Many law firms retain their strategies and templates, as these are borne out of years of hard work and expertise, making them highly valuable. However, I aim to share my knowledge on crafting the optimal lease agreement under Thai law. Having witnessed numerous foreigners suffer financial losses, I believe in disseminating knowledge to foster better protection. Here’s how I would structure a lease to secure your piece of paradise in the Land of Smiles. It is obviously for the Lessee that we presumed would be a foreigner.
Sebastien H. Brousseau, LL.B., B.Sc. (from ThaiLawOnline)
1) Initiating the Lease Before Construction and Registering it for the Maximum Duration.
It’s prudent to formulate the lease before initiating any construction to unequivocally establish that foreigners are the building owners. This can be reinforced by including a relevant clause in the lease giving improvements to the Lessee, and if possible, incorporating a superficies clause within the lease. It’s also advisable to have the building permits registered under the Lessee’s name.
It’s a common practice among many Thai individuals to limit leases to three years to evade registration with the land department and the associated taxes.
However, it’s imperative to register any lease exceeding three years to ensure binding with third parties, to be registered. Registered means that your lease appear on the title dead and it can only be Nor Sor Sam and higher (title deeds of the land departments). This is stipulated by Thai law under clause 540 of the Commercial and Civil Code of Thailand (hereinafter referred to as CCCT). The current maximum tenure for “standard” leases (excluding commercial leases) is 30 years with an renewal of maximum 30 years.
Clauses to Include:
– Ownership: All buildings, structures, fixtures, fences, orchards, perennial horticultural plantings, and other improvements situated on the leased land and procured by the Lessee, or constructed or positioned by the Lessee on any portion of the leased land during the lease term (referred to as “Improvements”), shall be deemed the property of the Lessee. Title to such improvements shall be vested in the Lessee.
– Alteration of Leased Land: The Lessee shall reserve the right to alter the landscape and existing buildings, construct or erect any buildings or structures upon or beneath the leased land, or engage in digging, excavating, filling, and planting or growing any trees or plantations upon or beneath the leased land, without requiring the Lessor’s prior approval. The Lessor shall assist the Lessee in obtaining any necessary construction or other permits that may be required.
– Maintenance and Services: The Lessee shall bear the sole responsibility for maintaining the leased land at their own expense. The Lessor is not obligated to provide any services or facilities, including, but not limited to, electricity or water, or to undertake any repairs on the leased land. All service or facility provisions shall be the sole responsibility of the Lessee.
2) Leveraging the 30-year Tenure with One Renewal Permitted by Law or having a lease that is “more than a lease” according to Supreme Court Decisions.
Clause 540 of the CCCT authorizes a 30-year lease term with a provision for one additional 30-year renewal. I would advise against attempting a second renewal if you intention is to lease the land, pay the rent and that’s all. A second renewal could contravenes the law’s spirit, despite the practice being common among many law firms, possibly for marketing purposes.
Even though some advocate for two renewals within their leases, the law clearly stipulates a single renewal clause. Despite my long-standing advice, many choose to ignore this legal provision.
The legitimacy of two renewals might hinge some Supreme Court decisions that are not very clear about 90 years. But they established that a lease can be “more than a lease” or a “reciprocal contract”. However, I firmly believe this practice undermines the law’s essence. But I do understand the idea of 2 renewals and how it can be valid,
Thailand is a mixed law jurisdiction, just like Quebec where I come from. Good faith and adherence to the law’s spirit in Civil Law, are capital. Add a clause to ensure lease renewal is executed under identical terms and pricing to prevent unjustifiable price hikes by landlords. Although a moderate increase might be tolerable, establishing the same conditions safeguards against exorbitant price escalations.
3) Creating a Lease and an Addendum
Over the years of working for law firms in Thailand, I’ve learned that different land departments or authorities may interpret the law in varied ways. Therefore, I’d draft a simple lease with straightforward conditions to prevent any refusal from the land department. The lease would cover basic terms, subleasing permissions, and conditions for renewal. Once registered, this lease, as perceived by Thai lawyers, becomes a real right attached to the title deed and is enforceable against third parties.
Additionally, I’d draft a separate contract as an addendum, which is private between the Lessee and the Lessor. This addendum can include numerous conditions not present in the lease, such as:
– Automatic renewal
– Options to purchase (though its legal standing may be questionable)
– Adding servitudes
– Successions clauses (also in the lease)
– Superseding clauses to override the lease, and more.
Since this document isn’t shown to the authorities, it allows for a more robust drafting protecting the lessee and adding whatever you want, as long as it is not against public order.
A clause could also be added permitting the Lessee to demolish any buildings or structures they erected, which would counter Decision Supreme Court of Thailand No. 5770/2539 stating that in that case, the Lessor owns all structures built on the land.But in that case, the contract was mentioning it.
(Do note: This is my interpretation of 5770/2539 that a rental fee of 200,000 baht per month for 3 years, and 15% increase 3 years later. The lessees invested 6 million baht in the building and the court decided that the lessor could keep it as mentioned in the contracts).
4) Prepaying Rent with a Receipt
Given that the lease pertains only to land, it’s plausible to pay for 30 or even 60 years in advance. Providing a receipt for this advance payment can prevent any legal disputes over unpaid monthly rentals. But remember registration of the second lease will have to be paid. And if 30 years from now, the price of land is very different, the land department could maybe refuse to register at the same conditions. Who knows.
5) Including a Clear Declaration of Intent to Renew
A declaration of intent to renew can be fascinating as it holds retroactive effect and binds the heirs, as per Section 168 and subsequent sections of the CCCT.
I became aware of this in 2007 and have utilized it ever since, although it appears the Supreme Court clarified it only in 2016 through decision 11058/2559, a landmark case concerning the inheritance of leasehold property in Thailand.
This case revolved around a lease agreement between a Thai landlord and a foreign lessee. Post the lessee’s demise, his heirs asserted their right to inherit the lease, which the landlord contested, claiming the lease terminated with the lessee’s death.
The Supreme Court affirmed the inheritability of the lease by the lessee’s heirs, provided the agreement explicitly mentioned its continuation beyond the lessee or lessor’s lifetime and was duly registered with the Land Department for enforceability against third parties.
A lease, being a right established by contract, necessitates registration if extending beyond three years, as articulated in Section 538. This section stipulates the requirement of written evidence signed by the liable party for the enforcement of a lease of immovable property. In the absence of a written, registered document, a lease exceeding three years is enforceable only for a three-year term.
Decision 11058/2559 notably clarifies the applicability of Section 540 to all lease agreements, irrespective of the property type, and underscores a tenant’s fundamental right to lease renewal that can neither be waived nor contracted away. This clarification fortifies tenants’ rights in Thailand and eliminates ambiguity surrounding the enforcement of commercial leases under Section 540.
6) Adding Clauses Regarding Successions and Heirs
The initial 30-year term that is registered constitutes real rights. Given that the lessee is the owner of the buildings, it’s crucial to include a clause regarding successions applicable to both parties.
The question of the Lessor becomes more complex for the subsequent 30 years if a declaration of intent to renew the lease isn’t made.
7) Incorporating a Subleasing Clause
Given that section 544 of the CCCT prohibits subleasing unless stipulated by the contract, it reads:
Unless otherwise provided by the contract of hire, a hirer cannot sublet or transfer his rights in the whole or part of the property hired to a third person.”
This contrasts with a usufruct, where such a restriction isn’t present, and a usufructuary can “sublease” their rights. It’s vital to tread cautiously with terminologies, as people often confuse leases and usufructs. They represent distinct legal concepts. In cases of legal marriages, the land department normally rejects a lease (in the last 10 years). However, a freely registered usufruct in Thailand at the land department seems stronger to me for married coupled but again, contracts should be clear and you often need more than one.
8) Integrating a Servitude Clause
To ensure maximum protection for the lessee, it’s advisable to add as many rights as possible to the lease. Under Thai law, as per clause 1349 of the CCCT, land enclavement is not allowed, providing a right to pass over surrounding lands to reach a public way. However, uncertainties arise if the lease terminates and foreigners or their heirs own the structures. While the right of servitude may provide access, there hasn’t been a decisive ruling regarding separate structures on the land or options to purchase.
To create a contract viewed as a “reciprocal agreement” by the Supreme Court, consider transferring all buildings and constructions as they stand to the Lessor.
This is where it becomes complex: are you looking for a lease, with the Lessor getting his rent, or a contract that could be MORE than a lease?
What is you wish more than 1 renewal?
Now, if you want to create a case that would be “more than a lease” at the end of the term of two renewals, for example (as this is not illegal, but simply not explicitly defined in the law), then I would give all of the built assets to the lessor. This would allow the lessor to fulfill the agreement, which would then become “more than a lease.” This would also protect the heirs of both the lessees and lessors, with succession clauses and a declaration of intention to renew binding the lessor and their heirs, for one or two renewals.
Reciprocity in pure civil law is called a “synallagmatic contract.” It comes from the Greek word “synallagma,” which means “mutual obligation.” A synallagmatic contract is one in which both parties have obligations to each other. An example of the opposite would be a gift, which is a unilateral contract, meaning that only one party has an obligation (the giver). A contract that is more than a lease would have extra clauses binding both parties because both parties have to gain from it and both parties agreed to it. However, the lessor must see a benefit from the agreement, otherwise the court will not consider it a “reciprocal agreement.”
This source has some references to this concept : http://www.psthailaw.com/article.php?cid=813
9) Including Superficies in the Lease
While it’s wise to clarify this, from my experience, the land department only registers the lease and not a secondary right, unless it’s a mortgage or sale with rights of redemption, and the lease doesn’t prohibit it.
10) Incorporating a Termination Clause and First Right of Refusal
There seems to be a lack of Supreme Court decisions addressing the scenario post-lease termination when buildings belong to one party (like a foreigner) and the land to the Lessor. Typically, the buildings would annex to the land unless a clause specifies otherwise. However, relocating a house is a rare practice.
A viable approach could be adding a clause allowing the lessee to sell their buildings or the added value brought to the land, with the Lessor having the first right of refusal. This arrangement, within a standard lease (and not a “reciprocal agreement” that elevates it beyond a mere lease), seems logical. If you want 2 renewals, personally, I would think about giving the properties to the lessor. The lessor will gain more than just the rent.
11) Incorporate a Severability Clause
This clause essentially states:
“Should any provision within this Addendum be found void, invalid, or unenforceable, it shall be deemed ineffective only to the extent of such voidness, invalidity, or unenforceability, without invalidating the remaining provisions nor affecting the validity and enforceability of such provisions in any other jurisdiction.”
This means that if, for instance, your option to purchase is deemed invalid under Thai law, it does not render the rest of the contract invalid. It’s important to remember that under Civil Law, the contract serves as the law between the parties. This implies that any agreement is valid unless it contravenes public order. Public order represents clauses that cannot be altered by a contract. For example, there are established conditions for marriage which usually pertain to public order. In Thailand, you cannot register a marriage between two males (maybe next year according to the new PM) or between individuals who are, for example, 10 years old (unless there are specific court conditions see 1448 CCCT)
This text is a little bit long but explains how I would structure a lease agreement, before marriage, and if buildings or structures are built with the money of the foreigner after marriage, I would make a document stating that the wife recognize that the money to build the constructions was money the husband has before marriage.
This is not all. I normally add clauses for taxes, disappearance, expropriation, notices, assignments, waivers, language and much more. But the basic is above.
Hoping you enjoyed this text and nothing is perfect. You can disagree.
I have been 17 working with Thai lawyers, I never had a lease, a usufruct, a Last Will, a prenuptial or any other contract broken by any Court.