Why Selling a Lease Thailand Law Requires Both Assignment and Novation
Selling a lease Thailand parties attempt through assignment alone is legally incomplete — the Civil and Commercial Code requires both an assignment of rights and a novation of obligations to fully transfer a lease.“Assignment” and “novation” are lofty-sounding legal terms frequently used by consultants and lawyers — in Phuket, especially often in relation to lease agreements. It’s important that anyone considering using these mechanisms clearly understands their legal meaning and effect, and the starting point for that understanding must be what these terms actually mean under Thai law. Recently, however, a Thailand English-language news publication discussed assignment and novation in a way that was, unfortunately, inaccurate — describing them as “viable options when it comes to resale of a lease.” In this article, we’ll explain the legal concept of assignment and novation, and examine whether these are really “options” that parties are free to choose between.
The term “assignment” does not appear directly in the Civil and Commercial Code of Thailand (CCC). Instead, the CCC, in Book II, Chapter IV, refers to the “Transfer of Claims.” Section 303 of the CCC states that a claim may be transferred unless its nature does not permit it. It’s important to understand that what may be transferred under Chapter IV is a “claim” — or, in plain terms, a “right.” A loan repayment is one example of such a claim: the lender is entitled to “transfer” that claim, and the borrower’s authorization is not legally required for the transfer to be binding — notice to the debtor from the relevant creditor is sufficient (Section 306 CCC).
In a lease relationship, the parties hold reciprocal claims against one another. However, Section 544 of the CCC restricts a lessee’s right to transfer possession of the leased property to a new lessee “unless otherwise provided in the contract.” It is therefore generally highly advisable for lessees entering into a long-term lease to secure such transfer rights in the agreement itself.
Novation, by contrast, is governed by Chapter V (“Extinction of Obligations”), Part IV of the CCC. Section 349 provides that when parties conclude a contract changing the essential elements of an obligation, that obligation is extinguished through novation. Section 350 specifies that a novation involving a change of debtor may be effected through a contract between the creditor and the new debtor, but cannot be carried out against the will of the original debtor.
Returning to our lease example: a lease relationship involves reciprocal obligations — the lessor is obligated to provide possession of the property, and the lessee is obligated to make lease payments. The lessee is therefore the “debtor” with respect to lease payments, while the lessor is the “debtor” with respect to providing possession. It is always important, then, to identify precisely which obligation — and which party’s status as debtor for that obligation — is being “novated.”
In a typical lease sale, a lessee “sells” their lease to a third party. The lessee holds the right to claim possession of the property from the lessor, and that right must be assigned to the new lessee in accordance with Section 303 ff. of the CCC (Transfer of Claims). At the same time, the lessee is also a debtor with respect to the rental payment obligation. This means a novation agreement between the lessor and the third party — with the lessee’s approval, per Section 350 of the CCC — is also required. Both elements are necessary for the third party to fully “step into the shoes” of the original lessee. Parties to a contract with typical reciprocal rights and obligations are therefore not free to simply choose between novation and assignment when “selling” a lease.
Based on the above, what is such a “sale” legally? It is an assignment and a novation — not an assignment or a novation.
Finally, it’s worth noting that once both the rights and obligations of a party have been transferred and novated to a new party, a new contract comes into being. This is particularly significant where the contract in question is a lease in Thailand: if the remaining lease term carried over into the new contract exceeds three years, that term will only be enforceable for up to three years unless the new contract is registered at the relevant land office.
Anyone selling a lease Thailand law governs should ensure both the assignment and novation documentation are properly executed — and that the new lease term is registered where required — since overlooking either step can leave the buyer with a lease that isn’t fully enforceable against the landlord.