Sat, 08 Sep 2007
Editorial: Amidst Bali's Current Property Boom, Our Quick Primer for Foreigners Wishing to 'Own' Property in Bali.

(9/7/2007) Foreigners trying to obtain a freehold title on land in Indonesia should note that current law is abundantly clear on both the intent and letter of the law: namely, foreigners cannot directly hold a freehold title on Indonesian land.

Despite the lack of equivocation by the Government on the continuing prohibition of foreign land ownership, it is more than a little ironic to discover companies who erect booths in the arrival halls of Bali's airport, place ads in local publications and distribute brochures all including the term "freehold" in reference to Bali property. For the reasons included here, we believe anyone using the term "freehold" in connection to a local property transaction should be held immediate suspicion for employing tactics that clearly illegal in many other jurisdictions.

The bottom line: "freehold title" in Indonesia is called "hak milik" in Indonesia and we believe that in order to prevent further confusion that only the Indonesian term "hak milik" should be used in promotion what is, after all, an exclusive privilege for Indonesian nationals. On the simple assumption that all Indonesians speak their own national language, the very use of the English term freehold title in connection with any Indonesian property offering should be seen as highly suspect and its use set cautionary alarm bells ringing in the head of any potential property investors.

What's Going On Here?

Once a deal is finally made, those offering "freehold title" to foreigners on Indonesianproperty typically create a legal construction that, in the end, offers nothing resembling the free and direct ownership offered by agents in Bali to a foreign owner. Using a local nominee, local notaries and legal consultants will typically create a multi-party construction that:

Puts the "hak milik" or "free hold title" in the hand of an Indonesian nominee. It is the Indonesian nominee whose name is on the property title and who free holds the parcel, not the foreigner who is the purchaser "in fact" of the property.

The notary will also typically create an irrevocable power of attorney in which the nominee owner surrenders all rights to use, sell and lease the subject property to the foreign purchaser. Is such an irrevocable "power of attorney" legally iron clad? The answer is that there is little in Indonesian law that can ever truly be considered "iron clad" and should you eventually transfer your property to a new party you'll still be very heavily dependent on the good grace of the Indonesian nominee owner to attend the notary and sign over the deed to the new owner or his nominee.

The notary also typically draws up a loan agreement for a large sum of money that is theoretically on loan from the foreign owner "in fact" to the Indonesian nominee. In principle, this creates a lien on the property held by the Indonesian nominee who should remain in benign abeyance for so long as the Indonesian nominee owner stays tame and cooperative. While superficially attractive to a foreigner eager to own a home in Bali, these loan agreements may not have much force of law and are extremely vulnerable to any future vagaries of the "personal bond" between the owner "in fact" and his Indonesia nominee.

Two other legal pitfalls may await such loan agreement arrangements. First, because the loan is fictive the foreign owner may be hard pressed to demonstrate to a court that the alleged "loan" was ever made in the first place to the Indonesian nominee. Also worthy of note is that current Indonesian law also prohibits foreign borrowings by Indonesian entities without prior approval from the Foreign Investment Coordinating Board - an approval virtually always absent in the purchase of land through an Indonesian nominee.

Caveat Emptor Let the Buyer Beware!

In the face of a legal environment in which foreigners are clearly not allowed to hold title on Indonesian land, any effort to circumvent the intent of the law is wrought with danger and potential future heartache.

The good news in this sad tale is that the law does permit the lease of land and property to foreign individuals and companies for periods of 25-30 years. While not guaranteeing the personal satisfaction of direct ownership of a Bali property, such leases can be registered in the name of the foreign renter and are generally felt to provide a high level of security to the foreigner for the duration of the lease.

In any case, always seek competent legal advise before embarking on any property transaction in Bali. Engage the lawyer to give you a legal opinion before asking him or her to draw up the paperwork to check your property deal.



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