The Attractions of Buying a Leasehold Villa in Phuket
Not only does a detached villa give a foreigner the home in the tropics they’ve always dreamed of, but many Phuket villas provide some of the best rental yields, especially those situated close to the west coast beaches. During peak season it is almost impossible for any villa in Phuket to remain empty. Those on the west coast tend to be 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 Phuket villas have excellent rental potential.
When it comes to generating a great return on investment, a detached villa is the preference among most foreigners, not least because, during the few weeks the owners themselves spend on the island each year, it also offers them a peaceful, private pool villa in which to relax. You can be certain that any villa will meet your exacting standards both inside and out because a lessee has the full say-so on decoration and landscaping. And with a well maintained pool villa, it is relatively easy to find both shorter-term holiday rentals, as well as longer-term monthly tenants all year around.
As mentioned above, if the best legal advice is sought, a villa can also be a solid income producing asset, as well as a sound investment. To ensure that your property is both, it is absolutely vital that you use a good lawyer when finalising the lease contract. If structured correctly, and with the cooperation of the owner/developer, the lease can be sold on to any interested buyer and the buyer would have the right to convert the lease to a freehold, in the event that any new future buyer is a Thai juristic person. A leasehold may not be fully titled ownership, but it does offer domain over the property for the duration of the lease. Furthermore, most lessors will offer to renew the leasehold after the initial 30 year leasehold in Phuket, giving a lessee the prospect of longer-term ownership.
Most leases are pre-paid, insofar as the lease purchase price equates to the price of the villa, including consecutive renewals up to 90 years. This seems to have become an accepted means of extending/renewing a lease, and it obviously makes it easier to promote a leasehold villa, but there are questions as to how it can be enforced from a legal perspective. While a good leasehold contract will always include a clause that states that the lessee has the option to renew their lease after the initial 30 years, guaranteeing that renewal upfront or prepaying a lease for 90 years is not strictly legal.
The Financial Logic of a Phuket Leasehold
Although the concept of a leasehold villa may not sound appealing to some buyers, the financial case for a 30-year lease can certainly be made. (When you consider the fact that the villa may be sold as a freehold at any time to another buyer, such as to a Thai national or a Thai Co. Ltd., the case becomes even stronger.)
The only options for anyone wishing to live in a villa in Phuket for the long term are renting, leasing for 30 years or buying freehold through the establishment of a Thai company. There is certainly an argument that a leasehold is the safer option.
When comparing leasing to rental, 30 years is a long time, and rental prices are only going up. Luxury villas in Phuket fetch top dollar prices, even on a monthly or yearly basis, and the cost of a leasehold can pale in comparison to renting over a 30 year period.
The initial cost of a leasehold could save a great deal of money over the long-term for someone who is intent on staying in Phuket, and wants to live in a villa. And because a lease is paid up front, the lessee shields his/herself from the effects of inflation as the cost of villas on the island steadily climbs.
When you also consider the year-on-year increases in rental rates, this also benefits the individual who plans to rent out their villa, as they will see steadily increasing income. In the next 15-20 years, the rental rates on a luxury Phuket villa could easily be double, if not treble from what they are today.
If you compare leasing to buying freehold through a Thai Company Limited, there is an argument to made for either. But buyers must contemplate the repercussions of buying freehold through a wrongly-formed Thai company.
A foreign lessee, on the other hand, is on a more solid legal footing because of the right of “exclusive possession” mentioned above. Both the foreign lessee and the foreign company owner may view their villa as a long-term income-producing investment, but only the lessee can be certain that the asset is theirs to rent for the next 30 years.
When you further consider that the cost to register a leasehold is only 1.1%, the financial logic for leasehold villas in Phuket becomes even clearer.
Other Types of Leasehold Property in Phuket
Although Phuket’s private pool villas are one of the most popular types of property purchased by foreigners utilising a leasehold legal structure for ownership (discussed above), some long-term residents (and even investors) are also interested in condominiums and apartments. These have a lower price tag than villas, making them available to more potential lessees.
Leasehold Condominiums in Phuket
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 developer (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 one of Phuket’s many freehold condominium options instead.
If you are absolutely in love with a specific Phuket 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 villas, it can prove to be cheaper than paying rent for 30 years. If structured properly, it might also offer an extension, or be transferable to a new owner.
But the key word here is might. If you carry on reading this section you will understand the potential pitfalls of a leasehold condominium. The biggest problem for leaseholders in the future is their perception of what they actually “own”, or as the case may be, don’t own.
Some foreigners think it is more or less the same as owning a freehold Phuket condo. With a leasehold condo, they believe they have “bought” something akin to a UK leasehold. But they don’t have 999 years of ownership. While they have may have been offered lease extensions up to 90 years, those 90 years are also not guaranteed.
Because of these misconceptions, people think their leasehold is a saleable asset for the next century. With the cooperation of the freeholder/landlord, it may one day be transferable, and you may even be able to sell it. But it is best to think of a leasehold as a long-term rental.
Viewing a leasehold as a 30-year rental with the possibility of future extensions will prevent the misconceptions from skewing your understanding.
You can read more about using a Thai corporate structure to buy a leasehold condominium here:
Using a Thai Company Limited to Purchase a Leasehold Condo Unit
Phuket Apartment Leaseholds
Unlike Phuket condominiums, whereby you have foreign freehold ownership of some units, with the balance being leasehold or sold to Thai nationals, 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 a Phuket apartment built since 1979, you really need to ask yourself why the developer chose to structure it as an apartment, rather than a condo.
SUMMARISING THE POSITIVES OF A PHUKET VILLA LEASEHOLD
Because the options for a foreigner to purchase landed property in Phuket, such as pool villas are limited, it is certainly easy to view leasehold as a “glass half full” solution, especially when the closest alternative requires the extra step of forming a properly-structured company to remain within the law. Although a leasehold isn’t perfect, it does provide most of the ownership benefits that foreigners seek when investing in a Phuket property.
In fact, owning a leasehold has many advantages and attractions, which include:
- Foreigners can live in any Phuket villa of their choice
- It is a 100% legal means for a foreigner to have undisturbed possession of their villa
- With a cancellation clause the lease period may be restarted for a potential buyer
- It may be resold as a freehold to a Thai national or a Thai Company Limited
- If the lease contract is structured correctly, leaseholders will have the same sense of ownership as freeholders
- Writing a lease in multiple names (including children or grandchildren) can ensure succession, and that the lease is used to its full term
- Leaseholders of Phuket villas can avoid inflation and steadily increasing rental prices
- Leaseholders have full control of the villa’s interior/exterior design, including garden landscaping
- A foreign lessee of the land may own any buildings or other structures they build upon that land
- Rental income from villas in Phuket is far superior to that of condominiums
- A leasehold villa can also obtain a hotel exemption, and legally offer short-term rentals (this approval is more complicated with a condominium)
- Closing costs are low, i.e. leasehold registration is relatively cheap
- Lessees may receive further renewals after the initial 30 year term
- The legal interest in a lease can be sold on to a third party
- The purchase option allows lessees to take advantage of any change in ownership laws (should they occur), and allows for greater flexibility in resale
- A leasehold may become a “Special Reciprocal Contract” (more on this later)
What to Look Out for With Phuket Villa and Condo Leaseholds
Most villa and condo 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 in Phuket. 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 Phuket, 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 Phuket 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 the 1st 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 a competent 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 a Lease in Phuket
It is essential that any lease agreement longer than 3 years be registered with the Land Department. Since most leases for Phuket 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 of the original lease.
If a lease longer than 3 years has not been registered at the Land Department, however, the new owners are not even obligated to allow the lessee to keep living there. The tenant, because that is what they are, could effectively be evicted after 3 years.
Promises, like an unregistered lease, do not hold up in court. A new owner is not obliged to fulfill any agreement, verbal or written, made by the past owner. The lease may be protected, but any consensus reached with the former owner to renew the lease after 30 years will now be at the whim of the new owner. This highlights the importance of a cancellation clause and putting the lease in multiple names, both of which are touched on below.
What Olaf Says About Leasehold Property In Thailand
“Lease” Does Not Mean “Own”…
As foreigners are by and large prevented from owning landed property in Thailand, it is common for them to enter into a lease agreement for a property as an alternative. But leasing is not owning, and it is important to understand the distinction when it comes to property. When you leasing a property you are effectively “renting” it, subject to the terms of the lease contract agreed with the actual owner of the property. While it is generally a long-term arrangement, violating any of the clauses in your lease may be grounds for terminating the lease and evicting you from the property.
A lease is essentially a contract to utilize a product – in this case a property – in exchange for payment. But how long is a lease? It is an idiosyncrasy of Thai real estate law that the term of a property lease may not exceed 30 years, although it is possible to renew the lease through the insertion of a “renewal clause” in the lease agreement. However, and this is another crucial quirk of the law in Thailand, only the original owner (or lessor) is bound by the renewal clause. If the lessor were to change during the lease term (e.g. the owner dies, the company sells the property to a new owner or goes out of business, etc.), the new owner shall not be bound by any renewal clause signed by the original owner.
In other words, a typical real estate lease in Thailand, even if it contains a clause for renewal, is not a secure long-term investment. To make up for this, there are developments which promote “collective leases” (also called “secured leases”) to foreigners. The security, however, is questionable because, as mentioned above, leasing does not mean own.
…and a Building Permit Is Not Ownership
You have probably heard someone say that they own a building because they have their name on the building permit. Hopefully you will not be that misinformed person one day.
While a foreigner typically may not own land in Thailand, they are able to own a physical structure like a villa. It was once commonplace for developers marketing real estate to foreigners to sell the notion of villa “ownership” by committing to the issuance of a building permit in the foreigner’s name. It is pure speculation on our part, but the purpose of this could have been “tax planning” by the developer (a seller does not incur any real estate transfer taxes for selling a building permit).
What is not speculation is that owning a building permit in your name achieves nothing for you as a foreigner. A building permit is government authorisation for you to build a structure (itself subject to approval) on a specific plot of land within a specific time frame. That’s it. Nothing more. While it may not be as common today, you may still encounter people (even developers) selling the idea of a building permit as ownership.
STRENGTHENING THE LEASE CONTRACT
Certain clauses should be standard in any Lease Agreement. But without the proper legal advice, a foreign buyer may not manage to tick all the pertinent boxes to protect their investment.
Purchase Option
If the land owner or estate manager agrees, it is advisable to have a “Purchase Option” written into the lease for the Phuket 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 and the villa and land in their own name. It would be foolhardy not to include this relevant clause in the lease contract, however unlikely this outcome may be.
Cancellation Clause
Insisting on a clause to allow the cancellation of the lease may sound strange, but there’s a very good reason for it.
Imagine a foreigner has held a lease on a villa in Phuket 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 villa. Any prospective buyer can look forward to the full 30-year lease, meaning the lease on the villa is sold at market value.
A cancellation clause is only enforceable against the original lessor – whether an individual or a corporation – so if the freehold ownership changes hands, the new owner does not have to honour the clause.
There is a fee for re-issuing a lease, but this may be shared by both the current lessee and the new buyer. There may also be an additional tax burden on the developer in the event a new lease is generated (owing to a further 15 years of income being added), and this could form part of the terms of any cancellation clause.
Furthermore, if the House and Land Tax mentioned previously has not been paid, it will not be possible to re-register the lease at all. And whether or not the lease ever does get registered in the name of a new owner, the local district office will be thanking someone for the back taxes.
Sub-Leasing Clause
If a lessee would like to sublet their property, there is nothing wrong with this. In fact, many foreigners who take out a 30-year lease on their villa in Phuket – 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.
Assignment Clause
As with any clause or addendum on a Phuket lease agreement, the cooperation of the lessor is necessary to assign the lease to a new lessee, and it must be included in the original agreement.
Arbitration Clause
Arbitration is a process by which the parties in a dispute can have their arguments heard by an independent body, without the need to go through potentially lengthy court proceedings. Foreigners have been allowed to serve as arbiters in Thailand since 2000, and individuals may also be represented by foreign lawyers at arbitration proceedings.
Thailand has been following The United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration since 2002, which ensures that the ruling of the arbiter in such cases is internationally observed.
Arbitration proceedings may take place in any language, and there is no requirement to have documents translated into Thai (as is the case in Thai courts). While mediation is potentially less costly, in arbitration the parties are the masters of their own procedure, and the arbitrator is free to award a settlement 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 Phuket 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 villa 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 villa because the new landlord is effectively allowed to repossess it.
Any lease agreement drawn up for a villa in Phuket, 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 villa, or even to sell the lease.
Leasehold Phuket Property and Succession
This has been touched on already, but a quick summary of inheritance law for leasehold villas in Phuket is quite important.
In Phuket, 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 their villa 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 villa is not bound by the succession clause.
On the other hand, should the lease be deemed a Special Reciprocal Contract (see later from Sam Fauma), 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 Phuket villa lease agreement.
These 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 on a villa in Phuket.
Usufruct in Phuket
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 Phuket 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 pool villa or any other property in Phuket, 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 in Phuket?
Usufruct is often mentioned as an ideal way for foreigners to possess a leasehold for life in Phuket, 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 standard 30-year lease on a Phuket property, 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 heirs, making it only valid for the life of the usufructuary.
If the buyer is able to take advantage of a usufruct in Phuket, 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 in Phuket
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 Phuket, you may want to read our article below:
Buying or Leasing Land in Phuket
And if you’d like to understand a little more about Phuket’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).
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 Phuket, 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 Phuket has no automatic right to ownership of any villa or house sitting upon that land. The legal ownership of any 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 in Phuket, with a view to building a lovely pool 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 of villas in Phuket almost certainly receives reams of documentation and shiny brochures before they agree to a lease contract. In most 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 this right in Phuket in the first place. Although the registration of superficies by foreigners in Phuket 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 Contracts in Phuket
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 villa. Only the person named on the habitation contract has right to inhabit the property.
A habitation contract gives a person the right to use a Phuket villa, together with their 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 Phuket.
It is very common in Phuket 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 “servitude”. While the name may suggest the lessee is being forced to do yard work for their new neighbour, have no 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 Phuket 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 Phuket, 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 Phuket 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.
If you would like to learn more about Special Reciprocal Contracts, you can read our article on the subject here:
Understanding Special Reciprocal Contracts in Thailand Leaseholds
Finding a Phuket Villa with a Secured Lease
A structure known as a “Secured Lease” (also known as a Collective Lease or Protected Lease) is a novel ownership vehicle for anyone aiming to buy a villa in Phuket. 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 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 villa resorts in Phuket now structured using a secured leasehold 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. And this structure isn’t just appealing to foreigners. Many secured leasehold luxury villa projects in Phuket now also have many Thai owners using this structure.
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 is set up in compliance and adherence to Thai law and how the resort handles its owners.
The risk a buyer may run 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.
However, for the most part, and as long as all parties are happy, and no issues with this leasehold structure ever find their way to court, these secured lease developments are likely to continue.
But if one may be challenged at some point in the future, what happens in the end will 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 a Phuket 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, and Phuket. 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.
The Expiration of 30-Year Leaseholds in Phuket
The vast majority of people who take out a leasehold in Phuket are under the impression they have bought a tangible long-term investment asset.
While most developers do their best to make sure that buyers are aware of their legal standing under a 30-year lease, many buyers believe they are being guaranteed two or three renewals (for a total of 90 or 120 years), and they believe they can sell their lease whenever they want to, as would be the case in other countries. This may be the case provided they never find themselves in court.
The first 30 years are written in indelible ink, but any further renewals/extensions are written in pencil. While it is possible, there is no automatic guarantee that either the sale or extension of a lease can be enforced, as both are dependent on clauses agreed by the original owner. To sell a leasehold, the freeholder (owner or developer) must agree to restart the lease period for any new buyer. If the freehold owner has changed, and the new owner balks at this, some unfortunate lessee will see their extension request denied. This may not be a major worry for the Phuket property market now, but at some stage in the future it could be a key driver for new buyers. Many people who purchased a Phuket condominium in the last few years opted for a cheaper leasehold unit rather than the freehold equivalent, mainly because they did not understand exactly what they were spending their money on.
Sam Fauma of ILO has been in Phuket since 1989, which is nearly 35 years now, has assisted clients with Lease Extensions.
Here’s what Sam has to say:
Buying and Leasing Property in Phuket Articles
SECTION 8: Buying a Foreign Freehold Condominium in Phuket
Condominiums are the safest way for foreigners to purchase real estate in Phuket. Condominium law allows 49% of the living area in each condominium project to be sold to foreigners as foreign freehold. Foreign freehold ownership means the foreigner will own the condo unit in perpetuity i.e. forever. This ownership is registered at the local Phuket Land Department. If a foreigner is considering buying property in Phuket, then this article explains everything you'll need to know, and why a Phuket condominium is the best option!!!!
SECTION 9: The Option of a 30-Year Leasehold When Buying a Villa in Phuket
We do not necessarily dispute the concept of a Phuket leasehold, however, anyone entering into a Phuket landed property leasehold, must be aware of all the risks associated with this type of legal arrangement. A leasehold in Phuket is very safe, in the sense that it guarantees you a 30 year lease period, but any term over and above this initial 30 year period must be viewed as a mere verbal promise. It is not guaranteed. It is simply a verbal guarantee to extend the lease for further renewals, but if denied, it is questionable whether it will upheld in a court of law in the favour of the foreigner.
SECTION 10: Using a Thai Company Limited To Own Villas, Town Homes and Landed Property in Phuket
It is possible for a foreigner to own a Thai company in Phuket, if the Thai company is adhering to all the corporate laws of Thailand. However, if that Thai Company owns landed property, there are other implications. A company set up with the sole existence of owning property for a foreigner, with shareholders, who have not invested in the Thai company, and who the foreigners does not even know, are deemed as nominees. This is illegal. All foreigners entering a sale and purchase agreement in which they either transfer ownership of shares of a Thai Company Limited, or set up their own Thai Company must know these rules and the laws governing Thai companies, and the legal implications of their company owning land in Phuket.
SECTION 11: Evolution of the Phuket Property Sector – Why So Many Foreigners Own Villas Illegally
Foreigners in Thailand are not allowed to own land. However, over the last few decades, it has been commonplace for foreigners to set up a Thai company, which allows them maintain control of the company which owns the physical land. This is all fine, if done correctly. It really depends on whether the Thai company is adhering to all the corporate laws of Thailand, and if everything is done correctly, such as the company having legitimate Thai Shareholders. If everything is set up correctly, it may be acceptable to the authorities. This section explains why and how so many foreigners today are blatantly violating Thai laws, and for the most part, most have no idea they are doing so.
SECTION 12: An Overview On The Thai Baht
When any foreigner invests in Phuket property, they are also exposing themselves to the Thai currency. Any fluctuations in the Thai Baht to, obviously affects their investment value, depending on how the Thai Baht strengthens and/or weakens against their home currency. They make gains if the Thai Baht strengthens, yet they make losses when the Thai Baht weakens. However, the situation is different for buyers, who may hold off on a purchase should the Thai Baht get too strong. Currency fluctuations play a major part in the Phuket real estate market dynamics.
SECTION 13: Transferring Money into Phuket
If transferring money into Phuket to purchase a Phuket property, it is important to seek legal advice. Many foreigners make the mistake of transferring money into Thailand and then later finding out they can’t purchase the condominium (or building) without sending the money back out of Thailand again and sending it back in to get the correct documentation. This happens quite frequently, because many foreigners decide to move to Phuket without understanding the laws and procedures. This is especially the case with a condo purchase, as it is important to understand how important the FETF is when registering the condo in the buyer’s name, as well as repatriating the funds back the buyers home country upon sale.
SECTION 14: How Low Are The Fees And Taxes When Purchasing Phuket Real Estate?
Government fees and taxes are low in Thailand compared to most other countries. In fact, they are some of the cheapest in the world, which is a big attraction to potential Phuket property buyers. Although taxes and fees are easy to understand, they depend on the given situation, legal structure, and whether it is a new build or a resale condominium unit or a villa. A reputable lawyer will be able to ascertain the taxes due on any property purchase.
Social Contact