Except under special circumstances, foreigners or foreign juristic entities may not own land in Thailand, and are limited to ownership of 49% of condominium units as defined by the Condominium Act of 1999. As a result, a popular method for foreigners to take possession of property, either land or an apartment, is through a long term lease.
For stand alone detached homes, the foreigner will lease the land and is able to transfer the house (the physical building) to their name. For tracts of land, or apartments, either the formation of a Thai majority company, or a long term lease are the possible methods. With the recent restrictions on using Thai nominees as shareholders and directors however, taking possession of property through a Thai company has become more difficult and expensive. A long term lease in many cases is the preferred method.
Apartment projects can be sold either as freehold condominiums according to the Condominium Act of 1999, or sold through leasehold. More recently, many apartment projects are being sold as leasehold (long term lease) as this has tax advantages for the developer.
According to Thai law, Section 540 of the Civil and Commercial Code states that the maximum term for an unmovable property lease is 30 years. Any lease longer than three years must be registered with the Provincial Land Department to be valid. According to Section 540, at the end of the 30 year term the lease expires automatically and both parties must register a new 30 year lease. The practice in Thailand is to offer two additional 30 year leases for a total of 90 years through a separate contract often referred to as the “Addendum” or “Memorandum” contract, whereby the Lessor agrees to extend the contract for two additional terms of 30 years each,
In this extra contract, there are often other lease rights added which are not included in Section 540 of the Civil and Commercial Code. In addition to promising to provide the renewal contracts for a total of 90 years, other clauses can include the right to transfer the lease to freehold title if the Thai law changes, as well as the promise to assign and transfer the lease agreement to heirs if either party dies during the term of the contract. These additional clauses are considered personal contractual promises between the two parties in addition to the normal contract laws for leases covered in Sections 540 and 569 of the Civil and Commercial Code.
Attorneys have highlighted some of the risks to the Lessee in taking possession of property through the long term lease method:
1) Death of the Lessor – the possibility that the heirs will not renew the next additional term of the lease
2) Bankruptcy of the Company – in a lease with a company, the risk the property is transferred to the Bankruptcy Court into receivership
3) Death of the Lessee – the possibility the Lessor will not assign and renew the contract with the heirs of the Lessee
4) Sale or transfer of the underlying property – risk the new owner will not renew the additional lease.
Except for the case of company bankruptcy (#2) the additional “Addendum” contract to the long term lease can limit the risk by both parties agreeing the contract is passed on to their heirs, and prohibiting the sale or transfer of the property except by inheritance.
Since most apartment projects will have a company issuing the long term lease, it is thus important to perform due diligence on the company issuing the long term lease and acting as Lessor. The main risk that can not be covered by an additional contract is that of bankruptcy. However it does not affect the terms and conditions of the lease which has been registered. So the potential buyer (Lessee) should ask the following questions: How long has the company been in business? How long has it owned the land? Does it have an established track record for business operations? Is the land fully paid for? Has the company paid for all its taxes and financial obligations to date?
If these questions can be answered satisfactorily then the risks of a long term lease can be reduced dramatically.