Indonesia: Real Estate (3rd edition)

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This country-specific Q&A provides an overview of the legal framework and key issues surrounding Real Estate law in Indonesia.

This Q&A is part of the global guide to Real Estate.

For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/real-estate-third-edition/

  1. Overview

    Over the past decade, the real estate sector in Indonesia has shown strong progress due to various factors, including the expanding middle class and national economic growth. International investments in the real estate sector cover the office, retail, residential, industrial and logistics sectors. While some of these sectors are currently oversupplied, the longer-term attractiveness of the Indonesian real estate market remains compelling.

    Recently, the real estate sector has seen growing penetration by technology sector players and technology-based innovations. This has led to the following key developments in Indonesia’s real estate sector:

    • Co-working and collaborative environments

    One recent trend in the Indonesian real estate sector has been business expansion by players in the collaborative environment sector. Co-working companies continued to expand their presence in Jakarta in 2019, purchasing several properties in Jakarta’s central business district.

    While co-working spaces are already abundant in Jakarta, shared workplaces are also being introduced in other places, including Jogjakarta, Bali and Medan, among others. Co-working companies include both foreign-funded and local players.

    • Co-living spaces

    Co-living spaces are also cropping up in Jakarta and other large cities, including Bandung, Surabaya and Makassar. With the rising prices of apartment units, these types of properties are expected to make housing more attractive for increasing numbers of younger middle-class Indonesians who want to live in cities but need more affordable homes.

    • Property crowd funding

    Technology-based investments are introducing novel ways of investing in the real estate sector in Indonesia. One such method involves the crowd funding of commercial real estate. This type of investment typically allows investors to own a contractual interest in relation to a commercial real estate based on a contractual arrangement with the owner of such real estate (eg, debt or quasi-equity instruments). In some cases, it functions similarly to Real Estate collective investment contract (CIC). However, unlike a Real Estate CIC, property crowd funding has not been formally regulated in Indonesia and typically has a lower barrier to entry and allows individuals to invest in smaller real estate developments.

    To support the overall investment climate, the Indonesian government has invested heavily in large infrastructure projects both within and outside Jakarta. The Jakarta MRT began operating in April 2019 and is intended to provide more convenient access to central Jakarta, which is seen as highly attractive to investors.

  2. How is ownership of real estate proved?

    Registered Land

    There are several types of registered land titles, which are described in more detail under question 4. Each type comes with its own purpose and permissible holders, and is registered with the National Land Agency (Badan Pertanahan Nasional – “Land Office”). Ownership over registered land is evidenced by a land certificate issued by the Land Office.

    The Indonesian Land Office has recently issued new regulations on the digitalisation of certain aspects of land registration and certification. These new regulations envision land ownership certificates being issued through an electronic system established by the Land Office. However, these regulations were not yet fully implemented at the time of publication, and the electronic system has not yet been introduced. In practice, therefore, land registration and the issuance of certificates are still being handled manually.

    Unregistered Land

    In Indonesia, there are also plots of land which are not registered with the Land Office, including girik land and customary land (tanah adat). Ownership over these types of land is normally evidenced by payment of land tax or a statement letter issued by local officials or the community. People may also claim ownership over a plot of unoccupied state land (tanah negara) if they have occupied the land for at least 20 consecutive years.

  3. Are there any restrictions on who can own real estate?

    Please see our answer to question 4 for a complete list of the types of land title and their permissible holders.

    With respect to foreign persons:

    • For business purposes, foreign parties may only own real estate by establishing a type of Indonesian Limited Liability Company called a foreign investment (Penanaman Modal Asing – “PMA”) company.
    • For residential purposes, foreign individuals resident in Indonesia (i.e. holding work permits) can own a residential home where the land in question has a HP (as defined below) title or a strata title apartment unit under HPSRS title (as defined below), subject to fulfilling certain requirements such as minimum sale value and maximum land size. In practice, however, since HPSRS titles are not yet fully implemented, it remains difficult for foreigners to own strata titles.
  4. What types of proprietary interests in real estate can be created?

    Land Titles

    The Indonesian parliament is currently deliberating an amendment to the land law, with a revised draft having been in circulation for some time (“Draft Land Law”). While it is unclear when the Draft Land Law will come into effect, our summary of land titles in the table below covers some of the changes being proposed.

    Registered Land Rights

    Description

    Time Period

    Permissible Holders

    Right of Ownership – Hak Milik (“HM”)

    HM is the most extensive form of land title in Indonesia that can be owned by individuals (eg, ownership for an indefinite time period). It is the closest equivalent to the common law concept of freehold. HM can be granted over state land (tanah negara).

    Indefinite

    - Indonesian citizens

    - Certain Indonesian domestic legal entities determined by the Indonesian Government which engage in certain sectors, such as religious and social sectors

    Right to Build – Hak Guna Bangunan (“HGB”)

    HGB allows its holder to build, construct and use the land and buildings on the land. This is the most extensive form of land title in Indonesia available for foreign controlled Indonesian legal entities or PMA companies. HGB can be granted over state land, HPL (as defined below) or HM.

    Maximum 30 years and extendable for 20 years. Multiple renewals and extensions permitted.

    Under the Draft Land Law, HGB titles will be valid for a maximum of 35 years and extendable for 35 years for the first extension, and 20 years for the second extension.

    - Indonesian citizens

    - Indonesian legal entities (including foreign investment (PMA) companies)

    Right to Use – Hak Pakai (“HP”)

    HP allows its holder to use a plot of land (including, subject to permitting requirements, the right to construct buildings) and/or collect produce derived from such land.

    HP can be granted over state land, HPL (as defined below) or privately held land (HM).

    Foreign citizens residing in Indonesia may be granted a HP (subject to certain requirements) which is derived from a conversion of HM or HGB when he/she purchases a residential home.

    Over state land

    Maximum 25 years and extendable for 20 years. Multiple renewals and extensions permitted.

    HP is granted for a term determined, on a case-by-case basis, to Indonesian government institutions, representatives of foreign states or international organisations, or religious or social institutions.

    Over HM

    Maximum 25 years and any extension require a new agreement with the Indonesian landowner holding the HM title.

    For foreign citizens residing in Indonesia:

    - A HP which is derived from conversion of a HM: Maximum 30 years and can be extended for 20 years and renewed for 30 years.

    - A HP which is derived from conversion of a HGB: valid for the remaining term of the HGB and can be extended for 20 years and renewed for 30 years.

    The Draft Land Law divides HP into a ‘Fixed-Period HP’ (HP dengan jangka waktu) and a ‘Use-Period HP’ (HP selama digunakan).

    The Fixed-Period HP is valid for 25 years and may be extended for 25 more years.

    The Use-Period HP is granted in accordance with its function and purpose.

    - Indonesian citizens

    - Indonesian legal entities (including foreign investment (PMA) companies)

    - Indonesian government institutions (including regional government institutions)

    - Social and religious organisations

    - Foreign citizens residing in Indonesia

    - Foreign companies that have a representative office in Indonesia

    - Representatives of foreign states and international organisations (eg diplomats/ embassies)

    Right to Manage – Hak Pengelolaan (“HPL”)

    HPL relates to operating industrial or housing estates and is granted based on a government decision (penetapan pemerintah) whereby the holder is allowed to use a plot of land for its own purposes (eg land used for ports or airports)

    Determined on a case-by-case basis

    - Indonesian government institutions or agencies (including regional government institutions)

    - State-owned companies and/or regional government-owned companies

    - Companies wholly owned by the government

    - Authority agencies (eg port authority)

    Based on the Draft Land Law, HPL can be granted to a ‘Bank Tanah’ (literally, a ‘Land Bank’). ‘Bank Tanah’ is defined as ‘an agency established by the government to carry out the acquisition, maintenance and provision of land’. It remains to be seen how this will be implemented in practice.

    Right to Cultivate – Hak Guna Usaha (“HGU”)

    HGU is granted for the purpose of agriculture, fisheries or animal husbandry. HGU can be granted over state land.

    Maximum 35 years and extendable for 25 years. Multiple renewals and extensions permitted.

    Under the Draft Land Law, the HGU is valid for up to 35 years and can be extended for up to 35 years more.

    - Indonesian citizens

    - Indonesian legal entities (including foreign investment (PMA) companies)

    Strata Title – Hak Milik atas Satuan Rumah Susun (“HMSRS”)

    HMSRS grants its holder the rights of ownership over (a) individual units and (b) common areas (ie common part, common object and common land).

    HMSRS can be granted over (i) HM; (ii) HGB/HP over state land; (iii) HGB/HP over HPL; (iv) utilisation of state/local land or utilisation of donated land (pendayagunaan tanah wakaf).

    The term of the HMSRS title follows the term of the underlying land title, except for the utilisation of state/local land or utilisation of donated land, which will be valid for 60 years.

    - Indonesian citizens

    - Indonesian legal entities

    - PMA companies, subject to certain requirements below

    - Foreign citizens residing in Indonesia, subject to certain requirements.

    Right to Use Strata Title – Hak Pakai atas Satuan Rumah Susun (“HPSRS”)

    HPSRS is a title derived from a conversion of HMSRS granted to resident foreigners who purchase an apartment unit in Indonesia.

    For new apartment units: Maximum 30 years, and can be extended for 20 years and renewed for 30 years.

    For second-hand apartment units: valid for the remaining term of the HMSRS and can be extended for 20 years and renewed for 30 years.

    Foreign citizens residing in Indonesia, subject to certain requirements.

    A resident foreigner may purchase a new or previously-owned apartment unit with HMSRS title, built on land with a HGB or a HPL title, and the HMSRS title will automatically convert into HPSRS. If the resident foreigner sells the apartment unit to an Indonesian citizen, the HPSRS title will automatically revert to its original status (HMSRS title). As mentioned above, however, in practice the HPSRS title is not yet fully implemented and it remains difficult for foreigners to own strata titles.

    There do not appear to be any provisions on HPSRS in the Draft Land Law. However, the transitional provisions of the Draft Land Law provide that any existing regulation on land remains valid provided it does not contravene the new law.

  5. Is ownership of real estate and the buildings on it separate?

    In the absence of any specific arrangement, a land owner will be deemed to be the owner of any buildings constructed over the land. However, Indonesian law recognises the horizontal separation principle (asas pemisahan horizontal) which allows for the land and the building on top it to be owned separately. For example, a person leases vacant land and under the lease agreement is granted the right to own any buildings they construct on the land during the lease period.

  6. What are common ownership structures for ownership of commercial real estate?

    The most common ownership structure for ownership of commercial real estate is that the real estate (under HGB title or HMSRS title) will be owned by an Indonesian company (eg, a PMA company owned by a foreign investor) that holds the business licence to operate the relevant commercial activity (eg manufacturing).

    Unincorporated joint venture structures are also common. Under such structures, two parties will set up a joint operation in relation to a commercial real estate development where typically one party will contribute the land and the other party will contribute cash or expertise. The parties will then operate the commercial real estate together and share the economic benefits.

    In certain regions (eg Bali), it is quite common to see foreigners entering into a financed shareholder ownership structure to circumvent the restriction on real estate ownership by foreigners. This structure is normally implemented by way of a secured loan (to purchase the land) arrangement under which a nominee Indonesian individual will hold the land (usually in exchange for a fee). It is important to understand that under the secured loan arrangement the foreigner does not have any legal or beneficial ownership in the land but only contractual rights against the nominee Indonesian individual. Such structures come with risks.

    Real Estate CIC

    In 2017, Indonesia’s Financial Services Authority issued regulations to encourage establishment of Indonesian real estate investment funds in the form of collective investment contracts (Real Estate CICs). The 2017 regulation consolidated and replaced four existing regulations on Real Estate CICs and it is hoped that this change will help investors to better understand the regulatory framework.

    A Real Estate CIC is essentially an investment vehicle whereby funds are raised from investors for investment in real estate assets, real estate-related assets, and/or cash and cash equivalents. It is managed by an investment manager and a custodian bank, which enter into a collective investment contract with the investor. In exchange for their fund contributions, the investors in a Real Estate CIC are issued participation units which reflect their interest in the fund.

    Since 2017, only three Real Estate CICs of this kind have arisen, with the last one being registered in late 2019 through investment in the companies operating Plaza Indonesia and FX, which are both mall properties in central Jakarta. Real Estate CICs are not as prevalent in Indonesia as in more mature Asian markets such as Singapore and Hong Kong.

  7. What is the usual legal due diligence process that is undertaken when acquiring commercial real estate?

    Land Due Diligence

    The minimum level of land due diligence will normally involve the following:

    (a) reviewing the land certificate and the latest deed of land transfer;

    (b) checking the originality of the land certificate with the relevant land office;

    (c) confirming that the land is free from blocking or disputes registered at the relevant land office by obtaining a Statement Letter of Land Registration (Surat Keterangan Pendaftaran Tanah) from the relevant land office; and

    (d) confirming that the landowner is not subject to any legal proceedings at the relevant district court by obtaining a statement letter from the relevant district court.

    Building Permits and Planning Requirements

    For existing buildings, it is important to review the relevant building permits such as the building construction permit, certificate of worthiness, and operational permits (eg, licences relating to the use of generators, elevators, etc.).

    It is also important to check whether the zoning and use are consistent with the intended project. Please see question 16 for further details on zoning.

    Confirming zoning consistency at the preliminary stage has become easier in some locations thanks to checks that can now be carried out by reviewing an online map, which can be accessed simply by registering online.

  8. What legal issues (if any) cannot be covered by usual legal due diligence?

    The key legal issues mentioned in our previous answers should all be covered. However, there are certain other issues that can complicate real estate due diligence in Indonesia, including the following:

    • Unregistered land that lacks evidence of ownership and may be subject to unforeseen claims.
    • In certain areas, privately held land may overlap with concession areas granted by the government of Indonesia for mining, forestry and plantation activities.
    • There is no centralised or electronic land registry in Indonesia, so conducting land title searches requires the involvement of third parties (such as local land deed officials/notaries) and cooperation from land owners. As noted above, the government is introducing new regulations to allow digital registration of land titles to make them more easily accessible. However, the new system is not yet up and running.
    • The licencing process for land development in Indonesia is complex and regulations may vary from region to region. There are various licensing requirements that developers need to obtain prior to and during the development phase.
    • Certain Indonesian laws and regulations relating to land and real estate are unclear and conflict with other laws and regulations. For example, regulatory uncertainty exists in relation to strata title assets due to the absence of implementing regulations. This vacuum is filled by government policies which may not be consistently applied. Enforcement of regulations by regulators is generally uneven due to lack of resources and may, at times, be driven by political factors.
    • In respect of the management of strata title developments, the owners of the strata title units are obliged to establish an Association of Owners and Occupants (“Owners’ Association”). A regulation issued in late 2018, requires the owners of strata title units to establish an Owners’ Association, and the developer must facilitate its establishment within one year after the first delivery of a strata title unit to the owner. The Owners’ Association applies ‘one owner, one vote’ rules in certain circumstances, rather than distributing votes based on the relative size of the plots. This may lead to developers having limited decision-making power over the property despite owning a substantial part of it.
  9. What is the usual process for transfer of commercial real estate?

    To ensure that the relevant zoning and uses are in line with the purpose of the real estate acquisition, depending on the location of the real estate, certain permits (eg, Location Permit) must be obtained by the buyer before it can sign the deed of transfer or AJB (as defined below) and acquire the real estate. If a buyer intends to develop or redevelop the real estate, they may also be required by the regional government to fulfil certain development obligations (eg, provide public facilities).

    Acquisition of land already under registered title

    The legal steps to acquire land depend on whether it is already under a registered title. The key document in the transfer of a registered land title is a Deed of Sale and Purchase of Land (Akta Jual Beli Tanah – “AJB”). An AJB is a document of conveyance and needs to be signed by the proposed buyer and seller of the land title to effect legal title transfer. An AJB is entered into between the parties in notarial deed form before a local Land Deed Official (a public official whose authorities include, among other things, preparing land transfer documents).

    After signing the AJB, the Land Deed Official will then process the registration of the new land owner with the relevant Land Office. This registration process is purely administrative and the risk of completion of registration not taking place is very low. Under Indonesian law, once the AJB is signed, the proposed buyer under the AJB is the legal owner of the relevant registered land title notwithstanding that registration is not completed. Upon completion of this registration process, an updated certificate of land title will be issued under the name of the new owner. The overall process itself may take approximately 2-3 months in practice although it can take longer, depending on the location (the registration process may take longer in rural areas than in urban areas).

    In addition, it is also common practice in Indonesian land sale transactions for the proposed buyer and seller to enter into a Conditional Sale and Purchase Agreement over Land (Perjanjian Pengikatan Jual Beli atas Tanah – “PPJB”) in addition to the AJB. A PPJB is not mandatory under Indonesian law and can be made privately or in notarial deed form before a Land Deed Official. Unlike an AJB, a PPJB only grants contractual rights but it does not in itself transfer legal title to registered land. In order for a transfer of legal title over a registered land title to be effected, the parties must still enter into an AJB.

    Recently, the Indonesian government issued a new regulation regulating, among other things, the PPJB provisions for a Strata title sale transaction. This new regulation sets out the minimum provisions of a PPJB in a Strata title sale, which must include, among other things, the timing of handover, guarantees from the developer (jaminan pelaku pembangunan), and provisions on building utilisation and maintenance. The regulation appears to be aimed at providing better statutory protection to an individual buying strata titles property, noting its increased prevalence in Indonesia.

    Acquisition of land not under registered title

    Ownership of unregistered land is, in practice, typically evidenced by land tax payment made by the owner of the land (the tax is referred to as “Girik” and so this type of unregistered land is commonly referred to as “Girik Land”).

    The proposed buyer will enter into a contractual arrangement with the existing owner of the Girik Land pursuant to which the buyer will pay a sum of money in exchange for the land owner signing a ‘relinquishment statement’ in favour of the new buyer. This ‘relinquishment statement’ equips the buyer to become the registered land owner by making an application to obtain certificated land title to the Land Office. The process from the submission of the complete application to the Land Office up until the issuance of a registered land certificate (eg, HGB) may take 6-8 months in practice. The declared compensation payment to the party giving a ‘relinquishment statement’ is typically determined based on (and cannot be lower than) the ‘tax object sale value’ of the land (nilai jual objek pajak - “NJOP”).

  10. Is it common for real estate transfers to be effected by way of share transfer as well as asset transfer?

    Yes – it is common for transfer of real estate ownership to occur indirectly as a consequence of a share transfer in a company. In this case, there will be no change to the registered owners of the real estate in the land certificate. In the event of a share acquisition transaction, due diligence on the company owning the real estate will also need to be conducted in addition to the real estate due diligence.

  11. On the sale of freehold interests in land does the benefit of any occupational leases and income automatically transfer

    The Indonesian Civil Code provides that a lease arrangement will not automatically terminate due to a sale of the underlying property, unless provided otherwise in the lease agreement. As such, the lessee has the right to continue as a tenant even if the owner of the property has changed. However, the Civil Code is silent as to whether the benefit of leases and income would automatically transfer to the new owner when the sale happens. On one reading, the fact that the new owner is obliged under the law to honour the rights of the lessee until the lease expires would imply that the new owner should be entitled to receive any remaining benefits from the lease. To remove uncertainty, the treatment of any existing leases including their remaining benefits should be specifically covered by the sale and purchase agreement between the seller and the buyer.

  12. What common rights, interests and burdens can be created or attach over real estate and how are these protected?

    In addition to the land titles referred to under question 4 (including the HMSRS title, which grants its holder the ownership right to an individual unit and common areas), it is possible for real estate owners to grant rights in relation to the real estate to third parties by entering into a contractual arrangement (eg, a joint operation agreement under which the land owner agrees to share economic rights in relation to the real estate) or by providing a mortgage (hak tanggungan). Please see our answer to question 19.

    The concept of rights, interests or burden which can be created or attached over the land and which can be protected by registration (eg, easement as understood under common law) is not recognised under Indonesian law.

  13. Are split of legal and beneficial ownership of real estate (i.e. trust structures) recognised?

    No. A trust structure, as understood under common law-based legal systems, is not a formally recognised concept in the civil law-based system in Indonesia. However, Indonesian law has tried to accommodate real estate investment through less traditional forms with the establishment of the Real Estate CIC, which is discussed under question 6.

  14. What are the main taxes associated with commercial real estate ownership and transfer of commercial real estate?

    Land and Building Tax

    Land and building tax (Pajak Bumi Bangunan – “PBB”) is a tax on property chargeable on all land and/or buildings. An individual or an entity that owns a right to a piece of land, and/or takes benefits therefrom, and/or owns, controls and/or takes benefits from a building can be regarded as a PBB taxpayer for such land and/or building.

    PBB must be paid on an annual basis at the maximum amount of 0.3% (depending on the regional regulation) of the NJOP (as defined under question 9) imposed by the local government.

    Tax on Land Transfer

    In general, in a sale and purchase of property, the buyer must pay the tax on the acquisition of land and buildings (Bea Perolehan Hak Atas Tanah dan Bangunan –“BPHTB”) and the seller must pay the transfer tax (Pajak Penghasilan Atas Penghasilan Dari Pengalihan Hak Atas Tanah – “PPh”) in accordance with the following formulae:

    (a) for the seller (PPh) = 2.5% x the sale value or NJOP (if the sale value is lower than the NJOP); and

    (b) for the buyer (BPHTB) = 5% x (the sale value or Tax Object Acquisition Value (Nilai Perolehan Objek Pajak or “NPOP”, if the sale value is lower than the NPOP) minus the Non-Taxable Sales Value (Nilai Jual Objek Pajak Tidak Kena Pajak or “NJOPTKP”).

    NJOPTKP is effectively a non-taxable portion, which is a fixed value set for each region by the tax office. Note that the application of tax may differ in certain circumstances, including in relation to inheritance, and may vary by region.

    BPHTP is due on the date of the execution of the deed of conveyance to the land title (i.e. the date of the AJB). In practice, a notary would not typically officiate the execution of an AJB until evidence of payment of the BPHTB has been presented.

    Fees for land deed officials

    Aside from taxes, there are typically also fees payable to Land Deed Officials in a real estate transfer. This fee is negotiable and is typically based on a percentage of the purchase price or transaction value.

  15. What are common terms of commercial leases and are there regulatory controls on the terms of leases?

    Generally, the terms and conditions of a lease agreement under Indonesian law can be freely negotiated between the parties. The typical provisions of leases for a commercial premise are as follows:

    a) Period of lease. Parties typically regulate the lease commencement, expiry and any extension terms of the lease agreement.

    b) Rent payment and adjustment. The formula for the rent is typically determined in accordance with the area and size. Rent adjustments may be determined on a periodic basis.

    c) Service or maintenance charge. Agreements typically set out the coverage of the service and maintenance to be carried out by the lessor and the rate of the service and maintenance fee to be paid by the lessee.

    d) Insurance. Insurance over the building is typically borne by the lessor, although some lease agreements may require that items within the leased premises are insured. The agreement may also prohibit the lessee from conducting activities that may increase the insurance premiums of the lessor.

    e) Alteration to property. The lease agreement commonly regulates the type of alterations or modifications that can be carried out by the lessee on the property.

    f) Defects. The lease agreement often regulates what constitute defects that are assumed by the lessor, the lessor’s liability period, and the amount the lessee may claim.

    g) Assignment and Sub-Lease. Clauses typically provide that any assignment or subletting of the lease requires approval from the lessor or at least notification to the lessor by the lessee.

    h) Naming rights. Anchor tenants will typically request naming or signage rights over the relevant building.

    i) Non-competition. Anchor tenants will typically request clauses that restrict or require the building owner to obtain the tenant’s consent if the building owner wishes to lease space within the same building to a competitor of the tenant.

    j) Rights for Expansion. In some cases, the tenant may have a right to be offered to expand its premises by the building owner if a certain area becomes available. Alternatively, the tenant may also have a right to be offered if a certain area is to be leased to a new tenant by the building owner.

    k) Novation. Lease agreements in Indonesia typically contain provisions on novation for newly established companies. We have seen instances where the lease was initially entered into between the property owner/developer and a tenant that is a foreign offshore entity. Once the foreign offshore entity has established a new company in Indonesia, the lease will then be novated to the newly established company.

    l) Surrender of property/yield-up. Clauses are almost always included to govern the surrender or yield-up of the leased property upon termination of the lease. Lease agreements often also contain provisions allowing the property owner to pay for the initial fit-out of the tenant. In these cases, upon termination of the lease the building owner would have the option to either purchase the content of the property at no additional price or ask the tenant to yield up the premises at the tenant’s cost.

  16. How are use, planning and zoning restrictions on real estate regulated?

    Usage, planning and zoning are regulated at national and various regional levels. Generally, spatial planning is determined by the Government of Indonesia through a “general spatial plan” and a “detailed spatial plan”. A “general spatial plan” takes the form of an RTRW or a Rencana Tata Ruang Wilayah (Regional Spatial Layout) and is determined at a national, provincial and regional or city level. An RTRW lasts for 20 years and is reassessed every five years. A “detailed spatial plan” typically takes the form of, among other things, an RDTR or Rencana Detail Tata Ruang (Detailed Spatial Layout) which is determined at a regional or city level. An RDTR typically includes a map setting out the zoning and permissible function for each area in the region.

    Usage, planning and zoning requirements in relation to a specific project will be confirmed through specific licences issued by the regional government (eg the Location Permit or similar licence, and the City Planning Statement Letter (Keterangan Rencana Kota or “KRK”) or similar licence). In a real estate due diligence transaction, it is critical to review these licences in order to ascertain that the property is in line with the area’s usage and zoning requirements.

  17. Who can be liable for environmental contamination on real estate?

    The Indonesian Environmental Law adopts the “polluter pays” principle, under which each individual or company that causes environmental damage is responsible for the relevant actions committed. Therefore, in general, every person who is responsible for businesses or activities that cause environmental pollution or environmental destruction, and inflict loss on any other party or the environment, must pay compensation or take remedial action (such as installing or improving waste treatment units, restoring the original environmental function, or eliminating the causes of the environmental pollution or damage).

    In addition, the Indonesian Environmental Law provides a strict liability regime, which states that every person who uses, produces or manages hazardous and toxic materials (that is, B3) or causes a serious threat to the environment is strictly responsible for the losses suffered, without any requirement to prove wrongdoing.

  18. Is expropriation of real estate possible?

    Yes. If a registered land title (such as HGB) is not extended or renewed and expires, the land title will cease to exist and the title holder will lose its ownership rights over the land. In most cases, the land in question will be converted to state‐owned land. If there are any buildings over the land, such buildings must be demolished as the land must be returned to the government in a vacant condition.

    In addition, any plot of land that is not utilised in accordance with the purpose for which land ownership is granted (eg, manufacturing activities to be undertaken on land under a HGB certificate) may be declared ‘abandoned land’ which may be acquired by the state. Before declaring land as ‘abandoned’, the Ministry of Agrarian and Spatial Affairs (i.e. the main ministry overseeing land, spatial planning and utilisation in Indonesia) through relevant regional land agencies must undergo several procedural stages including issuance of warning letters to the relevant land title holders. The land area to be declared as abandoned may cover the entire area under the land title or a part of it, subject to the assessment by the relevant authorities of the level of land utilisation and abandonment during the government’s identification and due diligence stages.

    Land owners may be required to relinquish their land to the government if it is designated to be used in the ‘Public Interest’ (Tanah untuk Kepentingan Umum). Land to be used for ‘Public Interest’ is defined as land to be used for the construction of, among other things, property for national security, roads and highways, airports, terminals, ports, government telecommunication networks, public facilities, and green spaces. The land owners are entitled to receive ‘appropriate and fair’ compensation if their land is expropriated in these circumstances.

    Prior to conducting expropriation, the government will initiate a public consultation with the land owners, who have a right to submit their objections. These objections would be submitted to the governor of the region who may accept or reject them at his discretion. Landowners can also file a lawsuit if they object to the governor’s decision.

  19. Is it possible to create mortgages over real estate and how are these protected and enforced?

    Yes, it is possible to create mortgages over real estate assets in Indonesia. A mortgage (hak tanggungan) may be granted over a registered certificated land and must be registered by the Land Deed Official at the local Land Office where the land is located. Upon its registration, the creditor will have preferred status with respect to the property subject to the mortgage. If buildings or other fixtures such as plants or machinery are affixed to the land and the owner of the land grants a mortgage, the mortgage can cover both the land and the plants and machinery affixed to the land, and no separate security over the latter is necessary.

    Mortgages have executorial force. Executorial force means the instrument is equivalent to a final and binding court decision, which in an enforcement scenario would mean that the beneficiary of the security should have the right to sell the secured collateral by virtue of its own authority in a public action and collect the proceeds of the sale to settle the outstanding debt owed by the debtor or security provider.

    In theory, the holder of a security interest should be able to do this without going to court. However, in practice, this is rarely possible, as the debtor is likely to resist or dispute the entitlement to enforce, and third parties will not want to become involved.

    A new regulation (“Rule 9/2019”) has recently been issued which allows for electronic registration of mortgages over real estate. Rule 9/2019 introduces an electronic system which will be operated by the Land Office (named ‘HT-el’) whereby all services with regard to a mortgage/security right (Hak Tanggungan or “HT”) can be conducted electronically. The HT-el system is expected to cater for, among other things, electronic applications to:

    • register a security right/mortgage;
    • transfer a security right/mortgage;
    • change a creditor’s name in the security right/mortgage certificate; and
    • release a security right/mortgage.

    In order to use the HT-el system, a party must become a registered user of the electronic system. Individuals or legal entities deemed creditors under the relevant laws are eligible to be registered users.

    However, legal entities wishing to become registered users of the HT-el system are limited must meet certain requirements, including:

    1. having an electronic domicile; and
    2. having a Letter of Registration (Surat Keterangan Terdaftar) from the Indonesian Financial Services Authority (“OJK”).

    From discussions with government officials and public notaries, we understand that these electronic systems have not yet been fully implemented. It is not yet clear when the government intends to fully roll out the electronic registration services described in Rule 7/2019 and Rule 9/2019. In the meantime, manual registration and release of security rights/mortgages is still permitted.

  20. Are there material registration costs associated with the creation of mortgages over real estate?

    Yes.

    Fees under Regulation 128/2015

    Government Regulation No. 128 of 2015 (“Regulation 128/2015”) provides the non-taxation fees applicable at the Land Office in relation to mortgage registration costs. Under Regulation 128/2015, mortgage registration fees at the Land Office are determined based on the value of the mortgage as follows. (For this purpose, we have assumed an exchange rate of USD1 = Rp14,000.)

    Mortgage value

    Land Office Fees per mortgage certificate

    up to 250 million Rupiah (USD17,857)

    Rp50,000 (USD3.50)

    above 250 million Rupiah (USD17,857) up to 1 billion Rupiah (USD71,428)

    Rp200,000 (USD14.20)

    above 1 billion Rupiah (USD71,420) up to 10 billion Rupiah (USD714,285)

    Rp2,500,000 (USD178.50)

    above 10 billion Rupiah (USD714,280) up to 1 trillion Rupiah (USD7,142,857)

    Rp25,000,000 (USD1,785.70)

    above 1 trillion Rupiah (USD7,142,857)

    Rp50,000,000 (USD3,571.40)

    Note however that on top of the above land registration fees payable to the Land Office, fees are also payable to the Land Deed Official, typically including fees for the preparation of the deed of mortgage and its registration, so that the mortgage certificate can be issued over the security. Please see the explanation below.

    Fees for Land Deed Officials

    Fees for the Land Deed Official in the creation of mortgages are negotiable. Typically, the notary will charge 0.1 percent of the mortgage value. So, if the mortgage value is USD500,000, the Land Deed Official fee may be USD500. Where the mortgage value is high (for example, hundreds of millions of dollars), the parties will typically negotiate the fee down by up to half of the normal fees, but the amount will depend on negotiations with the notary on a case by case basis.

  21. Is it possible to create a trust structure for mortgage security over real estate?

    As discussed under question 13, a trust structure in the common law sense is not a recognised concept under Indonesian law.

    It is not uncommon, however, for lenders to appoint a “security agent” or “collateral agent” to manage the mortgage in place of a trust structure. The security agent in this instance will be responsible for administering all security documents related to the financing transaction and is given authority to act on behalf of the lenders with respect to the security interest obtained by the lenders from the borrower. The appointment, authorities, rights and obligations of a security agent will commonly be set out in a security agency agreement among the security agent, the lender and the borrower.

  22. What is the main legislation relating to commercial real estate ownership?

    The main law governing land titles in Indonesia is Law No. 5 of 1960 on Basic Regulations for Agrarian Affairs (“Land Law”). The Land Law establishes the various types of registered land title set out under question 4. Aside from the Land Law, other important laws which sets out the types of land rights include, among others, Law No. 20 of 2011 on Apartment Units (for Strata or HMSRS titles) and Regulation of the Ministry of Agrarian and Spatial Affairs No. 29 of 2016 (for Strata Right to Use or HPSRS titles).

    Other rules governing land mortgages, buildings and other real estate aspects exist at both national and regional level.