In regular intervals, the Thai government and the media discuss the question whether or not to increase the maximum land lease period in Thailand from thirty to fifty years. A recent statement of Finance Minister Surapong Suebwonglee, mentioning internal discussions in the government about such increase, once again attracted the interest of the public. However, until now such discussions have not led to a formal legislative procedure regarding a change of the law in this regard.

What does long term lease mean exactly, how is it used in practice and are there any risks?

General characteristics

Leasehold is a frequent choice of property developers and foreign buyers. It means renting property and is regarded as an alternative to freehold ownership. Land can be leased on short or long term contracts up to thirty years. Leases for industrial or commercial purposes can be registered for a term of up to fifty years. Property leases are governed by the Thai Civil and Commercial Code (CCC) in Sect. 537-571. Whereas, with a few limited exceptions, land ownership is prohibited to foreigners, land lease is not. In a typical situation, the land owner and the foreign lessee would normally prefer entering into a sale and purchase agreement but chose leasehold to comply with Thai property law. In such cases, the land owner offers a lease agreement which is clearly biased for the benefit of the lessee and gives the lessee as many rights and options as possible in an effort to make it resemble a freehold ownership. Obviously, this effort can only be successful to a certain extent.

Leases are relatively uncomplicated and easy to set up. In order for the lease to be enforceable for any term beyond three years it must be registered on the title document for the land at the competent land office. The lease is recorded on and becomes an encumbrance upon the title deed. It serves as notice to anyone who would attempt to purchase the underlying land, or loan money against it, that they would do so subject to the existing lease.

Renewal option

It is common practice in Thailand to enter into long term lease agreements which include renewal options of two terms with thirty years each, in an attempt to make the duration of the lease ninety years in total. For commercial lease, the renewal terms accordingly have durations of fifty years.

Although widespread, it is a misconception that Thai law provides for a third term of thirty years and that it would be enforceable. Even though it is common to include such term as a standard clause and it can be found in practically all long term lease agreements, in fact Thai law provides only for one renewal. There is no confirmation whatsoever by court rulings that a third term would be valid, only confirmation regarding the second term of thirty years actually exists. Put simply: 30+30+30 is by no means certain or secure.

The maximum registration period for the first term of a lease is thirty years and not more. The renewal option does not mean that a second or third term of thirty years can be registered on the title deed right away or that they would be automatically registered on the title deed after the expiration of the previous period. The lessor or his representative must physically attend the registration of the first extension and if he refuses to do so, the foreign lessee has to go to court to enforce the contract.

However, theoretically such does not prohibit the registration of one term of thirty years followed by the registration of a second thirty year term to the same lessee with a gap of at least one day between the two registered terms with both terms being registered contemporaneously; or the registration of a first thirty year term followed immediately by another thirty year term with each term being registered to different lessees, (e.g. two separate company lessees); both of which we are reliably informed have been recently allowed by at least two different land offices.

A forthright renewal clause in the lease agreement is not valid as it will be seen as avoidance of the maximum duration prescribed by the CCC and it will not be enforceable. According to the Thai Supreme Court, the renewal is only a "promise" by the lessor and the lessor must still make a binding "offer" regarding a renewal. A binding renewal agreement is then considered an addendum (side letter) to the lease agreement. Such addendum can be entered into after the expiration of the lease, but it is debatable if it can be entered into at an earlier stage. If the lessor should pass away, the promise will not be binding for his heirs. Then, also the renewal option would not exist anymore. The same problem applies for bankruptcy or dissolution otherwise of the lessor in case it is a company.

Purchase option

Apart from the renewal option, another standard contractual option in a long term lease agreement is the so-called "purchase option". This option will provide the lessee with the possibility at any time during the lease to have the ownership of the property transferred by the lessor to the lessee himself or to a third party.

If the lessee is a foreigner, with a few exceptions at present only the latter possibility is legal under Thai law. However, over the course of thirty years it is not impossible that freehold land ownership may become more accessible to foreigners, in which case the purchase option would allow the lessee to become the owner of the land. In any event, such an option would also allow the lessee to "sell" the freehold to any lawful owner at anytime during the lease, since they have the right to designate any such transferee of their choice during the lease term. Both of these benefits make the purchase option a highly advisable lessee asset in any long term land lease.

A third party transferee can be any lawful purchaser of Thai nationality. This gives the lessee the possibility, either as a well planned measure or as a short notice "emergency break", to have the land transferred into the name of a Thai natural or juristic person of his confidence. Thus, the purchase option provides effective protection for the lessee.

In this context again the question arises: What happens if the lessor should pass away or (if a company) be dissolved? The answer is in our opinion in favor of the lessee, as the purchase option must be transferable both on the side of the lessee and the lessor if the lease agreement in general is transferable.

Conclusion

The long term lease as an alternative to freehold ownership is not without its legal complexities. Nevertheless, it is for good reason a standard choice for property acquisitions in Thailand. Important is that a lease agreement is thoroughly drafted and all standard terms are included. Such lease then offers sufficient security for thirty years and contractual options for the time thereafter. Through such options one can avoid bumps and potholes that could otherwise pose significant problems further down the road.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.