Financing
Secured lending
Discuss the types of real estate security instruments available to lenders in your jurisdiction. Who are the typical providers of real estate financing in your country? Are there any restrictions on who may provide financing?
A mortgage is commonly used to secure the performance of an obligation.
Property used in a real estate business can also be used as collateral under the Business Collateral Act of 2015. Security receivers under this law are limited to financial institutions and other entities specifically prescribed by law. Business collateral is similar to a mortgage.
There are two basic methods for enforcement of mortgage and collateral, whether by way of public auction or foreclosure of property. Considering the time-consuming process of foreclosure, a public auction is more common, but it still takes a long time to complete enforcement. As the parties cannot agree on enforcement otherwise, only those two measures are available to enforce security.
Real estate financing in Thailand is usually given by financial institutions. Generally, commercial banks are qualified to act as finance providers.
Leasehold financing
Is financing available for ground (or head) leases in your jurisdiction? How does the financing differ from financing for land ownership transactions?
A leasehold, particularly for a commercial or industrial purpose, can be mortgaged under the Lease of Immovable Property for Commercial and Industrial Purposes Act of 1999.
A leasehold can also be used as collateral under the Business Collateral Act of 2015, provided that the business collateral agreement is made in writing and registered at the Department of Business Development.
In addition, a right over leasehold assets under the Rights over the Leasehold Asset Act of 2019, which is similar to the leasehold right in some respects, can also be mortgaged, provided that such right can be established only for land or condominium, with a valid title deed. It must be registered with the competent land office.
Leasehold financing usually requires consent from the landowner so that the enforcement thereof may be executed more smoothly. There are no specific lease provisions required in a ground lease to make it financeable.
Form of security
What is the method of creating and perfecting a security interest in real estate?
One of the most typical methods to create a security interest over real estate is a mortgage. A mortgage must be in writing and registered at the competent land office.
As for collateral, under the Business Collateral Act of 2015, the execution, amendment, cancellation and revocation of business collateral agreements must be made in writing and registered at the Department of Business Development. Information about registered collateral is publicly available.
Valuation
Are third-party real estate appraisals required by lenders for their underwriting of loans? Are there government or industry standards for appraisals? Must appraisers have specific qualifications or required government or industry certifications? Who is required to order the appraisal?
An appraisal report may be requested by the lender. Currently, as regulations for real estate appraisals are still under consideration, such activity is not regulated under Thai law; meanwhile, an appraisal is a profession supervised by the private associations (ie, Thai Valuer Association or Valuer Association of Thailand) through the membership system where appraisers could voluntarily register themselves and agree to comply with the appraisal standard thereof. However, in practice, certain transactions may require appraisers to be certified by such private associations and, in addition, to be approved by the relevant authorities such as the Securities Exchange Commission, the Bank of Thailand or the Office of Insurance Commission.
Legal requirements
What would be the ramifications of a lender from another jurisdiction making a loan secured by collateral in your jurisdiction? What is the form of lien documents in your jurisdiction? What other issues would you note for your clients?
In principle, a loan made by foreign lenders to borrowers in Thailand may be subject to foreign business restrictions, and if such a loan is secured by collateral located in Thailand, the loan is highly likely to be subject to foreign business restrictions. Therefore, making a loan secured by collateral in Thailand from another jurisdiction would be prohibited in principle unless a licence from the Ministry of Commerce is provided. However, it is difficult for offshore entities to obtain such a licence in practice.
Loan interest rates
How are interest rates on commercial and high-value property loans commonly set? What rate of interest is legally impermissible in your jurisdiction and what are the consequences if a loan exceeds the legally permissible rate?
In Thailand, the Thai Baht Interest Rate Fixing (THBFIX), or minimum lending rate, was previously used to determine a floating rate loan’s interest rate. However, it was discontinued at the end of June 2023. Existing loans using THBFIX shall be automatically subject to the Fallback Rate, which will be discontinued at the end of 2025. New loans are encouraged by the Bank of Thailand to use the Thai overnight repurchase rate (THOR).
In principle, under Thai law, the chargeable interest rate shall not exceed 15 per cent per annum. An agreement on interest exceeding the prescribed rate will be invalid and the lender will be subject to criminal liability under the Excessive Interest Rate Prohibition Act of 2017.
Regarding interest rates chargeable by financial institutions, the interest rate for loans can be set by themselves under the supervision of the Bank of Thailand. For transactions other than loans, the chargeable rate shall not exceed the maximum rate prescribed by the Bank of Thailand.
Loan default and enforcement
How are remedies against a debtor in default enforced in your jurisdiction? Is one action sufficient to realise all types of collateral? What is the time frame for foreclosure and in what circumstances can a lender bring a foreclosure proceeding? Are there restrictions on the types of legal actions that may be brought by lenders?
Enforcement of a debtor’s obligations under a loan agreement can be made through judicial proceedings. Mortgage or business collateral can also be enforced through judicial proceedings. As the court judgment is a prerequisite for public auction, this process could take some time.
Loan deficiency claims
Are lenders entitled to recover a money judgment against the borrower or guarantor for any deficiency between the outstanding loan balance and the amount recovered in the foreclosure? Are there time limits on a lender seeking a deficiency judgment? Are there any limitations on the amount or method of calculation of the deficiency?
Under Thai laws regarding mortgages, if the amount received from the foreclosure of the mortgaged property or from sale by public auction of the same is less than the outstanding loan balance, the lender cannot recover the deficiency from the borrower unless it explicitly agrees otherwise in the loan agreement. This principle is applicable in cases where the borrower or any third party assigns his or her property to secure the borrower’s loan.
For enforcement of collateral under the Business Collateral Act of 2015, the lender can recover deficiency after the sale of collateral, provided that the claim for deficiency can be made only against the borrower. The lender, however, cannot recover deficiency after foreclosure.
Protection of collateral
What actions can a lender take to protect its collateral until it has possession of the property?
A lender can request an injunction from the court to prevent the borrower from disposing of the mortgaged property.
Recourse
May security documents provide for recourse to all of the assets of the borrower? Is recourse typically limited to the collateral and does that have significance in a bankruptcy or insolvency filing? Is personal recourse to guarantors limited to actions such as bankruptcy filing, sale of the mortgaged or hypothecated property or additional financing encumbering the mortgaged or hypothecated property or ownership interests in the borrower?
Where a security is provided to secure the debt, lenders can choose to bring a case against the borrower either to request repayment under the loan agreement or to enforce the security under the mortgage agreement. When choosing to claim for repayment, the lender will be able to recourse from all assets of the borrower, while, upon enforcement of a security, lenders can recourse only from such security. Recourse is not typically limited to the collateral.
Recourse from the borrower’s asset is generally not prohibited in the bankruptcy proceedings unless it is deemed as fraudulent or the court has ordered otherwise. However, it is prohibited in a business reorganisation procedure unless the court’s approval is granted.
Personal recourse against a guarantor is generally not limited only to an action of bankruptcy or sale or foreclosure of the mortgaged property.
Cash management and reserves
Is it typical to require a cash management system and do lenders typically take reserves? For what purposes are reserves usually required?
In Thailand, lenders, particularly commercial banks, usually require borrowers to open and use particular bank accounts for cash management control of borrowers. Commercial banks sometimes require certain amounts of reserves from borrowers to maintain their working capital.
Credit enhancements
What other types of credit enhancements are common? What about forms of guarantee?
It is common for a lender to obtain credit enhancements, even if mortgages and other security arrangements are taken. Letters of credit and guarantees are commonly used as enhancements in Thailand.
Loan covenants
What covenants are commonly required by the lender in loan documents?
In the case of a limited recourse loan, it is common to incorporate a set of covenants to protect the lender, while a recourse loan arrangement (typically for corporate loans) is much more limited in scope and number. Covenants commonly required include affirmative covenants, such as compliance with relevant laws, and negative covenants, such as restrictions imposed on the borrower in relation to merger and acquisition, disposal of assets, making payment and creation of additional encumbrance. Covenants in loan documents are not generally different depending on asset classes, but covenants for freehold and leasehold may be different.
Financial covenants
What are typical financial covenants required by lenders?
Financial covenants that are typically required by lenders mostly concern the financial status of borrowers, such as maintenance of debt-service-coverage ratio, debt-to-equity ratio, registered capital (in the case of a corporate borrower) and the amount of debt not exceeding the specified amount or ratio. Lenders will usually require borrowers to report their financial status upon request or within a specified period.
Secured movable (personal) property
What are the requirements for creation and perfection of a security interest in movable (personal) property? Is a ‘control’ agreement necessary to perfect a security interest and, if so, what is required?
Typical forms of security interests in movable property are:
- pledges;
- business collaterals; and
- mortgages on specific types of movable property, such as machinery registered with the Department of Industrial Works, vessels, equipment and trade fixtures.
A ‘pledge’ is defined as a contract in which the pledgor delivers to the pledgee a movable property as security for the performance of obligation. The pledged property must be a movable property or the right represented by a written instrument and must be delivered into and kept in the possession of the pledgee or by a third person throughout the period of pledge. A pledge becomes valid and perfect upon the delivery of the pledged property into possession of the pledgee.
A mortgage does not require the delivery of the property to the mortgagee. A mortgage becomes valid and perfect upon registration at the competent land office.
Movable property that borrowers use in business operations (eg, machinery, goods, inventories or raw materials), can also be collateral under the Business Collateral Act of 2015. The method of creating and perfecting a collateral agreement for movable property is similar to that for immovable property.
Single purpose entity (SPE)
Do lenders require that each borrower be an SPE? What are the requirements to create and maintain an SPE? Is there a concept of an independent director of SPEs and, if so, what is the purpose? If the independent director is in place to prevent a bankruptcy or insolvency filing, has the concept been upheld?
In the case of a non-recourse loan, the lender will sometimes require that a borrower be an SPE. As fully non-recourse loans are not common in Thailand, it is not common that the lender will require the appointment of an independent director as well as the submission of a non-petition letter (as Thai bankruptcy law chooses an involuntary system).
