Know Your Rights Before Buying a Residential Unit in a Mixed-use Project

By Florian Maier, Managing Director, Antares Group and Phi Ploenbannakit, Director, Antares Group

Florian Maier, Managing Director, Antares Group

Living in the heart of a populated city or its periphery, close to important transport links, is a trend we are seeing more and more of in the major cites of Asia. Property developers in Bangkok are responding with developments along these lines. The limited space around the city centre, rising land prices, and the demand for ease of living next to working places and malls have encouraged the typical business complex buildings to include permanent living spaces as part of the development. Mixed-use projects with residential units on top and office and commercial areas below have already been developed in Bangkok and surrounding big cities.

Mixed-use projects are not only advantageous for tenants, but also for property developers, due to the attractive common facilities, that can help them easily sale the residential units. Additionally, the more residential occupancy a complex has, the more attractive it becomes to shop and business owners.

Mixed-use projects may be comprised of standalone buildings of varying purposes, loosely connected within the same fence. In case land is limited, buildings can be multi-purpose. The project’s layout is normally based on the best land utilization, architectural limitations, and applicable building control laws. As such, you will find a variety of structures built from the vertical to the horizontal within the same project. By default, the residential units are on the upper floors of the multi-purpose building or combined into a single purpose high-rise building. The entrance and access to the common facilities are shared among the co-owners and visitors, possibly with or without restriction, subject to internal management regulations and any change thereafter.

At first glance, it seems that there is little concern about the co-owners’ well-being as opposed to the commercial owners’ expectations. However, there are things that the buyer should be aware of as far as the initial land development and resale conditions are concerned.

In this article, we will answer the most important questions and inform you of issues you should be aware of before making a bid for a residential unit in a mixed-use project.

I. Does the land originally belongs to the property developer?
Unoccupied land in the city area is becoming less available or even non-existent in many prime areas. The typical landlord is aware of the increase in value and in many cases is unwilling to give up his ownership, especially considering the profits can be generated through rent. As such, the developer may be only a tenant with the granted right to construct and exploit the infrastructure and buildings on the leased land. The ownership of the completed construction normally vests in the landlord upon the lease’s expiry, otherwise the developer is obliged to unbuild and restore the land to its original condition. In this case, the developer or project owner can merely sub-lease the residential units, as opposed to the absolute ownership transfer, which would be prohibited by the landlord. The same arrangement applies to the land owned by government authorities.

II. What is difference between leasehold and freehold?
Despite attractive appearance, e.g. location, unit layout, floor plan, facilities, etc., it is crucial to be aware of which type of acquisition you are taking, whether a leasehold or a freehold, since these two have different legal implications.

Leasehold refers to the direct lease from the developer or the sub-lease from the landlord through the developer. Freehold simply refers to the absolute transfer of legal ownership from the developer to you when the developer is the former owner of the land and residential units.

The major differences in legal rights between leasehold and freehold are as follows:

1. Occupancy Term
As you may be aware, the legitimate lease term for a residential unit under the Thai law is limited to a maximum of 30 years. The renewal may be further agreed upon the termination of the original lease term, subject to the landlord’s consent. A pre-agreement to automatically renew the lease term is unlikely to be enforceable as court rulings are always unpredictable. Many court precedents continue to suggest that such automatic renewal is seen as a non-binding agreement and therefore void, because it blatantly violates the maximum lease term indicated by the law. Therefore, the advertised 90 years leasehold sale is not always as straightforward as it seems to be.

Unlike leasehold, the absolute transfer of ownership under freehold bears no occupancy term limit.

2. Foreigner Occupancy Ratio
The general foreigner to Thai national occupancy ratio restriction of 49 percent to 51 percent of the total residential units typically applies to freehold sales.

Phi Ploenbannakit, Director, Antares Group

Foreign buyers are allowed to purchase residential units up to 49 out of 100. The remaining units must be sold to Thai nationals.

Thus, whenever a sale is advertised to unblock restrictions by saying all the units are available for sale to foreigners, it is wise to assume that the sale tends to be leasehold, in other words, a lease or sub-lease agreement with a limited term and other restrictions.

3. Unit Modification
By default, the exterior design of the building is unlikely to be modified due to legal prohibitions and engineering limits. Interior modifications or renovations with light construction are normal to some extent. Although this seems to be a small issue, making a place fit for a home requires a lot of effort and cost. The fixtures and curtain walls are restorable, but could cause damage and incur repeated cost.

Absolute ownership of the property under a freehold is more advantageous in this respect, provided the landlord imposes strict conditions and penalties to protect the leased property.

4. Unit Resale and Succession
Leaseholds are assignable under the law subject to the landlord’s consent. However, leasehold is automatically terminated upon the death of the tenant, unless it is otherwise explicitly agreed that the remaining contract shall survive the tenant’s death and pass on to the heirs. The assigned or resold leasehold to a third party carries forward the remaining contract, including the lease term. As such, the resale price depends on the depreciation of the remaining lease term.

The resale and succession of freehold property bears different implications. The property owner is entitled to enjoy a variety of profit-making endeavours i.e. renting out or resale by complete transfer of property to a new owner. The reselling price of a rare unit in a prime location is likely to bring a large return on investment when there is a turnaround in the economy. Theoretically, it could be treated as a fixed asset which can be resold and inherited by freewill.

5. Property Management
Property management after the sale is always an important consideration for residences whether the owner is living in the unit or renting it. It is especially important if they do not reside in Thailand. Mismanagement is likely to lead to an unpleasant living environment and an undervalued rent or resale price.

The Condominium Act governs freehold residential units, i.e. condominiums. The juristic person, whose board is nominated from and elected by the majority votes of the co-owners, is responsible for the day-to-day property management and common area maintenance of the property. The law is straightforward as it allows the co-owners to participate and make decisions through meeting resolutions on all matters related to the property.

The same rule applies to those freehold units in mixed-use projects as long as the residential zone has its distinct legal boundary regardless of any obstacle. However, property management becomes more complex when the structures, common facilities, or access areas are shared among residents, businesses, and visitors. The leasehold residences in mixed-use projects are even more complex when they are not recognized as co-owners under the Condominium Act.

III. How the property is managed in the mixed-use project?
Regardless of the freehold or leasehold acquisition, residential units in mixed-use projects are exposed to the change of shared space and facilities where the residents may not be able to take absolute control. Joint management control among the mix-used projects population, in absence of a condominium juristic person, is conceptually outlined by a contractual arrangement. The typical legal structure introduced by the developer is to set up a property management company. Both leasehold and freehold owners of the residential and commercial zones will be required to participate in the company’s share subscription. In other words, the persons who have the right to enjoy the private and common property in the project will respectively supervise and manage the property as stakeholders of the management company, i.e. shareholders or board of directors. The connection between the management company and property is bound by a service agreement where the fund is pulled from the stakeholders’ proportionate contribution to pay for service fees. The basic agreement package generally comprises the following:

Usually, the developers themselves will become the major stakeholders of the property management company considering the greater commercial space proportion they have on hand e.g. hotel, serviced apartments, mall, office, etc. The intention is to continue operating a constant rental business, all the while having part of the profits realized by the sale of residential units. Major control extends to the modification of common property usage e.g. facilities, connected access, landscape, etc. As such, the buyer of a residential unit in a mixed-use project, either freehold or leasehold, should also have adequate knowledge of corporate law and its implications to fully exercise his or her rights.

Final Thoughts
Freehold seems to be more advantageous than leasehold since it conveys superior ownership rights under the law, but a leasehold offered in a prime location is often irresistible and overcomes the legal restrictions on ownership. The key takeaway is in the case of a residential unit in a mixed-use project, the legal exposures to the common property management after sale can be equal for both freehold and leasehold. Therefore, uninterrupted peaceful living and right to enjoy the facilities around the project requires attention to the contract’s content and the applicable laws, which should be analyzed early before making a purchase decision.