Buying land in Bali: Watch your step

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.

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.