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 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 with nominee shareholders to purchase landed property, but a considerable percentage of these arrangements are unlikely
to stand up to legal scrutiny. There are other supposed “loopholes”, each lacking any recent legal precedent, and a foreign buyer should be wary of putting their faith (or their money) in supposed technicalities of law 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 habitation of a house or a villa for the long-term.
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.
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.
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.
FOREIGN FREEHOLD PROPERTY OWNERSHIP
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:
WHAT 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:
- The person obtains a residence permit in accordance with immigration law;
- The person obtains a permit to enter the country in accordance with the law on investment promotion;
- The person is a juristic person under section 97 and section 98 of the Land Code, registered as a juristic person under Thai law.
- 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.
- 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.
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.
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.
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.
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.
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.
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.
People debate whether a leasehold property is technically a solid investment, but there is no debate that it is a sound income-producing asset. When finalising the lease contract, as always, use a good lawyer. If structured correctly, and with the cooperation of the owner/developer, the lease can be sold on to any willing buyer. A leasehold may not be fully titled ownership, but it does offer domain over the property for the duration of the lease. Furthermore, a lessor will almost always offer a clause to renew the leasehold after the initial 30 years, giving the lessee a sense 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
An outsider may wonder why people opt for a leasehold villa, but a financial case for it can certainly be made. Consider the options: buying freehold through the establishment of a Thai company, or renting for 30 years.
If the foreigner has created the company with the express purpose of buying a villa, and used nominee shareholders to satisfy the 51% Thai ownership requirement, they could find themselves in legal trouble. The foreign company owner may face fines, and be forced to sell the property, if they are found to have violated the law – either in their attempt to control a company through nominees, or to exercise ownership control over landed property. 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 are looking at their villa as 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 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 benefits both the individual who plans to rent out their villa (steadily increasing income), as well as the person who is coming to Phuket to live, but not to buy (no need to pay those steadily increasing rental rates). In the next 15-20 years, the rental rates on a luxury villa could easily be double, if not treble what they are today.
When you also consider that the cost to register a leasehold is only 1.1%, all of this makes a pretty clear financial case for leasehold villas.
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.
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 transferrable 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 leasehold property. 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 transferrable, and you may even be able to sell it. But it is best to think of a leasehold as 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.
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 are limited, it is certainly easy to view leasehold as a “glass half full” solution, especially when the closest alternative is to potentially break the law through more dubious means of ownership. Although a leasehold does not provide the kind of ownership that some foreigners may want, it does have a number of advantages and attractions.
- Foreigners can live in the house or villa of their choice
- Leaseholders avoid inflation and steadily increasing rental prices
- Leaseholders have a sense of ownership
- It is a 100% legal means for a foreigner to have undisturbed possession of a villa or house
- Leaseholders have full control of the interior/exterior design, including garden landscaping
- A lessee of land may own the buildings and structures
- 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, 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
- With a cancellation clause the lease period may be restarted for a potential buyer
- Writing a lease in multiple names (including children or grandchildren) can ensure succession, and that the lease is used to its full term
- The purchase option allows lessees to take advantage of any change in ownership laws (should they occur), and allows for greater flexibility in resale
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.
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.
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.
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.
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 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.
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.
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 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:
And if you’d like to understand a little more about Thailand’s land measurement system, you can find out more here:
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.
Habitation differs from usufruct in that the person granted habitation does not have the right to allow someone else (apart from themselves) to inhabit the property. Only the person named on the habitation contract has right to inhabit the property.
A habitation contract gives a person the right to use the house, together with his family, as a dwelling. But the property cannot be sub-leased or used as a dwelling by any other party.
A right of habitation must also be registered, and the title deed duly endorsed, at the Land Office.
Servitudes, Easements and Public Rights of Way
These do not refer to ownership per se, but are relevant concepts when addressing the rights of property owners in Thailand.
It is very common in Thailand that access to a property is blocked by another plot of land. Servitudes, Easements and Public Rights of Way are three distinct means of legal redress to ensure that the “landlocked” property is afforded access to a public road.
Anyone from the UK is likely already familiar with laws and statutes governing “public rights of way”. (In fact, detailed books of maps showing every public footpath and right of way in Britain are readily available.) Thailand has a nearly identical law which allows the “landlocked” owner to pass over an adjoining plot to reach a public road.
There are however two conditions which must be met:
1) The location and manner of passage must cause as little damage as possible.
2) The landowner must be compensated by the person requiring passage for any damage that occurs.
However, enforcing this “right of access” could cause acrimony between the buyer/lessee and their new neighbour. If the lessee were to find themselves one day needing to borrow a cup of sugar, or some power tools, they probably would not want to be the guy who forced a path through the land next door.
A more cooperative and conciliatory approach is the Servitude. While the name may suggest the lessee is being forced to do yard work for their new neighbour, have no such fear.
Servitudes are covenants between landowners which offer rights to the landlocked property owner, while assigning duties to the other. A Servitude may go into great detail, such as denying construction or development rights, but not always. In most cases, it simply agrees that the property with access shall grant passage to the plot without access. (The UK equivalent would be “permissive access”.)
An Easement is granted automatically when there is clear necessity, thus no registration is required. A Servitude must be registered with the local Land Office, and the compensation agreed between the parties must be stated. If the parties fail to stipulate the amount of compensation, the Land Office will set the fee at THB 50 (per plot of land).
Servitudes and Easements are simply the right to enter onto another person’s property without actually possessing said property, the purpose of which is generally to permit the right of way to a public road.
What Sam Says About Special Reciprocal Contracts
Question: When is a lease not necessarily a lease?
Answer: In Thailand, when it is instead a Special Reciprocal Contract. The Supreme Court of Thailand has ruled that upgrades to a leased property, when made with the mutual agreement of the lessor, can, under specific circumstances, cause the lease agreement to become a “Special Reciprocal Contract”. What does these mean in practice for the lessee?
This new designation changes the legal standing of the lease agreement, making enhancements to the agreement such as Succession Clauses “contract rights”, which become inheritable. This is a major benefit to any foreigner concerned about what happens to their leased property at death.
It is further possible that an extension clause – merely a promise under a lease agreement – could be enforced by virtue of the material improvements to the property, especially in the event a villa is constructed on leased land. Theoretically, any building owned by a foreigner could be taken away and rebuilt on another plot of land at the end of a 30-year lease (e.g. a traditional Thai-style wooden house dismantled and removed, or a western-style house taken down brick-by-brick).
Anyone who cares to look into the intricacies of Thai law will learn that the landlord (or lessor) owns all the land, and barring any enforceable agreement to the contrary, also assumes ownership of any buildings that go up on that land. When the lease period is over , everything reverts back to the owner.
If the lease agreement is deemed to be a Special Reciprocal Contract, this could offer leverage to extend the original lease, but as mentioned above, any foreigner should also ensure the lease also contains a right of superficies to solidify their ownership of the building in the first place.
The Secured Lease
A structure known as a “Secured Lease” (also known as a Collective Lease or Protected Lease) is a novel ownership vehicle in Thailand. The tenant is essentially committing to a lease agreement, while at the same time entering into a sale and purchase agreement in the developer’s Thai company.
For all intents and purposes, it is a corporate ownership arrangement which – while respecting Thai majority shareholding rules – positions the tenants to use their (minority) shareholder influence to protect their interests. It accomplishes this because the foreign shareholders of the business (usually through an offshore company) actually have superior voting rights, even if their preference share holdings are limited to 49%.
There are dozens of resorts now structured like this, and still more are being set up today. It is a wonderful concept in theory, and it has been working well for most developments for many years. There are versions of this structure which have been struck down by the Thai courts, so it really depends on how well a specific development handles its owners
The risk a buyer runs is that an interested party (which could be anyone with knowledge of the underlying structure or with a grievance against one of the owners) files a complaint with any official department. If the authorities are able to see through the sale and purchase agreement, and recognise which parties ultimately have control of the land upon which the development was built, that is where a problem may arise.
For the most part, as long as all parties are happy, and no issues with the structure ever find their way to court, these secured lease developments are likely to continue.
But if one is challenged, what happens in the end can depend on the specific case in court, the motion filed, the judge on the day, or the political winds blowing at that time.
The Spirit of the Law
There are a multitude of opinions and recommendations for how a foreigner may get around “the letter” of the law to own landed property. The problem with such schemes is that, if challenged in court, the foreign ownership scheme is unlikely to be upheld.
It is interesting to note what the letter of the law in Thailand actual says about foreign land ownership. Rather than expressly prohibiting foreigners from owning land, the law actually states that foreigners (aliens) are allowed to own land. Section 86 of the Land Code Promulgating Act states that: “Aliens may acquire land by virtue of the provisions of a treaty giving the right to own immovable properties…” What the Act fails to mention is that the last such treaty was terminated in 1970.
In the absence of any treaty, “the spirit of the law” is clearly to forbid foreign ownership of land in Thailand. Regardless of the ingenuity of the supposed loophole, it is clear from court rulings, that this “spirit” of the law is invariably upheld.
When a case goes to court whereby land is deemed either to be owned or controlled by a foreigner, the same verdict is returned pretty much every time. Whether before a local trial court or an appellate court (such as the Supreme Court in Bangkok), schemes which have helped foreigners circumnavigate the law are regularly shot down by judges.
If a foreigner is the owner of the building, and the dispute is merely over use or rights to the land, which they duly lease, it is fairly common for judges to side with the foreigner. It becomes an issue when it involves ownership or control over the physical land.
PHUKET VILLAS, HOUSES AND LANDED PROPERTY
When any conversation in the pub turns to “ways you can buy freehold landed property,” the pseudo-legal advice flows faster than the beer.
For many current villa owners, and for many who have recently been persuaded to buy landed property, this is a very sensitive subject. It is almost impossible to challenge someone’s existing beliefs, and no matter what these pages say on the subject, it is bound to upset someone (if it hasn’t already).
So let us just reiterate a simple fact:foreigners are prohibited from owning land in Thailand, and this applies to landed property such as houses and villas. Furthermore, as mentioned previously and contrary to “pub talk”, those who lease land, then build a house on it, do not automatically gain subsequent perpetual ownership rights over the building.
It all may have sounded convincing after a few pints, but it is not true.
When it comes to villas and houses, everything depends on the underlying contract to lease (not buy!) the land, and whether that contract mentions who owns any buildings or what happens to those buildings after the lease expires. Which brings us to everyone’s favourite “loophole” for buying land, villas and houses in Thailand.
Buying Landed Property Through a Thai Company
Loopholes exist where there is ambiguity in the law, i.e. there is more than one plausible interpretation, allowing clever legal minds to devise means of bending the law to suit their own ends.
Loopholes remain legal as long as the law is ill-defined, but on two specific points, Thai property law is unambiguous: Foreigners cannot own landed property, and a foreigner cannot control a Thai company using nominee shareholders.
As mentioned previously, the Land Code Promulgating Act states that foreigners (“aliens”) are allowed to own land by virtue of the provisions of a treaty, but fails to mention there has been no such treaty for nearly 50 years.
While it states it in the nicest possible way, the Land Code’s stance on foreign land ownership is nevertheless clear. Enter the Thai Company Limited. Unlike an offshore company (which is also an “alien” under the law), a Thai company offers local ownership. The forbidden fruit (land) can now be harvested, and leasehold becomes freehold.
The Thai company opens up the options for ownership. Buy a villa or a house? No problem. Buy a plot of land and build? No problem. The condo you like is sold out of the 49% allocation to foreigners? Since you are now “Thai”, you can feel free to buy one from among the other 51%.
The problem is a company established solely for the purpose of buying a home to live in – a company with no other function or real business activity – is violating the law. A company with Thai nominee shareholders (owned “from the shadows” by a foreigner) is flagrantly against the law.
In May 2006 the authorities began clamping down on what was (and remains) an illegal activity.
Procedures were put in place to ensure that Land Department officials made additional, thorough checks to prevent land registration by any company with foreign shareholders. Specifically, they were trying to identify companies established purely to buy land, houses and villas.
The immediate effect of this policy was to reduce the practice, but four months after the enforcement began, on 19 September 2006, Prime Minister Thaksin Shinawatra was deposed in a military coup. Changes in governments often result in changes in priorities, and a succession of new governments did not take up the mantle left by Thaksin.
People ceased to be concerned about this law because successive governments had more pressing matters on their plate (like staying in office). But during the last 13 years only the current government has had any real staying power.
Recent murmurings from Bangkok have suggested that another round of legislative amendments, guidelines and regulations could be on the cards. And yet newcomers to Thailand are being told by some that the government would be shooting itself in the foot if it were ever to crack down again.
If a further clamp down does come on the use of Thai companies with nominee shareholders to acquire landed property, the foreign shareholders could find that the “loophole” they bought into was actually a black hole. And that’s where their money could possibly end up.
Everyone has an opinion on the laws in Thailand restricting foreign land ownership. But is Thailand truly alone when it comes to home ownership laws? You can find out in this article here:
Legitimate Corporate Ownership
There is however one set of circumstances whereby buying land through a local Thai company could be perfectly legitimate – if the company itself is a legitimate business.
The fact that a company has foreign shareholders may be a red flag for the authorities, but this is not illegal. The same cannot be said of the Thai nominees, with no stake in running the company, who are only names on a ledger in a lawyer’s office. They are breaking the law, as is the foreigner who set up the company using their names.
But if a business is established properly, run professionally, follows the law to the letter, and pays its taxes, it is extremely unlikely that the Thai authorities would view it as illegal. Thai officials will quickly see through any attempts to subvert the law, but anyone doing things the right way may just find a clear path to land ownership in the name of their company.
If the foreigner is making personal use of any villa owned by the company, however, the same issue of a “benefit in kind” (discussed under offshore company ownership) would arise, and there would be income tax implications. Again, if this is all handled “by the book” there is nothing to be afraid of.
In A Very Big Nutshell
This section has offered an extremely forthright overview of the stories foreigners are told about buying property in Thailand, including villas. Beliefs as to what is truly possible and what is legal range from one extreme to the other, but most methods of owning landed property fall down under closer scrutiny.
The intention here was not to antagonise existing owners, nor was it to make people so disheartened that they give up on their dream of owning a property in Thailand. Quite the contrary, it so potential buyers understand the legal avenues to ownership in Thailand, and can appreciate that, while some rights may be conferred upon foreigners, these are not all guaranteed. Sometimes everything depends on the discretion of, or interpretation of, the law by the officials dealing with the paperwork.
Whether it is the city life in Bangkok, Phuket’s amazing beaches and sunsets, or the mountains in Chiang Mai, Thailand truly is an amazing country. There are wonderful villas and condos available in every part of the country, but to secure the right home, one sometimes requires patience, persistence and a healthy respect for the law.
EVOLUTION OF THE PHUKET PROPERTY SECTOR (Or Why So Many Foreigners Now Own Villas Illegally)
In 2006, thousands of foreigners who thought they owned land, houses and villas found out in no uncertain terms that they did not. Everyone knew back then that foreigners were not allowed to own land, but they also “knew” there were easy ways to get around this law.
Set up a Thai Company Ltd. with nominee shareholders – that was the most commonplace solution. A Thai company is not a foreigner, it is a Thai entity, so problem solved . . . right? Wrong.
Foreigners impacted by this advice we remade to pay in one form or another. Either through fresh legal fees to restructure ownership, or through sales at below market prices, it cost people money to extricate themselves from the problems created by an incorrect perception of Thai law. Of course, many were unwittingly misled throughout the entire buying process by professionals who had full knowledge of the illegalities involved.
Every year Phuket welcomes new investors from overseas, and in the last 5-10 years many of these have come from Russia and China. In 2006, not many of Phuket’s tourists came from these two countries; whereas, today they are some of the major buyers and investors in Phuket property.
If the authorities resume in earnest with fresh enforcement efforts, it may come as a huge shock to foreigners who own (or thought they owned) villas and land in Phuket, especially those foreigners who are new arrivals.
For the rest of us, it will just be déjà vu.
As mentioned above, the last two decades have seen multiple changes in the government in Thailand. In fact, Thailand has undergone three major changes since 2006, including two military coups, and seen 10 different prime ministers.
When regimes change, the whole political outlook of a country changes. What had been a focus of enforcement could be put on the back burner as the new government asserts its own priorities. Likewise, previously overlooked transgressions can become the focal point for a new regime.
The degree of disdain for those flouting the law varies from regime to regime. Indeed, the crackdown in 2006 only lasted four months, until a military coup unseated Prime Minister Thaksin, who was spearheading a strict enforcement of land ownership laws.
During that brief four-month window, some land and villa owners were forced to dissolve companies and sell their land or property. Others escaped punishment once the regime changed. That cooling off period continued through a succession of regime changes up until the present day.
With the current government demonstrating considerably greater staying power, it is anyone’s guess if they will make this their focus in the near future.
Caveat Emptor or Confirmation Bias?
Websites, brochures and flyers have long touted foreign land ownership in Thailand as easily attainable by setting up a Thai Company. In Phuket alone there are literally hundreds of sales booths, shops and stands, most of which are offering the same solution.
This singular mantra is repeated until it sadly receives an undeserved aura of respectability. Many in the real estate industry tell the buyer what they want to hear, and so the mantra is repeated over and over to potential buyers.
We have already noted how difficult it is to challenge established beliefs. How can someone disbelieve a message (however incorrect) which has been “reinforced” by multiple sources? The industry has even evolved to the extent that villa developments (marketing to foreigners) regularly win respected property awards, adding further positive reinforcement to the narrative. (Occasionally, as reported by Thailand Property News, developers are actually brazen enough to invent an award, simply declaring one their buildings to be “Condo of the Year.”)
Caveat Emptor means “let the buyer beware”. One might think the outlay of hundreds of thousands of Dollars, Euros, Pounds or millions of Renminbi or Roubles would make most buyers more inquisitive. Bizarrely, this is not always the case.
What happens when a new arrival to Thailand reads articles discussing a law firm which has been raided? Or hears a news item about a group of foreigners who have had their day in court, but lost in their attempt to defend a complex ownership structure?
The first thing they do is call the lawyer (or more likely, the accountant) who set up their Thai Company and arranged their villa purchase. When that professional individual is either willing to obfuscate the facts, or is ignorant of the facts, then the foreign owner is often left feeling bullet proof.
Every story they hear about illegal ownership then becomes wrong in their eyes, and every other foreigner they meet who buys a property through a Thai company with nominee shareholders perpetuates a false confirmation bias.
No Frame of Reference for Russians and Chinese Buyers
Jim Thompson was the American credited with reviving the silk industry in Thailand. He first travelled to Thailand in 1945, and like many who visit the country, ended up spending the rest of his life here. In later years, he designed and constructed a house on the Khlong Saen Saep, which was an architectural marvel inits day, and as a museum remains one of the most popular tourist attractions in Bangkok. At the time, however, he owned it. He bought the land and he put a house on it.
Foreign tourists have been flocking to Thailand for decades, but since 1970 (three years after Jim Thompson’s mysterious disappearance), foreigners have not been allowed to own land.
English language newspapers, forum sand chat rooms have been cautioning readers for years not to be fooled into illegal property purchases, but many still choose to ignore the warning. While there are also those who are “fresh off the boat” and receiving bad advice, very few English-speakers are completely oblivious to the fact that they cannot own villas or land in Thailand as a foreigner.
Sadly, the same cannot be said for Chinese and Russian tourists/investors. Russians have only been coming to Phuket in large numbers for the last ten years, and the significant growth in Chinese tourism only happened in the last five years. Many Russians and Chinese are therefore unaware of the previous efforts to enforce illegal ownership, perhaps because no one has ever bothered to tell them. Having no frame of reference, they are unfortunately more easily misled, and do not know what structures are above board and which are not.
There does not appear to be a comparable social network campaign in either Russian or Mandarin to inform people about the laws regarding foreign land ownership. It is possible that one reason why this information has not reached the Russian or Chinese blogospheres is that those writing online about Phuket Property did not experience the last crackdown, and are not familiar with the letter vs. the spirit of the law. Instead, the buyers – and perhaps the bloggers, too – are relying on the advice of individuals who are either oblivious to the facts, or incentivised not to tell the whole story.
The Legal Culture in Russia and China
Another issue impacting Russian and Chinese buyers is a cultural one, specifically the culture surrounding the use of Lawyers.
We mentioned above that Thai Property Law is rooted in a cultural attachment to land remaining in Thai hands. What we have learned from speaking with Russians and Chinese in Phuket is that, in their cultures, lawyers are usually not involved when buying or selling a property back home.
In fact, many Chinese nationals have been willing to part with money in China, and without leaving their country, have been handed the keys to a property purchased in Phuket. This has allowed some developers and agents to getaway with selling property that an experienced lawyer would have likely advised against buying. The fact that conducting due diligence and hiring a lawyer is not commonplace in China means developers can sell condominium units to unsuspecting buyers in the same way cheap and faulty goods can be hawked online.
Some Russian and Chinese individuals could therefore “come unstuck” with their property transactions in Thailand, simply because they didn’t appreciate the need for using a lawyer.
From 350,000 to 35,000,000
In 1970, when the last treaty allowing foreigners to buy land expired, around 350,000 tourists visited Thailand every year. Today that figure is 35 million, and a large number of those visit Phuket each year.
When the tourist numbers were lower, the foreigners buying villas were barely noticeable. The authorities could almost turn a blind eye to the relatively small number of foreigners circumnavigating the laws. In many cases they did, mainly because no one complained.
But as foreign interest in acquiring Thai property steadily increased, the resentment among Thai nationals grew stronger. Anyone who believes that the government will sit idly by and watch the laws of the Kingdom be openly flouted forever is demonstrating a complete ignorance of the depth of feeling which the Thai people have toward foreigners attempting to buy their land.
The Blind Leading the Blind
As tourists numbers steadily climb, Phuket is also welcoming new residents of many nationalities who have come here to work. Some of these new arrivals work in the real estate industry.
When foreigners investors are being told “all is well” with a villa purchased using nominee shareholders, all is clearly not well with the advice they are receiving. Any purchase through a Thai Company must be a trading company, not simply a holding company, in order not to fall afoul of the law.
Those conveying this message to buyers are some of the very same foreigners freshly arrived from overseas. There is also no guarantee that the people teaching them the ropes are clued up on the complexities of Thai property law.
In some cases, it truly is “the blind leading the blind,” and we are now at a stage where it is universally accepted by all newcomers that it is fine for foreigners to own land in Thailand.
The laws in Thailand can be complex, and some of them are not easy to understand or comprehend. For example, it is illegal to go out in public if you are not wearing underwear. That is an actual law, but we are not sure how it can be adequately policed.
Property ownership laws, on the other hand, are much clearer, and far easier to enforce.
Bad Luck / Bad Choices
As with any industry, when it comes to law firms, you get what you pay for.
Someone preparing for a camping trip, for example, knows they need weather-proof outerwear because the conditions they face will be unpredictable. When deciding what brand to buy, maybe they take the attitude “weather-proof gear is all the same” and choose the cheapest option. And maybe the week they spent in bed with the flu because their apparel was not truly wind or waterproof could have been avoided by spending a little more money.
Hiring a lawyer in Thailand is a little like that—you need one who can help you weather any storm, and it is usually the more experienced lawyers who can do this.
When Thailand saw an unprecedented boom in tourism, a boom in property sales soon followed. We’ve already discussed the solution that was presented to foreigners who wanted to buy a villa in Phuket (Thai companies with nominee shareholders), and we’ve already made it clear that this violated the law. But the advice was commonplace.
After 2006, most experienced law firms stopped recommending the use of nominee structures. This should be a relief to their clients because for the first time ever, the State Auditors Department, The Land Department, Board of Investment and Department of Business Development, the Crime Suppression Division (CSD) and the Department of Special Investigations (DSI) all appear to be cooperating with one another.
This unique example of multi-agency collaboration will make uncovering illicit land ownership a simple process. But those foreigners who have sought experienced legal advice for their property purchases should have no concerns for their own Thai companies.
A Change in Nationalities
The villas being constructed 20 years ago were, for the most part, being purchased by foreigners with Thai wives. These were predominantly Europeans, North American and Australians and a large proportion of these foreigners living in Phuket at that time had Thai spouses. It was (and remains) perfectly acceptable for a foreigner to purchase a villa or house in the name of a local spouse.
If anything, the restrictions placed on purchasing in the name of a spouse have lessened during that time. The same cannot be said for any other means by which a foreigner seeks to buy a villa.
Of the Russians and Chinese buying on the island (barely a blip in the tourism stats ten years ago), only a small percentage are married to Thais. But the sheer volume of properties being bought by these two groups (as residents and tourists) has once again put foreign ownership under the spotlight.
Foreign Demand for Villas
If it is illegal for foreigners to own landed property, then why are so many villas being constructed in the first place?
Of course, foreigners with Thai wives can always buy a villa in their wife’s name, and any foreigner making a Prescribed Investment under the Land Code Act or qualifying for the Board of Investment scheme can apply to buy land and build a house on it. It is also possible to own property if you have a legitimate Thai small business, but that is about it.
The easy answer to the question above is demand. Some foreigners who want to live out their retirement years in Phuket are happy to take a 30-year lease on a villa. Others, who want actual ownership, make use of Thai companies to buy a villa or a bungalow.
Whether as a leasehold, through a legitimate corporate arrangement, or by skirting the law, a certain segment of the foreign market in Phuket will always be drawn to landed property. As long as there is demand, new villas will continue to be constructed.
It’s Not Just One Law
Investigators in the capital can easily see through an illegal company structure, especially when working with the Department of Business Development (DBD), where the records of all current company shareholders, including foreign ones, are registered.
So in addition to all the laws being broken under the Foreign Business Act (FBA), the Civil and Commercial Code (CCC) and the Land Act, foreigners owning Thai companies should also be aware that as the director of a Thai company, they also have certain duties to carry out as an employee of the company. This requires a work permit, and working in Thailand without a work permit can carry hefty penalties.
There is also the issue of renting illegally, which subjects the foreigner to further penalties. And the enforcement of these laws is not one or the other, it is all of the above. This not only compounds the fines, but the active evasion of multiple laws makes the possible loss of the villa or investment all the more likely.
Some enforcement has already been reported, but if the current regime really gets laser focused on widespread illegal land and villa ownership, everyone hopes the issue is addressed with subtlety rather than force.
In A Nutshell: Loopholes Are For Archers
The word “loophole” originally referred to the arrow slits in castle walls (“loop” being an obsolete word for window). One theory states that the ability of children or small adults to crawl through the slit as a means of escape gave us our current understanding of loophole – a way to escape the law, or at least exploit its ambiguities.
Property law in Thailand, however, is unambiguous. Anyone who believes they have found a loophole to enable foreign ownership of landed property is simply ignoring those statutes which contradict their optimistic interpretation of the law. Leave the loopholes to the archers.
The rest of this section can be summarised fairly succinctly:
1. Get an experienced lawyer.
2. Always stay well within the spirit of the law.
3. Never forget numbers 1 and 2.