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Are leases giving a false sense of security for foreigners entering the Bali property market?

Long term leases in Bali

Since I moved to Bali I have seen a change in the way foreigners buy property rights here. As we all know, foreigners cannot own freehold property in Indonesia. When I first moved here, it was quite common for foreigners to buy property and place it an Indonesian friend’s name, otherwise known as a “nominee” agreement.

In 2015, the Minister of Spatial Planning, Ferry Mursyidan Baldan, declared that the government would start cracking down on cases of foreigners trying to circumvent the law to control property. It was a hot topic of discussion at the time. There has also been at least one high profile (and complicated) case of a foreigner losing their property to a nominee in the courts.

While I personally haven’t seen any evidence of a crackdown, there definitely has been a shift in the attitudes towards using nominees to buy property. Some notaries may not even provide nominee agreements. Real estate agents marketed towards foreigners seem to have more advertisements for leased properties.

Since the tax office has become more computerized it is easier for the various government departments to see who owns what, so there is an understandable reluctance of Indonesians wanting to lend their name and enter a nominee agreement with a foreigner, due to the tax implications.

This is certainly a positive change for Bali and the whole of Indonesia. It is great for land owners to be able to retain ownership for future generations, but still receive income by leasing it out. The change however, has not seen much or any dampening of interest by foreigners in wanting to have a house or villa in Bali, even if it means entering into a long term rental or lease agreement.

Since most foreigners now understand that they cannot own freehold property, but they can lease property, I believe it is giving them a somewhat false sense of security. I think it is as important or even more important to do thorough due diligence check on the property before signing any documents or even paying a deposit.

Since these rental agreements are not registered with the government’s land agency (BPN) they are sometimes less formal and occasionally not even made in notary’s office. I have seen personally, and mentioned on online forums, cases where the owner has sold the property even though it was leased, banks foreclosing on a property and even a case where a person was renting out a property they had leased for just one year, but they were leasing it to a foreigner for 20 years for which they were demanding the full payment for 20 years.

It is also common for people to lease a property and then for whatever reason, they decide to lease or sublease it to another party. You also see this called an “over-contract”. This can however happen multiple times over, especially with prices rising. If this is the case for a property you are interested in, you need to check every agreement that goes right back to the first lease with the actual owner.

Now, before someone says that I shouldn’t be giving legal advice, then I just want to say that the point of this post and others like it on my blog, that you definitely should seek fully, independent legal advice before entering any type of property purchase in Bali, just as you would in any other country around the world. I understand that many people form a strong, emotional connection to Bali and Balinese people, but it shouldn’t get in the way of legal and practical considerations.

I you thought this post was interesting you might also want to take a long at this one I wrote about renting our property on Airbnb in Bali.

Comments

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3 Responses to Are leases giving a false sense of security for foreigners entering the Bali property market?

  1. Pauline Cash June 21, 2019 at 6:09 am #

    Hi Mike ,first time I have received an email from you in a long time…..

    always enjoyed your info. And still come up to Bali Three times a year from Aus.

    • mike July 18, 2019 at 3:27 am #

      Thanks Pauline.

  2. Patrick Clancy June 24, 2019 at 12:39 am #

    Hi Mike. The word “freehold”, in my opinion, needs to be removed from the conversation about property acquisition.

    Your statement that foreigners cannot own is, as such, misleading due not to the fact that you are misinformed, but that you have bound yourself to a word that simply does not apply to our market, except when it is used to explain the differences between Hak Milik and Hak Pakai.

    A more clearly practical statement would be along these lines. “Any buyer can purchase a property that is marketed as “freehold”; when a foreigner wishes to take on the property they would own the property by way of the Hak Pakai structure. When an Indonesian citizen buys it, they of course take on the Hak Milik title.

    Maybe your readers would want to know the difference and how they can benefit.

    As you may have a sphere of influence that is broad, a clear explanation of the above differences and similarities might go a long way towards educating your followers with a more sophisticated understanding of the market in which they plan to invest.

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