Owning a property in Bali

Previously, with respect to Government Regulations Nos. 40 and 41 of 1996 (“GR 41/96″), there were still insufficient rulings to enable non-resident foreigners to hold Rights of Use (Hak Pakai) over Indonesian real property.

This has changed dramatically with the issue of Regulations of the Minister of Agraria No. 7 of 1996 (“RMA 7/96″) on 7 October 1996, under which, in effect, any foreigner may hold Hak Pakai.

Qualifications for Ownership
There has been no formal change in the categories of persons who can hold Hak Pakai, which remain limited to:

Legal bodies
Government bodies
Religious and social bodies
Foreigners resident in Indonesia
Foreign companies with representative offices in Indonesia
Representatives (i.e. embassies and consulates) of foreign countries
Representatives of international organizations

However, one of these categories, foreigners resident in Indonesia – has been interpreted in a radically new way. Under GR 41/96, this category was stated to include “foreigners whose presence in Indonesia gives opportunities to national developers”. This was too broad a test to be directly applied, and it was felt that the Minister of the Land Department (BPN) would need to provide more precise implementing provisions.

What has actually happened, however, is that the Minister has substituted this test with one which is so neatly circular that it can be passed by any foreigner who wishes to buy a house in Indonesia.

Thus Article 1 (1) of RMA 7/96 states that “a foreigner whose presence in Indonesia gives opportunities for national development” may own a house under Hak Pakai; and Article 1 (2) closes the circle by saying that such a foreigner is one who; “has and maintains an economic interest in Indonesia by implementing an investment in the ownership of” that house.

In other words, any foreigner who buys a house in Indonesia is contributing to national development and therefore is entitled to hold Hak Pakai.

In his letter accompanying RMA 7/96, the Minister stated specifically that, according to this new concept, a foreigner will qualify for Hak Pakai even if he is only Indonesia “from time to time” – no minimum frequency being stated – provided that at the time of entry into the Deed of Sale and Purchase for the property, he can show (presumably to the Land Deed Official) that he has a visit pass or other immigration pass in other words, that he has not entered the country illegally.

Cessation of “Residence”
GR 41/96 says that if a foreigner ceases to be resident in Indonesia he must divest himself of his Hak Pakai property within one year. In the light of the Minister’s interpretation of “resident”, however, this requirement would seem to be irrelevant; unless the foreigner is actually declared persona non grata, it is hard to see how he could be said to have ceased to be in Indonesia “from time to time”.

It is true that RMA 7/96 as originally issued contained a provision (Article 4) stating that a foreigner would cease to qualify as resident in Indonesia if he or his family did not use the house for twelve consecutive months. This, however, was immediately amended by provision says that the foreigner will only cease to be resident if he no longer satisfies Article 1 of RMA 7/96 – i.e. if he no longer owns the house.

Tenure
Hak Pakai can be granted over:

state land
rights of management (Hak Pengelolaan – “HPL”)
rights of ownership (Hak Pakai)

The status of Hak Pakai over State Land or HPL on the one hand, and over Hak Milik on the other, is very different, to the extent that they should for practical purposes be regarded as distinct titles.

The principal points of divergence are as follows;

The first type is registrable in its own right, and will be the subject of a land certificate, whereas the second type will be protected only by a notice on the respective Hak Milik certificate.

Both types can be granted for up to 25 years. However the first type can also be made the subject of a prepaid extension for 20 years, and a prepaid renewal for 25 years, at the time of the initial grant, giving an effective duration of 70 years. This is not possible in the case of Hak Pakai over Hak Milik. Hak Pakai over State Land or HPL can be mortgaged, but Hak Pakai over Hak Milik cannot.

Object of Ownership
RMA 7/96 allows each foreign individual to own, under Hak Pakai, “one residential or dwelling house” in the form of either a house on its own parcel of land, or a strata title unit in a condominium which itself stands on land held under Hak Pakai over State Land.

There are now obvious obstacles to developers selling landed properties to foreigners by surrendering the existing HGB or Hak Milik titles over the respective parcels to the Land Office, in exchange for a re grant of Hak Pakai. The only substantive way in which these titles would be inferior to HGB would be that the initial period of the title would be limited to 25 years, rather than 30, and that the effective period – i.e. inclusive of a prepaid extension with a prepaid renewal – would be 70 years rather than 80 years.

With respect to strata title units, on the other land, there is a major practical difficulty arising out of the requirement that Hak Pakai strata titles can only be held in a building which itself stands on a Hak Pakai titled property. It is not possible for a single building to contain Hak Pakai and HGB units; all strata titles must conform to the underlying title.

To take Hak Pakai over a whole building, a developer would need to be confident either that all the units would be sold to foreigners, or that locals would be content with Hak Pakai instead of HGB. Given the novelty of Hak Pakai in its current form and its rather shorter duration as compared to HGB the acceptability of the title in the local market may be doubted.

Moreover, in cases where the developer has already sold HGB titles in the building, it will not be possible to convert the development to Hak Pakai without the consent of the existing strata title owners, which they are unlikely to give, at least without substantial compensation.

Conclusion
With the issue of RMA 7/96, the Indonesian Government has put beyond doubt its intention to make Indonesian residential and holiday homes available to foreigners. Arrangements which have been used in the past to achieve this purpose – long leases, ownership though nominees, and company title arrangements can now be seen as largely obsolete, with the possible exception of highly integrated resort developments, where the granting of individual title might undermine the long-term attractiveness of the resort, or its operations as a hotel.

As a matter of pure law, it may be doubted whether GR 40/96 and GR 41/96, and more especially RMA 7/96, can really be reconciled with the Basic Agrarian Law; that is, whether the construction that they place on “residents in Indonesia” is supportable. For practical purposes, however, the risk that some future government might use this argument to revoke the executive legislation, or event to cancel Hak Pakai titles which had by then been issued to foreigners, must be viewed as political rather than legal.

This analysis was prepared in consultation with Arie Hutagalung, S.H. Lecturer in Agrarian Law, University of Indonesia, dated 15th December 1996.