Samui Phangan Real Estate Magazine October-November

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.
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