Decoding the 'Controlled Lease Agreement': How Should Landlords and Real Estate Investors Adapt?

Since May 1st, landlords of dormitories/apartments and real estate investors have likely been feeling a bit anxious due to the announcement from the committee regarding the regulation of lease agreements for residential buildings under the Controlled Lease Agreement Act of 2018. This means that from now on, anyone who has houses for rent condos for rent or rooms for rent can no longer draft their own contracts. Henceforth, almost all lease agreements must align under the 'Controlled Lease Agreement'. The term 'almost all' is used because it does not mean that everyone must comply with the 'Controlled Lease Agreement'. Today, TerraBKK will decode the 'Controlled Lease Agreement' to clarify who needs to comply and how to handle this new contract.

Who Must Comply with the 'Controlled Lease Agreement'?

                  As mentioned earlier, not everyone is subject to this regulation. So, who must comply with the 'Controlled Lease Agreement'?

  1. Only those renting out buildings, rooms, houses, condominiums, apartments for residential purposes (excluding dormitories – dormitories that are registered and licensed with the authorities)
  2. Only those with rental properties 'for residential purposes' of more than 5 units (whether in the same building or multiple buildings)
  3. Only individual tenants, while landlords can be either legal entities or individuals

                  Therefore, any investors who do not fall under these three criteria can rest easy, as they are not compelled to comply with this law.

Key Points of the 'Controlled Lease Agreement' to Know!

                  Now, let's get to the highlights of the 'Controlled Lease Agreement' that everyone wants to know. The law itself not only specifies the contract but also outlines the 'obligations of the landlord' and 'prohibited clauses in the lease'. Of course, anyone who has seen the full official publication might be confused due to the abundance of information. So, for those who are confused, TerraBKK has gathered the essential points you need to know right here.

Landlord's Obligations

  1. The landlord must send a 'billing notice' to the tenant at least 7 days before the rent payment due date.
  2. The landlord must create a building condition inspection report to attach to the lease agreement.
  3. The landlord must return the tenant's security deposit immediately upon contract expiration (unless waiting to check for damages, but if there are no damages, the deposit must be returned within 7 days).
  4. If the tenant breaches a significant term of the lease (the significant terms must be in red, bold, or italicized text that stands out from the general text), the landlord must send a written notice of warning. If the tenant does not comply within 30 days after receiving the notice, the landlord has the right to terminate the contract.

Contents of the Lease Agreement Under the 'Controlled Lease Agreement' Law

  1. The text in the lease agreement must be in Thai with a font size of no less than 2 mm. Even if you are renting to foreigners, there must also be Thai accompanying text.
  2. The lease agreement must clearly state the details of both parties, including the names and addresses of the tenant and landlord.
  3. The lease agreement must clearly specify the details of the rented property, including the project name, number, and identifiable location.
  4. The lease duration must be clearly stated.
  5. All monetary amounts must be clearly specified, including the rental rate, security deposit, water, electricity, telephone charges, service fees, and all payment methods and due dates must be clearly outlined.
  6. Don't forget!! Any clause that we consider significant enough to terminate the contract must be in red or italicized text that stands out from the general text.

                  Additionally, the lease agreement must be created in two identical copies, with one kept by the landlord and the other by the tenant.

Prohibitions Under the 'Controlled Lease Agreement' Law

  1. Prohibiting the collection of rent in advance for more than 1 month.
  2. Prohibiting the collection of deposits or security fees for more than 1 month.
  3. Prohibiting the confiscation of security deposits or advance rent.
  4. Prohibiting inspections of the rented property without prior notice.
  5. Prohibiting the collection of water and electricity fees exceeding the amounts charged by the electricity and water authorities.
  6. When the tenant fails to pay rent, the landlord is prohibited from locking the door or seizing the tenant's belongings.
  7. No right to charge renewal fees from the existing tenant.
  8. Prohibiting the collection of damages resulting from normal use, wear and tear, or damages not caused by the tenant.

What Happens If You Don't Comply?

*** Imprisonment for up to 1 month or a fine of up to 100,000 Baht, or both ***

How to Adapt to the 'Controlled Lease Agreement'

From all the points outlined, it is evident that many landlords of rental rooms and houses are still pondering how to solve these issues, as some points seem quite challenging. If they encounter good tenants, it’s great, but if they face difficult tenants, they may need to find solutions. Here are some ways for you to adapt to the 'Controlled Lease Agreement'.

  1. Prohibit collecting security deposits or advance payments exceeding 1 month.

This point is likely the biggest issue with the 'Controlled Lease Agreement' because, as we all know, when some tenants move out leaving significant damages, sometimes a 2-month security deposit is still not enough to cover repair costs. Trying to collect additional fees often leads to disputes. So, how can we resolve this?

Solution: Use the missing 1-month security deposit to average out with the monthly rent. For example, if the security deposit is 6,000 Baht, we might need to increase the rent to 6,500 Baht (the additional 500 Baht is 6,000/12=500) or consider other non-monetary guarantees, such as having a guarantor.

  1. Prohibit collecting water and electricity fees exceeding the amounts charged by the electricity and water authorities.

                 

Another contentious issue between apartment/room owners and tenants is why water and electricity fees are charged at rates higher than those from the electricity and water authorities. The difference often covers other expenses, such as elevator electricity, common area electricity, maintenance costs, and cleaning fees, but landlords do not always disclose this information transparently. When charging high water and electricity fees, it can seem exploitative to tenants. So, how can we resolve this?

Solution: Switch to charging for other services that actually occur, and you must transparently disclose what expenses are involved, such as cleaning fees for common areas, common area electricity, maintenance fees, etc.

  1. Prohibit confiscating security deposits or advance rent.

                  Normally, when a tenant breaches any term of the contract or moves out early, what apartment/room owners typically do is 'confiscate the entire security deposit'. However, this can no longer be done, as if the tenant has a legitimate reason, such as needing to relocate for work or traveling abroad for an extended period, they would lose that money unnecessarily. So, how can we resolve this?

Solution: If a tenant moves out early, we may need to calculate the 'opportunity cost' of the room being vacant and waiting for a new tenant. The opportunity cost here refers to the time it usually takes to find a new tenant, calculated as a daily rate instead, which would be fair to both parties. This opportunity cost means the potential income from another tenant (not the one who moved out) who could have rented for the full term.

  1. When the tenant fails to pay rent, the landlord is prohibited from locking the door or seizing the tenant's belongings.

For this point, we have never had the right to do so, as it constitutes trespassing on the rental property while the tenant is still in possession. Therefore, breaking into your own property that is currently rented out is against the law. Additionally, it violates the tenant's personal property rights (even if they have not paid rent). So, how can we resolve this?

Solution: Remember that we must send a 'billing notice' 7 days before the payment due date, stating that if payment is not made within 7 days after receiving the notice, it will be considered a notice of contract termination. This means the tenant must vacate immediately upon defaulting on rent.

                  All of this is just a portion of what the TerraBKK team learned from a lecture by Professor Chinapat Visutthiphat - Legal Advisor and Mr. Rawirom Amponsathian - Real Estate Investor, shared to help operators or investors find the best solutions that comply with the law and do not exploit tenants. Ultimately, TerraBKK believes that this law was drafted to protect consumers, specifically 'tenants'. Some points are indeed beneficial as they refine lease agreements, acknowledging that some landlords have previously drafted contracts that excessively exploited tenants. However, the entire agreement must also be fair to both parties.

Article by: TerraBKK Knowledge Base

TerraBKK: Find good, valuable, and affordable homes