Reciprocal Contracts Explained
Foreigners have always been drawn to Thailand, and Phuket is without a doubt one of the most attractive and enticing destinations in the country. With its gorgeous beaches looking west over the Andaman Sea, it’s no surprise that the island attracts a large number of international visitors.
People who want to settle down here in Phuket are understandably intrigued in owning property, and many are seeking for houses or villas. They aren’t really necessarily interested in a long-term leasehold, but what if that lease were instead designated as “Special Reciprocal Contracts”?
While foreigners cannot purchase and own land in Thailand, people can still own the property’s bricks and mortar. However, when their lease on their land ends, there are no safeguards in place to ensure that they may continue in their home.
Owning a physical structure may be meaningless if it is located on property that you are no longer permitted to occupy. And the freehold landowner has the power to expel you at the conclusion of the lease period. Unless, of course, your agreement no longer qualifies as a basic lease.
So What Are Special Reciprocal Contracts?
When a leasehold agreement exists between two people and the lessee makes alterations or additions to the property that are considered significant enough to generate a “benefit” for the owner (lessor/freeholder) of that land, the lease contract may potentially become a Special Reciprocal Contract (SRC).
In other words, the tenant/renovations lessor’s to the property are regarded significant enough to change the legal structure of the arrangement. Clauses in a lease agreement that would ordinarily be regarded as merely promises would instead become contract rights.
These include succession provisions or extension/renewal conditions, which are not enforceable at law in a lease contract but may become contractual if the tenant adds value (or benefit) to the property. (More on this later.)
A benefit is often something that can only be obtained via financial investment and has increased the value of the property. Building a house or villa on leased land, for example, would be considered an improvement that would benefit the owner at the end of the lease period. Leasing a home and then self-financing significant upgrades or modifications might also be considered an advantage. In certain cases, the leasing arrangement may legally cease to be a lease agreement and therefore become a Special Reciprocal Contract.
Are Special Reciprocal Contracts Written into Law?
There has never been a legislation requiring the creation or use of a Special Reciprocal Contract. It is not mentioned in the Civil and Commercial Code, nor is it mentioned in any other Thai legislation.
Instead, Special Reciprocal Contracts arose as a result of Supreme Court judgements in Thailand. These judgements have been consistent, and their application has been sufficient to establish a legal precedent. (In the business world, SRC is referred to as a Build-Operate-Transfer Agreement) (BOT). The lessee constructs and then utilizes the structure, and ownership of the structure passes to the lessee at the conclusion of the lease period.)
The notion of legal precedent states that previous decisions or judgements serve as the foundation and authority for judges dealing with comparable issues in the future.
Higher court rulings constitute binding precedent for all other courts in the country, therefore the fact that the Supreme Court (the highest court in the land) has already chimed in on Special Reciprocal Contracts is quite relevant in this instance.
The SRC was mainly designed to rebalance the advantages to the lessee, who generally receive little profit from a standard lease while spending their own money to improve the property. As a result, judges added value through the SRC, such as making a lease transferrable, inheritable, and non-registrable – yet still enforceable.
Because a lease determined to be an SRC is exempt from registration and transfer taxes, judges will only rule in genuine circumstances, and SRC will not be regarded as a subterfuge to exempt every lease from these taxes.
Does The Lessor Have To Agree To A Special Reciprocal Contract?
A lessee cannot presume that any further investment made during the first lease period would result in the creation of a Special Reciprocal Contract.
A lessee always requires the landlord’s permission to remodel, rebuild, or dismantle any parts of the property, and the lease cannot become an SRC without this permission. Even if the landlord has no intention of entering into a Special Reciprocal Contract, their approval of specific renovations sponsored by the lessee may result in an SRC.
Simply put, approval is necessary in all cases, although upgrades may result in an SRC even if that is not the landlord’s goal.
The approval for a specific investment does not always have to be provided in the initial lease contract, with specifics decided later in the lease period. However, as long as the particular aims are fully stated out by both parties and the freehold owner provides formal assent, the arrangement might still be classified as a Special Reciprocal Contract.
Can An Agreement Between Both Parties Change?
A leasehold contract is an arrangement for the “rental of property.” The lessee (tenant) compensates the owner (lessor) financially for the hiring or rental of their property, in this case the land, for a certain length of time. The maximum permitted land lease in Thailand is 30 years.
The arrangement only permits for temporary leasing rights, not longer-term contract rights. Essentially, a lessee (the hirer) enjoys exclusive use of the property for the whole 30-year lease duration. However, if a foreign couple leases some property from a Thai citizen and subsequently decides to build a luxurious villa on that plot of land, the land owner will have received a “benefit” (the villa).
At such point, the leasing agreement (a property hiring agreement) might assume some contract rights (e.g. inheritability and transferability).
From the start, consider the possibility of a special reciprocal contract. Anyone considering a leasehold contract, whether from a developer or a private individual, should consult a qualified lawyer ahead of time about the likelihood that the lease would be declared a Special Reciprocal Contract.
The development and construction of a villa on leased land or the major renovation of a leased villa are pretty standard types of investments – above and beyond the lease price of the property – that can be shown to have benefited the landlord at the end of the 30-year lease term because ownership will eventually revert to him/her.
If you approach the lease with the intention of it one day becoming a Special Reciprocal Contract, as described above, any investment that potentially add enough value for this to transpire must still be agreed upon with the lessor.
As an aside, while an SRC legally ceases to be a lease, failing to register the lease with the Land Department does not invalidate or render the agreement unenforceable.
Special Reciprocal Contracts Can Bring Success To Your Property Purchase
As previously stated, if the agreement is regarded to be a Special Reciprocal Contract at the conclusion of the 30-year lease period, it is no longer a standard hiring of property contract, but rather a type of “Lease Plus.”
Because of this substantial change in the legal definition of the contract, the lease may be passed down to family members or other beneficiaries/heirs upon death. This is not the case with a typical leasehold which, under hire of property law, is not inheritable.
The value contributed to the property may also be regarded sufficient to compel any lessor to provide extensions or renewals. Renewal clauses are lease promises that may or may not be enforced if the original lessor dies or sells the property. Nonetheless, in a Special Reciprocal Contract, these become contract rights that may be enforced against any owner/lessor.
Why Doesn’t Everyone Use Special Reciprocal Contracts?
This is a complicated matter, but one possibility is that foreigners have been led to believe that purchasing landed property is not a questionable act, but rather perfectly acceptable.
One of the glaring faults in Thailand’s real estate business, particularly in the market geared at foreigners, is that buyers are informed they are obtaining a 30-year lease with two further 30-year terms to follow. However, this is legally unlawful and may result in the lease being terminated if violators are detected.
The 30+30+30 Leasehold And It’s Pitfalls
Whilst foreigners recognized a few decades ago that they had zero right to own landed property ownership in Thailand, foreigners now often own villas and even buy and sell land. All of this activity might backfire one day, particularly if the Thai Co. Ltd. is used as a holding company rather than an actual corporation that trades, files accounts, or pays taxes.
If a foreigner just intends to reside in Thailand during the next 60 years, having exclusive possession rights to their villa for the duration of their stay, which an SRC would allow them, makes financial sense. It surely puts you on a better legal basis than other methods of owning a property.
If villa projects in Thailand arranged their sales so that the lease to occupy the land was completely seperate, then the procurement of the physical building (which a foreign person can legally own) could be considered a “benefit” if the owner of the building gives it up to the land owner when the lease terms expired.
A contract of this type would then be written to provide for its potential reinterpretation as a Special Reciprocal Contract. Instead of the typical 30-year lease period, it would essentially offer the lessee with a guaranteed tenancy for 60 years, with the option of renewal thereafter.
It is also clear that consumers frequently make the incorrect judgments as a result of inadequate legal counsel, whether from the developer, a lawyer or an accountant.
A developer may enjoy the uncertainty involved with a standard leasehold arrangement. If this is the case, the concept of practically ensuring a 30-year renewal via a Special Reciprocal Contract may not be particularly appealing. After all, such uncertainty may leave them or their heirs with a luxury home that they may resell in 30 years.
Conclusion
A leasing arrangement that is subsequently declared to be a Special Reciprocal Contract is definitely preferable to a 30-year lease, but is it preferable to utilizing a properly constituted and operated Thai Company Limited to purchase freehold?
One significant advantage of an SRC is that it eliminates all of the unnecessary expenditures associated with keeping the firm functioning properly. The SRC guarantees the foreigner at least 60 years of continuous enjoyment of their residence at no extra cost.
A Thai company has an additional cost factor, which includes having genuine shareholders, doing appropriate business, producing money, filing audited accounts, paying taxes, and conforming to Thai corporate rules.
However, a foreigner who purchases through a genuine Thai company has an investment asset that may be easily resold to other foreigners at a later date, potentially reaping capital profits.
