An announcement in the Royal Gazette on Feb 16 created widespread panic among condominium owners who rent out their assets, condominium developers and apartment operators across the country. It detailed the government's plan to enact a law that will turn residential leasing into a contract-controlled business from May 1.
While the new law will offer lessees of residential property better protection from unfair contract terms, landlords are concerned that it might become more difficult for them to handle bad tenants. In addition, developers are worried that the law may scare off investors who are looking for opportunities to buy condominiums to rent out.
First and foremost, it should be clear that the new law will affect only individual investors or business entities that lease at least five property units in one building or more to individuals for residential use. Property types to be covered are not limited to condominiums and apartments but also include houses and other types of property that are leased for residential use, except dormitories and hotels, which are subject to separate laws.
Among the many requirements and restrictions outlined in the new law, JLL has identified three that may worry lessors the most:
1. The lessor will be prohibited from asking for any more than just one month's rent deposit and one month's security deposit.
Deposits are taken as security for tenants' liabilities in respect of rent and damage to the property, as well as unpaid utility bills. At present, lessors typically ask for a rent deposit and a security deposit, equivalent to two months' rent and one month's rent, respectively.
A deposit of one month's rent should suffice to assure the landlord will receive the final month's rent when the lessee vacates at the end of the lease contract. However, there are cases where lessees fail to pay rent for more than one month or, in fewer cases, fail to move out after the leasing contract expires.
2. The lessee has the right to terminate the lease agreement prior to the contract expiry, but must notify the lessor at least 30 days before the intended termination date.
The new law should provide better clarity to lessors, some of whom misunderstand that the lessee has no right to terminate the contract prior to lease expiry and thus confiscate the rent and security deposits in case of early lease termination.
3. The lessor is prohibited from stipulating electricity and water charge rates exceeding the rates applied by the main utility providers.
This new requirement should be most welcomed by lessees, particularly in apartments where many operators set their own utility charge rates that can vary considerably from one operator to the next. In most condominium buildings, and some apartments, utility charge rates can be set by an agreement between the co-owners and the juristic person committee if the meters are not supplied directly by the utility provider. The new regulatory requirement should help create more transparency on utility charges to the lessee.
There are a number of other restrictions or requirements that could worry lessors but JLL would prefer to leave commentary on these areas to legal specialists. For example, the new law will require the lessor to describe in the contract different scenarios of material breaches for which the lessor will be allowed to terminate the agreement.
Implications for real estate: For lessees, the new law has been designed to provide greater protection and consequently the confidence that should help accelerate the lease decision and transaction process.
The law is not expected to scare off investors who are looking for opportunities to purchase residential property in Thailand for rental returns. On the other hand, investors should have greater comfort, realising that definitive guides to lease arrangements will be put in place.
As lessees will be better protected, lessors are expected to adopt a more cautious approach in screening prospective tenants as well as the agents that introduce them.
There will be a need for juristic persons and property managers to understand the changes in the law, as it is usually the property managers who are asked questions by co-owners and tenants alike. Having said that, it must be made clear that neither juristic persons nor property managers are responsible for the governance of leases, which are a contractual agreement between the owner of the property and the relevant tenant thereof. Hiring or consulting with a qualified legal firm if there are any doubts about the new law or lease agreement is recommended.
Any lessor or lessee, however, must still adhere to any articles of association or registered rules and regulations of a condominium. It is also advisable that both parties should be aware of these rules and regulations when they enter into an agreement.