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Is it a 3+3+3 years Lease Contract legal and protect my Business?

Posted by Niccoli Uberto on 07/03/2014
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Guest House Lease Contract

Almost 99% of the Lease Contract we draw up for our clients, mostly for Businesses as Guest House, Hotel and Restaurant cover a period of time of 9 years if a new contract, and what is remaining in case of a take over.
When the clients read the Lease contract’s draft, mostly ask…”why did you split the 9 years in 3+3+3 years, is it the same, is it legal?,  is it safe for the whole 9 years?

The answer is ..yes..and no..

Legally an UNregistered lease/rent contract is valid only for 3 years, then…even if not easy for the Lessor, there is the possibility he/she can break the contract..or at least…try.

The reasons why most of the over 3 years contracts are not registered are mainly two.

First is because Tax, yes, you (the Lessee) are probably willing to pay your part of it, it’s a small per cent of the total rent you are paying, but, for the Landlord (Lessor), all the income will be taxed as a personal income, therefore he prefer to do it without register it, and probably asking you to stipulate 2 different contracts, 1 with the real rent amount (he will keep that), and another 1 with a lower amount, the lower one will be the one he will show at the proper government office (less amount = less tax for him…but less costs to deduce for you).

Second,  Thais can easily access Bank’s credit, mostly had the Land, then ask Bank’s credit to build the Hotel or Guest House, of course, on the back side of the Chanote land deed, the last name will be the Bank , in this case, even if the Landlord would agree to register the contract he MUST obtain the approval from the Bank to do it.

In case the Bank agrees, and then you finally have your 9 years Lease contract registered,  the Bank will run the risk that, if the Landlord will fail to pay the loan back (NPL, non performing loan), the Bank will foreclose the property BUT wont’ be able to have it free of tenant and may be resell it…because your lease contract has been registered with their approval.

Normally the Banks approve the registration of a lease contract only if the rent paid by the Lessee is equal or above the monthly loan the landlord has to pay.

Ok, so now…the landlord doesn’t want to register the contract…or may be would..but the Bank not…you can have only 3+3+3 years..you are protected by the law only for the first 3 years…what can you do minimise  the risk to be kicked out after the first 3 years term?

We usually help our clients in this way, we draw up a contract where the Lessor agrees to, before the end of the first term of 3 years, come and sign a new contract of 3+3 years..and repeat this before the end of the second term..leaving the Lessee with the  last contract of 3 years…

In this way, you are always protect by the law for the first 3 years, and renewing the lease contract every 3 years..will leave you always with a new 3 years validity.

What about if the Landlord, at the right time won’t show up to sign a new contract? yes, can happen, and the only way you can protect yourself, is, in the contract to add a  compensations if he/she won’t show up or refuse to sign a new contract.

Remember..add a compensation even in case she/he will sell the property to a third party, the new Landlord has not duty vs. the tenant…you have to write in the contract that in case she/he sell the property..She/he must pay you X amount ..not the buyer.

For further information in case you need a Lease contract, please don’t hesitate to contact us.

Niccoli Uberto
Phuket Island Property
399  Patak Road, Karon beach
Phuket, 83130 Thailand

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