Phuket court rules ‘secured’ or ‘collective’ leases are void

Construction News


The terms may look tempting, but will the courts agree?

PHUKET: — In a shock decision by the Phuket Civil Court, backed by the Region 8 Appellate Court, it has been ruled that the so-called “secured leases” offered by some real estate developers to allow foreigners to secure a cast-iron 90-year lease are not valid.

The case is now to go to the Supreme Court.

The Phuket News’ legal correspondent, Jerrold Kippen, has revealed that not only has the structure been ruled invalid but the courts’ decision may mean that the original underlying 30-year lease, even if registered with the Land Office, is now void – it never existed, leaving the buyer with two handfuls of nothing.

Mr Kippen explained, “As a general rule foreigners cannot own land and apartment units but it is possible for foreigners to lease them and that is the reason why these are commonly marketed to foreign buyers on a leasehold basis.

“Under Thai law the maximum lease term is 30 years, which may be renewed upon expiration of that term.

“The leases marketed to foreigners typically provide for an initial 30-year term plus two additional successive 30-year renewal terms.

“However, the renewal of a lease in Thailand is by no means assured even if it is provided for in the original lease agreement.”

He explained that in order to overcome this issue the “Secured” or “Collective” Lease was devised and marketed to foreigners. This is meant to ensure that the lease is renewed, twice, as originally agreed.

The way this “security” is supposedly provided is by the buyer not only entering into a lease agreement with the Thai company that owns the developer’s land/apartment, but also entering into a share-sale-and-purchase agreement for shares that control the Thai company that owns the developer’s land/apartment.

Now, however, two Thai courts have concluded that the “Secured” Lease is “void” as a matter of law.

A contract that is found to be void is considered never to have existed.

If other courts confirm these two courts’ opinions, then not only will any renewal term of “Secured” Leases be invalid but also the current lease terms.

“This would be the case regardless of whether such a lease was already registered,” Mr Kippen said.

“Why? Because a 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 because, legally, nothing happened by such acts.”

In the test case now headed for the Supreme Court, the buyers entered into the project’s “Secured” Lease structure. Leases, in this case for apartments, were registered several years ago.

The lessees filed a civil case against the developer of the project in the Civil Court to protect their leasehold rights. Neither the buyers nor the developer argued that the leases were not valid.

Quite the contrary: they both relied on provisions of the leases to support their respective arguments.

However, the court decided on its own that the leases – when considered in light of the share-sale-and-purchase agreement for the shares that control the Thai company that owns the developer’s land/apartments – were actually fictitious agreements made to conceal what the parties had actually agreed: to sell and buy the relevant real estate.

“Section 155 of the Civil and Commercial Code of Thailand (CCC) provides that if two parties enter a fictitious agreement in order to conceal their real agreement, the fictitious agreement is void.

“It goes on to state that although the fictitious agreement is void, the hidden agreement that the parties actually made must then be evaluated under the provisions applicable to it,” Mr Kippen explained.

“In this case, the courts ruled that the parties had entered into fictitious lease agreements through the “Secured” Lease structure and had done so in order to hide their actual agreement to sell and buy the properties.”

The court, he said, decided this meant that the leases were void and that the provisions of Section 456 of the CCC applied to the “real” sale and purchase agreements.

Section 456 provides, in pertinent part, that “a sale of immovable property is void unless it is made in writing and registered by the competent official.”

The court then concluded that since these sales were not made in writing nor registered with the competent official, they too were void.

This ruling, by a sole trial court judge, was then appealed to a three-judge appeal court panel. The Appellate Court confirmed the trial court’s decision on the very same factual and legal grounds as the trial court outlined above:

– The “Secured” Leases with their lease-plus-share-sale-purchase agreements were fictitious agreements meant to conceal actual sale-and-purchase agreements for the real estate; thus

– The leases and share-sale-purchase agreements were void; as were

– The actual concealed real estate sale-and-purchase agreements because they were not made in writing or registered with the competent official.

“Taking these new decisions into account the “Secured” Lease not only does little if anything to address the very real insecurity that your long-term lease will not be renewed, but it also could have the disastrous consequence that your current lease could be considered legally void,” Mr Kippen said.

“And according to these courts’ analysis, anyone who has already invested or is considering investing in such a structure is facing the immediate loss of the investment.”

The good news, he said, is that secured leases can be restructured to provide actual long-term lease security legally and without any downside to the developer by securing the pre-paid renewal terms with a mortgage over the land involved.

“It is a simple and straightforward legal structure that provides security for the investor. A current ‘Secured’ Lease can be restructured into this better and genuinely secure alternative, before it is too late.

“As always,” he added, “you should engage competent legal and tax counsel in order to implement this mortgage-based security structure successfully.”