THE THREE WAYS OF ESTABLISHING CONTROL OVER LAND IN CAMBODIA
1. Buying land through a locally-incorporated company
Foreigners often hold land in Cambodia through a company. This structure offers the least risk for the foreign investor, who can be an individual, or a legal person. More than one piece of land can be held. But setting up a landholding company is expensive, and there is a high maintenance cost, and taxes on rental income are quite high (see above).
The applicable legislation is the Law on the Investment of the Kingdom of Cambodia (Chapter VI, Article 16), which states that ownership of land can be vested in “legal entities in which more than 51% of the equity capital are directly owned by natural persons or legal entities holding Cambodian citizenship”. Moreover, “use of land shall be permitted to investors, including long-term leases of up to a period of 70 years, renewable upon request”.
There are 3 layers of security in the land-holding company structure:
- Different classes of shares. The land holding company must be 51% Cambodian owned, but is usually structured with 2 classes of shares having different rights, one class held by foreign investor, one by local investors. For example the Cambodian entities or persons might have lesser rights to transfer shares and to nominate directors, and company decisions might require a 2/3rds majority.
- Minority control document. A series of private agreements are usually drawn up by which the Cambodian shareholders grant the foreigner special rights – e.g. a permanent majority on the board, or different powers of attorney, or blank shareholder transfer forms.
- Land Security. The landholding company often registers a mortgage on the land, which means that the land cannot be transferred without the consent of the foreigner.
The result is not 100% bullet proof – the main risk is always the Cambodian partner. Because the Cambodian courts are corrupt and decisions are normally bought, the buyer should also methodically undertake due diligence on the local partner to reduce the likelihood of an issue arising in future which will reach the courts.
“In 10 years, we have only had 2 problems,” says Martin DeSautels, managing director of DFDL Mekong Phnom Penh. “But if you have a problem and you have to go to court, sorting things out can cost a lot.”
2. Taking control of land through a lease.
Long-term leases are another common way for foreigners to control land in Cambodia. For instance, the super-luxurious Phnom Penh Raffles Le Royal Hotel is held on a long-term lease. A long term lease gives the lessor all necessary rights to develop the land – e.g., he can get construction permission in his own name.
This is a very simple structure, but is less secure than the company structure.
There is no maximum term for which land can be leased from a private owner – the period is indefinite in the Land Law. Leases commonly last 50 years, 70 years, or 99 years. Leases longer than 15 years must be registered at the Land Office. On state land, there is a 40 years maximum, with the possibility of extension.
A background check on the owner is essential, as in the case of the landholding company structure. Leasing from a greedy, politically well-connected owner can be disastrous.
Safeguards typically built into the lease contract involve:
- Dispute resolution is often placed by contract outside Cambodia, e.g. in Singapore. This is less effective than widely believed, as many land disputes do not involve disputes over the contract itself, but over other matters. In addition, Cambodian courts often refuse to recognize foreign arbitration, or revisit issues already decided in the Court of Arbitration.
- A clause is often inserted requiring the owner to get the lessee’s permission to sell. Or preventing the owner from selling, unless the new owner recognizes the lease.
- In addition, a ‘block sale notice’ can be registered with the Land Office, instructing the office not to sell the land without the lease owners’ permission.
There are currently two problems with the lease structure.
Problem 1 – ownership of the buildings at expiry of lease
It is not settled who owns the buildings after the lease has finished. The 2nd and 3rd floors of buildings clearly belong to the lessee, who can register title. Because the owner of the 1st floor also owns the land, according to the Land Law, once the lease is finished the owner of the building is the landowner. But according to the Law on Investment (covering companies registering for tax incentives) the buildings are owned by the lessor.
The issue could be settled by changes in the revised Land Law and elsewhere: “The Cambodian authorities are reportedly thinking of setting up a separate registry to registed the ownership of buildings. This would be a massive step forward,” says Matthew Rendall of Sciaroni & Associates. Such a register would give effect to the Law on Investment provisions.
Problem 2 – leases not recordable at Land Registry
Hitherto leases been recordable on title deeds at the Land Registry. “I have heard that now that they are registering,” says Rendall. “If this is true, it is another significant development, which would greatly improve the leaseholder’s security.”
3. Buying land by acquiring Cambodian citizenship.
Taking out Cambodian citizenship is one way of getting the right to buy land, which the government is encouraging. Citizenship applications will be considered if a significant investment is being make in Cambodia. It is important to ensure that the Ministry of the Interior, the Council of Ministers, and the President, all agree to the grant of Citizenship.