Mortgages in Thailand may be granted over most any kind of immovable property provided that they are in writing and registered with the appropriate authority. Mortgages over real property are perhaps the most common form of mortgage, and Thai subsidiaries and affiliates of borrowers are routinely called on to provide mortgages as security under credit facilities. For an overview of Thai mortgage law, please see the Property section of our website here.
A bill proposed by Thailand’s National Council for Peace and Order (NCPO) to amend Civil and Commercial Code, which has since been enacted and published in the Royal Gazette, will reduce the potential liabilities faced mainly by mortgagors in Thailand and require creditors to take additional steps when enforcing a mortgage. In a summary to members of the National Legislative Assembly, the NCPO explained that its bill is necessary as current Thai law is not sufficient to protect the rights of and provide justice for mortgagors in Thailand who provide mortgages in support of third parties. According to the NCPO, Thai mortgagors are at a disadvantage when negotiating the terms of their mortgages as they do not have sufficient bargaining power or financial advantage and are thus not protected in accordance with the spirit of Thai law.
The Actwill take effect in from February 13, 2015 and impacts guarantees provided by Thai entities as well (please see our article here for a discussion).
Mortgages securing debts of a third person limited to value of mortgaged property
One of the more significant provisions of the Act will reduce the potential liabilities faced by a mortgage in Thailand that secures the debt of a third party. Under the Act, the mortgagor’s liability will be limited to the value of the mortgaged property at the time of enforcement or foreclosure of mortgage, even where the mortgagor has provided a separate guarantee.
Mortgagor’s consent required for any deferral granted to borrower
In the event a creditor allows a borrower to defer performance of an obligation that originally was to be performed by a definite time, the mortgage will automatically terminate unless the mortgagor consents to such extension. Under the Act, the mortgagor consent must be made at the time the creditor grants the borrower a deferral. A provision in a mortgage providing for automatic consent of future deferrals will be unenforceable.
This particular provision of the Act will have retroactive effect to Thai mortgages granted prior to the effectiveness of the Act.
New notice requirements as a condition to enforcing Thai mortgages
The Act introduces notice requirements that must be met by a creditor before it can enforce a mortgage and will depend on whether or not the mortgage is made in support of a third party debt.
If the Thai mortgage is not made in support of a third party debt (such that the mortgagor and debtor are the same entity), then the creditor will be required to give written notice to the mortgagor/debtor to perform under the debt within a reasonable period not less than 60 days from the date of such notice before enforcing the mortgage.
If the Thai mortgage is made in support of a third party debt, then the creditor will have to (i) give written notice to the debtor to perform under the debt within a reasonable period not less than 60 days from the date of such notice before enforcing the Thai mortgage and (ii) provide a copy of such notice to the mortgagor within 15 days of delivery to the debtor. This requirement may not be waived by the mortgagor.
These notice requirements will have retroactive effect to Thai mortgages outstanding prior to the effectiveness of the Act.
Mortgagor may act proactively by instructing mortgagee to foreclose
In its summary to the NLA, the NCPO stated its concern that mortgagees may choose not to enforce a mortgage when it is enforceable in the hope of receiving additional interest at a later date. The Act grants mortgagors in Thailand the right to act proactively, such that the mortgagor will be able to require the mortgagee to enforce the mortgage once an underlying obligation becomes due, provided that there are no other mortgages or preferential rights on the mortgaged property and subject to the conditions that (i) the debtor has failed to pay interest for two years; and (ii) the mortgagee has satisfied the court that the value of the mortgaged property is less than or close to the amount due.
Under this provision, the mortgagee will have one year following receipt of notice from the mortgagor to auction the mortgaged property. If the mortgagee fails to proceed with the auction, then the mortgagor will be discharged from its liabilities to the debtor under the mortgage. This requirement may not be waived by the mortgagor.
These new enforcement provisions will have retroactive effect to Thai mortgages outstanding prior to the effectiveness of the Act.
Notice period for transferees extended to 60 days
Transferees of the mortgaged property will be entitled to 60 days’ notice before a mortgagee can take action against the mortgaged property. This notification requirement is in addition to the notifications required above and may not be waived by the mortgagor. Transferees will also have the right to redeem the mortgate at any time.
These requirements will have retroactive effect to Thai mortgages outstanding prior to the effectiveness of the Act.
Creditors with outstanding Thai mortgages will need to keep in mind the retroactive effect of the various changes introduced under the Act, such as the 60 day notice requirement outlined above. As mortgagors who are not primary obligors will face liability limited to the mortgaged property, creditors may want to consider the feasibility of having the applicable Thai entity become a joint debtor, with the mortgage acting as security for the underlying debt. As transferees of mortgaged properties are entitled to additional notification, a creditor may want to specify that the underlying property in a Thai mortgage may not be transferred until obligations under the credit facility are performed and mortgage is released.