Samui Phangan Real Estate Magazine October-November

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ealty in focus l legal buzz BUILDING A VILLA IN KOH SAMUI OR KOH PHANGAN This article was written by Jeffrey Martin, Senior Associate of Limcharoen Hughes & Glanville (Samui). For further information, please contact our Koh Samui offices on (0) 84 714 8800 or e-mail jeffrey@limcharoen.com. Other offices located in Bangkok, Phuket, Ho Chi Minh City, Bali and coming soon, Hong Kong. 52 samui phangan real estate Koh Samui and Koh Phangan have become recognized destinations for bouquet residential development projects. However, both islands also offer a variety of individualized single-standing villas and houses. Indeed, a number of property investors in Koh Samui and Koh Phangan elect to acquire raw land, and then have their envisioned dream home built upon that land, rather than invest in a serviced project. Investors are no doubt aware that the construction process carries uncertainty and risk, and noting that the cost of construction can often-times exceed the value of the underlying land (and that construction costs can escalate during the construction period), it is essential that investors are proactive in addressing these risks. This article addresses the basic legal and commercial issues associated with construction in Thailand. The reader should be aware that construction is inherently complex from both a legal and commercial perspective and therefore this article will not fully explore the relevant legal issues. Before commencing construction, and indeed before investing in raw land, it is essential to first consult with a legal advisor. PRELIMINARY INVESTIGATIONS Before investing in raw land, one should conduct full due diligence upon the land, including a full title investigation back to Sor Kor 1. It is particularly important to determine if the land has full legal rights of access, including access to electricity, water and sewage. Failure to investigate into these issues at an early stage may result in increased costs in the future, or an outright inability to utilize the finished property. In addition, it is essential to determine what “zone” the land falls within according to the Ministerial Regulations, issued under the command of Plantation Law, Koh Samui, Province of Suratthani B.E. 2549. The scope of construction is significantly limited in certain zones, and all zones carry height and footprint restrictions and required set-backs from the sea-line and water sources. Therefore before acquiring raw land, the savvy investor determines which zone the target land is located within and assesses the construction rules applicable to that zone. SOURCE A RELIABLE CONTRACTOR One of the primary risks associated with building upon raw land is the chance that the construction will not be completed on time or at all, or that it will be of poor quality. Common sense suggests that an investor can mitigate this risk by doing homework on the various contractors available, and selecting a contractor with an established positive track record in relation to the type of construction sought. Personal compatibility with the contractor is also important, noting that the relationship may be tested or strained if difficulties arise. CONSTRUCTION PERMIT It is necessary to obtain a construction permit to legally construct a building. While serving as evidence that the construction itself adheres to
the zoning regulations and other applicable laws, a validly issued construction permit also serves as evidence of ownership of the underlying building. Care should therefore be taken to ensure that the building permit is issued to an appropriate person as it will serve as prima facie evidence that such person owns the building post construction. The local authorities do not generally issue construction permits for the benefit of foreign individuals or entities, and therefore foreigners wishing to establish personal ownership of a building post construction will generally be required to register a transfer of the building to their name, or the name of an appointed foreign entity, which will entail land office registration fees and taxes. CONSTRUCTION AGREEMENT It is a trite recommendation, although so often neglected: investors should enter into a written construction agreement with the contractor before work is commenced. As noted above, construction is itself a complex area of law and therefore any construction agreement should be prepared or reviewed by a legal advisor specializing in construction matters. Noting the complexity of construction agreements, any attempt to provide a full survey of a construction agreement in this article would be futile. However, a few terms might be highlighted, in addition to the terms discussed elsewhere in this article. For instance, a construction agreement should clearly identify the target land, the parties and the works (including detailed building plans, descriptions of the materials and future bill of quantities); include any warranties and guarantees agreed by the parties; provide for payment and procurement of insurance on the construction site; apportion the applicable taxes on construction; and contain the appropriate default, termination and dispute resolution terms - amongst other terms. CONSTRUCTION MILESTONES AND DEADLINE The construction agreement should provide for payments following specific construction milestones, and following inspection of those milestones. Ideally, the majority of the contract price should be settled towards the end of the construction process. Furthermore, a percent of the contract price should be held back from each milestone payment, and paid out only after the completion process, including a snag check and post completion repairs. It may be possible to retain the holdback until the expiry of a warranty period. These steps can mitigate the risks of poor or incomplete construction by providing a significant economic incentive onto the contractor to progress quality construction, and by allowing the investor to cease payments if the contractor fails to perform adequately. The construction agreement should also provide specific completion deadlines, and impose penalties on the contractor for failing to comply, although some flexibility and provision for extensions and variations should be considered. ExCHANGE RATE RISKS It is important to consider the exchange rate risks associated with construction in cross-border settings. Exchange rate risks arise where the construction agreement provides for stages payments in one currency, namely Thai Baht, while the investor’s funds are primarily held in another currency. Currency fluctuations over the construction period can be significant and therefore it is essential that the investor take steps to mitigate currency exchange risks. Currency exchange risks may be mitigated by capping the exchange rate (or setting a range of exchange rates) in the construction agreement, or by hedging against the risk using designated financial instruments. However, the simplest way to protect against this risk is to transfer all or a significant portion of the contract price into Thailand prior to, or in the early stages of construction. samui phangan real estate 53
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THE EMERALD THONGSON ..............
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Samui Phangan Real Estate Magazine October-November

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