Land title(ownership) rules in Indonesia are stipulated in Law No. 5 of 1960 regarding Basic Principles of Agrarian Law (the “Agrarian Law”). Set out below is a summary of each type of land title available.
How do foreigners wishing to buy land in a place like Bali do it ?
1. Hak Milik (Right of Ownership) (“HM”):
HM is the most complete land title available under Indonesian law. HM is transferable and may be encumbered. HM is equivalent to freehold land or fee simple absolute under the common law system. Unfortunately, except for certain legal entities (not including PMA companies) designated by the Indonesian government, only Indonesian citizens are allowed to hold HM. This is not relevant for foreign individuals owning residential property in Indonesia.
2. Hak Guna Usaha (Right of Cultivation) (“HGU”),
HGU gives the owner the right to exploit land for a certain period for the purposes of agriculture, fisheries or cattle breeding. HG- U is transferable and may be encumbered. Land with HGU title may be owned by (i) Indonesian citizens and (ii) legal entities established under Indonesian law and domiciled in Indonesia, including PMA companies. HGU is granted for a maximum period of 35 years and extendable for further 25-year period. Upon the expiration of such extension, the HGU may be renewed. This is not relevant for foreign individuals owning residential property in Indonesia,
3 Hak Guna Bangunan (Right to Use Building) (“HGB”)
HGB is right to construct and own buildings on land. HG is transferable and may be encumbered. Land with HGB title may be owned by (i) Indonesian citizens and(ii) legal entities established under the Indonesian law and domiciled in Indonesia, including PMA companies,
HGB is granted for a period of up to 30 years and extendable for a farther 20-year period. Upon the expiration of such extension, new HGB title may be granted on the same land. This is the title most PMA companies use to hold real estate.
4. Hak Pakai (Right to Use) (“HP”)
HP is the right to use and/or to harvest from land, which is directly controlled by the State, or land of other persons. HP may be encumbered. HP may be owned by:
(i) Indonesian citizens;
(ii) Legal entities established under the laws of Indonesia and domiciled in Indonesia, including PMA companies;
(iii) Departments, Non-Departmental State Agencies, and Regional Governments;
(iv) Religious and social organizations-,
(v) foreigners residing in Indonesia;
(vi) Foreign legal entities which have representatives in Indonesia;
(vii) Representatives of foreign countries and international organizations.
Ordinarily, HP is granted for a period of up to 20 years and can be extended for 20 years. Upon expiration of the extension period, HP may be renewed. This is the title used, in recent years, to “sell” condominium units (both commercial and residential property) to foreign individuals,
5. Hak Sewa (Right to Lease) (“HS”):
An owner of HS is entitled to use property of others, with the owner of HS obligated to make rental payments to the owner of such property. There is no fixed term for HS. The following persons are eligible to hold HS:
(i) Indonesian citizens;
(ii) foreigners residing in Indonesia;
(iii) legal entities established under the Jaws of Indonesia and domiciled in Indonesia, including PMA companies;
(iv) foreign legal entities which have representatives in Indonesia.
This is the title held by foreign individual and company renters of houses in Indonesia.
6. Hak Membuka Tanah dan Memungut Hasil Hutan (Right to Clear Land and Collect the Forest Products):
Indonesian citizens may only hold this right.
Many foreign individuals in Jakarta, Bali and elsewhere also hold residential property indirectly through arrangements (often called nominee or trustee arrangements) where Indonesian individuals or companies are legal titleholder on behalf of foreigners. Under such arrangements, the foreigner generally funds the Indonesian purchasing the property and then takes a formal or informal security interest in the land purchased. These relationships are largely built on trust between the foreigner and the Indonesian and any contractual legal rights the foreigner has may be difficult to enforce. Nevertheless such arrangements are pretty common and many long-lived and appear to satisfy both parties.
This information is provided as a courtesy by Morgan, Lewis & Bockius LLP, an international law firm with offices in New York, Philadelphia, Singapore and Jakarta, Indonesia.