Acquisitions and leases
Ownership and occupancy
Describe the various categories of legal ownership, leasehold or other occupancy interests in real estate customarily used and recognised in your jurisdiction.
Legal ownership and occupancy interests in real estate that are well recognised under Thai law include the following:
- ownership: an absolute right granted to the owner of property to use and dispose it or to acquire its fruits or to recover it from any person not entitled to take it, and prevent such person from unlawful interference;
- servitude: commonly known as a ‘right of a way’ or ‘easement’, which is a property right granted to the dominant property on the servient property for access by foot or vehicle or use in any means; and
- right over leasehold asset: a right granted by the owner of real estate over a plot of land, a building on land or a condominium to create and register a transferrable right over the property of the owner for a maximum period of 30 years. The right is transferrable and can be inherited and pledged as a security. The right over the leasehold asset shall be registered with the competent land office.
Other than the above, other forms of occupancy interest include leaseholds, mortgages, joint ownership, possession, habitation, usufruct, superficies and charges.
Pre-contract
What are the typical pre-contractual steps?
At the pre-contractual stage of sale of real property of substantial value, there are the submission of reservation form, undertaking of comprehensive due diligence, or execution of the letter of intent between the parties by a potential buyer. The legal effects of pre-contractual documents depend on the intentions of the parties. The parties can reserve certain provisions in the agreement to have either non-binding effect for common understanding between the parties or to have legal and binding effect on the parties, which the court may enforce.
During the course of negotiation, it is not customary for the owner to take the property off the market.
Having a real estate broker is not necessary for the transaction, but they are sometimes involved. Real estate brokers in Thailand are not specifically regulated. Thus, it does not require any educational requirements, certification, caps on commission, disclosure obligations or professional conduct regulations in Thailand.
Contract of sale
What are typical provisions in a contract of sale?
A sale contract typically includes the following particulars:
- details of the property (eg, location and title owner);
- details of seller and buyer;
- purchase price and payment term;
- registration of transfer of property;
- taxes, fees and expense payment;
- representations and warranties of seller and buyer; and
- termination and breach of contract.
Typically, the down payment varies from 10 per cent to 20 per cent of the purchase price. In Thailand, it is not common to have an escrow arrangement. The buyer can verify the good title to property from the land title deed available at the competent land office at the buyer’s expense.
Typical representations and warranties with respect to the title of property provided by the seller are legal ownership, transferability and confirmation on non-encumbrance on the property, due or outstanding taxes or payment for the property, pending or potential litigations or claims, and compliance with the relevant laws and regulations.
Environmental clean-up
Who takes responsibility for a future environmental clean-up? Are clauses regarding long-term environmental liability and indemnity that survive the term of a contract common? What are typical general covenants? What remedies do the seller and buyer have for breach?
The Enhancement and Conservation of National Environmental Quality Act of 1992 prescribes a duty of care for a business operator (ie, owner or operator) and imposes strict liability on them. A business operator who is a source of pollution or contamination that causes death, bodily harm or health injury to any person, or causes damage to the property of any individual or the state shall be liable for the compensation or damages, including expenses incurred by government services, for pollution clean-up.
When purchasing commercial real property, buyers sometimes conduct an environmental land survey, and generally the cost of the survey will be borne by them. If any contamination is found as a result of the survey, generally the seller will be responsible for the clean-up of such contamination unless the transaction is on an as-is basis.
Clauses regarding long-term environmental liability and indemnity that survive the term of a contract are not common in Thailand.
If any environmental defect is discovered on the target real estate before the execution of a real estate sales contract, the buyer usually requires the seller’s covenant to cure that environmental defect before or after the closing. Completion thereof shall be stipulated as one of the closing conditions, or by setting such covenant as a post-closing obligation of the seller.
For breach of the provisions, remedies will be contractual damages or request for termination of the contract of sale.
Lease covenants and representation
What are typical representations made by sellers of property regarding existing leases? What are typical covenants made by sellers of property concerning leases between contract date and closing date? Do they cover brokerage agreements and do they survive after property sale is completed? Are estoppel certificates from tenants customarily required as a condition to the obligation of the buyer to close under a contract of sale?
Representations and warranties from the seller usually include confirmation of any existing lease agreement, no current breach of lease agreement and completion of rent payment.
Typical covenants from the contract date to the closing include clauses on no material adverse change for the existing lease or no change of the lessor and the lessee.
Generally, representations and covenants do not cover brokerage agreements.
Lease representations and covenants generally do not survive after the completion of the sale.
Estoppel certificates are not customarily required for the purchase of property that contains a large number of tenants as a condition to confirm the status of each lease agreement prior to the sale.
Leases and real estate security instruments
Is a lease generally subordinate to a security instrument pursuant to the provisions of the lease? What are the legal consequences of a lease being superior in priority to a security instrument upon foreclosure? Do lenders typically require subordination and non-disturbance agreements from tenants? Are ground (or head) leases treated differently from other commercial leases?
Whether the lease will survive the enforcement of security interest (ie, mortgage) depends on the sequence of creation of the lease.
If the lease is created after the security interest, it may not generally be subordinated, as registration of lease cannot be made without having the consent of the mortgagee, and as long as the consent of the mortgagee is provided, the lease will survive after enforcement of mortgage. If the lease is created prior to the security interest, the lease will remain in effect for its full legal term upon the enforcement of the security interest.
The lender may ask tenants to enter into subordination and non-disturbance agreement.
Unless otherwise stipulated in the lease agreement, the above analysis is applicable to either ground (head) leases or sub-commercial leases, as they are considered the same under Thai law.
Delivery of security deposits
What steps are taken to ensure delivery of tenant security deposits to a buyer? How common are security deposits under a lease? Do leases customarily have periodic rent resets or reviews?
When ownership of real property is transferred to a buyer, all obligations under a perfected lease with respect to such real property (including the obligation to repay security deposits to existing tenants) are automatically transferred to the buyer. To ensure delivery of all security deposits, it is common for the buyer to offset the amount of such tenants’ security deposits against the purchase price.
When entering into the lease agreement, a security deposit is commonly given to ensure the performance of obligations to the lessor. It can be made in any form of payment and it is customarily made in immediately available funds (eg, cash or cashier cheque), rather than letter of credit or bank guarantee.
It is common for residential and commercial leases to have a short term (usually not more than three years) to avoid the burden of registration and to have rent reviews at the end of each term.
Due diligence
What due diligence should be conducted before executing a contract? Is any due diligence customarily permitted or conducted after contract but before closing? What is the typical method of title searches and are they customary? How and to what extent may acquirers protect themselves against bad title? Discuss the priority among the various interests in the estate. Is it customary to obtain government confirmation, a zoning report or legal opinion regarding legal use and occupancy?
It is common to have lawyers perform a legal due diligence investigation, regardless of the size of transaction. Due diligence is generally completed prior to the execution of a contract.
As the priority of interests in real estate is statutorily created as a result of registration with the land office, most information is usually obtained from the competent land office and other relevant government authorities.
As a preventive measure in real estate transactions, representations and warranties and indemnification clauses will provide contractual protection to buyer. There is no practice to use title insurance, legal title opinion or indemnity funds.
It is not usual, but if necessary, a written official confirmation letter from the competent authorities regarding legal use and occupancy can sometimes be obtained to confirm compliance and avoid potential disputes regarding the target property after closing.
Structural and environmental reviews
Is it customary to arrange an engineering or environmental review? What are the typical requirements of such reviews? Is it customary to get representations or an indemnity? Is environmental insurance available?
Unless it is a large-scale investment project, it is not common to have an engineering company review the legality of the structure, use and occupancy of relevant real estate. Representations and indemnities on technical perspectives (eg, engineering and environment) are customarily provided.
Environmental insurance is available, but not common in Thailand.
Review of leases
Do lawyers usually review leases or are they reviewed on the business side? What are the lease issues you point out to your clients?
As long as it is an important agreement, a lease agreement is usually reviewed, not only from a business perspective, but also from a legal perspective by lawyers. One of the key legal issues to point out in particular under Thai law is how to keep a leasehold for more than 30 years for long-term projects.
Lenders generally do not allow a property management agreement to be prioritised to financing security instruments, but do not in practice require it to be subordinated to financing security instruments should it be deemed the ordinary course of business of the borrower.
Other agreements
What other agreements does a lawyer customarily review?
In commercial property transactions, in addition to the real property contract of sale itself, it is customary for lawyers to review a variety of other transaction-related documents, including:
- certified copy of title deed;
- official purchase and sale agreement;
- construction permit and an occupancy permit;
- property management agreements and other service contracts; and
- debt financing-related agreements, if applicable.
Closing preparations
How does a lawyer customarily prepare for a closing of an acquisition, leasing or financing?
Actions taken at the closing include the preparation of the list of deliverables, based on the agreement contemplating the transaction. Usually, lawyers have the important role of organising the closing to run smoothly. This involves not only preparation of the documents and a dry run through the closing and checklist, but also coordination with the competent land office to cross-check the application to be registered on the closing date and to estimate the taxes, fees and expenses payable in advance.
The list of deliverables may include:
- confirmation of consideration payment;
- personal and organisational documents to verify authority and internal approval to enter into the transaction;
- original or copies of title documents;
- application to register the transaction at the competent land office; and
- confirmation letter from the relevant authorities, if applicable.
The time from the contract date to the closing date may be subject to the nature of the transaction, but it may take three to six months.
Thai parties usually use the signature of an authorised director with the company seal (if necessary) to execute documents, with confirmation of due corporate authorisation of the authorised director duly registered at the Department of Business Development.
Debt finance advancement is usually necessary for sourcing part of the real estate purchase price, and a lender or other debt finance provider always requires immediate perfection of the security interest over the purchased real estate upon advancement of the loan. The timing of the closing and funding should normally be simultaneous or very closely executed.
Closing formalities
Is the closing of the transfer, leasing or financing done in person with all parties present? Is it necessary for any agency or representative of the government or specially licensed agent to be in attendance to approve or verify and confirm the transaction?
A closing meeting for the transfer is usually held at a law firm, the competent land office or one party’s office, depending on the case. The closing shall be conducted by having either the parties themselves or their representatives under the power of attorney present to submit the application at the competent land office, as the registration is required to complete any property-related activities, including conveyance or creation of mortgage. Once the registration is successfully completed, the official fees and taxes shall be paid, recording of transaction will be made on the title document and an official receipt thereto will be issued as an evidence of registration.
Contract breach
What are the remedies for breach of a contract to sell or finance real estate?
Regarding the execution of a real estate sale contract, the seller may request a down payment from the buyer as part of the payment obligation. However, in practice, the parties usually request a deposit to secure obligations under the contract. In general, the receiving party may forfeit the deposit if the giving party breaches the contract. On the other hand, the receiving party is generally obliged to return the deposit if the receiving party breaches the contract. In addition, if a party breaches the contract, the other party can terminate the contract and each party shall be restored to the original states. A non-defaulting party can enforce the contract in case of non-performance and claim damages against the defaulting party through the court proceedings.
Breach of lease terms
What remedies are available to tenants and landlords for breach of the terms of the lease? Is there a customary procedure to evict a defaulting tenant and can a tenant claim damages from a landlord? Do general contract or special real estate rules apply? Are the remedies available to landlords different for commercial and residential leases?
Remedies are provided for tenants and landlords upon the breach of lease agreement (eg, termination by the non-defaulting party and claiming damages).
When the lessee defaults, eviction cannot be enforced against the lessee unless a court order is given. An execution officer will be appointed to process the eviction and restore the possession of the leased property to the lessor.
There is no material difference between the proof of remedies of commercial and residential leases.
