Thai Supreme Court strikes down "automatic" long term lease renewals

Summary of Facts

The case stems from a lease granted over a property in Phuket. The plaintiff, who owns the property, had entered into a 30-year lease agreement for both the land and an (at that time) existing house ("Lease Agreement") with the defendant for 1,500,000 baht on 10 May 1990. Pursuant to Clause 3 of the Lease Agreement, the parties had agreed that in the event the initial 30-year lease expired, and the defendant wished to continue leasing the land and the house, the plaintiff would allow him to do so. 

On the same day the Lease Agreement was entered into, the parties also entered into a separate agreement. Under the terms of this agreement, the defendant promised to pay the plaintiff an additional 1,200,000 baht by November 1990 to extend the lease by 2 further terms for a total of 60 years ("Lease Extension Agreement"). 

Although the parties seemingly agreed to a cumulative lease of 90 years, towards the end of the first term in 2020, the plaintiff notified the defendant and his associates to vacate the land and house, and to dismantle the structures (another house and garage) built by the defendant on the land, which the defendant refused. 

Consequently, the lessor filed a complaint in the District Court in Phuket seeking damages of 120,000 baht per month from the date of the lawsuit until such time that the defendant and his associates removed their belongings from the land and house. In response, the defendant filed a counterclaim, requesting (i) a dismissal of the plaintiff's demands; and (ii) for the court to order the registration of a new lease term of 30 years for which the defendant had already paid (i.e. Baht 600,000 out of Baht 1,200,000).

Decision of the Trial Court

In the court of first instance, the defendant prevailed. The trial court dismissed the plaintiff’s case and ordered the plaintiff to register another lease term for a period of 30 years, starting from May 22, 2020. The plaintiff appealed.

Decision of the Court of Appeal Region 8

On appeal, the Court of Appeal Region 8 reversed the trial court's decision and ordered the eviction. The defendant was to hand over the land and house in good condition to the plaintiff, dismantle the structures built by defendant on the land and pay the plaintiff damages of 50,000 baht per month from the date of the lawsuit until the defendant had complied with such order. The defendant was also prohibited from interfering with the land and house any further. The defendant appealed.

Decision of the Supreme Court

The Supreme Court found that the key issue to be determined was whether the plaintiff had the right to evict the defendant, or whether a personal rights contract had arisen between the parties. 

Of immediate relevance to the issue is Section 540 of the Civil and Commercial Code, which states that “For immovable property, it is prohibited to lease for a period exceeding thirty years. If a contract is made for a longer period, it shall be reduced to thirty years. […] When the lease period mentioned above expires, it may be renewed, but the renewal period must not exceed thirty years from the date of renewal.” 

According to the Supreme Court, Section 540 of the Civil and Commercial Code prohibits leases which exceed a period of 30 years. If a lease term exceeds 30 years, it must be reduced to 30 years. The Supreme Court did acknowledge that after the initial 30 year term expires, the lease can be renewed. 

The Supreme Court argued that the agreements amongst the parties – which in addition to an initial lease included a promise by the lessor to renew the lease for two more 30-year periods (on the same terms) and the prepayment by the lessee for the 2 future lease periods – amounted to a circumvention of the provision of Section 540 that a lease term cannot exceed 30 years.

In its reasoning, the Supreme Court considered that because the condition of the leased property is likely to change over the course of a long-term lease, such that its economic value cannot be predicted, lease terms should be limited to 30 years to protect parties from any advantages or disadvantages which can arise as a result. 

The Supreme Court did not agree with the defendant’s argument that the renewal provisions in the main lease and the separate agreement, along with the payment made by the lessee in advance for the two renewals, created enforceable personal contractual rights. The Court argued that allowing this would circumvent the mandatory provisions of law contained in the first part of Section 540.

A decisive factor in forming the Supreme Court's judgment can be found in the summary of the judgment: "The promise made by the plaintiff and the defendant effectively adheres to the original rental rate and conditions in every respect." In this case, the rental amount for the 2 future lease periods was fixed at a lower rate than the rental for the first 30 years. 

Considering the above, the Supreme Court upheld the decision of the Court of Appeal Region 8 and further ruled that the refusal by the defendant to leave the property amounted to a tort and that damages were payable at a rate of Baht 30,000 per month. 

Key takeaways

This case does not overturn earlier court decisions, contrary to what has been claimed online. The judgment must be considered in the context of the unambiguous provisions of Section 540.

The Supreme Court applied a strict interpretation of the first paragraph of Section 540. As such, any contractual agreement that appears to create a lease of more than 30 years from the outset is null and void, regardless of the general concept of freedom of contract under Thai law. The Court was particularly sceptical about lease renewals where the conditions of the first and second renewals remained the same as those agreed upon for the first term. This implies that renewal terms may be upheld as long as they reflect future circumstances.

“Should I be worried about my lease contract?” 

The reality is that many leases have been drafted similarly to the one litigated by the lessor. The irony of this case is that the plaintiff/lessor reneged on what she agreed to 30 years earlier with a compatriot. Undoubtedly, the dramatic increase in property values in Phuket since 1990 played a role.

In most cases that we handle in our practice, the lessors are professional developers. The non-legal answer is that one would hope (and expect) these developers not to use this judgment to argue that the lessee has no right to a new lease term. The earliest development projects in Phuket that marketed leasehold started less than 20 years ago, so we will have to wait at least another 10 years before leases in these projects come up for renewal.

New lease contracts can be drafted to reduce the likelihood of renewal provisions being deemed null and void by Thai courts by including the following terms:

• Lessees may exercise an option to register a new 30-year term at the end of the current term (this should not be an “automatic” renewal).
• The rental for the new term is the rental for the current term but with an escalation provision based, for example, on the CPI over the past 30 years, and this rental is paid at the time of the registration of the new term.
• At the end of a term, the lessee must transfer to the lessor structures built on the land, and the lessor must pay the lessee the market value of such structures unless a new term is agreed upon.
• If the law changes and longer leases are permitted, the lessee has an option to request the lessor to cancel the existing lease and register a lease for such longer period, subject to additional rental being due. This additional rental should be calculated as suggested in the second bullet point.