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Phuket Law: Pitfalls of diligence and leases

Phuket Law: Pitfalls of diligence and leases

As a general matter, real estate in Thailand can be an excellent investment. Unfortunately, however, horror stories are not rare enough. But if you adhere to our “nine points”, such tragedy can be avoided. Here are two key points to beware:

constructionland
By Jerrold Kippen

Sunday 23 October 2016, 11:00AM


Before inking any property contract in Thailand, have qualified legal counsel perform true due diligence on the property – and remember that what you lease, you do not own. Photo: GraphicStock

Before inking any property contract in Thailand, have qualified legal counsel perform true due diligence on the property – and remember that what you lease, you do not own. Photo: GraphicStock

Do your due diligence

Due diligence means checking for any negative legal issues with the property you are planning to buy. Due diligence is a must anywhere in the world, but especially here in Thailand. Once you’ve bought the property you’ve also bought any legal liabilities it might have.

More than once we have heard a remorseful purchaser tell us they did have a due diligence done, with quotes such as, “My lawyer got a copy of the deed from the land office and translated it. The deed showed that the seller was the owner and there was no mortgage on the property.” That is not due diligence.

The minimum essential components of a real estate due diligence should include:

• A full check of the entire history and validity of the title deed. Just because the deed has been issued does not mean it was legally issued. A current title deed can later be found to be legally invalid. That can and does happen in a number of ways. (See here.)

• Verification that the property has legal access rights;

• If you are planning on building on the property, a full report on all land use laws and regulations governing construction on the land;

• If there is already a building on land, a villa perhaps, then a check into the legal validity of the structure’s building permit. Just because a building has a building permit does NOT make it legal and if it is not it can be ordered demolished. (See here and here.)

• If you are planning on purchasing a property that requires special licensing like a condominium or a unit in a building that will also function as a hotel, then verify that the project is planned or built to properly qualify for such licensing. This does happen even in very high-end projects were you would not expect it. For example in Phuket a project was market and sold as a seaside condominium development that won awards for “best condominium project”, only later it was “discovered” that its access was not wide enough to qualify for a condominium license. It is now a hotel; and

• if you are planning on “buying” a property by buying a company that owns such property (something that is generally not recommended) then a check of all corporate, accounting, and legal records of the company is required.

Do your due diligence.

Diamond Resort Phuket

A “lease” does not “own”

Because foreigners are generally restricted from owning land in Thailand they commonly enter into a lease for such property instead. It is important to understand that leasing a property is not the same as owning it. Leasing is “renting” something pursuant to the terms and conditions of an agreement or contract with the person who really owns it. If you break any terms of your lease agreement the real owner can terminate the agreement and evict you from the premises.

Hence, a lease is just a contract to use something in exchange for payment – but for how long? A peculiarity of Thai law is that real estate can be leased for a term of no longer than 30 years. Such a term can be renewed by means of a “renewal clause” in the lease contract. However, and crucially, if the real owner (the lessor) changes (that is: dies, goes out of business, sells the property, etc) during the lease, then the new real owner will not bound by the renewal clause.

This means common real estate leases with renewal clauses in Thailand are not a long-term secure investments. As a result many developments marketing to foreigners what they call a “secured” or “collective” lease. It is neither of those. (See here, here and here.)

If you do want to invest in a long-term lease, a better and completely legal and secure structure for your investment, renewal terms, and resale value is easy enough to arrange through experienced legal counsel.

Beware that what you lease, you do not own.

Stay tuned for more on the “Dos and don’ts of real estate in Thailand” in our next article in this series.

See also:

Running the real estate gauntlet: The ‘Dos and Don’ts of real estate’ in Thailand (Click here)


 DUENSING KIPPEN is an international law firm specialising in business transaction and dispute resolution matters, with offices in Bangkok and Phuket, Thailand and affiliated offices in 45 other countries. Visit them at: duensingkippen.com

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swerv | 26 October 2016 - 08:41:57

Kurt: FYI i am involved in both legal and real estate, my office transfers on average 2-3 land/properties/condo's a week mainly into Thai entities. So i do know what i am talking about whereas you don't have a clue. You just make things up as you go along.
The land office are not interested as they are unable to check if a company is trading or not.
Thai's also purchase land and prop...

Joe12 | 25 October 2016 - 20:00:35

Kurt...when you have clue, then comment, otherwise dont bother.

Kurt | 25 October 2016 - 19:19:01

swerv, You ever heard of the expression:
When they shave you, you have to sit still?
Seems the change in property owning is by passing you.
Annual audits submitted of so called dead companies today have very much the interest of the NEW appointed land office  authorities.
That is great business to them.
Good luck. Better keep low profile.

swerv | 25 October 2016 - 13:38:24

Kurt: The land office has no idea whether a company is trading or not and are not interested.
I own several properties in separate companies and none of these companies trade, but they have a land asset.

It is not a "loop hole", it is perfectly legal to have a nonperforming Thai entity.

It cannot be a "death company" or even a dead company if annual audits are submit...

Kurt | 25 October 2016 - 12:23:31

Swerv, I am sure others will come up here to comment on your reaction.  :-)
But just a quicky: A company with a yearly audit submitted, year after year, with no trading shown, is a 'death company'.
And the legality is questioned now by the government.
Many Land offices don't accept that anymore today, as it obviously breach the legal setting of what a company is mend for.
Like a gu...

swerv | 25 October 2016 - 11:32:11

Kurt: Stop scare mongering you are just showing your ignorance of purchasing real estate here.
There is no law that states a company has to trade and the usage of a Thai entity to purchase land and property is legal.
A yearly audit is submitted with no trading shown...perfectly legal.
What is a \"death\" company?

Kurt | 25 October 2016 - 10:46:54

Recently I was offered a nice villa with a large garden, for sale with 'freehold'.
How was that possible?
Well, I had to take over a company, as it was on company name.
Was told; very easy, just yearly a accountant declaration and you will be fine.
Question: How about company operation? A company must 'work', yes?
Answer: no problem, accountant takes care.   ( Really?)
Questi...

malczx7r | 23 October 2016 - 16:35:51

Personally with all the con's, illegal land titles, the only "do" option to be safe is do invest your money in property elsewhere! Preferably in your home country where you have rights!

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