Four months ago, The Phuket News carried a story suggesting that a push by the Joint Foreign Chambers of Commerce for amendment of the regulations on land ownership – without having to persuade Parliament to change the underlying laws themselves – might effectively lengthen leases from the current maximum of 30 years.
Here, The Phuket News’ favourite lawyers argue that this push is misguided and is doomed to failure.
The aim of the push was to bypass any need to persuade Parliament to amend the law.
Ownership of land by foreigners in Thailand is severely restricted. Often, a long-term leasehold is the best option for a foreigner wanting to invest in property here in Thailand.
In Thailand the duration of a leasehold is limited to 30 years by Section 540 of the Civil and Commercial Code (CCC).
Thirty years is rather short when one is making an investment of any significance. In order to “overcome” this limitation a typical long-term lease agreement in Thailand between lessor and lessee will provide for two additional renewal periods of 30 years each for a total of 90 years.
Thai law, however, provides for only one such renewal. Due to these unfavourable restrictions, for many years now, developers and consumers have been calling for an extension of the maximum lease term.
However, extending the current maximum lease term and/or renewal periods under Section 540 of the CCC would require parliamentary approval. For various reasons, achieving more favourable long-term lease conditions at this level of the legislative process has been unfeasible.
You may have read a recent article in this publication regarding “hope for longer land leases” (see The Phuket News, December 2, 2011, page 14). The article’s source was “a lawyer whose company has been working on proposals” to extend the maximum lease term which are being “pushed by the Joint Foreign Chambers of Commerce (JFCC).
According to the article’s source, “there is positive sentiment” in the Government towards these proposals. If this true, such sentiment appears to be due to the fact that neither the Article’s source nor those feeling so positive, actually understand the legal implications of the proposals.
Unfortunately, once the sentiment wears off and the actual legal analysis begins, one finds that these proposals are unworkable. To understand why, the two proposals as
explained by the article’s source need to be analysed:
“The easier one would be to apply to land for private homes the rules that currently apply to industrial land, on which leases of up to 50 years are allowed.”
Unfortunately this proposal is legally untenable.
The “rules” referred to are the Lease of Immovable Property for Commercial and Industrial Purposes Act (1999). This act does, indeed, provide for a lease term
of up to 50 years.
However, Section 3 of the act and the legislative comments to the act make it
very clear that the only permissible purposes of any lease under the act are commercial or industrial. It is therefore not permissible for someone to use the act for a 50-year lease for residential or recreational purposes.
It would seem that the JFCC is advocating a mere administrative change of the regulations promulgated in the act, the idea being that the Ministry of Interior should issue a regulation that would include “residential living” as a permissible purpose
for a 50-year leasehold under the act. This would not need any amendment to the act itself or, therefore, Parliamentary approval.
However, this is not possible. It is true that, under Section 5 and Section 11 of the act, the Ministry of the Interior could issue regulations to make the act applicable to a wider range of commercial and industrial activities.
That might be very good news for hotels and resorts, offices and shopping complexes. However, foreigners who wish to lease land to live or vacation on the relevant land would still not be able to use the act in their favour.
To repeat: this is because the act itself can be applied only to commercial and industrial activities. It cannot, as suggested by the article’s source, simply be applied to “land for private home” purposes.
Application of the act to residential activities would therefore require amending the act itself. So this first proposal is no more attractive than amending the CCC.
In fact, considering that the act is the “Lease of Immovable Property for Commercial and Industrial Purposes Act”, amending the CCC would be more reasonable and likely.
The second proposal also reflects the intention to avoid parliamentary approval:.
“The second would be to take the current 30 year leases and allow an extension of a further 30 years to be registered with the Land Office.”
Sadly, this proposal, too, is legally unworkable.
The registration of a land lease and its effects seem to be one of the common mysteries in Thai real estate law. The common misunderstanding is that the “registration” somehow makes all elements of a lease contract enforceable and unassailable.
The registration of the lease is, however, merely an administrative act. To the extent that the registration does trigger any legal rights between contract parties – a lessor and lessee – such rights come from the law itself and not from the administrative act of registration.
For example, it is true that under Section 538 of the CCC any lease over three years
must be registered or it will not be enforceable beyond three years – this is why
parties generally register long-term leases.
Nonetheless, registration itself triggers no further legal relations or obligations between the lessor and lessee than those outlined in Section 538 of the CCC.
In other words, simultaneous registration of a second 30-year lease term would not make that second term automatically enforceable; thinking that it would is a fundamental misunderstanding of the law.
Under the law, any additional lease term is not an “extension”. It is a “renewal”. Thus, if during the first 30-year term the lessor changes and the initial term ends, the new lessor would be under no obligation to enter into a new lease with the lessee.
Such would be the case even if the original lessor had “registered” a renewal term.
The relevant legal question is: “Who is the owner of the land at the beginning of the new lease term?” This is because only the owner at that time can act as the lessor and at that time enter into a lease agreement with the lessee.
Therefore, merely registering the second 30-year renewal term would not itself make that renewal term enforceable.
To conclude: Legally ineffective administrative acts as currently proposed by the the JFCC and the article’s source are not what is needed. The only way forward is an amendment to the relevant law, Section 540 of the CCC itself, to provide for a lease term of more than 30 years.
It is unfortunate that the JFCC and the article’s source are pushing for such measures without first receiving fully competent legal counsel, which would undoubtedly make their efforts more efficient and might perhaps provide a real opportunity to hope
for longer land leases.
– Duensing Kippen is a multi-service boutique law firm specialising in real estate and corporate/commercial transactional matters as well as arbitration proceedings arising therefrom. It is the only such firm in Thailand that also compliments its transactional expertise with a core tax law practice.
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