Thai law provides a means of real security and an alternative to the mortgage, the so-called Sale with Right of Redemption (Thai: "Khai Fah"). It is governed by Sections 491 ff. of the Thai Civil and Commercial Code ("CCC"), and it involves a conditional transfer of ownership that can be redeemed under certain circumstances.
Recently, the legal provisions related to the Khai Fah have been revised under a new law called the Protecting Citizens when Entering to Khai Fah Agreement of the land for Agricultural or Residential Act (the "Act"). This is to control the Khai Fah Agreement for the land for agricultural and residential use, and to protect the seller, who usually has limited power in contract negotiations with the buyer.
Even if the ownership of the property sold passes to the buyer upon registration of Khai Fah, Section 12 of the Act states that "the seller has the right to possess, make use and benefit from the property sold for the purpose of agriculture or residence until the redemption has expired, without remunerating the buyer. Meanwhile, the seller shall take care of the property sold as a person of ordinary prudence would take care of his/her own property." This means that the Khai Fah seller (that is, the borrower under the loan) may utilize the property during the Khai Fah period. The buyer or new owner may neither sell nor use the house for himself.
Section 10 of the Act provides that "the duration of the Khai Fah period of the land for agricultural and residential use shall not be less than one year or exceed ten years. Notwithstanding, the seller is entitled to redeem the Khai Fah at any time before the duration."
Section 18 of the Act provides that "in case the seller cannot exercise the right of redemption with the buyer by a cause not attributable to the seller, he/she is entitled to make the agreed repayment and redeem the property sold to either the land office or deposit office within 30 days from the due date of redemption."
The Khai Fah is a particular legal structure in the Thai legal system. Usually, the Khai Fah is set up in connection with a loan arrangement. The redemption takes place upon repayment of the loan. Characteristic of the Khai Fah is that a period of time is registered in which the borrower/seller has the opportunity to pay back the loan. If he does not succeed in raising funds for the repayment in time, he automatically loses the property to the lender/buyer. After the expiration of the Khai Fah period the ownership of the property cannot be redeemed anymore, the ownership remains with the lender/buyer unconditionally, and the ownership transfer automatically becomes final.
This is in contrast to the mortgage, which is not tied to a registered time period. The mortgage remains registered until it is redeemed, i.e. when the loan is paid back or until it is enforced by the lender. Certainly, there will be a time period for repayment stipulated in the loan agreement. But if such period expires, the lender still has to go through lengthy enforcement procedures, i.e. go to court, public auction, etc. In particular, given the rather slow court procedures in Thailand, this is much more burdensome and costly.
A Khai Fah for land or a condominium unit is registered on the title deed of that property. Such registration includes the names of seller and buyer and the date and duration of the Khai Fah.
In addition, a detailed contract between the seller and the buyer will be prepared to detail the terms of the loan and the right to redeem.
The duration of the Khai Fah period is limited to ten years in the case of immovable property.
If during the Khai Fah period, the borrower/seller uses the right to make the agreed repayment and redeem the property, he can pay the land department directly, i.e. the local officer in charge. Alternatively, he can pay to a "deposit office" according to Section 492 CCC. The land officer will then immediately void the previous ownership transfer to the lender/buyer without the requirement for his consent. Only after the redemption has been registered, the land officer will notify the lender/buyer.
Unless otherwise agreed by the borrower/seller and lender/buyer, the price of redemption shall be equal to the sale price.
Regarding official registration fees and taxes, the following cases need to be distinguished:
- The transfer fees and taxes for the initial ownership transfer (the "sale") from borrower/seller to lender/buyer are according to general rules, i.e. the same amounts as for a standard ownership transfer.
- If the Khai Fah is not redeemed, i.e. the Khai Fah period expires without redemption, the borrower/seller will be obligated to pay additional income tax for the property during the Khai Fah period. It is payable as a part of the income tax for the year in which the Khai Fah expired.
- In case of the redemption of the Khai Fah, i.e. the transfer back to the borrower/seller, no transfer fees and no specific business tax apply. However, withholding tax applies in the same amount as for a standard ownership transfer. The withholding tax is a prepayment of income tax, collected by the land office at the time of the transfer registration. The lender/buyer is obligated to pay this tax; the borrower/seller, however, is entitled to withhold and deduct the amount from the repayment to the lender/buyer.
The Khai Fah as a form of encumbrance is an excellent means for a lender to secure a loan in Thailand, and in certain cases, it can be a good alternative to registering a mortgage. The advantage is the very efficient enforcement, which is also viable for a private lender. A standard enforcement procedure, including a public auction, is completely circumvented, and an "automatic" final ownership takes effect upon the expiration of the Khai Fah period. For the borrower/seller in the Khai Fah arrangement, it is however important to note the rather high fees and taxes and to be aware of the drastic consequences of expiration of the Khai Fah period.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.