The recent decision in Case No. 4655/2566 overturns decades of previous legal holdings by the Supreme Court and lower courts and would invalidate the common practice of pre-agreed long term lease renewals ‒ effectively rendering them null and void.
The decision has important implications for developers, investors and buyers who have organised their property holdings around leasehold renewals.
The court’s firm stance asserts that contractual promises for lease renewal, when made at the beginning of a lease, are: 1) unenforceable; 2) violate the Civil and Commercial Code; and 3) are void as a matter of law.
Case Background and Legal Reasoning
The case arose in Phuket, where the Civil Court of Phuket initially ruled in favour of the lessee, upholding the lease renewal clause as an enforceable promise from the original lessor to the lessee.
The decision was consistent with past rulings by the Thai Supreme Court and the prevailing consensus in legal opinion that acknowledged renewal clauses in long-term lease agreements as enforceable personal obligations.
However, a three-judge panel of the Court of Appeal Region 8, which includes Phuket, overruled the Trial Court by declaring the renewal clause void.
Subsequently, the Thai Supreme Court upheld the appellate ruling, marking a significant departure from previous interpretations. This ruling fundamentally alters the legal landscape for long-term lease renewals in Thailand.
Key Legal Findings of the Supreme Court Decision
The two primary legal conclusions from the Supreme Court’s ruling are:
- Pre-agreed Lease Renewals are Void: The Supreme Court found that any agreement at the inception of a lease providing for renewals beyond 30 years is void under Thai law. Specifically, it held that such arrangements circumvent Section 540 of the Thai Civil and Commercial Code, which states: “Immovable property may not be leased for more than thirty years. If a lease is made for a longer period, such period shall be reduced to thirty years. After the expiration of the lease, it may be renewed, but such renewal shall not exceed thirty years from the date of renewal.”
The court ruled that attempting to contract for renewals at the start of the lease amounts to an effort to evade this legal restriction, rendering such terms legally ineffective from the outset. - Lease Renewal Promises are Not Enforceable Personal Obligations: In addition to striking down pre-agreed renewals, the court rejected the argument that a lessor’s promise to renew a lease could be enforced as a personal obligation. It held that the promise to extend a lease beyond 30 years does not create an enforceable right for the lessee at the time of renewal.
Instead, the court deemed such agreements void from the outset, meaning that even if the parties agreed to a renewal in their initial lease contract, the lessee has no legal recourse to enforce it when the initial lease term expires.
What does ‘Void from the Outset’ mean?
The ruling that pre-agreed renewal clauses are “void from the outset” has substantial practical implications. Because the renewal provisions, whether registered at the Land Department or not, are considered invalid from the start, any prepaid lease renewal term rental amounts pose a legal dilemma:
For the lessee: Since the renewal is void, the lessee no longer has the enforceable right to the extended lease for the period they thought they had secured, even if they have already paid for it.
For the lessor: The court ruling invalidates the renewal clause, raising questions about the lessor’s rights regarding any rental payments for the renewal term. This creates potential disputes over whether and how such funds should be returned, along with more significant issues, such as tax and accounting complications and penalties.
For both: Any side agreement to renew the lease, regardless of whether they specify the rental amount for the renewal term, does not resolve this issue and is likely void as well.
Implications for Real Estate Developers and Investors
This ruling represents a seismic shift in Thailand’s real estate market, particularly for developers who have traditionally marketed leasehold structures based on 30-year leases with multiple pre-agreed renewal options. The decision raises urgent concerns for several key stakeholders:
Developers: Numerous large-scale real estate projects, especially in resort areas such as Phuket and Pattaya, have been sold to foreign buyers through long-term lease agreements that included promises of renewals. These developers now need to reassess their sales models and legal frameworks to ensure they comply with Thai law.
Existing Leaseholders: Those who have already purchased properties under leasehold arrangements with pre-agreed renewals may discover that their renewal rights are unenforceable. This situation could lead to legal disputes and substantial financial losses for foreign investors who thought they had secured multi-decade leaseholds.
Prospective Buyers: Anyone thinking about investing in a long-term leasehold in Thailand should now be aware that any previously agreed renewal terms are likely to be void. Due diligence is more important than ever before.
Conclusion: A Watershed Moment for Thai Real Estate
The Supreme Court’s decision in Case No. 4655/2566 is a game-changer for the Thai property market, significantly altering the legal landscape for leasehold properties. It is important to remember that Thailand is a civil law country, and Supreme Court rulings do not become law themselves, as they do in common law countries like the United States. However, Thai Supreme Court rulings have a significant persuasive effect on lower courts, and we expect lower courts throughout Thailand to now follow this ruling.
Thus, developers, investors and buyers must now adapt to a new reality in which pre-agreed lease renewals may be unenforceable and the only legally valid lease renewal must be negotiated at the end of the initial lease term. This new reality does not mean that it is not possible to structure long-term leases that are secure and comply with this recent Supreme Court ruling and applicable Thai laws and regulations. However, all stakeholders must be open to revising such leasehold structures and past practices.
In any event, this recent ruling serves as a stark warning to those relying on long-term leasehold contractual arrangements that do not reflect the legal reality they purport to embody. In the future, all market participants must adjust their strategies to align with this definitive interpretation of Thai property law, ensuring compliance and mitigating risks in an even more complex legal environment for leasehold investments.
DUENSING KIPPEN is an international law firm specializing in business transactions and dispute resolution with offices in Bangkok and Phuket, Thailand, as well as affiliated offices worldwide. Visit them at: duensingkippen.com