Collective Leasehold

Phuket and neighbouring provinces contain some of the finest villa developments in Thailand. Thai law generally prohibits foreigners from owning land, however they are allowed to own buildings. A common method for foreigners to purchase a villa is to lease a land plot from a Thai landowner, and purchase or construct the villa. Thai law permits registered leases with a maximum lease term of 30 years. At the end of this term, the lease may be renewed together by the lessor and lessee but such a renewal agreement is by contract only. Most land lease agreements for the leasing of land in Phuket’s villa developments contain provisions stating that the lease will be renewed for two additional 30-year terms. As such, a common lease arrangement is 30 years + 30 years + 30 years, totally 90 years. This provides a time period that can be considered “near-freehold”.

Challenges Of Leasehold Arrangements

A significant drawback with such leasehold arrangements is that there is no legal guarantee that a landowner will actually renew the lease. Thai law does not require such lease renewals. A lessor’s ‘obligation’ to renew a lease is merely a contractual promise. If the lessor chooses not to renew the lease, it is a breach of contract, and not a violation of the law per se. The likelihood of a lessor breaking a contractual promise to renew a lease increases when the land is transferred to a third party, as is likely during a 30-year term.

Collective Leasehold

Despite the challenges outlined above, a structure is available that can provide greater security for villa owners. The structure is known as ‘Collective Leasehold’ or also ‘Protected Leasehold’, where owners, as a group, take a minority shareholding in the landowning company via a corporate entity. Through corporate and legal structuring, the owners would be able to provide their opinions on issues regarding the landowning company. This structure works by all the owners in a development each owning shares in an offshore (non-Thai) company. Usually, such shareholding corresponds with the land plots leased. In other words, if an owner leases two plots, they would own two shares in the ‘owners’ company’. This offshore company would then purchase a minority stake in the landowning company. The owners have a say in the landowning company’s corporate decision-making and therefore have more control over their own villa investments. The primary drawback of the collective leasehold structure is that it requires the full consent of the landowner to be implemented.

The structure can ultimately be beneficial to landowners, who are often the villa project’s developer, in that greater owner security means a more attractive project to potential investors.