Expatriate business people in Indonesia have a rightful concern regarding land use and ownership rights for business purposes. Act No. 5 of 1960 regulates the umbrella law regarding rights over land ownership. The law covers some rights – mostly those to Indonesian citizens – namely:
- Rights of Ownership
- Building Rights on Land
- Cultivation Rights on Land, and
- Rights of Use
With the emergence of foreign investment and business in Indonesia, many foreign investors need buildings or land for their companies. A foreign investor who wants to run their business in Indonesia can obtain building/office or land under the following rights:
Building Rights on Land
The right to build and possess a structure on land owned by others: The duration of the right for the building is maximally 30 years, extendible for 20 years (article 30 Act No. by 5/1960). This right can be transferred to other persons selling and inheriting, who also can secure a loan, as a Hypothec Right.
Those who may obtain right-to-build deeds are Indonesian citizens and legal entities (such as a limited liability company) established under Indonesian law and domiciled in Indonesia, either for 100 percent foreign-owned, joint ventures, or 100 percent Indonesian-owned companies.
Foreign investors who desire to establish their business in Indonesia can have their building/office under a “rights to build” deed for a stipulated period.
Cultivation Right on Land
This is a right to cultivate on state land for agriculture and farming enterprises. The duration is maximally 25 years, extendable for 35 years, and should be registered at the Land Register at the National Land Agency. As in Right to Build, Cultivation Rights can secure a loan by delivering the certificate of Cultivation Rights to the lender.
Indonesian citizens can own these rights, as can legal entities (such as limited liability companies) established under Indonesian law and domiciled in Indonesia, either for 100 percent foreign-owned, joint venture, or 100 percent Indonesian-owned companies.
Right of Use
This is the right to use and/or harvest from land directly owned by the state (rendered by authorized official government deed), or private land (by agreement with the owner of the land). This may be applied to the land for use as a building site or for agricultural purposes. The transfer of this right must have local government authorization.
Right of Lease of Building
A person or Indonesian legal entity has the right to lease another’s land. This right belongs to Indonesian citizens, foreigners, and legal entities (such as limited liability companies) established under Indonesian law and domiciled in Indonesia or the representative office from a foreign legal entity. The lessee and the leaser can make an agreement to arrange it.
Building Rights on Land vs Rights of Ownership
Building Rights on Land is only the right to use a building for a fixed period of time, which then has to be extended. The owner of Building Rights on Land is the Indonesian government. Meanwhile, only with Rights of Ownership do you actually own the land or the building. Rights of Ownership do not need to be extended.
Purchasing Properties (Strata Title, Convertible Lease Agreement or indirect purchase)
By Indonesian law, a foreigner cannot own land in Indonesia but purchasing apartments or office space is possible through a strata title deed. The 1996 regulation (No. 41/1996) states that an expatriate who resides in Indonesia or visits the country regularly for business purposes can purchase a house, apartment, or condominium, as long as it is not a government-subsidized development. The title is only for the right of use. In reality, regulation No. 41/1996 is still somewhat unclear and no foreigner has actually been able to receive a strata title as a certificate of ownership. Despite this unclear legal ownership, foreigners sign a convertible lease agreement with property management companies or indirectly by using the names of an Indonesian citizen with whom they have a separate agreement.
Convertible Lease Agreement
One manner for a foreigner to proceed with property purchases, despite legal ambiguities, is to sign a Convertible Lease Agreement to purchase an apartment. Under the foregoing agreement, the foreigner may purchase the apartment, but the title is still held in the name of the developer or property management firm. This lease agreement is for a definite period.
The Convertible Lease Agreement states that, if and when the prevailing laws and regulations permit, the lessee becomes the legal owner of the apartment/strata title unit. Both the lesser and the lessee will be obligated to sign a deed of sale and purchase and the title will be transferred to the foreign owner.
If you are interested in purchasing a condominium through this type of agreement, investigate the property management company thoroughly. In the current economic downturn, many developers are bearing serious economic pressures and construction costs on many properties that have been delayed or canceled. Consult with a reputable lawyer to ensure that all legal implications are thoroughly covered.
Another way to purchase a condo is in the name of an Indonesian citizen. But the person must be someone you really trust. The person would be the legal owner of the property according to the law.
It is strongly suggested that before making any property purchases or signing any property agreements, foreigners should consult bona fide lawyers that are experts in Indonesian property ownership to understand the legal status of the ownership and prevent any regrets in the future.