Four Pitfalls Of Long Term Land/property Leasing

[SiamLegal]

FOUR PITFALLS TO AVOID IN LONG-TERM LEASING OF THAI PROPERTY

As most of you know, the process of land ownership by foreigners through companies formed for that purpose has come under scrutiny by the Thai government and most lawyers are recommending leasing properties under long term lease contracts as a current alternative. We have recently been seeing many of these contracts signed without proper title searches or due diligence and with omitted legal clauses which seriously restrict the rights of the foreigners leasing the property. Here are four major property leasing errors which occur all too often:

1. No Title Search

A comprehensive examination of the title deed recorded at the Land Department should be done prior to placing of a deposit or signing of a reservation agreement. You need to verify that the Seller has clear and legal title of the land before you enter into any contractual agreement. The title search will trace the land to its first possession. This investigation will also verify zoning, environmental and planning codes in the area. Moreover, any mortgage, liens or encumbrances will be discovered during this process.

There have been a number of cases where foreign buyers have leased property only to discover later that they are restricted in terms of structural height on the land therefore rendering the land virtually worthless. This is especially true for beach resort communities where there are height limitations closer to the beach. The title search may also reveal that road/utility access to the leased land has not been registered on the title.

This is the number one pitfall since a title search can be completed within 48 hours of your decision to lease. Failure to conduct this step is a grave error and could be fatal to your plans to build your dream house on that wonderful piece of property.

2. Failure to Conduct Due Diligence

Every financial transaction requires some sort of due diligence on behalf of the purchaser to verify that it is a sound investment. When you purchase shares of a listed company in the stock market or a mutual fund you will generally research the profile and performance of the company or fund. The same is true when you lease a property from a developer. You should check with the previous buyers to see if they are satisfied with the quality and time frame of the construction. If you don't have time to spend on checking the history of the developer, a local lawyer near the development will know or can check the project, who their directors are and their performance history.

3. Not Properly Safeguarding a Deposit

Sellers and agents obviously want to sell properties. When you have found the ideal property and you are satisfied that it will meet your expectations, the usual process in a transaction is to put down a reservation fee or an earnest deposit. In return, the seller or agent will reserve the property for you and begin the process of drafting the contracts for the acquisition. This is normally a nominal amount and should, in good practice, be fully refundable.

This is not always the case as sellers and agents sometimes keep this fee for the opportunity cost involved while the property was reserved. Unless you specifically draft an "exit" clause in the deposit agreement, for example "subject to a clear title" or "subject to agreement on contract terms," the money deposited is non-refundable. Exit clauses can be items of fundamental importance such as 'subject to clear title; or 'subject to a new title deed being issued' and so on.

4. Leasing Without a Lawyer

It is possible for individuals to lease a property in Thailand without the services of a local law firm. This may be risky unless you are familiar with the country, the language and its legal system. Contracts in Thailand do not always adhere to the international standards that we are used to back home and may seem quite unfamiliar to us.

Long term property leases in Thailand can legally be registered for an initial thirty year period with contractual options for two thirty year renewals. A properly drafted contract will include the appropriate language to ensure, to the extent legally possible, that the renewal options will be honored by the owner. In addition a clause should always be included allowing the person leasing the property to obtain full ownership rights or change the property ownership structure if future changes to Thai law offer more beneficial ownership rights to foreigners. The contract should also properly allow for your assignment of the leasehold to another party should you wish to do so in the future. The contract the seller presents to you is still a part of the property acquisition negotiation and will often not contain these crucial legal clauses

Edited October 25, 2007 by SiamLegal
Email address removed as per forum rules.

[BL4u]

Long term property leases in Thailand can legally be registered for an initial thirty year period with contractual options for two thirty year renewals.

The main pitfall of leasehold is of course that property sellers are suggesting 90 year leases. Can you, as an American attorney, please explain why 2 renewals are possible under Thai law. Why not 3 or 4 renewals? If Siam-Legal has good lawyers working for them you must be able to explain where the 2 renewals origins from.

[cclub75]

he main pitfall of leasehold is of course that property sellers are suggesting 90 year leases. Can you, as an American attorney, please explain why 2 renewals are possible under Thai law. Why not 3 or 4 renewals?

If Siam-Legal has good lawyers working for them you must be able to explain where the 2 renewals origins from.

Indeed.

The debate has always been 30 years + 1 renewal.

And even with this debate, nobody agrees.

A lawyer will tell you : yes you can, look at my standard agreement.

An honest man will tell you : yes you can on... paper, but unfortunatly this scheme was never proven legal inside a thai court...

So now, i'm a little surprise to see Siam trying to sell the idea 30 + 30 + 30 !

[JimGant]

An honest man will tell you : yes you can on... paper, but unfortunatly this scheme was never proven legal inside a thai court...

As I understand it, if the original lessor still owned the land at renewal time, any contract you had with that lessor about renewal should be valid. But, if the lessor has died or sold the land (ie, new land owner/lessor), there is now no enforceable 30-year renewal clause, as this orginal contract has no carryover value with a new owner.

But, have not heard of any test cases concerning 30-year lease renewals.......

[JimGant]

Long term property leases in Thailand can legally be registered for an initial thirty year period with contractual options for two thirty year renewals.

I didn't think the renewal options could be endorsed on the chanote. At least our Land Office wouldn't do it (or maybe advised against it) since he said the renewal options weren't enforceable.

Essentially, you can have two contracts. One with the lessor that can be as flowery as you want, with clauses about renewal, subleasing, blah blah blah. The second contract is the one endorsed on the chanote, which simply says you've got lessee rights for 30 years from the date of endorsement. If, per the flowery contract, you're allowed to renew 30 years down the road, you once again go to the Land Office and get a new endorsement on the chanote. (Again, because endorsements can only be for 30 years -- not 60 or 90.)

But, I'm no legal expert. Just going with my personal experience/understanding.

[Khun Jean]

But, if the lessor has died or sold the land ....

Another thing to think about is:

What will the land be worth 30 years later, would you be able to afford to extend it even if the landlord is willing, and of course he is willing for the right price.

I don't think a landlord will be stupid enough to sign a contract with a fixes lease price 30 years later. And if he did he would probably transfer the land to his son/daughter/wife/whoever to correct that mistake.

A 30 year lease is only valid for businesses that can make enough profit in that timeframe, or a person that is probably to be dead ( Hopefully a natural one) within the next 30 years and has no relatives that would benefit from a will.

For all others it is a very fast depricating asset, i would not even call it an asset.

I personally would go for a 3+3 year lease and forget about the idea of "owning" land in Thailand. If you have a Thai spouse then there are other options, but that involves a lot of trust.

A usufruct seems to be the choice now, buit i thought it was mainly for agricultural use of the land. But i have been mistaken before.

Any lawyer that mentions "30 + whatever" is in my eyes not capable of giving advice. This firm will not be on my very short list of capable law offices. I would call a not capable lawyer pitfall number 5.

Edited September 12, 2007 by Khun Jean

[Solosiam]

Title is misleading in the title but not in the article.

Isn't this just an advert?

[cclub75]

Isn't this just an advert?

Surely. But a very bad one !

[SiamLegal]

My goal in publishing these articles and responding to emails and comments is to provide forum readers accurate legal advice to the extent possible. My hope is that by doing so some may choose to engage my services and I will make some money for my efforts, but that shouldn't diminish the value of someone with access to accurate information sharing it on this forum.

I'm not trying to "sell" the idea of thirty year renewal options although I can see how you might read it that way. I'm just pointing out that a properly drafted contract offers the best possibility of ensuring that your contractual right is granted at the end of the initial thirty year registered lease. The contracts offered by sellers are often worded so poorly that they don't stand a chance in a Thai court if the landowner must be sued for breach. I agree that its hard to determine how the law will be changed and interpreted in the next 30 to 60 years, but the contractual lease renewal options are what we have to work with now, so let's do them as well as possible now and minimize risk as much as possible.

Each individual's needs, circumstances and risk levels vary and the best a lawyer can do is work with what's available to the client to find a proper fit. For some that may mean a usufruct, a lease etc. Future articles will deal with other property control options. In all cases I try to provide the client with up to date information about different property control options and the best fit and risk assessment of each option I can.

I fully understand the suspicion that a lawyer is just someone trying to sell a product whether its needed by the client or not. I'll just do my best for a while to provide accurate information on this forum and see how it works out.

[Khun Jean]

Define the word accurate!

What i read is INACCURATE!!. Time to go read some law books i would say.

I think this is a good way to let people know that your advice is false and only serves you to make money over the backs of people who put there trust in you.

Let me ask you, would you pay for a 30+30+30 lease. In that case my wife has some nice pieces of land for sale, eh i mean lease. We, eh i mean she, will do it with whatever you write in the contract.

30 years is only 15 million. And the first extension after 30 years is only 150 miljoen. The third extension is a little bit unknown because it is far in the future , but we can write in the contract that she will not ask more than 300 million. That sounds about right? You know with appreciation and inflation and all.

But only under the condition that she gets to be 128 years old. Otherwise you will have to talk with my son or daughter.

DEAL?

[SiamLegal]

The way I would purchase a 30+30+30 lease is by doing my best to determine the risk that I would not be able to execute the renewal options, learn everything I could about how to minimize the risk and then bid on the property accordingly and that is what I advise my clients.

I can tell you feel really strongly about this. What do you suggest as a better option?

[Solosiam]

The way I would purchase a 30+30+30 lease is by doing my best to determine the risk that I would not be able to execute the renewal options, learn everything I could about how to minimize the risk and then bid on the property accordingly and that is what I advise my clients.

I can tell you feel really strongly about this. What do you suggest as a better option?

Has a 30 year lease EVER been renewed yet?

The land office will tell you categorically that you can only have a lease for 30 years, that is the law - a bit of paper saying that in fact the two parties have decided that they can circumnavigate Thai law doesn't really stand up IMO.

[Khun Jean]

What a load of .......

Like you can calculate a risk on a 30+30+30 years lease.

Just accept it is 30 years period.

Even if you get an extension, how do you protect yourself that the landlord is not asking a ridiculous price?

A tenfold rise in price is not that impossible you know, especially around tourist places.

I can not defend a decision to spend lets say 10 million baht which is 0 after 30 years and then have to spend another 100 million. (Or if you are lucky that you live in a not popular area it will only be 50 million baht, or maybe you are really lucky and the place changed into a slum. Then it would maybe only a few million)

Lets say you are 40 years old. At the time you are 70 you have to cough up another large amount of money.

Who in their right mind would do that?

I can only see it work for business purposes where you can make multiples of the invested money within the 30 years.

[SiamLegal]

I respect your deeply held conviction that the options to renew have no value. It also seems you believe that lawyers will make more money drafting leases containing renewal clauses. If you were my client I would therefore advise you to base your offer for a property on the belief that you will only have a thirty year leasehold.

However I am not as convinced as you that the renewal options are without value. I have had opportunity to discuss this issue with many well educated and knowledgeable Thai lawyers. I would suggest that they consider that renewal options are an evolving area of Thai contract law, that there is no ban on succession clauses under Thai law, and that a rent free clause for lease renewals can be included in the contract as long as the Lessee agrees to pay stamp duties and taxes as consideration for the lease renewal. There are definitly potential issues regarding lease renewals if the original land holder dies or sells the property. Unfortunately this is the law we have to work with at this moment in time.

Finally, I would like to point out that there is no substantial difference in legal fees between drafting a thirty year lease and a lease which includes renewal options.

[Solosiam]

Yes but nowhere near as many people would be buying properties (and hence engaging lawyers) for a 30 year lease!

[Khun Jean]

The only clear talk you can find here. http://www.samuiforsale.com/leasehold.htm

All other "stories" are made up to be able to "sell" to foreigners.

[quiksilva]

Actually Solo yes several long leases have been renewed, although mostly on Crown Property Bureau land and again mostly for commercial property, for example Mah Boon Krong's long lease was renewed recently for quite an incredible sum of money that they had to pay to renew the terms.

This is the pitfall that all too many fail to realise, is that the consideration paid to enjoy habitation rights of that property over the first term, only.

Therefore should you wish to renew, a new payment will be required to continue enjoying the Lessor's property for another 30 years.

Obviously the sum paid should not equate to the freehold value, but it should be considerably less. It's difficult to give you a rough estimate of how much that would be (valuing a long leasehold interest requires understanding current open market rental value, forecasting rental growth and discounting future annual rents to todays' values).

If one was forced to give an estimate though, and this would be extremely rough and ready, you could say that it might fall somewhere between 70-85% of capital value.

Edited September 13, 2007 by quiksilva

[Gary A]

When I came to Thailand to retire, I was single and had given up on finding a wife who would put up with a crotchety old farang who was VERY fixed in his ways. At that time a thirty year lease sounded great. What did I care what happened to the property after I was dead and gone?

Things change. I was very fortunate to find the right woman. The past four years of my life have been the happiest years I have ever had. I'm still a cynic and realize that things could still go pear shaped, but that aside, I have provided for my wife. Whether she throws me out or whether I die of old age I am comfortable that she will never go hungry.

When you lease a property you are going to pay basically what that property would cost of purchased freehold. If you do this when you are single and stay single, it is not that bad of a deal. Things change, that's the major problem. What if you get tired of it and want to move. You will NEVER get your money back, PERIOD. You have NOTHING to leave a loved one.

[JimGant]

Siam Legal said:

there is no ban on succession clauses under Thai law, and that a rent free clause for lease renewals can be included in the contract as long as the Lessee agrees to pay stamp duties and taxes as consideration for the lease renewal.

Are you saying that the renewal clause *can and should* be registered on the Chanote? If so, how would "stamp duties and taxes" be determined, since, as I understand it, these are a percentage of ascertained rental value - and you're talking about a "rent free" clause?

And how do you square the above with the following (from the Samui link from Khun Jean, above):

Pre-paid and pre-signed 30-year leases with pre-specified dates of execution are considered void or voidable as this is an avoidance of and in conflict with section 540 Civil and Commercial Code, the lease cannot exceed 30 years. Even if in some cases a second lease is registered at the Land Office simultaneously with the first one the Land Office official is not liable for registering a voidable act (Section 73 Land Code Act). If not considered void or voidable, the leases together will in line with Supreme Court judgments be considered as one lease and the total term will be reduced to 30-years (section 540).

Does your "rent free" somehow trump "pre-paid?" (But, in any event, the above quote's bottom line is: it all becomes "one lease....reduced to 30-years.")

Don't get me wrong, Siam Legal. You've caveated your lease renewal suggestions appropriately. But it's nice to see how your logic squares with that of others. (And it's also nice to have some legal input here in addition to Sunbelt's. Just hope you're thick-skinned enough to ignore the pings....)

Edited September 14, 2007 by JimGant

[JimGant]

When you lease a property you are going to pay basically what that property would cost [if] purchased freehold. If you do this when you are single and stay single, it is not that bad of a deal. Things change, that's the major problem. What if you get tired of it and want to move. You will NEVER get your money back, PERIOD. You have NOTHING to leave a loved one.

Even if you get an extension, how do you protect yourself that the landlord is not asking a ridiculous price?

The above quotes point out the duality of this thread, namely: Are you married to your lessor or not. The quotes would indicate the "not" and point out the financial pitfalls of an arms-length commercial lease.

But if you're leasing from your wife, most likely there is no rental cash flow involved, either with the original lease or with a renewal. The Land Office will assign a rental value as a baseline for taxes -- and this can be ridiculously low, as we found out when we asked our Land Office clerk to provide an acceptable figure. (A neighbor used a lawyer -- we didn't -- and the lawyer provided a rental figure ten-times that of ours, for about the same sized property )

The downside of renting from your wife:

Under Thai law the lease can be terminated by the Thai spouse without reason. A lease or usufruct does not offer security for the foreign spouse paying for the land, if the lease or usufruct is set up to protect in a divorce or separation. Do not think I have a registered 30-year lease so I am secured for 30-years (this quote from Khun Jean's Samui link)

Hmmm. Sounds kind of drastic. Plus, usufructs sound as tenuous as leases -- and I thought I'd read on this forum that usufructs provide added security to the lessee. But maybe not from a pissed-off spouse. Comments, Siam Legal?

[Naam]

i don't understand the attacks on "SiamLegal". he has presented some facts in (what i think) a fair way and wording.

[cclub75]

However I am not as convinced as you that the renewal options are without value. I have had opportunity to discuss this issue with many well educated and knowledgeable Thai lawyers. I would suggest that they consider that renewal options are an evolving area of Thai contract law, that there is no ban on succession clauses under Thai law, and that a rent free clause for lease renewals can be included in the contract as long as the Lessee agrees to pay stamp duties and taxes as consideration for the lease renewal. There are definitly potential issues regarding lease renewals if the original land holder dies or sells the property. Unfortunately this is the law we have to work with at this moment in time.

No offense SiamLegal, but you really do speak a lawyer.

And i'm very sorry to read something like :

"I would suggest that they consider that renewal options are an evolving area of Thai contract law, that there is no ban on succession clauses under Thai law, and that a rent free clause for lease renewals can be included in the contract as long as the Lessee agrees to pay stamp duties and taxes as consideration for the lease renewal. "

Evolving ? That's the whole point. The whole issue there. And as a lawyer, you should start by saying that to your customers, instead of selling this idea of 30 + 30 + 30.

I stick to my point : such scheme has never been validated in a tribunal. I mean even with jurisprudence, the thai judiciary system can be very... creative. So it's easy to forecast what it can be without any jurisprudence.

Anyway the whole discussion is virtual. Before the "buy land with the company scheme" was killed by the gvt, few people were talking about the long lease option.

Now the "industry" (lawyer and real estate) have to aknowledge this fact, so they try to "rebrand" the idea of long lease (show and business must go on).

Freehold. That's all. Only slave and dupe people, or people in very specific situation, can think that long lease is a good idea.

And as long the thai authorities don't take a real and serious stand about it,n with a clear law (like we have with the Condominium Act)... the "own your land and your house in Thailand" will remain a dupe market.

Even with many brillant lawyers on your side...

Edited September 14, 2007 by cclub75

[Heng]

Actually Solo yes several long leases have been renewed, although mostly on Crown Property Bureau land and again mostly for commercial property, for example Mah Boon Krong's long lease was renewed recently for quite an incredible sum of money that they had to pay to renew the terms.

And the judge would say, "of course they did... they are elephants and you are an ant." Do you have an elephant that will vouch for you?

[swillowbee]

Siam Legal . . . your comments please.

The initial 30-year land lease is recorded against the land title, so is presumably secure. As I understand, the land lease extension is a commerical agreement between the land owner [as an individual] and the lessee.

If the ownership of the leased land changes, the new land owner would have no obligation to honor the land lease extension agreement to which he is not a party.

The change in land ownership could occur as a consequence of: death of the owner; [ii] sale of the property by the owner; [iii] simple assignment of his ownership to someone else; [iv] bankruptcy of the owner; or, [v] foreclosure by creditor to whom the owner has pledged the land as collateral.

If a land owner has larceny in him [as I've heard is not altogether unheard of here in Thailand], could a land owner collude to transfer the land ownership under one of these scenarios, say item [v] through a contrived "bad" loan? The new land owner would not extend the land lease, and later return to the original land owner the property after the lessee's home has been leveled.

Leasing from a publicly-traded Thai developer, supposedly conforming to higher standards of ethics and subject to SET oversight, might be one way of mitigating this risk.

If leasing from an individual, can all possibilities, items through [v] above, be effectively dealt with in a land lease?

[percy2]

Actually Solo yes several long leases have been renewed, although mostly on Crown Property Bureau land and again mostly for commercial property, for example Mah Boon Krong's long lease was renewed recently for quite an incredible sum of money that they had to pay to renew the terms.

CPB is a bit different they have also leased out land on terms of longer than 30 years.

Cheers

[SiamLegal]

I regret that my first posting on this forum has been so controversial. I should have discussed potential problems related to contractual lease renewal options in the original post.

Although I work out of the Chiang Mai office of Siam Legal, I commute weekly to Bangkok and teach at Thammasat University as an adjunct faculty member in the economics department and in the business school. This week I'm going to try to find a Thai law professor interested in co-writing a journal article on current issues in foreign property control which will address the questions in this forum topic. It's an interesting area and I think I will be able to find someone.

I will let you know how that project is going and share what I learn and I think my next couple of articles will focus on more settled legal issues.

[Aussietraveller]

SiamLegal,

Thanks for your post, and taking the time to do that for the general benefit of everyone.

It is people like you who take the time to post on here, that make this a better forum.

As with any information posted, common sense would dictate that we all read it as being general advice.

No post can be so specific that it takes into account every different scenario for each individual and possibility of changes in the future, particularly when we are dealing with legal issues in thailand.

Your post has come in for some critisism, but i did note that none of the detractors posted their legal qualifications.

Perhaps their accreditation from Khao San Rd Legal School is still coming through...

I am sure that those who have been critical of Siam Legal are at home putting together an informative article to post on the forum, for the benefit of the forum members as you are so knowledgeable.

I look forward to your informative posts and hope that others treat you with more respect that you have shown.

SiamLegal, once again well done.

Keep up the good work.

[BL4u]

I regret that my first posting on this forum has been so controversial. I should have discussed potential problems related to contractual lease renewal options in the original post.

The name Siam Legal suggest you work for a law office, but you make yourself very doubtful if you are advertising with company structure to own land and professional brokerage service to sell and by land, house, condo.

As for your article, this is not accurate legal information, it is sales talk to sell your land due diligence services and for the lease part you are just copying from what others say, without knowing why!

I shall explain the 2 renewals for you;

If you draft a renewable 30-year lease you have 2 options:

1 – you draft the lease based on normal lease laws (1 renewal), or

2 – you hope to upgrade the lease to a Special Reciprocity Contract (2 renewals). Contrary to 'hire of property' this type of contract is not specified in the Civil and Commercial Code. This type of contract is created by the Supreme Court.

Option 2 is wishful thinking, but very important to have this knowledge if you draft a lease. As your are not able to defend yourself via the lawyers in your office by referring to such basic legal information I would not trust any lease drafted by your company.

[Khun Jean]

As long as lawyers in Thailand are not responsible (accountable) for their advice the risk is 100% for the client.

For this reason only, you should ask the lawyer a 1000 questions. Just go to a government website where the law is available and just ask the questions. Like where does it state that a 30+ year lease is guaranteed (and not only possible).

It is the GUARANTEE that is needed, not a promise by someone who makes money from you.

Most lawyers just talk as if a 30+ year lease is the most normal thing. I think when you just do it often enough people will have many 30+ year leases only to find out after 30 years that it was not what they thought.

And when many people have it they talk to others that it is possible, and there you have you untruth changed into a truth. (Same happened with the company trick).

I categorise it as lying and cheating and it should be stopped NOW. But yeah i know TIT. Buyer beware x 10.

[thaigene2]

Yes absolutely Khun Jean.

Let's break down a 15 million baht purchase of, let's say, a Phuket house/land...or Bangkok for that matter.

A 30 year lease would mean 500,000 Baht per year. And that DOESN'T include all the money you'd make by leaving the cash in the bank at say 4% per year - or higher I'm sure.

So in effect you are paying around 40,000 Baht per month. But - BUT!!! -- according to Thai immigration law you can only live here 6 months per year - so let's see........that means you're real cost for staying there 6 mnths is actually 80,000 +++ per month.

That's not much less than staying in a 5* luxury resort! And you don't cough up ANY of your money in advance.

SO WHY DO IT?? YOU ARE PAYING ALL YOUR MONEY UP FRONT!! I THOUGHT RICH PEOPLE WERE SMART??

HELLLLOOOO??