30+30+30 lease contracts deemed illegal by Phuket courts

Leasehold contracts in Thailand have been generally accepted by foreigners as an alternative means to purchase houses, villas, town homes, land or even small islands. Even “Thai freehold” units in condominium resorts, only available to foreigners as leaseholds, are still in demand.

But is a Thailand leasehold really the best decision you can make?

Most people who have visited Thailand, and certainly everyone who lives here, know that foreign nationals are unable to own land in the Kingdom.

The Land Code Promulgating Act, B.E. 2497 sections 86 to 96 spell out Thailand’s laws on aliens (foreigners) owning immovable property in Thailand.

Because a building is technically movable by dismantling it or demolishing it, “immovable property” refers to the land. A plot of land cannot be picked up and moved somewhere else.

The law makes it very clearly (both implicitly and explicitly) that land cannot be owned by a foreigner. The villa or house which sits on that land is another matter altogether. These are movable, and foreigners are allowed to own movable property.

Understanding Freehold Versus Leasehold in Thailand

Freehold property is an easy concept for most people to grasp. You receive a title deed in your own name, registered at the local Land Office. You own it forever and you can pass it down to your children or even your grandchildren.

Freehold is a simple form of ownership with no ambiguity. Leasehold, on the other hand, varies from country to country in its interpretation.

In some countries, such as the UK, leaseholds can last as long as 999 years, which most people consider to be essentially permanent. When a leasehold does expire, renewing it is generally simple and done at a minimal cost. The government of China, for example, is expected to just renew 70 year leases when they expire.

In Thailand, it is a little different. In fact, it is technically just a lease, rather than a “leasehold”. Here the lessee rents from the owner for a maximum period of 30 years.

What Exactly is a Leasehold in Thailand?

The lessee in Thailand never owns the land. While a Thai lease agreement extends the right of “exclusive possession,” it does not accord the same sense of ownership one receives in the UK or China.

In Thailand, you are simply a tenant, renting the land from the owner. Just like a tenant paying monthly rent on an apartment, you have zero ownership rights.

30+30+30 Lease Periods for Thailand Villas?

If someone is contemplating the purchase of a villa in Thailand, they have some choices to make as to how they go about this.

Some people set up a Thai Company to purchase the land, but if this is not done correctly, it leaves the foreigner criminally liable.

They could also own the building (movable property), and lease the land (immovable property). But the maximum timeframe for the lease on the land would be 30 years.

To overcome this relatively short timeframe, villa developments offer buyers additional renewal periods, usually two periods of 30 years each. These periods are prepaid, and therefore included in the sale price.

But while the renewal for up to 60 years is prepaid, it is far from guaranteed. It would probably make more sense for the sale price of a villa to be based on a 30 year timeframe. Prices would then be one-third of the current cost, and when the villa reverts back to the developer/owner after the 30-year lease has finished, the lessee can purchase a new lease if they wish.

But over the last 20-30 years, it has become commonplace for developers to offer prepaid 30+30+30 leases at the full sales price. It has now become universally accepted that everything is above board with this method.

Although additional 30 years are not guaranteed, it is worth noting that there is a way that villa renewals can be legally enforced through “Special Reciprocal Contracts”. But this is only possible when material improvements to the property are made, such as a villa having been constructed on a plot of land that has been leased for a period of 30 years. There are even many Supreme Court rulings on this subject that say that such improvements or upgrades on the said property can help to enforce further renewals.

What About 30+30+30 For Thailand Leasehold Condominiums?

With condos, foreign buyers in Phuket have the option of choosing a freehold title which, as mentioned above, is perpetual ownership and an easy concept to understand.

However, under the Condominium Act, only 49% of any condominium project may be sold to foreigners as freehold. The other 51% of the unit area in every condominium in Thailand must be owned by Thai nationals.

Over the years, developers have taken different approaches to utilise or sell the 51% quota designated for Thais.

Some have simply retained ownership of these units and rented them out to holiday makers to generate an income. (They can do this because the development company is necessarily a Thai entity.) This has been a good strategy for many developers because of the rapidly expanding tourism sector in Phuket.

On some projects, especially from renowned Thai developers, they were able to sell all the units to Thai nationals. There is a growing middle class in Thailand and many Thais buy condos for investment purposes. But for the most part, Thais only buy from Thai developers that are established and respected brand names in Thailand.

Most foreign developers, on the other hand, have struggled to offload “the 51%” to Thai nationals. They have instead opted for a different approach. The easiest way for them to sell the Thai proportion of units is to find other ways to market them to foreigners.

Some foreigners have purchased “Thai freehold” units by using a Thai Company Limited. This can make perfect sense, especially if the buyer has a legitimate, established business in Thailand. Because they are buying a Thai freehold, this means that company can own the condo in perpetuity, in the same way a Thai national would.

But there is another alternative. The Civil and Commercial Code (CCC) allows these units to be sold to foreigners as a lease contract.

This is acceptable because, as mentioned above, a developer must be a Thai Company Limited. Being a Thai entity, they may sell a lease to a foreigner, while actually retaining ownership. They continue to satisfy the 51%/49% requirement for a condominium, while monetising the 51% they were unable to sell to Thai individuals.

And in the same way villa buyers are offered automatic renewals after the initial 30 years, leasehold condo buyers are generally offered this same deal.

Again, as with villa sales, these 30+30+30 lease agreements have become universally accepted means of attracting foreigner buyers.

But Is the 30+30+30 Leasehold Legal in Thailand?

Buyers of lease contracts must be aware that the maximum lease period in Thailand is 30 years, and any renewal beyond 30 years is at the discretion of the landowner/freeholder.

Renewals are nothing more than a promise from the landowner, and cannot be contractually stated in the sale and purchase agreement. And while the willingness of the landlord to renew the lease may be written into an addendum, it is not contractually or financially guaranteed by the pre-payment.

When a foreigner buys a leasehold villa or a leasehold condominium, the payment therefore only legally covers the first 30 years of the lease. A prepaid 30+30+30 lease – even if there are 3 equal payments to represent 3 different lease terms – is unlikely to hold up in front of a judge.

So What if Your Case Ever Ends Up in Court?

Unfortunately, on more than one occasion, the Phuket Provincial Court has ruled that 30+30+30 contracts are not only unenforceable, but also illegal.

Furthermore, Supreme Court judgments in Bangkok have stated that the renewal of a lease may only be done within 3 years of the expiration of the 30-year lease period.

Judges have repeatedly said automatic extensions violate the law and that such contracts are akin to foreign ownership, which is illegal. Recent rulings have also reaffirmed that, because it is illegal to contractually guarantee the renewals, the contract for the initial 30 years is likewise void.

Even if the 30-year lease was duly registered at the Land Office, once it has been declared void it is as though the lease never existed in the first place. The leaseholder who thinks they have purchased a home for 90 years instead winds up with nothing.

It must be stressed once again that decisions made in courtrooms depend on the case in question, political winds blowing at the time and the individual judge handling the case.

However, based on court rulings over the last few years, it appears very obvious that if a judge sees that there is any contractual agreement or perhaps even in an addendum to extend a lease for a further period at onset, he will likewise deem this de facto freehold ownership and could possibly void the entire lease contract.

Conclusion

This is obviously extremely worrying for foreigners who have purchased property in Thailand and entered into a long-term lease agreement. These owners (tenants) should do everything they can to avoid any misunderstandings or conflicts with the developer which may at some stage end up in a court of law and in front of a judge.

One way around this would have been to ensure that any sale and purchase contracts included an arbitration clause. This would allow any disputes to be settled via arbitration rather than in a local court, provided the developers remains the same when that dispute arises.

New buyers need to think very carefully before entering into a 30+30+30 lease agreement. If you are buying a condo, it is advisable to choose a foreign freehold unit over a leasehold. While there is premium to pay for freehold, the cost is well worth the avoidance of legal hassle.

If you are only interested in buying a house or a villa, you may consider setting up a Thai Co. Ltd. to own it. But you must ensure that your company is 100% legally compliant, meaning it operates as a business, adheres to all corporate laws of Thailand, generates revenue, and pays taxes.

Anyone who enters into a leasehold agreement in Thailand must understand that they do not own anything. They are effectively only renting.

Any attempt to transform a lease into a form of illegal ownership violates the spirit of the law. And when the spirit of the law is threatened, judges in Thailand will pass the same verdicts. Every time.