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Friday, 16 February 2007

To lease or not to Lease on Koh Samui!

The fall out from the bitter dispute between the military backed interim government and the ousted ex-Prime Minister Taksin Shinawat has been the attack on the nominee structure of foreign controlled Thai companies which for years have been the accepted way for foreigners doing business in Thailand to control their investment. The statement that they are merely clarifying the law rather than amending it is a purely face saving one to avoid admitting that they are changing the law retrospectively. They are doing this by amending the Foreign Business Act but as yet no one knows just what the final version will be and if there will be changes to the Class 1, 2 & 3 lists of prohibited and permitted businesses in which foreigners can have an interest. Consequently there is a great deal of uncertainty in business and in the property sector in particular as the nominee structured Thai company was the usual and accepted way for foreigners to acquire an interest in land in Thailand.

What is certain however is that a foreigner can lease land and this lease can be registered at the Land Office for a period not exceeding 30 years. There is a provision within the Land Code for a further extension of 30 years after the initial lease has expired. Section 540 of the Civil & Commercial Code states:
“The duration of a hire of immovable property cannot exceed thirty years. If it is made for a longer period, such period shall be reduced to thirty years. The aforesaid period may be renewed, but it must not exceed thirty years from the time of renewal.”

So let us look at the pros and cons of leasing land in Thailand as the law stands today.

Firstly and most importantly the interest in the land under a lease is completely legal and enforceable in the Courts.
Secondly, it is possible and again perfectly legal for the lease to be renewed for a further thirty years – and by implication that could go on indefinitely, but subject to the comments below.

The downside to leases are the following.
1) A lease is a depreciating asset. Whereas a freehold will increase in value in line with property values generally, a lease will decrease in value with the reducing remaining term.
2) The renewal of the lease after 30 years is based on a contractual option with the original Lessor. It may not be enforceable against his heirs and successors if he has disposed of his interest or died, although a recent Supreme Court ruling seemed to indicate that it might be provided the option has actually been exercised prior to the Lessor’s death.
3) The lease must be carefully drafted and so registered at the Land Office stating that the lease holds good not only to the Lessee but to his heirs and successors, preferably named, because if he dies the lease, if not, dies with him and is terminated.

These reservations apply principally to leases with individuals. Many developers now are offering 30 year registered leases with both options to buy should the law change to allow that and to extend the lease at the end of the term. These are relatively safe in that the Lessor being a company cannot “die” and the Articles of Association require the company to renew leases when the fall due.

So for the time being the only totally legal way for a foreigner to acquire and interest in land in Thailand is by way of a lease. Will that change? The most likely change being muted currently is to extend the period for which a lease can be registered and both 60 and 90 years have been bandied about. We must wait and see.


Trafford Gazsik said...

Let us not forget that a company can also 'die' in the sense that it can be wound up / liquidated. Furthermore there can also be a change in management or a change of shareholders, both of which situations introduce new risks to the leaseholder.

Harry said...

That is a fair comment but far less likely than the alternative with a lease from an individual. We have to deal with the situation as it is today where the only totally legal way to acquire an interest in land is through a Leasehold. I am attempting to point out that there are risks attached to the Leasehold scenario and where they lie. In any acquisition it is important to know and understand the risk and then make an informed decision. We do that every day in business.

With the Leasehold from a company it is therefore important to investigate the company itself, does it satisfy the land holding requirements of the law, who are the shareholders and Directors, will you as a Leaseholder acquire shares in the company so you have a say in the running of the company, will there be a management committee elected from the shareholding Leaseholders, do the Articles of Association require the company to follow the decisions of the management committee, what are the financial controls within the company etc etc? I could go on and on. Ifyou want a risk free investment put your money in the bank. If you want to have a property in Thailand at the moment these are the risks you have to quantify and decide if they are acceptable.

Claude said...

If you lease a propertie you cannot sell it in case you dont wanna stay in your house anymore.

Harry said...

Are you saying it is legally not possible or that you would not find a buyer?

In the first in stance it would depend on the wording of the lease which is why it is essential to have the right to assign or sub-lease written into the lease. If the second that will depend on the market, the property and the price. To state that you cannot sell is simply incorrect

Claude said...

Thanks for the information, I didnt know the right to Sublease a propertie. How is the procedere to Sublease? Is this just part of the lease or will this be registered in the landpaper too? And the sublease will be just for the rest of the lease-period or for another 30 years?
Cheers from Nathon, Claude

Harry said...

It all depends on what is written in the lease. If there is no right to sub-lease or assign in the lease obviously that cannot happen which is why I stated that this must be included in the head lease. Essentially a sub-lease can only be for the remaining term of the head lease. There is no reason why, as far as I am aware that the sub-lease could not be registered on the land paper. Remember of course that the wording of the lease is critical to this as the land owner may try to extract additional payments to assist in the registration which may or may not be fair depending on the circumstances. A willing land owner may be prepared to cancel the existing lease and grant a new 30 year lease but he would then be genuinely entitled to some additional payment.

Claude said...

Thank you, Harry!