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Understanding the Commercial Lease Agreements for Businesses in Thailand
03/05/2024
As businesses expand and seek new opportunities in Thailand, an important aspect they need to consider is understanding commercial lease agreements. Commercial lease agreements play a key role in providing the necessary space for a business to operate and undertake their intended business activities.
In this blog post, we will explore the key aspects of leases for businesses in Thailand.
Key points
- Typically, commercial leases cannot exceed 30 years, but in certain situations lease can be valid for 50 years.
- Leases over 3 years must be registered with the Land Office.
- Properties must be zoned for commercial/industrial use and meet investment criteria to qualify for long-term leases.
- Tenants handle minor repairs, landlords major repairs unless the lease states otherwise.
- Tenants cannot transfer or sublease without landlord consent. New owners assume existing leases.
What is the Legal Framework for Commercial Leases?
Under Thai law, commercial lease agreements are governed by the Civil and Commercial Code and the Lease of Immovable Property for Commercial or Industrial Purposes Act of 1999. These laws outline the rights and obligations of both landlords and tenants, ensuring a fair and transparent leasing process.
Lease Term and Renewal of Lease Terms
The duration of a lease for land or a building cannot exceed 30 years as a general rule. Given this limitation, the contracting parties may have an agreement in some cases that the lessor grants an option to the tenant to renew the contract after completion of the 30-year period.
Please note that in practice it may be difficult to enforce the extension on a case by case basis, such an option to renew should be drafted carefully to ensure there are no problems when using it).
A lease under some special acts (i.e., the Eastern Economic Corridor Act and the Lease of Immovable Property for Commercial and Industrial Purposes Act) can have a longer period of up to 50 years.
If a lease period for immovable property is over three years, the lease must be registered with the Land Office. A lease will only be enforceable for three years without registration.
A typical term for a lease for commercial space such as retail space, office space or industrial space is usually three years. The agreement may include a renewal option for another three years.
If a lease period is three years or less, a tenant can assert its rights under the lease agreement against third parties even without the registration.
Prior to the commencement of the lease term, the tenant may request a rent-free fit-out period for one to three months for carrying out fit-out activities in the leased premises.
It is important to note that the extension term can only be registered after the initial term has lapsed. This means that businesses must carefully plan their lease agreements to ensure they can continue operating beyond the initial lease term.
Finally, it is important to note that after expiration of a commercial lease, the tenant does not retain the right to continue to occupy the property. However, if the tenant continues to occupy the relevant real estate with no objection from the landlord, it shall be considered that the lease is extended with no definite period. This matter is a contractual issue and subject to the agreement between the contracting parties.
3 Year Leases in Thailand
In Thailand, it is a common practice to offer 3-year leases to tenants. This approach is widely adopted for several reasons:
Avoiding Registration
Thai law requires all leases exceeding 3 years to be registered at the local land office. By keeping the lease term within 3 years, landlords avoid the need for formal registration, which would entail declaring their rental income and potentially affecting their tax calculations.
Furthermore, registering a lease also requires paying a registration fee of 1.1% of the overall lease price for the entire term. Typically, the payment of the registration fee is split 50/50 between the landlord and the tenant. The registration fee can be a significant outlay, especially for 30 year leases.
Tax Implications
It is common practice for landlords to offer 3 year leases to tenants, which is not in their best interests. The reason landlords like to only offer 3 year leases is because leases of more than 3 years must be registered at the land office which requires the payment of a registration fee of 1.1%. Registering a lease with the land office also results in the landlord having to declare taxes.
It is important to note that landlords are required to declare their taxes in relation to all leases, including 3 year leases, but a registered lease opens them up for more scrutiny from the Revenue Department.
In order for the landlord to offer a longer term agreement without having to register the lease, the landlord may offer an option to renew or to sign several leases (3 year maximum) for the duration of the intended arrangement. While such a scenario may seem like a fair compromise, registering the lease is beneficial for the tenant because if the landlord acts in bad faith and doesn’t honour the agreement, or goes back on his promise to renew it may be difficult to enforce the promise and the investor may lose his investment. Registering the lease avoids this risk.
Secondly, if the owner of the business wants to sell and the landlord is again acting in bad faith, it will be difficult to force the landlord to sign a new agreement for the option to renew for the purchases of the business. This is an issue because the right to renew may not be transferred automatically and new documents would be required from the landlord.
Finally, the protection offered by a registered lease is higher because if the landlord decides to sell the property or if he passes away and the property is transferred to his heirs, the registered lease will also be transferred with the property as it is specified on the back of the title. In such a situation the tenant will keep his rights and the lease would remain in force.
For businesses looking to rent a premises but are only able to get a 3 year lease, our experts always recommend registering the lease, even if the tenant is required to pay the fees themselves.
Does a Lease Agreement Have to be Written in Thai or Can it be Written in English?
A lease agreement can be drafted in English, as long as it does not have to be registered at the Land Office i.e. the lease exceeds 3 years or will be registered at the request of the tenant. When registering the lease, the Land Office will require a Thai language version of the agreement.
In practice, a lease agreement will be drafted in Thai with an English translation provided.
Please note that when registering the lease, the Land office will review the contents of the agreement. During the review, it is possible for the Land Office to reject certain clauses at their discretion.
What Type of Land and Business Activities are Eligible for a Commercial & Industrial Lease?
In order for a piece of land to be eligible for a Commercial and Industrial Lease, the land must be located in one of the following areas:
- An area that has been approved for commercial or industrial purposes under the applicable Town Planning laws
- An industrial estate zone operated by the Industrial Estate Authority of Thailand
The following requirements must be satisfied by the company in order to be able to secure a long term commercial lease.
- Commercial activities having an investment of at least THB 20 million.
- Industrial activities that are eligible for promotion under the Investment Promotion Act.
- Commercial or industrial activities that benefit Thailand as approved by the Minister of Interior and endorsed by the Cabinet.
- The commercial or industrial activities for which a foreigner can register such a lease must be one which a foreigner can undertake under the Foreign Business Act.
Please note that if the lease of land for commercial and industrial activities is an area greater than 100 Tai (one Rai is 160,000 square metres) must satisfy at least one of the following additional requirements:
- The business must add value to exports or support employment in the country.
- The operation must not have previously existed in the country or be otherwise insignificant.
- The operation must incorporate a unique process or development of high technology.
- The operation must be of benefit to the economic and social status of the country as declared by the Minister of Interior and endorsed by the Cabinet.
What are the Requirements for Rental, Security Deposits and Fees?
The payment of rent is an important consideration for a lease agreement under the Civil and Commercial Code. Rent can either be a fixed rent or a variable rent based on the turnover achieved by the tenant within the leased premises. Office and industrial rents tend to be fixed rent, and retail rents tend to be variable rent.
Lease agreements almost always require the tenant to place a security deposit of one to three months of rent in the form of a cash or bank guarantee. In addition, it is usually agreed in the lease agreement that the tenant must be responsible for the other ancillary costs as as well as taxes and other duties.
For a lease agreement with a term of more than three years, which is required to be registered at the land office, the costs for the registration include a registration fee at a rate of 1 percent of the total rental throughout the lease term and stamp duty at a rate of 0.1 per cent, also of the total rental throughout the lease term.
Who is Responsible for the Maintenance and Repair of the Property/Land?
Unless specifically stated by the lease agreement, typically the tenant is required to undertake minor repairs and maintenance. However, the lessor is obligated to undertake any major maintenance.
However, In practice for a long-term lease where the tenant occupies all or the majority of the leased premises, the tenant will be required to undertake any major maintenance work.
Can you Transfer and Sublease a Commercial Lease?
Any transferring of a lease by the tenant must have been approved by the landlord. Furthermore, subleasing is not permitted unless consent from the landlord has been received.
Please note, that If the lessor sells or transfers the ownership of the leased property to a third party, the lease is binding on the transferee of the leased premises. The new owner of the property will take over all rights and obligations of the lessor and will become the new lessor.
What are the Requirements for Termination of a Commercial Lease?
When tenants violate lease terms, such as defaulting on rent payments, landlords have the contractual rights to terminate rental agreements and keep any security deposits. However, most leases require a remedy period ranging from 30 to 90 days, subject to prior negotiations, allowing tenants an opportunity to correct any breaches before facing eviction.
On the other hand, tenants typically lack unilateral early termination privileges unless landlords themselves commit violations. Unless there are any clearly stated allowances contained within the specific lease agreement, tenants remain bound to honour the lease in full.
How can Belaws help?
For more information about commercial leases in Thailand, why not talk to one of our experts now?
Please note that this article is for information purposes only and does not constitute legal advice.
Our consultations last for a period of up to 1 hour and are conducted by expert Lawyers who are fluent in English, French and Thai.
Consultations can be hosted via WhatsApp or Video Conferencing software for your convenience. A consultation with one of our legal experts is undoubtedly the best way to get all the information you need and answer any questions you may have about your new business or project.
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Frequently asked questions
What is a commercial lease agreement?
In Thailand, a commercial lease agreement is a legal contract between a landlord and a business tenant. It grants the business the right to occupy a specific property for commercial or industrial activities for a set period. This agreement outlines the rights and responsibilities of both parties, ensuring a smooth and secure leasing process.
What is the legal framework for commercial leases in Thailand?
Commercial lease agreements in Thailand are governed by the Civil and Commercial Code and the Lease of Immovable Property for Commercial or Industrial Purposes Act of 1999. These laws outline the rights and obligations of both landlords and tenants.
What is the typical lease term for commercial property in Thailand?
The typical lease term for commercial property in Thailand is three years, with an option to renew for another three years. However, leases can be for up to 30 years or even 50 years under special circumstances.
What is franchising, and why is it popular in Thailand?
Leases exceeding 3 years must be registered with the Land Office, which can be time-consuming and involve additional fees. Landlords may prefer to avoid this process by offering shorter leases.
Why do many leases in Thailand only have a term of 3 years?
Leases exceeding 3 years must be registered with the Land Office, which can be time-consuming and involve additional fees. Landlords may prefer to avoid this process by offering shorter leases.
What are the benefits of registering a lease with the Land Office?
Registering a lease provides greater security for both tenants and landlords. It can help to avoid disputes and ensure that the terms of the lease are enforceable.
Who is responsible for maintenance and repairs of the property?
Unless otherwise stated in the lease agreement, tenants are typically responsible for minor repairs and maintenance, while landlords are responsible for major repairs.
Can a tenant transfer or sublease a commercial lease?
A tenant cannot transfer or sublease a commercial lease without the written consent of the landlord.
What happens if the owner of the property sells the property?
The lease agreement will be binding on the new owner of the property. The new owner will take over all rights and obligations of the lessor.
How can a commercial lease be terminated?
A commercial lease can be terminated by either the landlord or the tenant for breach of the lease agreement. Leases typically include a remedy period to allow the breaching party to cure the breach before termination.
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