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First step in buying a Thai property, the reservation agreement

First step in buying a Thai property, the reservation agreement

Whilst you browse the properties you are interested in, it is worth giving some thought to the fact that ‘reserving’ a property will have different connotations depending on the legal jurisdiction you are in. Even if you are an experienced real estate investor, and may have bought and sold many properties in different countries, Thailand does have its own unique set of rules, and in relation to real estate, its own set of practices and customs too.

An uninteresting article would dissect a reservation contract and talk about the methods of drafting such a contract in a legalistic manner. That isn’t what potential buyers of properties want to know about and it is of course why they pay lawyers to help them. However, there are some steps that may be taken by you as a buyer before you engage and pay a law firm. After all, why would you pay the legal fees deposit until you know you have reserved the property and that it is worth spending more monies.

Sellers and agents can rely upon the fact that many buyers might not seek legal advice at the reservation stage. Therefore, here are some key pointers to remember:

  1. Even though you are not a lawyer, define the property properly. Is it in a project? How many square meters internally and externally? What is the land title number and what type of land title is it? Is it leasehold?

Don’t rely upon the real estate agent description of the property to define the property in the reservation agreement. Check properly and make sure the definition corresponds with the facts.

  1. Mention the additions. There are all sorts of strange misconceptions about what may or may not be included in a property sale. The best way to avoid any issues is to list inventories of furniture; fixtures and equipment. In order to avoid the issues relating to ‘as is’ sales where ‘as is’ can change between reservation agreement and completion of a sale, ask the agent to use their efforts and camera to take a photographic inventory – attach that to the reservation agreement. Yes it might be quite a lot of pages but in this day and age we are all used to a lot of photos before our eyes every day.
  1. Describe what legal structure is being used correctly. You may need some preliminary help with this. However, if you are buying shares in a company, then don’t just describe the reservation as a ‘reservation of purchase of shares’ but go on to mention that the target company owns and will own the property at the time of completion. It is amazing how many times we see share sales and asset sales mixed up at the outset of a transaction.
  1. Be careful with the amount you place as a reservation. In certain notoriously highly priced and purportedly developed real estate markets, a 10% deposit is the norm at reservation stage. However, in those jurisdictions, if you don’t get your deposit straight back if you are indeed entitled to claim it back, you can use a generally fast and efficient transparent legal system to force the return of the deposit and there will be pressure on the parties to avoid breaching their obligations as they will know that legal remedies are swift and effective.

In Thailand, a dispute over a reservation agreement would take a long time to resolve, and the cost to resolve it might be more than the reservation deposit. On that basis, small reservation deposits are preferred as a general rule, but there are of course exceptions. For special deals, a higher deposit may be demanded, in which case you should conduct due diligence as early and as quickly as possible.

  1. Make sure the timing mechanisms work. Often we see issues where the reservation period is ’30 days’ and then the due diligence period is ’30 days’ which can cause confusion about the timing of completion of the deal. Timing should be divided into: due diligence; issuance of a full sale and purchase agreement and any other documents; enquiries and answers; preparing the ‘deliverables’ which are needed for completion; and completion itself. The temptation in a reservation agreement is to oversimplify and keep things too short, which can cause confusion about timelines.
  1. All contracts should be terminable for some reason – ‘cause’. In a property sale, if a seller is relying upon a buyer and passes by the chance to sell the property to others, you would expect a penalty for a withdrawal without ‘cause’ or ‘reason’. Therefore, it should be very clear between the parties what a good reason for withdrawal from a transaction would be, and what an unfair reason would be. Buyers and their lawyers may try to introduce a catch all ‘subjective’ test for withdrawal such as ‘if my lawyers aren’t happy, I can pull out and get my deposit back’. This is unfair. Lawyers must demonstrate the reason for any negative findings, and give the seller an opportunity to explain an issue or resolve it, but within a certain limited period of time.
  1. It is important to have the document signed properly. If either party wishes to rely upon the document, then they should actually take care on the signing process. So many times I have seen one party send a scanned version of a reservation agreement, never to receive the same from the other party. This can cause issues if the terms ever become contested or discussed. Further, the execution of the agreements should be done bearing in mind ‘identification’ of the signatory. If the signatory is a company – does it need to affix its company seal for the contract to be binding? It is your duty or your advisers’ duty to establish this.

Overall, the property buying process, especially for a holiday home or rental property, should be an enjoyable experience where you feel rewarded for taking the plunge and diversifying your investments, often into a place you actually like to visit and spend time. Whilst the pleasure sensors are activated, the brass tasks job of getting the paperwork right from the outset – including the Reservation Agreement, should be tackled diligently.

 

 

 

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Desmond has operated and owned 2 law firms in Asia in 14 years spanning Thailand; Vietnam; Indonesia with clients in all of Asia and other markets investing inwards into the region with his existing firm Hughes Krupica possessing a large market shares in its fields of expertise. Desmond’s professional expertise comprises real estate from the most complex mixed use development structuring through to assisting with private property transactions. Desmond also assists investors in relation to hotel disposals and acquisitions and restructuring. Desmond keeps his market knowledge fresh by presenting at seminars; participating in real estate industry events; writing prolifically for different printed and online publications and by meeting and networking amongst his client base.

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