Long Term Leases in Cambodia (Jan 2022)

1. INTRODUCTION

There are numerous types of leases, such as operating leases, sale and leaseback arrangements and financial leases. There is also the long-term lease, which is possible to enter into in Cambodia and is considered as a real property right. Also known as perpetual leases, their governing provisions are contained in Book 3 of the Civil Code 2007 (CC) and are further defined in the updated Land Law 2001 (LL). Previous to the implementation of the Civil Code, leases were governed by the Land Law 1992, and any leases created before the promulgation of the Civil Code are still under the jurisdiction of the former legislation. This article will focus on the updated laws and the current creation of long-term leases.

2. TERM

A perpetual lease must be for a period of at least 15 years (Article 244, CC) but can only be for a maximum of 50 years. Any lease term that exceeds 50 years will be automatically shortened to 50 years (Article 247, CC). Clauses for renewal are possible, but again, the renewal period must not exceed 50 years.

3. FORMATION

Article 109 of the Land Law 2001 states that lease contracts shall be entered into according to the will of the parties, and in accordance with the provisions of existing laws.

A perpetual lease must be in writing (Article 245(1), CC). In general, oral leases are possible, however they are treated as leases without a fixed term and can be terminated with prior notice equal to the rental period, meaning they are clearly not considered under the provisions on long term leases.

In order for the rights of a perpetual lessee to be held up against third parties, it must be registered. This registration is done with the Cadastral Office, and this registration is only possible if the lease has been certified by either a notary public or the local Sangkat of the immovable property. This registration means that even if the immovable property is assigned, the lessee is able to exert their rights pertaining to the perpetual lease against the new owner of the property.

Therefore, in simplified terms, to create a perpetual lease, there must exist the will of both parties, it must not be in contravention of any other existing laws or regulations, it must be in writing, and it must be registered.

4. RIGHTS OF A LONG-TERM LESSEE

A perpetual lease is known as an usufructuary real right, and the perpetual lessee possesses rights over the immovable property for the duration of the lease. They have the right to possess, use and profit from the immovable, and can demand removal or prevention of a disturbance that infringes the perpetual lease, exerting these rights against third parties (Article 253, CC). In effect, they have many of the rights of ownership, without, for example, the ability to transfer the immovable property or use it as security.

A long-term lease constitutes a right in rem over the immovable property, and this right may be assigned or transferred (Article 108, LL). Article 252 of the Civil Code sets out the provisions of the right of assignment, and this transfer can occur in three different ways. Firstly, the lessee is able to assign the lease to a third party, with or without consideration. Secondly, the lessee is able to sub-lease the immovable property to a third party, and finally the perpetual lease is subject to transfer through succession. Whilst these are the statutory provisions guiding the transfer on long term leases, in practice, through the provisions in the lease itself, the parties can amend these rights. An example being that the lessor may require their consent for a transfer of the lease.

A curious provision in the Civil Code is the right to demand an increase or decrease in the rental amount (Article 249, CC). If either party deem the rental as no longer appropriate due to a change in circumstance, they can request to the court to amend the amount. The potential application of this provision by the lessor could be seen in Sihanoukville over the past few years, when rentals have increased hugely and a lessor may feel as though a rental amount negotiated a decade ago may no longer be appropriate. Similarly, a lessee may use this provision to help mitigate the effects of the coronavirus pandemic, whereby a rental amount negotiated pre-pandemic may be too much of a burden in post-COVID Cambodia.

5. TERMINATION

Whilst the perpetual lease will expire at the end of its term, subject to any clauses of renewal, there are other ways in which the lease can come to a premature end.
Failure to pay the stipulated rental for 3 years will give the perpetual lessor the grounds to terminate the agreement (Article 250, CC).

In addition, the provisions of the perpetual lease agreement may stipulate obligations of either party, which may lead to termination if there is a breach of these obligations.
Article 254 of the Civil Code deals with the event of termination. Upon termination, the lessee is not compelled to return the immovable property in its original form. However, the lessor is entitled to acquire ownership of any improvements and structures installed without having to pay compensation. The parties have the ability to stipulate changes to these statutory requirements, however this special agreement must be registered.

It should also be noted that if a matter regarding perpetual lease is not covered by the provisions dealing with perpetual leases in the Civil Code, then the provisions relating to general leases will be applied.

6. IMPLICATIONS FOR FOEIGN OWNERSHIP ON LAND

I) Perpetual leases have long been used as a form of protection by foreign investors in Cambodia. For foreign ownership of land, a Land Holding Company is often the preferred method, whereby the foreign party owns 49% of the company and a Cambodian party owns the other 51%. The Land Holding Company is then considered a Cambodian entity and has the right of land ownership. To protect the right of the foreign party to use and operate on their land, the Land Holding Company can then enter into perpetual lease with the foreign party to ensure that they will enjoy the rights over the land for up to 50 years.

II) A perpetual lease also allows foreign person(s) to access financing that they may otherwise not be able to obtain. A perpetual lease is a mortgageable asset, meaning that it can be used by a foreign individual to get financing from a banking institution.

7. CONCLUSION

Long-term leases are an important property right with their own provisions in Cambodian law. Whilst operating in much the same way as a general lease, they differ in several significant ways, such as the minimum term of 15 years, the requirement of registration, the ability to request an increase or decrease of the rental amount, its use in the protection of the rights of foreign land ownership and it’s ability to be used as a mortgageable asset.