Buying land in Bali: Watch your step


Buying land in Bali and building your ‘dream house’ is something many people consider. During my time living in Bali I’ve seen some quite dramatic situations where foreigners went diving in and got / almost got burned. Indonesian law states that only Indonesian citizens can own land in Indonesia, but many property companies claim to be able to sell you ‘freehold’ land. What is the validity of these claims and how will it stand up down the line? An excellent article in BaliDiscovery warns foreigners to tread carefully when dealing with land sales.

Freehold Land Title for Foreigners in Bali: Caveat Emptor
Amidst Bali’s Current Property Boom, A Cautionary Primer for Foreigners Wishing to ‘Own’ Property in Bali.

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

Despite this lack of equivocation by the Government on the continuing prohibition of foreign land ownership; it is ironic to discover real estate companies have erected booths in the arrival halls of Bali’s airport, placed ads in local publications and distributed brochures – all advertsing “freehold” land in Bali. Given the state of current property law, the very use of the English language term “freehold” in connection to a local property transaction involving a foreigner is highly suspect and is a tactic that, in other jurisdictions, would form the basis of a criminal prosecution.

The bottom line: “freehold title”, or in Indonesian “hak milik”, does not exist for foreign property buyers and, as such, should be banished in its English form from all promotional material for Bali property sales. Companies offering the Indonesian equivalent of “hak milik” should be compelled to only use the Indonesian term for what is, after all, an exclusive privilege for Indonesian property buyers.

But, barring such regulations to protect Bali property buyers, the very use of the English term “freehold title” in an Indonesian property offering should be viewed with great suspicion and set cautionary alarm bells ringing in the head of any potential property investors.

What’s Really Going On Here?

If “freehold title” is unavailable to foreigners, what do non-Indonesian buyers actually purchace when responding to a “freehold” property purchase agreement in Bali? Those offering “freehold title” to foreigners typically create a legal construction that, in the end, fails to deliver the free and direct ownership title implied by freehold.

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To conclude a property sale a local nominee is generally used, with a notary creating a multi-party, multi-document legal constructs that:

• Puts the “hak milik” or “freehold title” in the hand of an Indonesian nominee. It is, in fact, the Indonesian nominee whose name is on the property title and who freeholds the parcel, not the foreign purchaser fronting the money for the land.

• The notary will also usually 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 most truthful answer is that there is very little in Indonesian law that should be considered “iron clad” and should the foreigner eventually wish to transfer or sell his “title” to a new party, the transfer transaction will be heavily dependent on the good grace and continued docility of the Indonesian nominee who will need to attend the notary and sign over the deed to the new owner or his nominee.

• In such transactions the notary also typically draws up a loan agreement for a large sum of money that is theoretically on loan from the foreign purchaser to the Indonesian nominee. In principle, this creates a lien on the property held by the Indonesian nominee. The purpose of the loan agreements is to “legally compel” the Indonesian nominee stay tame and cooperative.

While such agreements are often superficially attractive to a foreigner eager to own a home in Bali, these loan agreements may not have much force if legally challenged and may be extremely vulnerable to any future vagaries of the “personal bond” between the foreign owner and his Indonesia nominee.

There are at least two other legal pitfalls may befall such loan agreement arrangements. First, because the loan is fictiional, if legally challenged the foreign owner may be hard pressed to demonstrate to a court that the “loan” was ever transacted. No less legally problematic is the prohibition under current Indonesian for any foreign borrowings not approved by the Foreign Investment Coordinating Board.

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 property, any effort to circumvent the letter of the law is a path wrought with potential future heartache for the foreign purchaser.

The good news in an otherwise sad tale is that Indonesian law does permit the lease of land and property to foreign individuals and companies for fixed periods of time. While perhaps not guaranteeing the personal satisfaction of direct ownership of a Bali property, such leases can be freely registered in the name of most foreign renters and have generally proven to offer a high level of security to the foreigner for the duration of the lease.

The situations that often work out are when the foreigner buying the land uses their Indonesian spouse as the local nominee, neither party likely to rip each other off. Leasing can be a good way to go, as the original owner is comfortable allowing you to develop his land for 25 years or so, safe in the knowledge it will be his again one day.

Another item regarding buying property through development companies, the Bali government is cracking down on unlicenced villas which are rented to tourists. According to officials ‘umbrella agreements’ which claim to cover a whole apartment complex are not good enough, each villa / apartment needing to obtain a separate permit. Bali developers often make claims about the returns your asset will bring, but its up to you to get things legal.