The complexities of leasing long term.

harryopal

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May 5, 2016
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Land purchase/lease in Bali - issues to consider
I worked my way through this thread which alerts people to the many complexities of purchasing properties In Indonesia. At the moment I am contemplating "buying" a 16 year lease on a house "owned" by a foreign national living abroad.
I recognize the need to sight the land certificate relating to the property; obtaining a notaris oversight of any agreement; consulting the local Banjar before proceeding and the need to take heed of the old maxim "caveat emptor."
After some due diligence it would seem the simplest process to take over any such leasehold is by having a tenancy agreement made in the name of my Indonesian wife. As we would not be "owning" the property then I presume a prenuptial agreement would not be relevant although there is some dispute in the above thread about the need for that anyway.
I note the various taxes involved in property transfers but am not sure what if any taxes apply in taking over a leasehold.
I presume that at the end of that lease the property would simply revert to the original landowner preceding the present foreign "owner of the lease". As the place has furnishings I am not sure what the ownership of those items would be at the expiry of the 16 year lease.
I am yet to hear back from the present "owner" of the 16 year lease about availability of the place but any information relating to my questions would be useful for future reference even if this particular property were unavailable.
Looking at the asked for price, the lease would work out reasonably in terms of rental.... (assuming I don't kark it next week or sometime in the not too distant future. )
But then what of any maintenance issues? I guess these would then become my responsibility but to whom am I responsible regarding the actual owner of the property?
And while on this general topic how does taking a long term lease differ in terms of a leasing agreement for a one or several years tenancy?

Thanks in anticipation of helpful comments.
 

davita

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Mar 13, 2012
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The term 'lease' in regard to property in Indonesia can be misinterpreted relative to the way western people think of a legal lease.
Below are the common titles relating to property in Indonesia...there are others but I'm simplifying.

Hak Milik - freehold title that can be bought, sold, mortgaged and inherited and is only available for Indonesia nationals and Indonesian corporations. An Indonesian married to a foreigner can now purchase HM so long as a document, much like a 'pre/post-nup', is signed by both.

Hak Pakai - the right to use land for a specific and pre-agreed purpose for a defined amount of time. This can be held by an Indonesian national, foreigners domiciled in Indonesia, foreign investment companies (PMA) and representative offices. This is a 'lease' and is registered in the Land Office in the 'leaseholder's' name.... it can be bought, sold, mortgaged and inherited.

Hak Sewa - the right to rent land by a determined amount of time by the two parties. This is an informal agreement in that it is not certified or registered with the land authorities. It can be held by a foreigner that is residing in Indonesia or the Indonesian branch of a foreign company. The agreed use of the land must be maintained throughout the lease period. This is what is sometimes defined as a 'lease'. In reality it is a long-term rental and legally only comprises a contractual agreement between the entities. It could have problems if the HM owner died and the HM inheritors claim said property. I doubt if it can be mortgaged or inherited.
 
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ronb

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Aug 14, 2007
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My understanding is that your "foreign national" leased the land long term (maybe 25 or 35 years, and maybe with an option to extend) and then he built the house. You are looking at taking over the remaining part of the lease, so then you have the lease agreement with the land owner - and this is for the land only. You will become the owner of the improvements and so fully responsible for maintenance. The lease agreement will have a bit saying that at the end of the lease you must leave the non movable improvements like concrete/brick house and swimming pool to the land owner.

So to work out what is a fair price you first need to find what the cost/are/year for unimproved land in that area. I don't know where it is but say it was 5 million/are/year, and say this property is 5 are, then the amount you would expect to pay for the land lease is 5* 5*16 which is 400 million (almost 2 cars) for the land. The remainder of the asking price is for the improvements which you could look at as the replacement cost but then discounted because you only can use it for 16 years. If there is an option for an extension, then this adds value.

Finally my suggestion is that you transfer the lease into the joint names of you and your wife, so that if one of you dies before 16 years it does not get over complicated.
 

davita

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Mar 13, 2012
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Finally my suggestion is that you transfer the lease into the joint names of you and your wife, so that if one of you dies before 16 years it does not get over complicated.

A very good point...not only for a lease but all financial affairs like banking and investments.
I liquidated some investments in May, because they were only in my name, and I still have not received all the proceeds due to requirements of Financial Services rules (too complex to explain). One can imagine the problems my wife would have, to do the same, if it first required to be proved I was dead and she was my legal inheritor.
 

tel522

Active Member
Oct 30, 2015
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Morning mr Harryopal , by all means study the vagaries of leasing but I would not do anything at the moment , because of Agung , you may find prices cut in half or more ,very soon.
 

Mark

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Apr 19, 2004
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Morning mr Harryopal , by all means study the vagaries of leasing but I would not do anything at the moment , because of Agung , you may find prices cut in half or more ,very soon.
That's certainly wishful thinking, unless one is buying/leasing a property covered by a a few meters of lava.
 

tel522

Active Member
Oct 30, 2015
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We shall see what happens , but if this unknown situation carry's on for a long time , bali will empty of tourists thats for sure , no one will come here if they are not sure when they can get out etc , never mind the ash clouds etc etc etc and god knows what else .

Personally, I would definitely not do anything at the moment , who knows we may be all on another island or elsewhere in a years time .

But ya its not my money.
 

harryopal

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May 5, 2016
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Thanks for the responses. In the earlier Land Lease thread there were different views about the necessity for a prenup. (We didn't get one.) It makes sense to try for both names on a lease if it comes to that and we would then find out if the prenup is a sticking point.

The present "owner" of the lease has replied to question about taxes and fees with this: I believe there are no taxes for the transfer of a long term leasehold. But if there are any taxes involved it would probably be slight."

Is that the case as far as anyone knows?
 

davita

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Mar 13, 2012
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Thanks for the responses. In the earlier Land Lease thread there were different views about the necessity for a prenup. (We didn't get one.) It makes sense to try for both names on a lease if it comes to that and we would then find out if the prenup is a sticking point.

The present "owner" of the lease has replied to question about taxes and fees with this: I believe there are no taxes for the transfer of a long term leasehold. But if there are any taxes involved it would probably be slight."

Is that the case as far as anyone knows?

With regard to pre-nup the Constitutional Court recently threw that out and replaced it with what can be considered an agreement pre and post marriage. This gives rights to WNI spouses, married to WNA, so long as there is an agreement that the WNA cannot inherit the Hak Milik (HM) title to land in the event of death or divorce. It is only relevant (in practice) to HM property and mixed marriage. Pre-nup agreements are still available to Indonesians.

With regard to Hak Sewa 'long-term lease' the devil is in the details as written in the contract between the HM owner and the 'lease-holder'. The contract needs to be studied....in particular to see if the 'lease-holder' is even allowed to sub-sell his 'lease'....these details need to be closely scrutinised and understood before continuing with any purchase.

Only Hak Pakai has those details written in law in the Land Office as the HM title holder has, in effect, underwritten his title to the Gov't.
 
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harryopal

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May 5, 2016
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What is the situation with insurance? If one took out insurance can you claim the benefit even if you do not own the property if, for example, the place caught fire? Insurance companies are notorious for happily taking payments and doing everything they can to avoid pay outs.
 

Mark

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Apr 19, 2004
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What is the situation with insurance? If one took out insurance can you claim the benefit even if you do not own the property if, for example, the place caught fire? Insurance companies are notorious for happily taking payments and doing everything they can to avoid pay outs.
I'm pretty sure you must have a legal interest (ownership or proper lease) in order to take out insurance on a property.
 

ronb

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Aug 14, 2007
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Ubud, Bali
Yes you can insure, because you do own the property that is being insured. The land-owner only owns the land and you are not insuring that.

And yes it is correct there is no government tax on a lease transfer. There is a fee for the notaris (which can be bargained down from the set %age they first mention) and I think you and your foreign national can spilt that. I think you can select the notaris and you will be paying the money into a notaris account, then you all meet for signing and transfer of money and the completion of lease contract in your joint names.

A final thought - you should check out the land owner, meet him/her if you can and be confident that you are dealing with a respected person who will honor their side of the lease contract.
 

harryopal

Well-Known Member
May 5, 2016
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Thanks again for all the responses. At the moment I am waiting for a response from the seller in the US as to the status of the lease and if he is entitled to sub-let the lease. I will keep you posted for the benefit of others involved in lease take overs.
 

davita

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Mar 13, 2012
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As Ronb said.... the notary can be selected but should be a PPAT (Land Deed Officer) and have their office in the Regency where the property is located.
 

sunset_007

New Member
Sep 27, 2018
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My understanding is that your "foreign national" leased the land long term (maybe 25 or 35 years, and maybe with an option to extend) and then he built the house. You are looking at taking over the remaining part of the lease, so then you have the lease agreement with the land owner - and this is for the land only. You will become the owner of the improvements and so fully responsible for maintenance. The lease agreement will have a bit saying that at the end of the lease you must leave the non movable improvements like concrete/brick house and swimming pool to the land owner.

So to work out what is a fair price you first need to find what the cost/are/year for unimproved land in that area. I don't know where it is but say it was 5 million/are/year, and say this property is 5 are, then the amount you would expect to pay for the land lease is 5* 5*16 which is 400 million (almost 2 cars) for the land. The remainder of the asking price is for the improvements which you could look at as the replacement cost but then discounted because you only can use it for 16 years. If there is an option for an extension, then this adds value.

Finally my suggestion is that you transfer the lease into the joint names of you and your wife, so that if one of you dies before 16 years it does not get over complicated.

Who pays for maintenance? To me, a lease is like renting. The landlord pays for all upkeep, even if it's a 25 year lease. Is this how it works there?
 

Mark

Well-Known Member
Apr 19, 2004
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Who pays for maintenance? To me, a lease is like renting. The landlord pays for all upkeep, even if it's a 25 year lease. Is this how it works there?
Nope, that's not the practice in Indonesia. The tenant is usually responsible for maintenance, even for ordinary rentals.
 

tel522

Active Member
Oct 30, 2015
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An ordinary yearly rental , like mine , maintenance depends on the contract which we both signed ,and the morals of the owner, luckily I picked a good one .
As a foreigner there is little or no redress if the owner chooses not to honor the contract ,even locals who rent have problems with their owners .
 
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Mark

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Apr 19, 2004
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tel522 is correct, for a short term rental contract (eg 1- 2 years or less), you can negotiate with the landlord over who is responsible for maintaining what. Of course, you will rely on his/her goodwill to follow through on whatever is agreed. However, long term leases (eg 20 years) that go through a notary are essentially viewed the same as buy/sell transactions from the land owner's perspective, so I would be extremely surprised if a lessor would be willing to take on any expenses.