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Land purchase/lease in Bali - issues to consider

Discussion in 'Owning Property in Bali' started by Mark, May 10, 2013.

  1. Mark

    Mark Member

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    Following up the recent thread on land due diligence, and having completed a property transaction in Bali some months back, I thought I’d summarize some thoughts and observations. The list of issues and considerations below is by no means complete, authoritative or universally applicable. It is not meant to be relied on in lieu of one’s own due diligence and legal representation. Rather, it is based on one mixed marriage couple’s experience buying land near Ubud, and is hopefully a good starting point for those on this board who are contemplating a property transaction. As there is loads of experience on the board, it would be very interesting to hear other comments, perspectives and stories on the process as well.

    Ownership Considerations:

    1. As a foreign individual, you cannot own freehold land in your name in Indonesia (hak milik title). If someone tells you otherwise, they are either lying to you or are woefully uninformed. There are some company structures that may allow it, but you would need to do your own homework on this option.

    2. While using an Indonesian nominee to own the land on your behalf is a popular workaround for many foreigners wishing to ‘own’ freehold land in Indonesia, note that this arrangement would probably not stand up in court if there is a dispute between you and your nominee. Some foreigners have tried a ‘belt and braces’ approach to using a nominee structure by having, for example, mortgage agreements in place secured by the land, a lease over the land on top of the nominee arrangement, etc. Whether these would stand up in court is anyone’s guess, as far as I know there is no legal precedent and you are taking a chance on an Indonesian court supporting a foreigner over a local in event of dispute. A long-term lease is a tried and true method for foreigners to control land, and is fully supported under Indonesian law.

    3. If you are married to an Indonesian and do not have a prenuptial agreement in place, your spouse technically cannot own freehold land in Indonesia. Why is this? On the one hand, absent a prenuptial agreement, Indonesian law views property as co-owned 50/50 by a married couple. On the other hand, the Indonesian constitution provides that only Indonesian citizens can own freehold land. Regarding mixed marriages, this conflict has been resolved in favor of the constitution, so an Indonesian married to a foreigner without a prenuptial agreement loses the right to own freehold land. While this shouldn’t present any problems at the point of initial purchase (the seller just wants your money after all), issues will arise at the next point of sale, when the potential buyer’s notary will ask for a no objection declaration from the seller’s spouse, ie, you. This is when things could get sticky, as there would technically be a cloud on the title, which the notary may not be able to legally and inexpensively resolve.

    4. For those contemplating marrying an Indonesian and wishing for their spouse to continue to enjoy the right to own freehold land in their own name, I would recommend engaging a lawyer or notaris and entering into a prenuptial agreement in Indonesia. Make sure it is registered before the wedding and also make sure that your marriage is duly registered in Indonesia. Note that a prenup can also protect the foreign spouse in the event of a subsequent dissolution of the marriage, especially where he/she owns a business or has other individual assets in Indonesia.

    Purchase / Lease Considerations:

    5. Once you’ve found a property that you’re in love with and can afford, things get serious. Step one, consider using a notaris of your own choosing, and not necessarily the one that may be recommended by your friendly vendor / lessor. This is not a hard and fast rule – use your own judgment, but you are perfectly within your right to suggest a notaris. The notaris should be based in the regency where the property is located. Do not be upset if the vendor / lessor is not willing to contribute to paying the notaris fee, which is very possible if you insist on choosing the notaris. These fees are a very small part of the transaction (usually 1%) and if you are bearing the full amount the notaris may feel some obligation towards you, though legally they are supposed to be neutral.

    6. Ensure that the notaris confirms that the vendor / lessor owns the property free and clear, that the land certificate accurately describes the property that you are acquiring, and that the property is not in a ‘green belt’, too near to an important temple or have any other impediment that would preclude constructing a building (assuming that is your objective). Consider having a survey done to confirm the boundaries. This is not expensive, and if the property is on a slope or has a lot of terracing, consider asking the surveyor to do a 3D contour map as well. Get this in a digital file – it will be very useful for your architect later.

    7. A significant amount of land in Bali is not yet properly certificated. If this is the case with your potential purchase / lease, be very careful. In order to get a certificate, a court case needs to be heard to establish ownership. This expensive process has many pitfalls. For example, during the court process there is a period where anyone having a conflicting claim to the property may present their case for ownership. If you have already agreed to purchase / lease the property before this objection period has expired, you can be certain that someone will appear out of the woodwork and lodge a claim and thereby significantly delay proceedings and the ultimate issuance of title unless otherwise compensated. Listen carefully to the advice of your notaris if the land does not yet have a certificate.

    8. Ensure that there is road access to the property. If this is via a public road, as confirmed by your notaris and your own observation and checking, you’re in luck. If not, then you will have to negotiate a separate agreement with the owner(s) of the property that will provide access to yours. Do this as part of the land acquisition process and make the closing contingent on having a written agreement in place for access. You’ll no doubt have to pay something for this, but if you do it at the same time as land acquisition, the price should be reasonable (if not, walk away from the whole deal) and your friendly vendor / lessor should be able to help with negotiations. Involve the notaris and have him/her draft the agreements. If you wait until after you have done your land deal to negotiate access to it, then heaven help you. You will need it.

    9. Conversely, be sure that none of your neighbors need to access your land to reach theirs. If so, this could raise sensitive issues as most likely they could not afford to pay you for this access and yet it would not go down well in the village for you to deny them access. Moreover, consider how the access would affect your building and landscaping plans. Take the advice of your notaris if this situation arises. Personally, I would consider walking away from the deal rather than open this can of worms.

    10. Ensure that there is electricity available reasonably nearby. The PLN can be very helpful with this and will usually tell you what it will take to bring power to your plot. In any event, however nice they may be, the PLN will not actually provide electricity until you have a valid building permit (IMB).

    11. Coming back to zoning, if relevant consider making it part of the deal that the land be reclassified from agricultural to residential. You will have to pay extra for this and it takes a bit more time (in our case an extra month) but then you have the piece of mind of knowing that once the transaction is done, you can actually build on the land.

    12. Unless you’re in urbanized South Bali, water will be via a well or bore. If you’re concerned about this, have an expert come and give you an opinion before you complete the purchase.

    13. If the property is on a slope and you see signs of erosion, you may wish to have a soil study done before you agree to the deal. Also, take note of the location of any nearby rivers on the same level as the land. Flooding is not uncommon during the rainy season.

    14. If the land is currently rice paddies, and you don’t mind what some would consider political incorrectness by building over them, note that it could take eight months or more after the last harvest before the soil is dry enough to build on.

    15. If you’re planning to rent out a villa under a pondok wisata license, learn the requirements before you agree to acquire the land.

    16. If you and your notaris have included any conditional items in the P&S or lease agreement, tie the payments to the achievement of the conditions. In other words, keep the vendor / lessor motivated to fulfill the conditions and close the deal. Once you’ve handed over the money in full, you have very little leverage left (some would say zero).

    17. Once the lease has been registered or the title is legally in the name of your Indonesian spouse (with whom you have a validly registered pre-nup), congratulations. It is beyond the scope of this post to talk about building, however a final piece of advice and caution is that you must obtain a building permit (IMB) before you start. Anyone who tells you that you can start building first and then apply for an IMB is wrong. Yes, it does happen, but it’s not legal and puts you at the mercy of the authorities should they wish to make an example of you, or just extract a significant financial penalty. Also, as noted above, the PLN does not provide an electricity hookup to the land until there is a valid IMB.

    18. Last but definitely not least, it is very important to introduce yourselves to the headman in the banjar. There is a mix of opinion on this board as to the timing of this, ie before or after your transaction. We did it after, but nothing would stop you from doing it before and in any event I’m not sure that there is any right or wrong as to the timing. Not doing it at all, however, is a big mistake. At this meeting, it would be courteous to state your intentions regarding the property (building a family villa, having a pondok wisata , etc., living in the community full time, part time and so on), and also to confirm that you are keen to be a member of the community and to contribute as required. In our case, we were advised that this would be a small monthly security fee once we relocated to the banjar, and that any contributions for major ceremonies would be most appreciated. The headman also very diplomatically informed us that unemployment was a big problem in the banjar (as it is all over Bali), so that if we needed help (eg, gardener, pembantu, driver, etc.) it would be great if we could consider people from the community for any available positions. Not unreasonable at all in our view and we will heed this suggestion.

    One final piece of advice. Be patient, take your time. If you don’t understand something, ask. Hope for the best, but be mentally and financially prepared that if something can go wrong it just might do. Treat the transaction with much more care and preparation than a similar purchase in your home country, not with less like so many seem to do in Bali. And finally don’t try to force through a deal that doesn’t seem to be working out. If it’s not meant to be, it’s not meant to be. Bali is a big and beautiful place, and there will always be another opportunity.

    Good luck!
     
  2. ferdie

    ferdie Member

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    Great summary Mark :highly_amused:

    Point 18, meet the banjar klian should be done before, so you would know earlier what the conditions to stay there, if you already bought the property you cannot negotiate any demands from the banjar
     
  3. admin

    admin Administrator
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    Excellent post and thank you for taking the time to write it up.
     
  4. Smoke

    Smoke Active Member

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    Awesome information
     
  5. Markit

    Markit Active Member

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    Afraid I lost the will to live and was ready to give my property away at about point 12. But hat off for the effort and work done. I will return for the rest after my Bintang nap.
     
  6. ronb

    ronb Active Member

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    Hi Mark. I am no expert, but have for some years now taken an interest in news items relating to land disputes in Bali. You say there are no precedents - implying that land disputes involving the nominee structures have not been to court. But they have, many times I think, and my impression is that Bali courts respect nominee structures. You say "it would probably not stand up in court" and I think here you are repeating views from a notaris Rainy Hendriani - and I think what she maintains is that if a case went to the Supreme Court, it is possible they may rule that the nominee structure is trying to circumvent the law that says land must be owned by Indonesians. .

    There is some history to this on this forum. Back in 2008 (I think) Rainy Hendriani published one of these views in the Bali Update newsletters put out by Jack Daniels. Roy, who is a friend of Jack Daniels and was still active on this forum then recommended the article to the forum. A forum participant (Balilife) responded by suggesting there may be some self interest in publishing such views. Roy was not amused and "forced" Balilife to apologize - he never came back to the forum after the apology.

    My view is that the nominee structure is working well for many people, and that the local courts respect it. The chances of the Supreme Court intervening in an adverse way are probably remote.
     
  7. SHoggard

    SHoggard Member

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    A lot of this information/advice exists elsewhere on the forum in bits & pieces and with accompanying argumentative 'noise' but nowhere have I seen such a concise detailed step-by-step list - kudos Mark.

    Can I suggest Admin 'lock & sticky' this post for 1st point of reference viewers & to stop it getting drowned in a deluge of counter argiments &/or more recent posts.

    Thanks
     
  8. Mark

    Mark Member

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    Hi Ron. I don't know notaris Rainy Hendriani, my views are my own. The nominee structure is a workaround that has been used in Indonesia and other countries that prohibit foreign ownership of land (eg Thailand) for years. As long as nominee and foreigner are happy together, there should be no issue. However, my point was that, in the event of a dispute, it is unlikely that a nominee arrangement designed to circumvent Indonesian law would be upheld by a court of law in Indonesia. If you have proof to the contrary, then many people, including me, are keen to hear it. Also, I'm not making any judgment on anyone who uses this structure, it's just that one needs to know the risks. Many people come to Indonesia with blinders on and get suckered into doing dumb things or not understanding the risks and then all ends up in tears. Cheers.

    Ps, I'm only trying to be helpful - as noted in my original post, anyone concerned with a property transaction should consult their own advisers and not rely on what they read on the internet.
     
    #8 Mark, May 11, 2013
    Last edited: May 11, 2013
  9. villabalipassion

    villabalipassion New Member

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    JUST CAN 100% AGREE WITH EACH OF THE 18 points ..... looks like so many foreigners "complain" about corruption and bureaucracy but are the first to try to avoid the "legal prescriptions" by insisting on freehold .... I did leasehold land 25 years + inside contract a pre-agreed 25 years prolongation simple buy payment at notary with prices pro deadline. WAS VERY SIMPLE
     
  10. spicyayam

    spicyayam Active Member

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    Maybe someone else can confirm, but I think if you have a PMA, the company can only lease the land. Up to 45 years or something like that.

    I was under the impression courts wouldn't respect the nominee structure, but I have heard of cases where foreigners have won against their nominees. Even one where a foreigner had the property in his girlfriend's name, they had no agreement, but the foreigner had some receipts from the sale which he had signed, proving the money came from him.
     
  11. SHoggard

    SHoggard Member

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    I guess it all comes down to the level of acceptable risk
    If one has the stomach for something that
    - might or might not be illegal
    - might or might not be legal - on the basis that it's 'common practice' & nobody's ever really been caught
    - might or might not have a legal precedent actually tested in court (rather than hearsay)
    - be prepared for what could be a long drawn out & expensive court case in a legal system that we don't really understand (other than lawyers, who really understands the alleys and pitfalls of their own legal system back home?)
    - in a conflict be prepared to pay-off the relevant people (or even find out who they really are?)

    IF that level of risk is acceptable then the nominee route would be the way to go.
    If not, the lease or the PMA route is probably best.

    The more I think about it what's the attraction of 'freehold' - other than that's the way its done back home (wherever home is).
    A lease of '25 years + inside contract a pre-agreed 25 years prolongation' + the option of a further extension (15 yrs I recall) will outlast most of us & our children... who really intends to hold the property for more than 50 years anyway.
     
  12. joji gulapetis

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    Land Laws in Bali Differ from the Rest of Indonesia? Not Really. | Jakarta Expat

    just saw this in the Jakarta Expat Biz site. Adds little flesh to the bones we have all been following here.

    Goosebumps?
     
  13. spicyayam

    spicyayam Active Member

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    But "There are currently 140 cases in court, or police reports involving nominee structures – about 7,000 or more properties in Bali are currently held under this structure."

    As Shoggard says, it is all about acceptable risk. I would say, if these figures are accurate, that is still a pretty low figure. Also you don't know the full details of each of those cases. And it doesn't necessarily mean the nominee is at fault in all of those cases.

    I can't see how some people can call it "illegal" either since all of the agreements are made by notaries themselves
     
  14. Fred2

    Fred2 Member

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    The notaries has no come back, you can sign anything but it dose not make it legal. Most disputes are settled with some money. So any case that has reached court, every one starts running because money is not going to fix it. How many officers of this country know there own rules, polisi?, immiagration?, notaries?. The things I have been told makes me wonder.
    If you can show that you paid for things, that are in anthor person name, in court you could retain the car, apartment but land you would have to sell. Plus pay lots of money.
     
  15. Fred2

    Fred2 Member

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    I should say a great post, The IMB should be part of the contract to buy. Get any plan from a book, size you are looking at & have the owner process the IMB, this is your safe guard that the land can be built on. I will post more soon.
     
  16. Fred2

    Fred2 Member

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    7. A significant amount of land in Bali is not yet properly certificated. If this is the case with your potential purchase / lease, be very careful. In order to get a certificate, a court case needs to be heard to establish ownership. This expensive process has many pitfalls. For example, during the court process there is a period where anyone having a conflicting claim to the property may present their case for ownership. If you have already agreed to purchase / lease the property before this objection period has expired, you can be certain that someone will appear out of the woodwork and lodge a claim and thereby significantly delay proceedings and the ultimate issuance of title unless otherwise compensated. Listen carefully to the advice of your notaris if the land does not yet have a certificate.
    The owner has the notaries put ads in the local paper plus signs in the local area so any person who has interest in the land can dispute it (takes 3 months). Letter form the banjar & old people in the area & brothers/sisters saying he ownes the land, proof of paying land tax for the last ten years. If there is no disputes than the land title is passed (cost +\-40mill) if not off to court.
     
  17. Markit

    Markit Active Member

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    It has occurred to me over the years here and reading these same nail-biting and nerve tickling articles about nominee agreements and the various permutations that are floating about along with the hair-raising "details" about leasing and the correct methods/style/wording that it must be possible for a group of like-minded people with enormous reserves of cash to buy/research or cause to be made a final (insofar as the law doesn't change too radically) a legally binding resolution to the never ending question of property ownership by non-Indonesian in Indonesia.

    Does this sound like any group you might have heard about?

    Might I suggest you look at the top left hand corner of this page for some possible inspiration?

    OK, the Balipod expats forum. To see a member of this group turn on your camera.

    Just a thought...
     
    #17 Markit, May 13, 2013
    Last edited: May 13, 2013
  18. SHoggard

    SHoggard Member

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    Markit,
    Yes, good idea, I know where you're coming from....
    But unlikely to fly - I fear those with the most 'engagement' in the issue (& likely to invest in the project) are also those with most to loose IF the " final (insofar as the law doesn't change too radically) a legally binding resolution to the never ending question of property ownership by non-Indonesian in Indonesia." says you're chin-deep in the feces - because once there is a 'legal opinion' there's no more grey area

    & grey areas are the straws to clutch
     
  19. Markit

    Markit Active Member

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    Shog you are right in so far as you go - straws to clutch on in gray areas are a mirage of hope and are not worth any more than the ignorant bliss that we have now.

    My thinking goes a little farther in that if we as an economic force (guys and gals, we expats are probably the richest group of like minded people on the island) could pay to have some investigations taken on all around the land ownership issue.

    I would not restrict that to "just" the nominee/bule "freehold" or "leasehold" issues but I would like to have a look at finding some solution that would fly in the present Indo legal framework.

    If you have ever had anything to do with lawyers (phewee!spit! phut! - sorry to use such language) then you will know there is nothing on this planet more inventive if money is at stake.

    For instance, just off the top of the bean, what is the possibility of constructing a legal framework whereby the "buy in" into a company is the value of the house/villa you own and your share ownership in the company is to that exact same value. And this company would belong to all the villa owners to that value of their share ownership. Simply put your/my land is nominally owned by this company and you/I have the leasehold agreement with company not nominee. Maybe an Indonesian as chairman or whatever - I'm absolutely not the guy to figure this out but hopefully you can see the direction of drift?

    Please don't take this simple idea apart too much I only want to suggest one of possibly countless avenues of research that could be undertaken by a well funded group or company.

    Just imagine if 100 or 200 people each gave say 1 juta into a kitty and that this was used and accounted monthly to contract a company or bright individual. Not bragging but 1 juta goes away like soap on washed hands for me but 200 juta can get an awful lot done here.

    Just some thoughts...
     
  20. SHoggard

    SHoggard Member

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    No need to apologize, I'm with you on that score!

    Interesting idea, didn't they call that communism bbback in the U, bbback in the U, bbback in the USSR? :kiwi-fruit:

    Nevertheless, an interesting concept, off the top of my head the sticking-point would still be +50% local equity

    Generally I agree it has some merit.
     
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