also enjoy “free” accommodation in Phuket fora few weeks every year.

To function effectively as a condo, as well as a hotel, a Condotel development should apply for commercial use on day one. It is theoretically possible for the juristic person at a condominium to allow (or at least condone) short-term rentals, effectively “commercialising” the condo for use as a Condotel. If the juristic person chooses to allow this, the agreement of the owners is not required. But to apply for the hotel license, thus officially making the development into a Condotel, not only must the juristic person agree, but this legal commercialisation of the common area also requires the assent of 100% of the owners.

It is unfortunate that many condominium projects were rushed into development without first contemplating their use as a hotel. Shorter-term rentals (e.g. daily and weekly) are technically illegal in Thailand without a hotel license, yet many condominium developments offer guaranteed returns based largely on the short-term rental market.

It is also possible that many of the people profiting from short-term rentals are not paying tax on their income. Anyone who gets to know Thailand soon understands that nothing is a problem until lawmakers decide to take action. In other words, everything is OK . . . until it isn’t.

If Phuket should experience a slowdown in tourism, hoteliers may campaign in strength for an end to illegal short-term rentals. Any development already run with a hotel license would of course be immune from the potential backlash. So if hoteliers were successful in any such campaign against short-term rentals, Condotels would profit right along with them.

Owning and Leasing Condos in Thailand

Branded Residences

The Luxury Real Estate sector also offers a hybrid hotel/investment property which can be owned freehold by foreigners. Because while some branded residences in Phuket are villas, many developments are legally structured as condominiums.

The appeal of Branded Residences for high net worth individuals is obvious. Investors get to buy into the quality and high levels of service which are synonymous with upscale 5-star hotel chains. They also get to have the property resort managed for them, including a rental pool if they are not living on site.

This attraction has seen the popularity of these units expand significantly over the last two decades. While the USA has around one-third of the world’s total, the global market now has more than 50,000 units of branded residences worldwide, spanning 400 different developments.

The origins of Branded Residences date back to 1927 when the Sherry-Netherland Hotel opened on Fifth Avenue, at the southeast corner of New York’s Central Park. While other branded residences followed, the sector did not really become popular again until the 1980s when Four Seasons launched condominiums attached to their hotel in Boston.

Owning and Leasing Luxury Thai Properties

The first branded residence in Thailand followed shortly thereafter with the Amanpuri in Phuket, which revolutionised the concept with its resort setting.

In the last 30 years, the sector has gone from strength to strength. Today there are over 70 hotel groups which have entered the sector.

It is not a coincidence that the decade which saw the creation of branded residences (the 1920s), and the periods which saw an expansion in the market for luxury hotel-branded accommodation (the 1980s and present day), were all times of significant wealth creation.

According to Credit Suisse’s Global Wealth Report 2018, there are 42.2 million millionaires in the world, while Forbes magazine places the number of billionaires at 2,153. And in the last decade, the numbers of millionaires and billionaires in the world have more than doubled.

This shifting demographic is good news for Branded Residences, as their prices tend to be a few notches above traditional condominiums. But for that money, buyers know they can expect exquisite designs, often from world-renowned architects, as well as luxury interiors with the highest quality fixtures. In Phuket, they can also expect resort settings with magnificent landscaping, and wonderful views.

The quality standards that accompany a luxury hotel name not only ensure that the units sell for premium prices, but also that they are in high demand as rental properties, and command premium rental prices.

Existing developments have been extremely popular with wealthy Thai investors, which bodes very well for the industry in Thailand in general, and in Phuket in particular.

With 49% of any condominium development available freehold to foreigners – and Thai investors already eager to invest in the other 51% of branded residences – the Luxury Condominium sector will likely be developing more of this hybrid hotel/condo investment in Phuket.

HOW LOW ARE THE FEES EXACTLY?

As in most countries, when you buy a property in Thailand there will be either local authority or government fees and taxes to pay.  Those taxes in Thailand, however, are some of the cheapest in the world.

While the taxes and fees are relatively simple, they are not always uniform, as they depend on either the developer (for a new build), or on the seller’s situation (with a resale).   On a resale, you will likely be expected to share fees 50/50 with the seller.  These will vary depending on the length of time the seller has owned the property, and the actual capital gain they have made during that time.  If the seller has owned the property for more than 5 years, these costs shouldn’t amount to more than 1-2% of the purchase price (if shared).

Depending on where you live, you may be required to pay for a title search, valuation, survey, or Stamp Duty.  The fees are clear and easy understand, and Thai law prohibits a developer from charging more than 50% of the fees on a new build.  On a private sale the law does not specify which fees should be paid by which party, however, it is accepted practice that the buyer and seller should split the fees 50/50.  If you have doubts or questions about the fees you are being asked to pay, contact your agent or lawyer for advice on what the split should typically be.

Please note that while freehold condominiums are recommended over leaseholds, the upgrade to freehold usually entails an extra charge.  This may be either a fixed THB amount or a percentage, but it will not necessarily be included in the initial purchase price.

When buying property the fees are typically as follows:

2% — calculated on the higher of the assessed value or actual sales price (buyer typically pays, but developer is responsible for 50% on a new build)

one time fee (THB 500/m² — 1,500/m²)

The ongoing cost of condo ownership is also remarkably cheap in Thailand.

  • Common Area/Maintenance (CAM) Fees — average THB50/m², higher for luxury condos (payable to the condo management)
  • Utilities (e.g. water, electric, gas) — these vary, but are lower than in most other countries

House and Land Tax

If you are living in your property, or if it remains empty for most of the year, you do not need to pay this tax. Typically collected locally, a tax of 12.5% apples to your assessed annual rental income.

If you are renting out your Phuket property, you must also report and pay tax on the rental income. While this may sound ominous to some, the progressive tax rates in Thailand are actually very attractive. In fact, the tax payable on rental income of US$ 1,500 p.m. (US$ 18,000 per year) would actually work out to less than 3%, while the total tax payable on rental income of $144,000 per year would still be less than 15%.

The other conveyance fees, typically paid by the seller, include:

  • Application Fee: negligible (circa THB 500)
  • Specific Business Tax (SBT): 3.3%*
  • Stamp Duty: 0.5%*
  • Income Tax: 1% of the appraised value for corporations (marginal income tax rate for individuals)

*Stamp Duty and SBT are mutually exclusive (you pay one or the other)

A business will always pay the SBT + 1% Corporate Income Tax (also called a “withholding tax” because the Land Office withholds it for the tax department). Withholding tax for individuals is their marginal income rate, although the appraised value is reduced the longer you have owned the property, which means less withholding tax.

An individual selling their condo may avoid the SBT, instead paying the 0.5% Stamp Duty, if they have held their property for at least 5 years. The SBT may also be replaced by Stamp Duty if the transfer is to a legitimate child, or if the condo is being passed down as inheritance to a legal heir.

The fees for buying or selling landed property, are for the most part as above. If a company is the seller, the total fees should come to no more than 6.3%. While some developers split these with the buyer, or itemise fees separately, others require the buyer to pay the full amount.

As an owner of the property, the House and Land Tax and income taxes on any rental income (mentioned above) would also apply.

PHUKET VILLAS, HOUSES AND LANDED PROPERTY

Investment Promotion

We mentioned above the “extremely limited and exceptional circumstances” whereby a foreigner could legally acquire land or landed property in Thailand. This is that exception.

Under Section 96 of the Land Code Act, a foreigner may apply to own up to1,600 m2 (1 Rai) of land if they make a Prescribed Investment of not less than THB 40 million in bonds of either the Thai Government, the Bank of Thailand, a State Enterprise, or bonds of which the Ministry of Finance secures the capital or interest. It is also possible to make the same application for land ownership if the THB 40 million is invested in the share capital of a juristic person who is granted investment promotion under the relevant investment promotion law.

The ownership granted to the foreigner is subject to the Prescribed Investment remaining in place for a continuous period of not less than five years from the date of registration of the Land ownership.

Section 96 offers a real and absolute path to ownership for anyone who can afford it. There are exquisite villas in Phuket which sell for as much as THB 400 million, and some of these are bought (or even leased) by foreigners. Any foreigner considering a property in this price range may be best served by investing THB 40 million into the Thai Government Bonds, then spending the balance on a villa.

The application for Investment Promotion is best done through a competent Thai lawyer, but for any foreigner who has the resources it is a legitimate route to freehold land ownership.

The Board of Investment

A similar path to ownership is through The Board of Investment (BOI). The BOI was established in 1997 to assist with, and provide incentives for, investment in Thailand. These are primarily tax privileges, and certain exemptions on foreign ownership of companies.

Although these incentives are also available to Thai nationals, foreigners who wish to invest and promote a business in Thailand are granted certain privileges, which may include permission to own land.

The relevant law supporting this program is the Investment Promotion Act, which may “grant promotion” to companies which are substantially beneficial to Thailand and its economy. In addition to the amount of capital invested, the criteria for qualification require a company to be economically and technologically sound, and not undertake any business which is harmful to the environment.

These are business incentives, so if the“promoted person” (which is the business, not the foreigner) dissolves the promoted activity or transfers it to another person, the incentives no longer apply. If the promoted person has acquired land, the land must be disposed of. If the company does not sell the land within 1 year, the Director General of the Land Department shall have the power to dispose of it under the Land Code.

While the company will be the “promoted person,” and therefore the owner of the land, the foreigner may control the Thai company under the BOI scheme. This foreign ownership of the company is not possible with a standard Thai Company Limited, and because the foreigner controls the company, they also control the assets of the company (including any land).

For a foreigner with the resources to take advantage of this program, it is another route to legal control of Thai landed property.

Buying in a Thai Spouse’s Name

Prior to 1998, a Thai woman who married a foreigner gave up her right to own land in Thailand. This restriction was removed, however, a foreign husband is not permitted to co-own the land with his wife. (Because it is the most common relationship dynamic, we will continue to use the example of a Thai wife and foreign husband, but it applies equally the other way around.)

When purchasing land in a Thai wife’s name today, a joint declaration must be made stating that the wife purchased the house with her own personal funds. Because the foreign husband has no claim on the property, it may therefore be mortgaged or sold without obtaining his consent.

It was once a common practice for the wife to be the legal owner of a plot of land, which she would lease to the husband on a 30-year basis. The husband would then pay to construct a villa, which he could own through a right of superficies. Even if the wife were to sell the land, the husband’s right to live on it would be protected for the duration of the lease.

But any agreement between a husband and a wife pertaining to property, which was formalised during marriage, may be voided by either the husband or wife at any time (or within 1 year of the dissolution of the marriage). At present, it appears as though the Land Office will not even register any agreements signed between husband and wife (i.e. long-term lease, superficies, usufruct, lifetime living rights).

A foreigner may inherit landed property from their Thai wife, but he may not assume permanent legal ownership. If the wife were to precede her husband in death, he could inherit the property as a statutory heir, but would not be permitted to register the land in his own name. Under present law, as a sole non-Thai beneficiary, he must dispose of the land to a Thai national within a reasonable period (typically not longer than 180 days).

A foreigner would also be permitted to act as the executor of his wife’s estate, which would allow him to rent out, dispose of, or manage the property in any way he sees fit. But unless a period of time is otherwise fixed by the testator, by a majority of the heirs, or by the Court, the executor of an estate must perform his duties and complete the distribution of assets, including the property, within 1 year.

As always, it is highly recommended that any foreigner consult a reputable lawyer when purchasing a property together with their Thai spouse.

Owning and Leasing Marina Thai Properties

A Word on Wills

Planning for our passing is important. No matter where in the world you live, or where your assets are held, you should be sure to make a Last Will and Testament. Planning ahead ensures your loved ones will be looked after and makes the settlement of your estate far easier for everyone concerned.

In Thailand, there are no forced heirship laws. Forced heirship means that by law, the assets must be divided up amongst descendants and spouses. Countries such as France, Italy, Spain, and Portugal have forced heirship. Even Japan and many Arabic countries handle estates in this way.

So if you have Thai assets, especially something of significant value like real estate, then you should definitely have a Thai Will in place.

Thailand is influenced here by common law, and adheres to the rules of intestacy. If you die intestate (e.g. without a Will) your assets will be shared out equally between the statutory heirs. This means that assets are distributed according to different classes of statutory heirs, with descendants and spouses usually coming first.

But despite the fact that statutory heirs are the legal beneficiaries of your estate, don’t expect the procedure to be quick and fluid. It is anything but. Even if you are married to a Thai national, the settlement of the estate without a Will still inevitably turns into a lengthy process.

And this means legally married – the influence of common law in Thailand does not extend to marriage. If you’re not married to your partner, even if you have shared everything with them for many years, he/she will have no legal claim to any “joint” assets should you die intestate.

But what happens if you don’t have any family in Thailand and you never left a Will? The simple answer is that your family will be placed in an even more distressing situation than those described above.

To start with, they might have to fly 12,000 miles just to get to Thailand. Once here, the first hurdle is to prove they are who they say they are. Then they will have to go through the settlement of your estate, which is a complicated process that can only really be done using a Thai lawyer.

It could all take years to resolve, and as the lawyers’ work is quite in-depth, the fees involved will not be cheap. Depending on how long it takes, a huge chunk of the estate’s value, could be lost in lawyers’ fees alone.

There is also the chance that the authorities do not even recognise your family member as the beneficiary, which could mean they receive nothing.

Some people think they can get away with their overseas will (i.e. from their home country), which technically would be accepted in Thailand. But the probate of the estate still has to go through the Thai courts, which would require the Will to be translated into Thai. The translations also need to be notarized, and then authorised by The Ministry of Foreign Affairs.

Thailand’s probate procedures are lengthy enough without the introduction of an overseas Will. Depending on the length of the Will, it could cost as much to have it translated and notarised as it would to draft a Thai Will in the first place.

What If I Inherit a Property?

If you inherit a property as a foreigner there a few things to consider.

Firstly, if it is a landed property (land, a villa, a bungalow), you are allowed to inherit it, but will not be allowed to title it in your own name. The property must be disposed of – to a Thai national – within a reasonable period of time (typically 180 days).

If the property is a condominium, the inheritance laws are more favourable. If you inherit a condominium you’re required to inform the Land Office within 60 days. There will be some fees involved because the title deed will have to be transferred into your name.

As mentioned earlier, there are two competing pieces of legislation to contend with on an inheritance. They don’t agree, nor can lawyers agree which one carries the most weight.

Whether or not you get to keep your inherited condo may come down to something as simple as which judge hears your case on the day.

So How Do I Get My Thai Will?

We recommend that you use a Thai lawyer to write a Will. It is quick and easy to do, and a good lawyer can assist you in doing everything correctly.

There are many services provided by the state in Thailand, and making a Will is one of them. However, you need to be fluent (or at least extremely conversant) in Thai to take advantage of this service. If you are a foreigner who can speak and write Thai, you can go to the local Amphur (District Office) and they will write a Will for your Thai assets.

When you get your Will, get as many copies as you need. Give one to every family member who you have named as a beneficiary. Make sure your lawyer keeps copies, keep one safe yourself, and also give one to a trusted friend.

By doing this, you will help to ensure a smooth transition of your estate to your heirs.

Leasehold for Foreigners

THE 30-YEAR LEASE

What Exactly Is Leasehold?

The terms “freehold” and “leasehold” are not necessarily universal concepts. Freehold vs. Leasehold ownership is a common distinction in many countries. But the differentiation is found most frequently in the UK and those countries comprising the Commonwealth.

Freehold is a simple concept: absolute, titled property ownership with full proprietary rights. Leasehold, by contrast, is an ownership arrangement by which the owner of a home or building does not necessarily own the land it is sitting on, but rather rents it from the “freeholder”.

The practice dates back to feudal England when serfs paid landowners for the privilege of living on their land. If a serf failed to pay a certain amount of grain, gold or sheep, then he and his family were evicted.

In the 21st Century, someone is probably not going be raising crops or animals on behalf of the landowner, but as a foreigner in Thailand they are also not going to own the Chanote title for their land.

Leasehold in Thailand

The origin of leaseholds (above) is how the law still applies in the UK and elsewhere, but the duration of a UK leasehold ranges from 99 to 999 years. And because UK freeholders are interested in the rental income from the land, any leaseholder unlucky enough to experience the expiry of a lease which started just after the Norman Invasion is likely see it extended for a further 999 years. Most people would agree that this arrangement is akin to permanent ownership.

Any foreigner in Thailand who wants to buy landed property, but does not run a legitimate Thai company, must instead look to a 30-year leasehold.  Whether that dream home is a villa or a house, they must accept that the most secure way to realise their dream is through a 30-year leasehold.

A lease agreement spells out the terms and conditions, and this is registered by the lessee and the lessor at the Land Office.  Once registered it becomes lien against the title deed, confirming the leaseholder’s right to the property.  A leasehold contract also places the foreign individual on a somewhat more solid legal footing (for at least the next 30 years) than a Thai company owner buying freehold because the lease is in their own name.

With the best legal assistance a leasehold can also hold its value, and like a freehold, may be sold on to any prospective buyer in the future.  Crucially, the registration of the lease also confirms the foreign lessee’s right to legally enforce other aspects of the agreement, including the options to either sublet the property, or pass the lease down to heirs upon death.

The freeholder (owner, or lessor) gives the lessee “exclusive possession,” which is a right of undisturbed possession, with exclusive usage rights.  This means a foreign lessee has the right to occupy that property (either land or a villa), and to use it as a home or rental property for at least 30 years.

The Attractions of a Leasehold for Foreigners

Not only does a detached villa give a foreigner the home in the tropics they’ve always dreamed of, but villas also provide some of the best rental yields, especially those situated close to the West Coast beaches. During peak season it is almost impossible not to have your villa fully booked for a few months at a time. Four bedroom villas typically rent better than three-bedroom, and three better than two, but all villas have excellent rental potential.

When it comes to generating a great return on investment, a detached villa is the preference among most foreigners, not least because, during the few weeks the owners themselves spend on the island each year, it also offers them a peaceful, private pool villa in which to relax. You can be certain that any villa will meet your exacting standards both inside and out because a lessee has the full say-so on decoration and landscaping. And with a well maintained pool villa, it is relatively easy to find both shorter-term holiday rentals, as well as longer-term monthly tenants all year around.

As mentioned above, if the best legal advice is sought, a villa can also be a solid income producing asset, as well as a sound investment. To ensure that your property is both, it is absolutely vital that you use a good lawyer when finalising the lease contract. If structured correctly, and with the cooperation of the owner/developer, the lease can be sold on to any interested buyer, and a Thai buyer can even be sought to buy the property freehold. A leasehold may not be fully titled ownership, but it does offer domain over the property for the duration of the lease. Furthermore, most lessors will offer to renew the leasehold after the initial 30 years, giving a lessee the prospect of longer-term ownership.

Most leases are pre-paid, insofar as the lease purchase price equates to the price of the villa, including consecutive renewals up to 90 years.  This seems to have become an accepted means of extending/renewing a lease, and it obviously makes it easier to promote a leasehold villa, but there are questions as to how it can be enforced from a legal perspective.  While a good leasehold contract will always include a clause that states that the lessee has the option to renew their lease after the initial 30 years, guaranteeing that renewal upfront or prepaying a lease for 90 years is not strictly legal.

The Financial Logic of a Leasehold

Although the concept of a leasehold villa may not sound appealing to some buyers, the financial case for a 30-year lease can certainly be made. (When you consider the fact that the villa can be sold as a freehold at any time to another buyer, such as a Thai national or a Thai Co. Ltd., the case becomes even stronger.)

The options for anyone wishing to live in a villa for the long term are renting, leasing for 30 years or buying freehold through the establishment of a Thai company. There is an argument that a leasehold is the better and safer option.

When comparing leasing to rental, 30 years is a long time, and rental prices are only going up. Luxury villas fetch top dollar prices, even on a monthly or yearly basis, and the cost of a leasehold can pale in comparison to the renting over a 30 year period.

The initial cost of a leasehold could save a great deal of money over the long-term for someone who is intent on staying in Phuket, and wants to live in a villa. And because a lease is paid up front, the lessee shields his/herself from the effects of inflation as the cost of villas on the island steadily climbs.

When you also consider the year-on-year increases in rental rates, this also benefits the individual who plans to rent out their villa, as they will see steadily increasing income. In the next 15-20 years, the rental rates on a luxury villa could easily be double, if not treble what they are today.

If you compare leasing to buying freehold through a Thai Company Limited, there is an argument to made for either. But buyers must contemplate the  repercussions of buying freehold through a wrongly-formed Thai company.

A foreign lessee, on the other hand, is on a more solid legal footing because of the right of “exclusive possession” mentioned above. Both the lessee and company owner may view their villa as a long-term income-producing investment, but only the lessee can be certain that the asset is theirs to rent for the next 30 years.

When you further consider that the cost to register a leasehold is only 1.1%, the financial logic for leasehold villas becomes even clearer.

Other Types of Leasehold Property

The most popular types of property to access on a leasehold basis are by far villas and houses (discussed above), but some long-term residents (and even investors) are also interested in condominiums and apartments. These have a lower price tag than villas, making them available to more potential lessees.

Leasehold Condominiums Thailand

Leasehold Condominiums

Because the allocation of foreign freehold units is less than half of the total available in any given condominium complex, sometimes leasehold units are put forward as a viable alternative.

A condominium (or an agent) might encourage the foreigner to setup a Thai Company Ltd. to purchase a leasehold unit because, as the buyer would be a Thai entity, it could constitute part of the 51% Thai ownership.

As with BVI companies, running a Thai company may not be financially feasible for owners of low-end condominiums. Most crucially, however, it may also be questionable from a legal standpoint (more on that in the pages to follow). Unless you are running a company which actually does something and has turnover, it is probably best to seek out a freehold condominium instead.

If you are absolutely in love with a condo, and leasehold units are the only ones available, your options are legitimate Thai Company ownership or a 30-year lease. If you opt for a leasehold, it is best to view this as a long-term rental, not ownership. As with a house or villa, it can prove to be cheaper than paying rent for 30 years. If structured properly, it might also offer an extension, or be transferable to a new owner.

But the key word here is might. If you carry on reading this section you will understand the potential pitfalls of a leasehold condominium. The biggest problem for leaseholders in the future is their perception of what they actually “own”, or as the case may be, don’t own.

Some foreigners think it is more or less the same as freehold ownership. With a leasehold condo, they believe they have “bought” something akin to a UK leasehold. But they don’t have 999 years of ownership. While they have may have been offered lease extensions up to 90 years, those 90 years are also not guaranteed.

Because of these misconceptions, people think their leasehold is a saleable asset for the next century. With the cooperation of the freeholder/landlord, it may one day be transferable, and you may even be able to sell it. But it is best to think of a leasehold as a long-term rental.

Viewing a leasehold as a 30-year rental with the possibility of future extensions will prevent the misconceptions from skewing your understanding.

You can read more about using a Thai corporate structure to buy a leasehold condominium here:

Using a Thai Company Limited to Purchase a Leasehold Condo Unit

Leasehold Apartments Thailand

Apartments

Unlike a condominium, whereby you have foreign freehold ownership of some units, with the balance being leasehold, all developments legally structured as apartments in Thailand are only available on a leasehold basis. This applies to Thai nationals and foreigners alike.

Occasionally, a superbly managed apartment development may be attractive, but some apartments can fall into the same price range as freehold condominiums, so the ownership restrictions should make any buyer think carefully before considering one.

Furthermore, it is important to remember that the Condominium Act was passed in 1979. The ease of registering a condo structure, and marketing the units to Thais and foreigners alike, has meant most new developments in the last four decades have been structured as condos.

If you are looking at an apartment built since 1979, you really need to ask yourself why the developer chose to structure it as an apartment, rather than a condo.

THE ATTRACTIONS OF A LEASEHOLD

Because the options for a foreigner to purchase landed property such as villas are limited, it is certainly easy to view leasehold as a “glass half full” solution, especially when the closest alternative requires the extra step of forming a properly-structured company to remain within the law. Although a leasehold isn’t perfect, it does provide most of the ownership benefits that foreigners seek when investing in a Phuket property.

ATTRACTIONS OF A LEASEHOLD

In fact, owning a leasehold has many advantages and attractions, which include:

  • Foreigners can live in any house or villa of their choice
  • It is a 100% legal means for a foreigner to have undisturbed possession of a villa or house
  • With a cancellation clause the lease period may be restarted for a potential buyer
  • It may be resold as a freehold to a Thai national or a Thai Company Limited
  • If the lease contract is structured correctly, leaseholders will have the same sense of ownership as freeholders
  • Writing a lease in multiple names (including children or grandchildren) can ensure succession, and that the lease is used to its full term
  • Leaseholders avoid inflation and steadily increasing rental prices
  • Leaseholders have full control of the interior/exterior design, including garden landscaping
  • A lessee of land may own any buildings or other structures they build upon the land
  • Rental income from villas is superior to that from condominiums
  • A leasehold villa can obtain a hotel exemption, and legally offer short-term rentals (this approval is more complicated with a condominium)
  • Closing costs are low, i.e. leasehold registration is relatively cheap
  • Lessees may receive further renewals after the initial 30 year term
  • The legal interest in a lease can be sold on to a third party
  • The purchase option allows lessees to take advantage of any change in ownership laws (should they occur), and allows for greater flexibility in resale
  • A leasehold may become a “Special Reciprocal Contract” (more on this later)

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.

Always Register The Lease

It is essential that any lease agreement longer than 3 years be registered with the Land Department. Since most leases for bungalows or villas are 30 years in length, the protection offered from a registered lease is therefore extremely relevant should ownership of the land change hands. If the landlord dies, becomes insolvent, or sells the land to another party, the new owner must honour the terms o f the original lease.

If a lease longer than 3 years has not been registered at the Land Department, however, the new owners are not even obligated to allow the lessee to keep living there. The tenant, because that is what they are, could effectively be evicted after 3 years.

Promises, like an unregistered lease, do not hold up in court. A new owner is not obliged to fulfill any agreement, verbal or written, made by the past owner. The lease may be protected, but any consensus reached with the former owner to renew the lease after 30 years will now be at the whim of the new owner. This highlights the importance of a cancellation clause and putting the lease in multiple names, both of which are touched on below.

What Olaf Says About Leasehold Property In Thailand

“Lease” Does Not Mean “Own”…

As foreigners are by and large prevented from owning landed property in Thailand, it is common for them to enter into a lease agreement for a property as an alternative. But leasing is not owning, and it is important to understand the distinction when it comes to property. When you leasing a property you are effectively “renting” it, subject to the terms of the lease contract agreed with the actual owner of the property. While it is generally a long-term arrangement, violating any of the clauses in your lease may be grounds for terminating the lease and evicting you from the property.

A lease is essentially a contract to utilize a product – in this case a property – in exchange for payment. But how long is a lease? It is an idiosyncrasy of Thai real estate law that the term of a property lease may not exceed 30 years, although it is possible to renew the lease through the insertion of a “renewal clause” in the lease agreement. However, and this is another crucial quirk of the law in Thailand, only the original owner (or lessor) is bound by the renewal clause. If the lessor were to change during the lease term (e.g. the owner dies, the company sells the property to a new owner or goes out of business, etc.), the new owner shall not be bound by any renewal clause signed by the original owner.

In other words, a typical real estate lease in Thailand, even if it contains a clause for renewal, is not a secure long-term investment. To make up for this, there are developments which promote “collective leases” (also called “secured leases”) to foreigners. The security, however, is questionable because, as mentioned above, leasing does not mean own.

…and a Building Permit Is Not Ownership

You have probably heard someone say that they own a building because they have their name on the building permit. Hopefully you will not be that misinformed person one day.

While a foreigner typically may not own land in Thailand, they are able to own a physical structure like a villa. It was once commonplace for developers marketing real estate to foreigners to sell the notion of villa “ownership” by committing to the issuance of a building permit in the foreigner’s name. It is pure speculation on our part, but the purpose of this could have been “tax planning” by the developer (a seller does not incur any real estate transfer taxes for selling a building permit).

What is not speculation is that owning a building permit in your name achieves nothing for you as a foreigner. A building permit is government authorisation for you to build a structure (itself subject to approval) on a specific plot of land within a specific time frame. That’s it. Nothing more. While it may not be as common today, you may still encounter people (even developers) selling the idea of a building permit as ownership.

STRENGTHENING THE LEASE CONTRACT

Certain clauses should be standard in any Lease Agreement. But without the proper legal advice, a foreign buyer may not manage to tick all the pertinent boxes to protect their investment.

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.

STRENGTHENING THE LEASE CONTRACT

What Olaf Says about Arbitration Clauses:

Use Arbitration!

When entering into a contract or agreement, even one which involves investment in real estate, no one anticipates – and they certainly do not desire – that anything will go wrong. And they certainly don’t expect that their agreement will turn into a conflict. Sadly, this happens more frequently than you would probably care to imagine.

If you find yourself in this position, especially as a foreigner, you should consider settling the dispute not in the Thai courts, but through legally binding arbitration. Even if you lose, you are more likely to experience abetter outcome through arbitration. What we mean by “better outcome” is that you will find the process to be faster and less expensive, and the decision of the arbitrator will be internationally enforceable. On top of that, throughout the proceedings, all documentation may be produced and all discussions held in a foreign language (e.g. English).

That said, all parties must agree to binding arbitration. And because achieving any concessions from either side is less likely after the two sides have already begun fighting, it is important that your original real estate investment contract already includes a well-written arbitration clause.

Whether it is a purchase and sale agreement or a lease agreement, it is protecting you against the possibility of anything going wrong in the future.

Assignment Clause

As with any clause or addendum to a lease agreement, the cooperation of the lessor is necessary to assign the lease to a new lessee, and it must be included in the original agreement.

Arbitration Clause

Arbitration is a process by which the parties in a dispute can have their arguments heard by an independent body, without the need to go through potentially lengthy court proceedings. Foreigners have been allowed to serve as arbiters in Thailand since 2000, and individuals may also be represented by foreign lawyers at arbitration proceedings.

Thailand has been following The United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration since 2002, which ensures that the ruling of the arbiter in such cases is internationally observed.

Arbitration proceedings may take place in any language, and there is no requirement to have documents translated into Thai (as is the case in Thai courts). While mediation is potentially less costly, in arbitration the parties are the masters of their own procedure, and the arbitrator is free to award a settlements at the end of proceedings. The settlement does not establish any legal precedent, but it is legally binding.

Put The Lease in Multiple Names

If someone leases a villa in their name, then dies suddenly, the lease is immediately terminated. The owner of the land is then within their rights to take the property back at any time. Once they do so, they are free to sell a further 30-year lease to someone else. A succession clause can protect the spouse or the children of the lessee, but only if the clause is being enforced against the original freeholder/owner/lessor.

Neither a will nor a trust can confer inheritance of a lease upon a spouse, and, frustratingly, succession clauses are deemed to be promises, not lease rights. If the freeholder/lessor changes, a succession clause is no more enforceable against the new owner than a 30-year extension would be. This can be particularly annoying if the leaseholder’s spouse is forced to vacate her home because the new landlord is effectively allowed to repossess it.

Any lease agreement should therefore be in joint (or multiple) names. Depending on their ages, the foreign buyer may consider including their children’s names on the lease agreement. If anything were to happen to a foreign couple, their children would then have the right to live in the house, or sell the lease.

Leasehold Property and Succession

This has been touched on already, but a quick summary of inheritance law for leasehold property is quite important.

In Thailand, a lease is considered a personal right under hire and property laws, not an inheritable contract right. The Supreme Court of Thailand has ruled “the lessee is the essence of the lease agreement,” meaning without a lessee there is no longer an agreement.

If a lessee wishes to assign the lease to their heirs upon death, this must be written into the lease agreement as a specific clause. The clause, however, is a personal contract between lessee and lessor. If the lessee dies, their heirs may enforce the succession clause against the lessor. If the lessor changes, however, either through sale or inheritance of the title, the new owner of the property is not bound by the succession clause.

On the other hand, should the lease be deemed a Special Reciprocal Contract (see page 37), the applicable law changes, and the succession rights can be passed on the lessee’s heirs.

POWERFUL, LEGAL, BUT NOT NECESSARILY AVAILABLE

Usufruct, Superficies and Habitation are three rights which can be accorded to a lessee, each of which provides an additional and unique force of law to a lease agreement.

They are worth mentioning because their inclusion strengthens any lease to the benefit of the lessee. Unfortunately, there is no guarantee that these rights would be bestowed upon a foreigner holding a lease in Thailand.

Usufruct

A Usufruct is essentially a contract that allows one person to use the property of another. It has its origins in Roman law, where women were denied the right to own land. A usufruct was used to protect the family home if her husband died prematurely.

Usufruct contracts are still used, with minor variations, the world over. Although they can last a lifetime, they are usually established for a fixed period of time. In Thailand a usufruct may be set up for the lifetime of the usufructuary (the person wishing to occupy or use the property), or for a term of up to 30 years.

The word “usufruct” comes from the Latin roots usus (to use) and fructus (meaning enjoyment, or literally, “fruit”). In other words, it is the right to the use and profit from the property of another (without damaging it).

The profits (fructus) originally referred to fruit or crops which may be grown on the land and sold, but the definition also extends to renting or leasing a building, or charging a levy for others to access the land. In no way is any right conveyed permitting the sale or mortgage of the land itself.

If a usufructuary is granted a lifetime right to use a property, it is theirs to use as long as they live. Upon the death of the usufructuary, full ownership of the property reverts back to the true land owner.

Thailand Leasehold Strategy

Usufruct as a Leasehold Strategy?

Usufruct is often mentioned as an ideal way for foreigners to possess a leasehold for life in Thailand, but do not automatically assume this presumption to be correct. While a usufruct may be written into a lease agreement, there is no guarantee that a 30-year lease can effectively be made a lifetime leasehold.

While usufructs are recognised by the Civil and Commercial Code, it is not certain that a landlord’s lawyers would agree to anything which could potentially cost his/her client money, or exceed a 30-year lease term. Furthermore, while a usufruct could be sold or transferred, it cannot be passed on to ones heirs, making it only valid for the life of the usufructuary.

If the buyer is able to take advantage of a usufruct in Thailand, a good lawyer is essential to ensure it is valid and will work efficiently. It is in areas like this where a foreigner’s Thai legal representatives earn their fees.

Superficies

Superficies is another Latin term, and is used to describe anything which is placed upon the land. It generally refers to any buildings on the land which are erected by someone other than the owner.

If you are contemplating a land purchase in Thailand, you may want to read our article below:

Buying or Leasing Land in Thailand

And if you’d like to understand a little more about Thailand’s land measurement system, you can find out more here:   

Converting Thai Land Measurements to Metric/Imperial

Thai Civil and Commercial Code Section 1410 – The Right of Superficies

“The owner of a piece of land may create a right of superficies in favour of another person by giving him the right to own, upon or under the land, buildings, structures or plantations.”

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.