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Phuket Property Legal: Collective Leasehold Structures – Overview

Phuket Gazette - Thursday, January 17, 2013 3:00:00 PM
 

PHUKET: PHUKET and neighboring provinces contain some of the finest villa developments in Thailand. However, under Thai law, foreigners are generally prohibited from owning land. However, they are, as many are aware, allowed to own buildings. Therefore, a common method for foreigners to purchase a villa is to lease a land plot (or plots) from a Thai landowner, and purchase (or construct) the villa.

Thai law permits a maximum registrable lease term of 30 years. At the end of the 30-year term, the lease may be renewed together by the lessor (the landowner) and lessee (the buyer) but such a renewal agreement is by contract only, not pre-registration at the land office. Most land lease agreements for the leasing of land in Phuket’s villa developments contain provisions stating that the lease will be renewed for two additional 30-year terms. As such, a common lease arrangement is 30 years + 30 years + 30 years, for a total of 90 years, thus providing a time period that can be considered "near-freehold". However, many potential buyers and their international legal counsel question the validity and enforceability of the renewal term.

Challenges of leasehold arrangements
As stated above, a significant drawback with such leasehold arrangements is that there is no legal guarantee that a landowner will actually renew the lease. Thai law does not require such lease renewals. A lessor’s "obligation" to renew a lease is merely a contractual promise. Therefore, if the lessor chooses not to renew the lease, it is a breach of contract, and not a violation of the law per se. The likelihood of a lessor breaking a contractual promise to renew a lease increases when the land is transferred to a third party, as is likely during a 30-year term, since such a third party may (incorrectly) conclude that it is not under the same obligations as its predecessor.

What is more, a lessee’s remedies are limited in the event of a lessor’s breach of a contractual obligation to renew a lease term. To compel renewal, a court action must be initiated. However, the damages that are available regarding a breach of a renewal clause are restricted to damages, and a lessee cannot "force" a renewal.

Collective Leasehold

However, despite the challenges outlined above, a structure is available that can provide greater security for villa owners. The structure is known as "collective leasehold", where owners, as a group, take a minority shareholding in the landowning company via a corporate entity. Through corporate and legal structuring, the owners would be able to provide their opinions on issues regarding the landowning company. Importantly, this would include renewal of leases.

This structure works by all the owners in a development each owning shares in an offshore (non-Thai) company. Usually, such shareholding corresponds with the land plots leased. In other words, if an owner leases two plots, they would own two shares in the "owners’ company". This offshore company would then purchase a minority stake in the landowning company.

As such, the owners have a say in the landowning company’s corporate decision-making, especially regarding the development’s land. The end result of the collective leasehold structure is that owners have more control over their own villa investments.

The primary drawback of the collective leasehold structure is that it requires the full consent of the landowner to be implemented. For example, the lessor must agree to allow the lessees to own a stake (even if a minority portion). However, the structure can ultimately be beneficial to landowners, who are often the villa project’s developer, in that greater owner security means a more attractive project to potential investors.

Conclusion

Collective leasehold structures provide owners in villa developments the legal means to have a greater say in their villa projects. Importantly, this means that owners have increased control over the renewal of their leases, thus mitigating a major risk associated with long-term leases in villa developments. For the structure to be successfully implemented, owners must work with the project’s developer or landowner. While such a proposition may seem daunting to many owners, if correctly implemented, a collective leasehold structure has benefits for both owners and landowners. Projects, which do not have collective leasehold structures now, but contain multiple stand alone lease agreements, could be converted to this safer system.

This article was co-written by Desmond Hughes, Deputy CEO, and John Frangos, Senior Associate, of the law firm of Limcharoen Hughes and Glanville.

Desmond Hughes and John Frangos
Phuket, Thailand
15:00 local time (GMT +7)
http://www.phuketgazette.net/phuketproperty/2013/Phuket-Property-Legal-Collective-Leashould-Structures-Overview-19982.html
 
Land Titles
 
There are many different types of land title in Thailand , the majority of which do not allow for the legal right to built on that land. Only 3 land titles are recommended; Nor.Sor.3, Nor.Sor3 Gor, and Chanote.

In the beginning, i.e. the Sukhothai era, most the land in Thailand was in the possession of the people, who reserved the right to individually use said land and to transfer it to their heirs. Later, in the Ayuthaya and Ratanakosin era, the land was owned by the kings. The people had to request a royal grant in order to obtain land. At present, the possession of land has to be in accordance with the principle land administration laws.
 
There are two types of right to private land :
  1. The right of possession ( Possessory right ), i.e. people who possess and use the benefit of land will have the right to possess such land under the Civil and Commercial Code.
  2. Ownership by a person who has a title deed and document concerning the land. Here are the 3 recommended types :

    • Nor.Sor.3
      Is the lowest land title which allows for legally building a property and instrument certifying the use of land issued be the government to the proprietor of land not a possessory title, i.e. it is confirmed by law that a person holding Nor.Sor.3 has the legal document or to use the benefit of the land as an owner. Nor.Sor.3 is a floating map with no parcel points. It is issued for a specific plot of land and is not connected to other land plots. This causes problems in verifying the land area. Any legal acts must be publicized for 30 days.

    • Nor.Sor.3 Gor
      Is a legal land title with the same legal basis as Nor.Sor.3. The difference being that Nor.Sor.3Gor has parcel points on the map, and is set by using an aerial survey to set the points and the land area. It is possible to verify a nearby land area. It always uses the same scale of 1:5000. There is no need to publicize any legal acts, and it is possible to partition ( divide ) the land into smaller plots.

    • Chanote – Land Title Deed
      Is a certificate for ownership of land. A person having their name shown on the deed has the legal right to the land, and can use it as evidence to confirm the right to government authorities. This title deed has been issued by using GPS to set the area and boundaries of the land, which is a very accurate method. Any legal acts may be done immediately, as per the right of ownership. Land partition of more than 9 plots must be carried out according to the Land Allotment Law, Section 286. This is the most secure type of land title and is highly recommended.
 
Buying Property & Land
 
Land Purchase :
 
Thai law stipulates that a foreigner may not own land in his name, he has the right of ownership of buildings only. If a foreigner wishes to purchase land to build a property he has 2 options;

The land is purchased on 30 year leasehold, with an option to extend the lease for further 30 year periods. Possession of the land is assured by virtue of the fact that the property occupies the land. The lessor cannot seize the property upon experience of the lease, as the property is separate from the land.

If a foreigner is going to operate a business in Thailand then he may purchase the freehold of the land through his Limited Company. The land will be owned by the Company, not the individual.

Even recent amendments that allow a Thai spouse ( male or female ) of a foreigner to buy land require proof that the money used in the purchase of freehold land is legally solely theirs with no foreign claim to it.
 
House Purchase :
 
If however, what you want is a house, the fact that you can't acquire freehold land should not be a deterrent. You may own the building freehold and together with a well constructed leasehold ( typically a 30 year lease with two prepaid 30 year renewals )

And a purchase option for the land ( that could be exercised in the event the laws of foreign ownership changed – or you sold the property on to a Thai person or legal entity ) you will have effective ownership, yet still remain within the laws of Thailand .
 
          Condominium Purchase :
 
Purchasing a condominium is the easiest, simplest transaction. The law allows foreigners to hold 49% of the units in a condominium freehold while in certain condominium blocks a full 100% of the units can be owned by foreigners on a freehold basis. One important requirement in order to qualify for freehold status is that the foreign currency funds for the purchase have been remitted from abroad and correctly recorded as such by a Thai bank. The foreign freehold is definitely the preferred structure for purchase of condominium apartment. Foreigners have the right to ownership of buildings only, where land is not included. Legal acts are unlimited. A suggestion for foreigner is to lease the land for 30 years with an option of an extension of the lease, then purchase ownership of the house built on the land. Certainly of possession of land and house is assured, by being the owner of the house. The ownership of the land shall be leased out. If arranged as stated above, then the house will be separate from the land, and will not be component part under the Civil Law. Ownership of buildings can be confirmed, and the lessor cannot seize the house upon expiration of the lease.
 
Land Title Search :
 
It is highly recommended that a proper land search at the land office is carried out prior to making an offer.
 
Development Purchase :
 
Foreigners may own assets in Thailand such as a development constructed on the land. The owners of the development usually set up a legal structure and mechanism which enables the purchaser of the property to own the property. Here is an example of how this is achieved.
 
Corporate Ownership of property :
 
Thai corporate structures are very similar to British common law. Thai law allows for PLC;s LLC;s Ltd partnerships and other types of corporate entities. Once formed they are referred to as “Juristic Persons “ in Thai jargon ( legal entities ). Juristic Persons in Thailand which are owned by a Thai majority are considered in terms of property ownership, to be a Thai person and therefore, may own property in Thailand . Note that equitable ownership, which Thai law addresses, does not necessarily equate to actual control of the Juristic Persons. The most popular from of corporate land ownership is the the Limited Liability Company ( LLC ).
 
Control of the Limited Liability Company:
 
Thai law allows the issuing of classified or two tiered stocks. Hence shares of the LLC may be issued as “Ordinary Shares” where the holder of one share is entitled to one vote, and Preferred Shares where a shareholder must have multipleshares in order to obtain one vote. The Thai majority shares may be issued as “Preferred” and the foreign minority shares as “Ordinary”. This allows the foreign minority shareholders to hold fewer number of shares, but in fact have control of the company by voting rights.
 
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