Phuket Law: Long-term leases unenforceable, again

Under Thai law the maximum lease term is 30 years, which may be renewed upon expiration of that term. Because 30 years is a relatively short duration, leases marketed to foreigners typically provide for an initial 30‐year term plus two additional successive 30‐year renewal terms – or “30+30+30 leases” as they are often referred to.

The problem for investors in such a lease is that the renewal terms are generally not secured. Should the owner of the leased property changed during the lease the remaining renewal term(s) is not enforceable against the new owner. Thus, to address this issue developers have marketed “secured leases” to foreigners.

However, five Phuket trial and appellate judges found such leases to be legally void in 2015 as we wrote about at that time. It was these judges’ opinion that such a lease is the legal equivalent of a purchase and that such a lease agreement is entered into by the parties in order to conceal another contract: a sale and purchase agreement for the same immovable property.

Now, in yet another surprising decision, the Phuket trial court has ruled that leases of immovable property with a term of 30 years with two successive 30-year renewal options themselves are invalid for the same reason. In this court’s opinion, any 30-year lease with two 30-year renewals is void because it is not a lease but rather a sale.

What is also interesting – or perhaps, disturbing – is that in both the secured lease case and the recent case involving simple 30+30+30 leases, neither the plaintiff nor the defendant ever argued that they intended to conceal a sale and purchase agreement, the courts found and concluded this on their own.

In the recent 30+30+30 case, the relevant law that the court was relying on is Section 155 of the Civil and Commercial Code of Thailand (“CCC”) which states:

A declaration of intention made with the connivance (wrongdoing) of the other party which is fictitious is void; but its invalidity cannot be set up against third persons injured by the fictitious declaration of intention and acting in good faith.

If a declaration of fictitious intention under paragraph one is made to conceal another juristic act, the provisions of law relating to the concealed act shall apply.

In lay terms what this means that if two parties are “faking” in front of other people a contract (for example, a lease agreement) but they really mean to and are entering into a different contract (for example, a sale-and-purchase agreement), then the fake contract (in this example, the lease agreement) is void, that is, legally it never existed.

A “lessee” that entered into such a void “lease agreement” would then have no right to the relevant immovable property itself and could be forced to vacate the premises at any time as provided by Section 172 of the CCC:

A void act cannot be ratified, and its nullity may be alleged at any time by any interested person.

The return of a property arising from a void act shall be governed by the provisions on Undue Enrichment of the Code.

As we discussed in our article regarding the court decisions on “secured leases”, it makes no difference if the lease itself was already registered at the land department or not. The finding that a lease is void means that it never legally existed and, therefore, as far as the law is concerned, a void lease cannot be, nor ever could have been registered. Even if the legally void lease went through the land office formalities of registration, with registration fees paid, papers signed and stamped by the land officials, it simply does not change the legal non‐existence of the void lease. If you have a void lease agreement, you have nothing.

What about the “actual” agreement the parties entered according to the Phuket court, the sale and purchase agreement? Doesn’t the “lessee” at least have rights under that finding by the court? Not according to the court because, as Section 456 of the CCC provides that:

A sale of immovable property is void unless it is made in writing and registered by the competent official.

And in the courts on both the secured lease case and the recent simple 30+30+30 lease cases concluded that since the “sale” was not made in writing nor registered with the competent official it too was void, never happened as legal matter.

This is now the second case that we are aware of in which Phuket courts have declared long-term leases void. This must be extremely disturbing to many foreign investors investing or intending to invest in real estate in Thailand. Even though the present government is discussing an extension of the current 30-year lease to a maximum of 50 years, the problem of void leases will remain.

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