The acquisition of a property in Thailand can involve a significant investment.
Whether you are purchasing or selling a property each party should take into consideration the legal requirements of Thailand regarding property ownership.
Due diligence for every transaction is always recommended. This ensures that all parties understand the structure of various titles and ownership and implications of any agreements that may be formed in the transaction process.
For foreigners wishing to invest in Thailand, the laws are quite clear but they need to be well understood and followed. A professional legal team should be appointed to act in your interest and guide you through the process.
The Legal Process
Engel & Völkers in Huahin has a property portfolio comprising high end luxury properties, villas, condominiums, resorts and various types of real estate of premium value. When considering investing in such properties a general knowledge of the ownership and investment rules in Thailand in relation to foreign interests in property is essential. Such general principles need to be explained in practical terms so that when seeking legal advice you are prepared with basic information before being provided with the details on how best to proceed. The following is of course not advice but a guide as to the general information a purchaser should understand when reviewing information opportunities in Thailand:
- Ownership methods
- Contracts and legal structures of purchase/development
- Construction and Project Management
Most legal articles on title in transfer comprise a breakdown on the definitions of stages of title and a technical description of their legal meaning. However, there is a simple approach to title which can be applied to premium class real estate:
The titles known as “Chanote”, “Nor Sor 3 Gor” or even “Nor Sor Gor” may be acceptable titles for purchase, subject to due diligence by your legal advisers. Chanote is the ultimate land title and is deemed to be secure but an investigation is necessary to actually check if the titles preceding Chanote (the history of the Chanote) were issued legally, not subject to disputes and not in public restricted land.
A condominium may only be registered upon and built on “Chanote” title
When land was first registered by Thais the registration typically related to a possessory right known as “Sor Kor 1” although there are other rarer types of title from which Chanote can originate. The documents relating to this original right are key to confirming the legality of the title and should be checked by your lawyer
Nor Sor 3 Gor and Nor Sor 3 land can be bought and sold without the strict need to upgrade to Chanote. Chanote means that the land is (most of the time but not always) absolutely defined in terms of boundaries and size.
A conclusive title report and legal opinion that the title is clear should be issued before committing large sums of money to a purchase, unless the risk is viewed in terms of your wealth as nominal.
Four principal methods of purchase are available to you:
1. Purchase a direct foreign freehold condominium title in your name (this would fall within a quota of 49% of the total area of the condominium units which are permitted under Thai law to be sold directly to foreigners)
2. Purchase a freehold condominium title using a Thai company in which the foreign shareholdings have a controlling protected 49% interest with weighted voting rights. This company cannot be a “nominee” company.
3. Invest in a stake of a Thai company maintaining control over voting and dividends but never owning more than 49% of the shares in the Thaicompany.
4. Purchase a 30-year lease with two 30-year renewable options. Numerous structures exist where the leasehold owners hold an interest in the“landlord”company granting the renewals to protect the security of the renewals.
Those worried about Thai companies and their legitimacy when investing in property should bear in mind that Thai companies, as in other jurisdictions, should be compliant in respect of the accounting, tax and legal rules of Thailand. This carries an annual fee which in proportion to the typical value of investment is nominal. Leases must be scrutinized for security of investment: termination provisions; assignment and transfer provisions (re-saleability); enforceability of renewals. Inheritance issues must also be considered and the most reliable way of avoiding such issues is to own a lease in a company so that the shares in the company which owns the lease will pass to beneficiaries, as opposed to your beneficiaries being required to attempt to re-register a lease in their name. Foreign exchange transaction forms should be obtained from the recipient bank account when transferring funds to purchase or invest in property in Thailand. Additionally, records of transfer from the source country should be retained and all transfers marked as being for the purpose of “investment in Thailand”. Provided the correct taxes and regulatory requirements are adhered to, monies can later on be taken out of Thailand.
Contracts and legal structures of purchase/investment
Initially, you should be presented with a reservation contract. Provided the terms are fair and the seller reputable, a small deposit is reasonable to secure a property subject to refund in the event the title of the property is not clear or reasonable terms of purchase cannot be agreed. Risk averse buyers can simply await due diligence and the outcome of negotiation without securing their desired property if preferred. In a standard conveyance, most purchasers expect to see one sales contract which in a premium development would be accompanied by rules and regulations of an estate and perhaps a share purchase agreement to subscribe to shares in an owner-controlled management company.
However, in a purchase in Thailand, you may expect to receive these documents but perhaps some other contracts: In a lease purchase you may receive an agreement to purchase shares in a central land owning Thai company; In a purchase involving offshore entities providing services to the estate in which you are buying, you may receive a share purchase agreement relating to shares in an offshore entity. In a condominium purchase, you may receive a set of rules referred to as the “Condominium Rules” which are prescribed by law which may supplement the rules relating to the common areas (landscaped gardens; clubhouse; play area) surrounding the condominium used by other types of owners in the project such as villa owners. You may be presented with a master agreement, which links all of your contracts together and stipulates a timeframe under which certain key events in your purchase, especially if an off-plan purchase, should occur: staged payments; transfer of shares; transfer of legal title; registration of lease. Sometimes a master agreement can assist, if drafted succinctly in providing a purchaser with a clear overview of the transaction. If a management company is appointed in the first instance by a developer or seller, you may be supplied with the relevant contracts.
The importance of these contracts long term can be extremely important in investment and residential property as rising costs of management can erode into your projected rental income returns or your disposable income. Rental pool schemes can vary in complexity and so can the contracts reflecting terms. At the sales process, the rental pool income guarantee (if one is provided) should be compared with the provisions in the contract to assess whether there are any potential deductions from the rental income profit which have not been identified. Exclusive resorts may make their rental pool schemes exclusive for a period of time which begs the question, what happens after the term of management of the scheme expires. Finally, if you are buying into a special class of development such as a marina development, golf-course development or exclusive resort style development there should be a set of membership rules and terms supplementing your purchase contracts. If this is the key reason for your purchase and/or a significant factor in relation to potential re-sale, scrutiny of the terms such as assignability; change of control of management; exclusion/termination provisions should be conducted.
Construction and Project Management
In relation to off plan purchases of purchase involving construction whether contracting directly with the construction company, through the seller or with the assistance of a project manager, review of the contractual relationship, risk and remedies for breach is necessary. Points some readers will be familiar with equally apply in Thailand:
independent structural surveys are worth considering to supplement project management
the length of structural and non-structural defects guarantees will provide a clue to the quality of construction or at least the maximum length of time the builder is willing to guarantee work
if construction costs are separate to the purchase price of the property under the purchase contract then there should be a cap on costs to prevent mismanagement of budget. Careful consideration to ensuring that contractors are not starved of funds resulting in delay must also be taken.
if project managers obtain a percentage of construction costs and construction costs are not fixed there should be examination as to what incentives there are placed upon the project manager to ensure that costs are maintained at appropriate levels
construction is a matter that requires swift resolution in relation to potential disputes. The courts are not speedy enough to resolve disputes in time to prevent loss of capital appreciation profit or prevent escalating construction costs during a dispute period rising and detracting from profits. Therefore, good dispute resolution provisions are necessary.
payments are typically paid in accordance with construction milestones. The mechanisms for assessing whether certain percentages of the construction process have been completed should be clear at the outset and the trigger for payments will correspondingly be clear.
When buying property in a beautiful tropical environment such as Thailand, the same economic and legal principles should be applied. When buying premium class property, thorough due diligence, practical commercial and legal analysis of the contracts combined with good communication to the seller and Engel & Völkers comprise the ingredients for a potentially successful transaction. Lawyers are not supposed to control an investment but rather to ensure protection during and after your dream home purchase, resort acquisition or investment to generate rental income.
Belmont Limcharoen is an international law firm based in Thailand with offices in Bangkok, Phuket and Koh Samui. Desmond Hughes, Partner, is the author of this article and may be contacted through the Engel & Völkers Phuket office at firstname.lastname@example.org