Some real estate development structures marketed to foreigners in Thailand are commonly referred to as a “collective lease” or a “secured lease.” For simplicity, we’ll refer to it in this article as a “Secured” Lease.
As a general rule, foreigners cannot own land or apartment units, but they can lease them — which is why these structures are commonly marketed to foreign buyers on a leasehold basis. Under Thai law, the maximum lease term is thirty years, renewable upon expiration. Leases marketed to foreigners typically provide for an initial thirty-year term plus two additional successive thirty-year renewal terms. However, renewal of a lease in Thailand is by no means assured, even if provided for in the original agreement. To address this, the “Secured” Lease is marketed to foreigners as a way to secure the lessee’s renewal terms. The purported “security” comes from the buyer entering not only a lease agreement with the developer’s land/apartment-owning Thai company, but also a share sale and purchase agreement for shares controlling that same company.
In a previous two-part article (Does going ‘collective’ fix your lease renewal problem? and The hidden dangers lurking in collective leasehold contracts), we detailed why we believe the “Secured” Lease doesn’t actually provide any meaningful assurance that a lease will be renewed. Beyond our own legal opinion, however, two different Thai courts have now concluded that the “Secured” Lease is void as a matter of law. A contract found void is treated as having never existed.
If other courts confirm these rulings, not only will renewal terms of “Secured” Leases be invalid, but so will their current lease terms — regardless of whether the lease was already registered. Why? Because a finding that a lease is void means it never legally existed, and a void lease cannot be, nor ever could have been, validly registered. Even if it went through the Land Office’s registration formalities — fees paid, papers signed and stamped — none of that changes the lease’s legal non-existence; nothing legally happened by virtue of those acts.
In the court cases in question, the buyers had entered the project’s “Secured” Lease structure, with apartment leases registered several years earlier. The lessees filed a civil case against the developer to protect their leasehold rights. Neither side argued the leases were invalid — both relied on the leases’ provisions to support their respective arguments. The court, however, determined on its own that the leases — read together with the share sale and purchase agreement for shares controlling the developer’s land-owning company — were actually fictitious agreements designed to conceal the parties’ real agreement: to sell and purchase the underlying real estate.
Section 155 of Thailand’s Civil and Commercial Code (the “CCC”) provides that if two parties enter a fictitious agreement to conceal their real agreement, the fictitious agreement is void — but the hidden, actual agreement must then be evaluated under whatever provisions apply to it.
In this case, the court found that the parties had entered fictitious lease agreements through the “Secured” Lease structure specifically to hide their real agreement to sell and purchase the properties. This meant the leases were void, and that Section 456 of the CCC — which provides that a sale of immovable property is void unless made in writing and registered by the competent official — applied to the underlying “real” sale and purchase agreements instead. Since those sales were never made in writing or registered, the court concluded they were void as well.
This ruling, originally from two trial court judges, was appealed to a three-judge appellate panel — which confirmed the trial court’s findings on the same factual and legal grounds:
a) The “Secured” Leases — combining leases with share sale and purchase agreements — were fictitious agreements concealing actual real estate sale and purchase agreements;
b) The leases and share sale/purchase agreements were therefore void; and
c) The underlying, concealed real estate sale and purchase agreements were also void, since they were never made in writing and registered with the competent official.
Taken together, these decisions mean the “Secured” Lease structure does little, if anything, to address the real risk that a long-term lease won’t be renewed — and could carry the far more serious consequence that a current lease is legally void altogether. Under these courts’ reasoning, anyone who has invested, or is considering investing, in such a structure faces the immediate risk of losing that investment entirely.
Fortunately, there are far better legal mechanisms than the “Secured” Lease for achieving genuine long-term lease security, without any downside for the developer. One such approach secures pre-paid renewal terms with a mortgage over the land plot in question — a simple, straightforward structure that protects the investor and gives the developer a genuine marketing advantage. In some circumstances, an existing “Secured” Lease can even be restructured into this safer alternative before it’s too late. As always, competent legal and tax counsel should be engaged before implementing any such lease security structure.