The purchase of condominium units from a developer with subsequent guaranteed rental income is a very common practice, especially in Phuket.
Many property owners hand their units over to management companies and regularly receive income either as a fixed guaranteed amount or as a percentage of rental revenue generated by the management company.
This raises several questions: should guaranteed rental payments be expected during the quarantine period? Can a management company terminate a guaranteed rental agreement by citing force majeure? And does coronavirus qualify as force majeure in this context?
Let’s first define force majeure. It refers to circumstances that could not have been foreseen and cannot be controlled, making the fulfillment of contractual obligations impossible. In such cases, obligations may be suspended for the duration of these circumstances.
A difficult economic situation alone is not considered force majeure. The closure of borders, flight cancellations, or booking cancellations are not sufficient grounds for non-fulfillment of guaranteed rental obligations. However, a government-imposed ban on hotel operations and similar businesses is considered force majeure.
This is because the purpose of a management company under such agreements is to rent out the property on a short-term or long-term basis. A government order prohibiting this activity makes the use of the property for its intended purpose impossible. Accordingly, the management company may suspend guaranteed rental payments until hotel operations and similar business activities are allowed to resume.
Whether a management company can terminate a guaranteed rental contract based on force majeure must be determined by the contract itself. If the contract does not specify force majeure conditions, unilateral termination is not allowed. Once the force majeure situation ends, guaranteed rental payments must resume.
A management company may terminate the contract unilaterally only if such conditions are explicitly stated in the agreement — for example, if force majeure lasts more than six months. In any case, termination can only occur after six months of confirmed force majeure, not earlier.
For example, a guaranteed rental agreement was signed on January 1, 2020, with payments made every six months (the next payment due on July 1, 2020).
If the contract states that force majeure lasting more than two months allows termination, and the hotel ban came into effect on April 1, 2020 and was lifted on June 15, 2020, then:
On June 1, 2020, the management company sends notices to owners about contract termination due to force majeure and refusal to pay guaranteed rental income for the entire contract period.
What can the property owner do in this case?
- Demand payment of guaranteed rental income for the period before force majeure began (January 1 to March 31 — 3 months).
- Start using the property personally for living or transfer it to another management company.
- If the property is under long-term leasehold and was purchased for guaranteed rental income purposes, the leasehold contract may be terminated and the remaining lease payments may be claimed back from the developer.
In any case, if you believe the management company’s actions are unlawful, you may challenge them and seek compensation or unpaid income through court proceedings. The court will ultimately decide whether the circumstances qualify as force majeure or not.