Making safe property investments in Phuket

PHUKET: At a time of year when many property sales are taking place in hotspot investment destinations, such as Phuket, it seems now is an appropriate time to recap the types of legitimate investment for foreigners interested in property in Thailand, and to note that there are some very straightforward methods of avoiding complicated and cumbersome transactions.

Aside from land title due diligence in relation to the project you are planning to invest in, it is essential to scrutinize the method by which you purchase a property.

Many investors in recent years have shied away from what was a notoriously encouraged method of “acquiring” a real estate interest in Thailand: setting up a Thai company. In fact, the Land Code in Thailand prohibits foreigners from circumventing the laws protecting the land of Thailand by stating that direct or indirect acquisition of land is generally prohibited.

This means that if the only reason a foreigner sets up a company is to circumvent the Land Code, then there is a danger their transaction could, in very extreme circumstances, be scrutinized, and they may be required to dispose of their property and pay penalties. There is also the question in any Thai company, not just property related companies, as to whether all shareholders are genuine shareholders, and not “nominee” or “fake” shareholders, the practice of which is illegal.

This, of course, leaves the general option of purchasing a condominium interest, or leasing property for a long-registered term, the maximum registrable term of which is 30 years. Many foreigners do not wish to purchase condominium properties, especially in resort areas such as Phuket, Koh Samui, Pattaya or Koh Chang, where villa and lifestyle acquisitions are preferred.

So, if Thai companies are not a generally viable option, and condominiums aren’t appropriate as an investment, surely leasing a property should be a safe option? Of course it is, provided you follow some simple rules, and understand the nature of the investment you are making; and further ensure that you are properly advised of any risk in relation to the acquisition.

A straightforward limited 30-year registered lease in Thailand is enforceable between the lessor and lessee. If individuals are involved, and for example, the lessee dies, the lease could be scrutinized in relation to whether the lease interest may pass to a successor.

One of the elements of ensuring the lease properly addresses this issue is to include a successor clause in the lease. Another way is to ensure that only companies enter into the lease because companies don’t die, although they can become insolvent.

It should be noted that some of the most expensive property in Thailand is only available for leasehold. In particular, properties developed on Crown Property Bureau land in Bangkok are developed and sold on a leasehold basis, not just to foreigners, but to Thais. This means that Thais rely upon the security of the lease, and sometimes do so in relation to high-price-point luxury properties. This is absolute evidence that leases can and are often relied upon in Thailand by foreigners and Thais alike.

As far as straight leases are concerned, they are very straightforward.

Some investors and some developers prefer to contemplate the existence of an investment beyond the 30-year period by way of a pre-agreed “renewal”. The contemplation of this is generally legal, but the execution of it must also be legal.

The restriction on this approach is that any document referring to a term beyond 30 years must not contravene the law restricting the term of a registered lease – 30 years – and further, the parties must be aware that an agreement to agree to renew a lease will be a private agreement between the parties and subject to contract law, namely under the regulatory regime of Thailand’s Civil and Commercial Code.

Under this code, provided an agreement is not contrary to law, the parties are free to agree to the terms as they wish. When they do so, care must be taken to examine if what is being promised is enforceable now, and also in the future.

There are some further matters to be considered, such as what taxes may be payable in 30 years’ time for a lease renewal, and what the actual minimum assessed value of the rental must be. These questions can be settled in a contractual agreement under which the parties assess the reliability of each other in terms of compliance.

Beyond a simple lease sale, there are also projects in Thailand where lessees are offered a stake in a company which has either a direct or indirect interest in the landowning company that owns the land at a real estate project. As in all such matters, this cannot simply be a rushed, cobbled-together structure. To minimize legal risks in this type of structure requires planning to address and ensure that in a non-exhaustive list:

(a) nominee shareholder structures are not used
(b) leases are actually registered, because any lease for longer than three years to be legal, i.e. not deemed void, must be registered
(c) the proper and real values are used for rentals referred to in leases on which taxes must be paid
(d) the purpose of the company and its business activities are properly and legitimately associated with the estate. This can often be the case where the lessor company outsources management to a professional estate management company to manage properties, which exist on leased land.

Unfortunately, there are instances in which investments have gone wrong. This can happen when a developer is financially to finish property, but has sold property before it is finished off the plan.

If the contracts are badly prepared or the structure is not set up properly, then a court case can ensue and this can often expose weaknesses in documents. If a contract doesn’t comply with law, it may be deemed void. That doesn’t mean to say injured parties will not obtain compensation, provided they have sought proper remedies in their case, but preferably no court case is better than a successful one.

In such cases, some very important issues should be borne in mind before drawing conclusions from negative experiences of some investors, while ensuring that you take care when you are determining how to make your investment. It does not pay to draw rushed conclusions from cases, which appear to be negative for investors.

Some key points are:

1. Thailand is not a “common law” country, which means that judges do not make law when they make their judgments. Even Supreme Court case decisions are guiding only. This means that cases are decided on their merits, in accordance with the laws of Thailand, and the facts of a case. If you have bought a house in a common law jurisdiction, don’t mix up advice you have heard there, with the actual laws in Thailand. When it comes to contract law, you need a good contract, such as a lease, because the law will not step in and make the contract better for you.

Conversely, if one person in a country of approximately 60 million people receives a bad result from a court case, it does not mean that any other person from that 60mn headcount will receive the same result, even on the same facts. Some say that makes the law unpredictable and unfair. However, it is actually logical in many ways that a case cannot be decided until a case is actually proven under law.

2. The facts of many cases are different. The way in which some investors invest in property in Thailand can sometimes be in the same style as many people practice their holidays – “throwing caution to the wind”. If you hear of a case in which someone has suffered at the hands of an unscrupulous developer, make sure you investigate properly to establish how that situation arose, and what the facts were before making any conclusions.

3. Investment carries risks, but Thailand has a jurisdiction in which it is possible to safely lease and build upon land, notwithstanding the established prohibition on owning land directly, with some exceptions.

4. Avoid exotic, untested structures and anything that becomes too complicated. If you see a structure for investment that sounds odd, feels unnecessarily complicated or seems like a construct of an overactive imagination, then steer clear.

As you can see from all of the advertising in newspapers in Thailand, and completed property, there has been a serious amount of investment in the property market by developers, many of whom are public companies or serious, established companies.

Be cautious about your selection of property investment, don’t rush, but also remember that although Thailand’s development is an ongoing process, it is developed enough for safe investment if you choose the right strategy.

Woraphong Leksakulchai is a senior partner and attorney-at-law of Hughes Krupica www.hugheskrupica.com

— Woraphong Leksakulchai