For decades, property developers and sellers in Thailand have offered long-term leases structured with renewal options (often referred to as “30+30+30” leases) to foreigners.
As we have informed our clients for years, this extended 30-year lease arrangement is illegal pursuant to Section 540 of the Thai Civil and Commercial Code (“Thai CCC”) and also raises risks of liability under Section 86 of the Thailand Land Code, and its prohibition of land being owned by non-Thai nationals, as well as the Foreign Business Act regarding the use of nominee Thai shareholders.
A Thailand Supreme Court ruling (Decision No. 4655/2566) issued in 2023 should place foreign investors and residents on notice of the risks of following legal advice from non-qualified lawyers, real estate landowners, property developers, sales agents, and questionable online sources, instead of seeking a qualified attorney.
In a recently published case (4655/2566), the Supreme Court of Thailand examined a renewal clause in a long-term lease contract and its compatibility with Section 540 of the Thai CCC, which prohibits lease terms that exceed 30 years. The decision in this case was that the renewal provisions are void.
This judgment has received attention in various publications and social media sites, some of which portray it as a reversal of previous decisions on lease terms and renewals under Thai law. This has understandably caused quite a lot of unrest among foreign lessees in Thailand and parties marketing properties (including condominium units) with long-term leases to foreign buyers. Should lessees, developers, and potential buyers really be that concerned?
Summary of Facts
The case stems from a lease granted over a property in Phuket. The plaintiff, who owns the property, had entered into a 30-year lease agreement for both the land and an (at that time) existing house (“Lease Agreement”) with the defendant for 1,500,000 baht on 10 May 1990. Pursuant to Clause 3 of the Lease Agreement, the parties had agreed that in the event the initial 30-year lease expired, and the defendant wished to continue leasing the land and the house, the plaintiff would allow him to do so.
On the same day the Lease Agreement was entered into, the parties also entered into a separate agreement. Under the terms of this agreement, the defendant promised to pay the plaintiff an additional 1,200,000 baht by November 1990 to extend the lease by two further terms for a total of 60 years (“Lease Extension Agreement”).
Although the parties seemingly agreed to a cumulative lease of 90 years, toward the end of the first term in 2020, the plaintiff notified the defendant and his associates to vacate the land and house, and to dismantle the structures (another house and garage) built by the defendant on the land, which the defendant refused.
Consequently, the lessor filed a complaint in the District Court in Phuket seeking damages of 120,000 baht per month from the date of the lawsuit until such time that the defendant and his associates removed their belongings from the land and house. In response, the defendant filed a counterclaim, requesting (i) a dismissal of the plaintiff’s demands; and (ii) for the court to order the registration of a new lease term of 30 years for which the defendant had already paid (i.e., Baht 600,000 out of Baht 1,200,000).
Decision of the Trial Court
In the court of first instance, the defendant prevailed. The trial court dismissed the plaintiff’s case and ordered the plaintiff to register another lease term for a period of 30 years, starting from May 22, 2020. The plaintiff appealed.
Decision of the Court of Appeal Region 8
On appeal, the Court of Appeal Region 8 reversed the trial court’s decision and ordered the eviction. The defendant was to hand over the land and house in good condition to the plaintiff, dismantle the structures built by the defendant on the land, and pay the plaintiff damages of 50,000 baht per month from the date of the lawsuit until the defendant had complied with such order. The defendant was also prohibited from interfering with the land and house any further. The defendant appealed.
Decision of the Supreme Court
The Supreme Court found that the key issue to be determined was whether the plaintiff had the right to evict the defendant, or whether a personal rights contract had arisen between the parties.
Of immediate relevance is Section 540 of the Thai CCC, which provides that:
“The duration of a lease of immovable property may not exceed thirty years. If a lease is made for a longer period, it shall be reduced to thirty years. Upon expiration, the lease may be renewed, provided that each renewal term does not exceed thirty years from the date of renewal.”
According to the Supreme Court, Section 540 of the Thai CCC prohibits leases that exceed a period of 30 years. If a lease term exceeds 30 years, it must be reduced to 30 years. The Supreme Court did acknowledge that after the initial 30-year term expires, the lease can be renewed.
The Supreme Court held that the parties’ arrangements were intended to secure a lease term exceeding the 30-year statutory limit. In addition to the initial 30-year lease, the lessor had agreed in advance to grant two further 30-year terms on the same conditions, and the lessee had prepaid the rent for those future terms. The Court therefore found that the agreements were structured to circumvent Section 540 of the Thai CCC.
In its reasoning, the Supreme Court considered that because the condition of the leased property is likely to change over the course of a long-term lease, such that its economic value cannot be predicted, lease terms should be limited to 30 years to protect parties from any advantages or disadvantages that can arise as a result.
The Supreme Court did not agree with the defendant’s argument that the renewal provisions in the main lease and the separate agreement, along with the payment made by the lessee in advance for the two renewals, created enforceable personal contractual rights.
The Court argued that allowing this would circumvent the mandatory provisions of law contained in the first part of Section 540.
A decisive factor in forming the Supreme Court’s judgment can be found in the summary of the judgment: “The promise made by the plaintiff and the defendant effectively adheres to the original rental rate and conditions in every respect.” In this case, the rental amount for the two future lease periods was fixed at a lower rate than the rental for the first 30 years.
Considering the above, the Supreme Court upheld the decision of the Court of Appeal Region 8 and further ruled that the refusal by the defendant to leave the property amounted to a tort and that damages were payable at a rate of Baht 30,000 per month.
The Court was particularly skeptical about lease renewals where the conditions of the first and second renewals remained the same as those agreed upon for the first term. This implies that renewal terms may be upheld as long as they reflect future circumstances.
Conclusion
This case does not overturn earlier court decisions, contrary to what has been claimed online. The judgment must be considered in the context of the unambiguous provisions of Section 540. This decision clarifies and confirms what has always been the law in Thailand concerning long-term leases as stated in Thai CCC Section 540.
Normally, skilled lawyers can create legal structures and agreements that can achieve a client’s objectives without violating the law. In this case, however, the lease agreement appeared to blatantly violate Section 540 of the Thai CCC. For experienced Thai lawyers, the Supreme Court decision is not a surprise, but only confirms what was already the law and is consistent with the advice we have provided our clients for decades.
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