REAL ESTATE
Foreigners should study leaseholds
By Bangkok Post
Mar 9, 2009, 12:45

Though leasehold remains an option for foreign buyers wanting to own a residential unit, there are some pitfalls they should avoid when making contracts, according to Rene'-Philippe Dobout, managing partner of the Bangkok-based law firm Rene' Philippe & Partners Ltd.

The main drawback when purchasing a property under a lease agreement is the time limitation. In Thailand, leases are limited to a maximum of 30 years, but with an option to renew for another term not exceeding 30 years.

Mr Dobout suggests renewal promises needs to have three elements to be binding. They are the agreement to renew, duration of renewal period and amount of rent during the renewal period. In a good renewal clause, rental fees for initial and renewal periods should be determined in specific amounts.

Many first-time developers selling under leasehold claim a main benefit of the renewal lease is a provision of an option for the buyer to renew the lease in perpetuity, thus granting to potential buyers quasi-ownership rights.

"No claims are more false than this one and the renewal of a lease in perpetuity is simply not possible in Thailand," Mr Dobout says. "A clause of renewal providing for perpetual renewal of a lease agreement would simply not withstand the scrutiny of Thai courts.

"There are so many restrictions attached to the renewal clause. It would be nothing short of a miracle if half of the buyers who have purchased under a lease agreement were actually to be able to renew their lease agreements at the expiration of the initial term."

The Thai Supreme Court first makes a distinction between the nature of the rights and obligations stated in a lease agreement. A lease agreement includes what the court considers real lease rights, and rights the court regards as "non-lease rights".

Real lease rights are any clauses arranged for the purpose of the lease such as: the lease term, the amount and payment of the rent, the termination, the causes of defaults, the right to sublease and the right to assign a lease agreement. They are real lease rights because they are the core of a lease agreement.

Non-lease rights are promises or options not essential to a lease agreement such as a promise to renew a lease agreement or the option to purchase the land if foreign land ownership becomes permissible. The land owner may promise to purchase back the lessee's house at a predetermined price in case of non-renewal of the lease agreement.

Mr Dobout adds that the last difficulty most buyers purchasing under leasehold tend to overlook is the matter of succession. As a lease agreement will end and the rights of the lessee are not transferred to the lessee's heirs, buyers should not forget to include a clause of succession in the lease agreement.

Meanwhile, if the lessor dies, the lease agreement will not end but only the real lease rights pass to the lessor's heir. These do not include the renewal clause.

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