Avoiding the pitfalls in acquiring real estate in Thailand
Avoiding the pitfalls in acquiring real estate in Thailand
By Jiraporn Thongphong, Attorney at Law at Chaninat & Leeds
9 November 2011
Thailand has become an attractive option for many people interested in acquiring a second home, as well as those in search of a permanent residence or a retirement home. Blessed with warm weather year round, modern health care, a developed infrastructure, safe streets and a fascinating culture, Thailand competes favourably with other destinations around the globe. In addition, Thailand’s growing spa and hotel industries provide opportunities for savvy investors seeking real estate opportunities.
However, foreigners considering acquiring real estate in Thailand need to be aware of the potential pitfalls to ownership. As in any country, there are those ready to take advantage of a foreigner’s lack of knowledge concerning local property law and customs.
Here are the most common risks a property buyer ought to be aware of before signing a real estate transaction in Thailand:
There is no government-mandated licensing process for estate agents. Buyers should never place undue trust in anyone representing themselves as a real estate agent in Thailand before thoroughly checking them out.
Secondly, language and culture barriers exist. Most foreign buyers enter the Thai real estate market without speaking Thai. Moreover, the Thai legal system, as it involves real estate, title deeds and related issues, is likely to be very different to the system a foreign purchaser may be accustomed to.
Finally, many real estate purchasers in Thailand become interested in buying a second home here after having experienced the beauty of Thai nature and culture during a holiday. In many cases, people become infatuated with Thailand and make emotional decisions without hiring qualified legal counsel or conducting due diligence and negotiation.
For the careful investor, however, Thailand provides excellent opportunities for acquiring that dream holiday home, investment property, permanent residence or retirement home.
The risks on the horizon
The types of problems foreign purchasers may walk into are numerous but are, in most cases, preventable.
Perhaps one of the most publicised instances of Thai real estate fraud took place in 2006 on the island of Koh Samui. Government investigations into land companies on the island revealed that thousands of plots of land had been illegally issued title deeds. Deeds for measurements of land exceeded the amount of land on the entire island, and encroachment and development of state-protected reserves was revealed.
Similar cases have occurred elsewhere in Thailand, usually involving land that borders national parks and mountainous areas. Most cases of land fraud are on a smaller scale, however, and usually involve a purchaser or investor not performing proper due diligence, or not demanding basic contractual safeguards.
Less dramatic cases of real estate misrepresentation and fraud can involve foreign clients discovering that their purchased property lacked promised (and paid for) amenities, including water pipes and sanitation systems. There are also cases where buyers have discovered that the title deeds for the property they believed they had purchased were simultaneously sold to another party, leading to lengthy lawsuits. In other cases, overseas buyers have found agents or business partners had suddenly become unresponsive, or disappeared altogether after receiving large deposits.
Know the laws, understand your rights
The basic premise of Thailand Land Law as it concerns foreigners is, unfortunately, often downplayed in real estate brochures and advertisements. The most important point is that Thai law prohibits, with very limited exceptions, foreigners from purchasing freehold land in Thailand.
The Thai law does, however, allow long-term leases and the freehold purchase of condominium units in designated areas. Thai law also allows foreigners to own buildings (but not land) and allows foreigners real estate rights that do not amount to full ownership. In general, it is advisable to be wary of agents who promise outright ownership of freehold land or the use of complicated company “nominee” structures as a way to avoid the prohibition on freehold ownership by foreigners. Most importantly, prospective investors should obtain qualified, independent legal counsel and execute a thorough due diligence.
The safest, and recommended, option for foreigners acquiring legal rights to real estate in Thailand is to use the widely recognised options for land acquisition that do exist. Such options include acquiring land leases, condominiums and land rights such as usufructs and habitation rights.
- Land leases: While Thai law prohibits non-Thai nationals from owning land in the country, foreigners may hold a 100% interest in a Thai land lease for a maximum of 30 years, with the possibility of renewal for additional 30-year periods. Depending on the type of land lease, title deeds may be transferred and inherited, and leases may be negotiated so that the holder has the right to build on, or develop the land in question.
- Usufruct or right to habitation: Under Thai law, a usufruct is essentially a right to use real estate owned by a Thai national for a time period that can be extended until the demise of the usufructuary. Traditionally, a usufruct is used for agricultural purposes. A “right to habitation” under Thai law provides similar rights as the usufruct, but applies to habitation purposes. While usufructs and habitation rights are appealing due to the option to extend them for lifetime periods, they are inferior to leases in a number of ways. Unlike leases, usufruct rights may not be inherited and do not allow holders an absolute right to develop land.
- Company Ownership: Purchasing shares in a Thai-registered company has previously been a common means by which foreigners may obtain property rights in Thailand. In the past, and under certain circumstances, a foreigner may own up to 49% of shares in a Thai limited company that owns land. This method has come under increasing scrutiny. In many cases, this structure is not allowed due to concerns that it may be an attempt to circumvent the prohibition on foreign land ownership by use of Thai nominee shareholders.
- Investments and BOI (board of investment) approval: Another means by which foreign nationals may own land in Thailand is through an investment approved by the Thailand Board of Investment (BOI). Through an investment of 40 million TBHT for 5 consecutive years, foreigners may buy a limited amount of land, provided that the land is used for residential purposes. Foreign companies, alternatively, may request the approval of the BOI to purchase land for a limited time period.
- Condominium Purchase: Foreigners may purchase condominium units in designated projects in Thailand. This is an attractive option for many, as a foreigner may possess outright ownership of condominium units under Thai real estate law. Legally, non-Thai nationals may purchase condominiums in approved locations and projects throughout Thailand, provided that foreign ownership in the building does not exceed 49% of the total floor area.
Foreigners who wish to purchase condominiums in Thailand may do so without a Thai residence permit, provided that they can show proof that funds for the purchase came from outside of Thailand. Foreigners possessing legal Thai residence permits are not required to show evidence of funds from abroad at the time of a condominium purchase. Like many title deeds under land leases, condominiums may be inherited by either Thai or non-Thai nationals.
A final, but ill-considered, method of acquiring land, that has gained notoriety, is using a Thai national to purchase real estate in their own name on behalf of a foreigner. The Thai national may then execute an agreement saying that the land is held for the benefit of a foreign client. This method of land purchase is illegal under Thai law, as it is unlawful for a Thai citizen to act as a nominee for a foreigner in the purchase of real estate. There are a number of problems and risks in following this method.
Due diligence
A thorough due diligence by a qualified attorney offers potential purchasers a good measure of protection from real estate fraud and misrepresentation.
Due diligence is a customary legal investigation based on documents provided by the seller, the legal review of these documents, and then inquiries and investigations based on said documents, all with the aim of providing the purchaser with the maximum amount of information and transparency on the property he or she wishes to acquire. The procedure can also reveal important issues regarding the value of the property.
Due diligence can be extensive or minimal, depending on the property under review. A wide variety of documents may be requested for review, including, but not limited to:
- Copies of the title deed;
- Copies of the ID cards and signatures of the owners;
- Copies of insurance policies covering the land in question;
- Descriptions of lawsuits a land owner might have been involved in;
- Copies of land leases;
- Should the property in question include a business or enterprise, copies of assets owned by the company, and employee names and their salaries;
- Copies of mortgages registered against the land.
Due diligence normally also involves enquiries to the Government Land Department as well as inspection of the land involved. Most law firms will provide a detailed report that outlines potential risks and considerations.
Investment in Thai real estate can still be secure
Acquiring a second home in Thailand is an attractive option for many people. Thousands of foreigners successfully and securely acquire properties in Thailand each year. However, due care must be taken. Prospective investors should retain a qualified law firm and complete the necessary due diligence and not sign anything, or deposit funds, until potential risks have been either eliminated or minimized. The extra time, effort and expense involved in hiring a qualified attorney to oversee the purchasing process is well worth the payoff of the carefree enjoyment of a residence in one of the most beautiful countries on earth.
*Remarks
Much of the information in the article has been (unofficially) translated from clauses contained in the Act.
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