VLP Legal Press #34: Key Points in Real Estate Transaction (Lease)

Many businesses choose to acquire the right to use land through leasing rather than purchasing. Today, we explore leases in Cambodia through four questions you may be asking yourself too.

1.      I want to lease land in Cambodia for my business, but landlords seem reluctant to agree to leases longer than 15 years. Why is this?

It is common for businesses in Cambodia to look for a lease with a long term, especially if they intend to invest a significant sum of money in building infrastructure on the leased land. However, we have observed some landlords are hesitant to grant leases of 15 years or more. There is a legal reason for this and understanding it helps explain why many landlords prefer shorter lease terms.

Article 244 of the Civil Code 2007 defines any lease of immovable property for a term of 15 years or more as a perpetual lease (commonly called a long-term lease). The law allows a maximum period of 50 years for long-term lease and can be renewed of up to another 50 years.

How is a long-term lease different from a short-term lease?

A lease of less than 15 years, commonly called short-term lease, is subject to general rights and obligations provided under the law (including Civil Code). In addition to the law, the relationship between the parties is also governed by the terms in their lease agreement.

By contrast, in addition to the general rules applicable to the short-term lease, a long-term lease is subject to certain privileges provided under the law which grants the lessees more protections and may be registered with the land authority as explained below.

Why do some landlords prefer leases of less than 15 years?

In practice, many landlords intentionally keep lease terms below 15 years so that the lessee does not benefit from the protection associated with a registrable long-term lease, which include the following:

Registration that enhances the lessee’s rights: when a long-term lease is registered, (i) it is recorded on the reverse side of the original land title at the land authority which becomes visible to prospective purchasers and lenders and (ii) the full term of the lease is protected. Although the landlord remains free to sell the property, the length of the lease terms and those legal protections in favour of the lessee, may make the property less attractive to some buyers. Further, if there is a breach of the lease, the lessor may face hurdles in the cancellation of the long-term lease registration if there is no collaboration from the lessee.

Right to demand for a decrease in rent: Article 249 of the Civil Code allows either party of a long-term lease to request the court to adjust the rent if economic circumstances change significantly. This may not be favourable to the landlord of a long-term lease.

Lessee’s right to assign or sublease: Article 252 of the Civil Code allows a lessee of a long-term lease to assign or sublease the lease to a third party and does not impose any requirement for the landlord’s consent. Whereas the assignment or sublease of short-term lease requires landlord’s prior consent.

Lack of flexibility: a shorter lease gives the landlord greater flexibility to redevelop, refinance, sell or re-lease the property. In contrary, committing land for 30 or 50 years can significantly limit future options.

For these reasons, many landlords prefer lease terms of 10 or 14 years rather than 15 years or more so that the lease is not subject to these additional long-term lease protections for lessees under the law.

2.      I have a long-term lease, but my landlord does not want to provide the land title for me to register my long-term lease? What happens when I don’t register my long-term lease?

This is a common issue faced by long-term lessees in Cambodia. While the lease agreement may already be signed, registration cannot proceed without the landlord's cooperation.

What does registration actually require?

Registering a long-term lease is not something the lessee can do alone. It requires the active cooperation of the landlord including signing on prescribed application forms and providing the original land title.

In practice, registration generally requires the original hard title to be submitted to the land authority for notation. If the landlord refuses or is unable to provide it, registration may not be possible.

Upon registration, the land authority issues a Long-Term Lease Certificate evidencing the registered lease, which may itself be used as collateral in certain financing arrangements.

Why might a landlord refuse or be unable to provide the title?

The landlord may refuse or cannot provide the title due to certain reasons:

• the original title may be held by a bank because the property has been mortgaged;

• the landlord may see little personal benefit in registering the lease while accepting the additional administrative burden;

• the leased property is part of a bigger plot of land under a single title;

• the property may already be subject to another registered right or encumbrance; or

• the landlord may wish to preserve flexibility to sell or refinance the property in the future.

While some of these reasons may be legitimate, the lessee should understand the legal implications before agreeing to proceed without registration.

What are the risks of not registering?

The principal risk is that the lessee may not be able to enforce the lease against third parties for the full lease term.

Article 246(1) of the Civil Code provides clearly that an unregistered long-term lease cannot be held up against third parties. However, the lessee may assert its lease right against a new owner for up to the first 15 years of the lease by occupying and profiting from the leased property, but any remaining term beyond that may not be enforceable against the new owner. This means, if you have an unregistered 30-year lease, a new owner is only obligated to honour the first 15 years.

What Can You Do?

The lessee should:

• conduct title due diligence before signing the lease;

• ensure the lease agreement clearly sets out the parties’ rights and obligations, including the landlord's obligation to cooperate with registration where applicable; and

• if registration cannot proceed because the title is held by a bank or for another practical reason, seek legal advice early to explore available options and mitigate the associated risks.

3.      I am renting land for my business, and I heard the owner may be selling the property. What happens to my lease? Can the owner even sell while my lease is running?

Yes - from a legal standpoint, a property owner retains the right to sell their property at any time, even when a lease is still running. However, whether your lease survives the sale depends on what type of lease you have.

For short-term lease, Article 598 of the Civil Code gives a straightforward protection. if you have been continuously occupying, using and profiting from the property, the new owner must recognise your lease.

For long-term lease, it depends on registration. As discussed above, if a long-term lease is not registered, and without a written acknowledgement by the new owner of the entire lease term, the new owner only needs to recognise the long-term lease for up to 15 years, even if your original lease term was longer, provided you have been continuously occupying and using the property.

What can you do?

Therefore, it is worth negotiating a clause in your lease agreement stating that any sale of the property will not terminate the lease, and that the seller must ensure the new owner formally acknowledges and assumes the lease obligations in writing, through an assignment or a fresh lease agreement for the remaining lease term.

4.      I am investing around USD 10 million to construct a building on leased land. If things go wrong with the landlord, can I claim reimbursement for the construction costs?

As a general rule, the law does not automatically guarantee reimbursement.

For short-term leases, Article 618 of the Civil Code requires the lessee to restore the leased land to its original condition before returning it to the landlord though you are entitled to remove anything you have attached to the land beforehand. The lessee is also responsible for repairing or compensating for any damage caused by lessee’s own fault, excluding fair wear and tear from normal use. Overall, the law is built around restoration, not compensation and does not give lessee a right to demand payment for what the lessee built.

For long-term leases, Article 254 of the Civil Code works differently. The landlord cannot force the lessee to restore the property to its original condition, unless the lessee have destroyed the property or fundamentally changed its nature. However, the law also allows the landlord to take ownership of any improvements or structures the lessee have built, without having to pay the lessee compensation.

What can you do?

Since the law does not provide automatic reimbursement under either type of lease, the only real protection is to discuss this with your landlord upfront and include clear terms on reimbursement in your lease agreement.

The information in this article reflects the law as at the date of publication and is for general reference only. It does not constitute comprehensive legal advice. If you need further guidance, feel free to reach out to us at connect@vlplaw.co.