Contributed By SSEK Legal Consultants
The main sources of real estate law are as follows.
The Indonesian real estate market has experienced a slowdown since 2013. But in 2018, the sector began to regain its footing, not only because of strong economic growth, at about 5%, but also continued urbanisation and a growing middle class. According to the World Bank, 20% of Indonesia’s population, or about 52 million out of a total population of 260 million, is middle class. Such a large and growing middle class has pushed domestic consumption.
However, the growth in Indonesia’s real estate sector may not have been as robust as hoped, for a number of reasons. One major factor is the political uncertainty related to the presidential and legislative elections scheduled for April 2019, which has resulted in some hesitation among the upper-middle segment to invest in real estate. Many investors and occupiers, especially in the upper middle-class segment, seem to be taking a wait and see approach.
Interestingly, in the residential sector the focus of the market appears to be shifting from the middle-upper segment to the lower-middle segment for a number of reasons, including:
Meanwhile, in the lower-middle segment, purchasing power increased with the help of President Joko 'Jokowi' Widodo’s One Million Houses programme. Jokowi’s regime has been rolling out policies intended to boost home ownership and close the affordable housing shortfall. In December 2018, it was announced that the One Million Houses programme had exceeded its target, with 1,132,621 units.
Numerous major developers are also developing residential complexes, housing units and apartments specifically designed to cater to a middle-class lifestyle with flexible payment schemes, smaller down payments and instalment payments over long periods.
Despite the increasing number of entrepreneurs, demand in the office market continues to flag. The upcoming elections are seen to be a major factor for this stagnancy, while many tech-oriented companies and start-ups seem to prefer co-working space to traditional office spaces.
With the conclusion of the elections in the first quarter of 2019 and the completion of major infrastructure projects, numerous sources indicate that real estate market trends will continue to move in a positive direction.
Residential: Meikarta in Bekasi, West Java, developed by Lippo Group; Nuvasa Bay in Batam, near Singapore, developed by Sinar Mas Land; and Citra Maja Raya in Maja, Banten, on Java, developed by Ciputra Residence. Office buildings: Treasury Tower in the Sudirman Central Business District in Jakarta, developed by Agung Sedayu Group; Casa Domaine Tower 1 and 2 in the KH Mas Mansyur area of Jakarta, developed by three construction groups (Salim Group, Lyman Group and Kerry Group); and World Trade Center 3 in the Sudirman area of Jakarta, developed by Jakarta Land.
The government of Indonesia (GOI) is in the process of formulating a draft law on land to supplement the existing Indonesian Agrarian Law (the Draft Land Law). The Draft Land Law is considered to be crucial considering that Indonesia only has a single basic regulation on land, namely the Indonesian Agrarian Law, which was issued in 1960.
The Draft Land Law is aimed at governing, among other things, land registration and certification priority rights over land, agrarian dispute settlement and agrarian reform. The last discussion held by the GOI on the Draft Land Law was in early October 2018. The timeline for the enactment is still unclear.
Below are the types of titles that can be acquired and the parties who are permitted to acquire each of the specific titles:
In addition to these primary and secondary titles, in Indonesia (particularly in rural areas) there exist large areas of land that have not been registered and certificated under the Agrarian Law. The rights to this land are still governed by adat (customary) law. Adat rules vary significantly from one area to another.
This 'uncertificated land' can also be acquired. In this case, the buyer must apply for a registered title pursuant to the Agrarian Law and obtain a formal certificate of title. To obtain a land certificate, adat-based proprietary rights must be relinquished by the original owner to the State by signing a Right Relinquishment Deed, known in Indonesian as a Land Relinquishment Deed (Akta Pelepasan Hak, or APH), in favour of the buyer, as further explained in 2.3 Effecting Lawful and Proper Transfer of Title.
The fundamental legal basis for transfer of title in Indonesia can be found in the Indonesian Agrarian Law and GR 24/1997. For the sale of apartment units, the Condominium Law provides further procedural guidelines.
Special laws for transfer of land title in Indonesia are more region-based than sector-specific. There may exist regulations issued by a regional government that apply to the transfer of title of land located in that specific region. For instance, the determination of the purchase price for any transfer of land in Bali shall be subject to the suggestion issued by the Regional Revenue Service Office (Dinas Pendapatan Daerah) in the relevant area where the land is located.
Land is legally acquired in Indonesia upon execution by the seller and buyer of a Sale Purchase Deed (Akta Jual Beli, or AJB) or an APH. An AJB is used if the buyer is to obtain certificated title to the land that is the same type as the seller’s certificated title. An APH is used if the seller has certificated title to the land but such title is not the same type of title the buyer can or wants to acquire, or if the seller does not yet have certificated title to the land to be sold.
These deeds must be prepared by an authorised Land Deed Official (Pejabat Pembuat Akta Tanah, or PPAT) and executed in the Indonesian language before such PPAT. Upon execution of the PPAT deed, the PPAT is responsible, on behalf of the buyer, for arranging certification and registration of the buyer's title with the relevant office of the National Land Agency (Badan Pertanahan Nasional, or BPN).
Title insurance is not common in Indonesia.
Buyers normally engage local legal counsel to conduct real estate due diligence. The legal counsel will co-ordinate directly with the seller and, when necessary, the seller’s PPAT to obtain the documents to be reviewed and collect the necessary information on the land and the seller. The due diligence would normally include the following.
Indonesian law is silent as to the warranties that should be given in a real estate sale transaction, by both the seller and the buyer. Representations and warranties, as well as the buyer’s remedies for the seller’s misrepresentation, in a real estate sale transaction shall be freely agreed between the seller and the buyer.
Please note that Indonesian law recognises the principle of freedom of contract. This principle is codified in Article 1338 of the Indonesian Civil Code (ICC), which provides that parties to a contract are free to include any provisions they wish, subject only to mandatory provisions of Indonesian law.
The typical seller’s representations and warranties would provide, among others:
The representations and warranties of a buyer would normally be more lenient and typically provide, among others:
The most important areas of law for an investor to consider when purchasing real estate are as follows.
If soil pollution or environmental contamination is already present when the buyer becomes the legal owner of the land, it is possible the buyer will be responsible for such pollution or contamination, unless the buyer can prove that it did not cause the pollution or contamination. Upon the transfer of title, the buyer assumes the rights and liability of the land, including any environmental liability.
Article 88 of the Environmental Law provides that each person whose action, business and/or activity uses hazardous and toxic material (B3), produces and/or manages B3 waste, and/or causes serious threats to the environment shall be absolutely responsible for the damages suffered and no evidence of breach elements shall be required.
The sanctions under the Environmental Law are divided into three categories.
Under the Environmental Law, any environmental disputes may be settled through courts or outside the courts, provided that the parties to the dispute voluntarily agree to the settlement. Under the Environmental Law, lawsuits through the courts may only be submitted if a party or the parties to the dispute declare that out-of-court settlement has failed. A lawsuit can be submitted by a party that suffered a loss due to such environmental pollution or damage, an environmental NGO or the government.
As explained in 2.4 Real Estate Due Diligence, in addition to reviewing the licences held by the seller pertaining to the land, the buyer may, during the due diligence, conduct research at the relevant spatial layout office (ie, subject to the location of the land) to confirm the zoning and spatial layout of the area where the land is located. The buyer would then be able to identify the permitted uses of the land.
In the process of investigating a possible location for a project, a company should contact the Local City Planning Office (Dinas Tata Kota) and the Land Office to obtain official information pertaining to the land (Fatwa Tata Guna Tanah, or Fatwa).
If the buyer's intended use of the land is not in accordance with the requirements of the applicable spatial layout, the buyer may file an application with the relevant government political subdivision (ie, the regency, municipal or provincial government) to amend the spatial layout to permit the use of the land for the buyer's intended purpose. It is at the regional government’s discretion to decide whether to accept this application.
It is possible to enter into specific development agreements with the relevant public authorities to facilitate a project, as long as the project is necessary for the public interest and the relevant public authorities agree to the project.
Expropriation usually occurs on the basis of land procurement for the public interest. Law 2/2012 defines public interest generally as the interest of the nation, state and society that shall be implemented by the government for the maximum benefit of the people, but there is no single definition of what constitutes 'public interest'. The reasons behind nationalisation or expropriation are subjective, depending on the expropriating government. This firm's research on expropriation cases has found that legitimate public interest objectives can include protection of public health, safety and the environment, and penalty for crimes.
There are two legal bases to protect foreign investors in Indonesia: the Investment Law and the ASEAN Comprehensive Investment Agreement, dated 26 February 2009 (ACIA).
Article 7 of the Investment Law stipulates that the GOI will not nationalise or take ownership of investors’ assets, except by law. In the event that the GOI does so, the GOI will provide compensation based on fair market value. If the GOI and the investor cannot agree on fair market value, the dispute shall be settled by arbitration.
Similarly, the GOI and the Republic of Philippines are parties to the ACIA. This multilateral investment treaty protects Association of Southeast Asian Nations (ASEAN) investors and their investments. Specifically, the ACIA provides protection from various measures that may be taken by host countries, including protection from expropriation and fair market value compensation, as regulated in Article 14 of the ACIA.
In addition, in the event of a dispute, the Investment Law and the ACIA have dispute settlement mechanisms that allow an investor to file a direct claim against the host country. Section B of the ACIA stipulates dispute settlement processes that include conciliation, consultation and ultimately arbitration. Article 33 of the ACIA liberalises the choice of forums available to investors to resolve any dispute with a country, including ICSID. In Indonesia, an international arbitration decision can be executed based on Law No 30 of 1999 regarding Arbitration and Alternative Dispute Settlement (12 August 1999).
Sale of Real Estate Through an Asset Deal
This transaction involves the sale and purchase of a property owned by a company or individual. In this type of transaction, other than the purchase price of the land, the buyer must also pay various expenses, which normally include the following.
Other than the payment of income tax by the seller, the costs and fees related to a sale and purchase of land transaction are normally covered by the buyer. In special cases, in which the seller agrees to do so, the honoraria of the PPAT may be borne jointly by the seller and the buyer.
There are several goods that are exempted from the imposition of VAT. Those most relevant to real estate are as follows:
Further, the following parties are exempted from the imposition of BPHTB:
There is also an income tax exemption for the seller for:
There is also a tax exemption if the seller is a private person or entity that is not categorised as an Indonesian taxpayer.
Please note that for the sale of real estate through an asset deal, the buyer will inherit only those liabilities of the seller related to the land.
Sale of Real Estate Through a Share Deal
In this transaction, the sale will not directly involve any sale of a property, but rather a sale of shares of a company owning a property. The tax implications are not as complicated as an asset deal. However, the buyer will inherit the entire liability of the company in which the shares are acquired. The typical taxes imposed in a share deal transaction are as follows.
Foreign individuals and entities are given very little room under current laws and regulations to own real estate in Indonesia. Since its promulgation in 1960, the Indonesian Agrarian Law has only allowed a foreigner 'domiciled in Indonesia' to hold a Hak Pakai (Right to Use)land title among other forms of land title. GR 103/2015 and its implementing regulation further state that only foreigners with a 'stay permit in Indonesia' may hold a housing unit with a Hak Pakai land title.
The Indonesian Housing Law provides that in addition to a Hak Pakai land title, foreigners may only occupy housing units through a lease. A lease arrangement does not cause a transfer of ownership, but merely the transfer of 'possession rights' over the leased property and only for a certain period, which must take into account the period of the underlying land title where the property is built.
The most common financing methods for the acquisition of commercial real estate include:
In Indonesia, the most common form of security interest over real estate is a mortgage (Hak Tanggungan). A mortgage is used to secure land with certain land titles (ie, HM, HGB, HGU, Hak Pakai over State land and HMSRS over HM or HGB or Hak Pakai land) and all the fixtures attached to it.
There is neither a prohibition on granting security over real estate to foreign lenders nor restrictions on repayments being made to foreign lenders under a security document or loan agreement. The elucidation of Article 10 (1) of the Indonesian Mortgage Law expressly provides that the underlying agreement of a mortgage (eg, the loan agreement) can be signed overseas and the associated parties can also be a foreign individual or entity, as long as the loan is used for a development within the territory of the Republic of Indonesia.
A Hak Pakai over State land that is not transferrable (eg, Hak Pakai of the government, Hak Pakai of a social or religious agency and Hak Pakai of the representative of a foreign country), whose validity is not governed and is granted for as long as the land is utilised for specific purposes, cannot be granted a mortgage.
With the enactment of the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), it is possible that a party seeking funding from a US citizen or entity for a real estate investment in Indonesia will be subject to review by the Committee on Foreign Investment in the United States (CFIUS). Some parties are of the opinion that FIRRMA has expanded the authority of CFIUS beyond the appropriate boundaries.
The typical fees that need to be paid on the granting and enforcement of a mortgage are as follows.
The following are the steps that need to be taken to put a valid mortgage security over real estate in Indonesia.
An entitlement to execute a mortgage equals an event where a mortgage grantor (debtor) fails to fulfil the obligation stipulated under the loan agreement, which further generates the rights held by the mortgage holder (creditor) to execute the land or property being mortgaged agreed under the APHT.
Principally, a mortgage is enforceable without the need for the creditor first to submit any claims to the court or to wait for any final and binding court decision on the basis that the Security Rights Certificate (Sertifikat Hak Tanggungan) has naturally been conferred with executorial status written into the initial part of the certificate. This is in line with the nature of a mortgage, including that it is easy and certain to be executed.
Essentially, the Indonesian Mortgage Law provides two alternative mortgage execution methods: through a public auction or a private sale. It is possible for the debtor to challenge a mortgage execution by way of public auction, whereas the consent of both parties is required for the private sale method.
The execution of a mortgage by a public auction must be carried out based on a court order. Please note that the court order is not a court decision on whether the debtor was in an act of default, but is merely a stipulation issued by the court converting the rights held by the mortgage holder into a real action allowing the mortgage holder to auction the mortgaged land publicly.
However, the mortgage holder will normally have a much stronger position than the mortgage grantor in the event that the latter breaches the agreement. The mortgage holder may directly request the court to issue a court order so long as the mortgage holder can show that the mortgage grantor has failed to repay its debt that is due.
It is possible to subordinate secured debt to newly created debt; for instance, by way of signing a novation deed. The determination on what method to use for the subordination shall be agreed by the relevant parties based on the freedom of contract principle as explained in 2.5 Typical Representations and Warranties, while the restrictions should follow sector-specific regulations, if any.
A lender is not liable under environmental laws even if it holds or has enforced security over the relevant real estate.
A mortgage gives priority rights to the security holder during the insolvency and, theoretically speaking, gives the security holder the right to enforce the secured assets by way of private sale or through an auction as if the borrower is in default, as explained in 3.6 Formalities When a Borrower is in Default.
It is seemingly uncommon to apply the London Interbank Offered Rate (LIBOR) to Indonesian contracts. However, if the parties to a contract agree to apply LIBOR, it is advisable that the contract includes clauses that stipulate the determination of changing interest rates and allow the bank to substitute a new number to replace LIBOR based on its calculations.
Article 14 of the Indonesian Agrarian Law requires every regional government to plan the use of land. To implement this requirement, Indonesia enacted Law 26/2007. The spatial layout scheme consists of the national spatial layout plan, provincial spatial layout plans and regency/municipal spatial layout plans.
Pursuant to Articles 26(3), (4), (5) and (7) of Law 26/2007, a spatial layout plan for a regency or municipality must be stipulated by a regional regulation, issued by the relevant regent or mayor. The regional spatial layout plan for a regency or municipality must be the basis for the issuance of location development permits and land administration.
Other ministries such as the Ministry of Forestry also prepare special layout plans but their plans are more likely to affect land in rural areas rather than in developed areas/industrial estates. In rural areas, these plans will need to be reviewed and the local offices of the Ministry of Forestry, Ministry of Energy and Mineral Resources, Ministry of Agriculture and other relevant ministries will need to be approached to research the permissible uses of, and existing rights in respect of, a given parcel of land.
Building construction in Indonesia must adhere to technical requirements as imposed by the government. GR 36/2005 imposes an 'intensity requirement' for the construction of a building, whereby a building must be constructed not exceeding certain maximum density and height limits that are stipulated by the relevant regional government.
In the calculation of the maximum density and height limits, the following are terms commonly used, as well as the respective statutory definitions, which can be found in MPW Reg 06/2007:
The specific guidelines for each region shall be based on the relevant regional regulations.
The authorities that are responsible for regulating the development and designated use of individual parcels of real estate are the specific regional governments (see 4.1 Legislative and Governmental Controls).
Licences that must be obtained prior to the commencement of a real estate development project include a Location Permit (Izin Lokasi), a Land Utilisation Permit (Izin Peruntukan Penggunaan Tanah), IMB, SLF and Environmental Permit (Izin Lingkungan).
If it is completing a major refurbishment, a company will need to check whether the licences issued to construct the existing building are still valid and relevant for the refurbishment. If the licences are no longer valid and relevant, the company will need to renew the existing licences or apply for new licences, depending on the regional regulation and applied policies.
Technical approvals and recommendations will also need to be obtained from the relevant government institutions. These licences, approvals and recommendations are generally obtained from the regional government. There may be small differences in the licences, approvals and/or recommendations required from region to region, due to differences in the provisions of the relevant regional government regulations and adopted policies.
If an intended use of the land is not in accordance with the requirements of the applicable spatial layout plan, the company may file an application with the relevant government political subdivision (ie, the regency, municipal or provincial government) to amend the spatial layout plan to permit the use of the land for the company's intended purpose. However, this application may not be accepted.
This depends on the nature, capacity and purpose of the project. For a small-scale project with a purpose not related to the public interest, it is not necessary to enter into agreements with local or governmental authorities or agencies to facilitate a development project, unless the regional government requires so. For a bigger project with a purpose that is heavily related to the public interest, it might be necessary/possible to enter into agreements with regional governments, although this is at the discretion of the regional government.
This depends entirely on the applicable regional government regulations and adopted policies.
For domestic investors, Indonesian law recognises various corporate vehicles, including those with (i) non-legal entity status, such as a (a) maatschap (civil partnership), (b) firm and (c) comanditer venootschape (limited partnership, or CV); or (ii) legal entity status, such as a limited liability company (perseroan terbatas, or PT) or co-operative.
Small to medium-sized business players usually use a CV or PT as their corporate vehicle, while large-scale businesses will use a PT.
For foreign investors, as generally required under Law No 25 of 2007 regarding Capital Investment (26 April 2007) (the Investment Law), direct investment in Indonesia is implemented through the establishment of a limited liability company (usually referred to as a PT PMA, with PMA standing for Penanaman Modal Asing, or foreign capital investment) or other forms allowed under relevant Indonesian laws and regulations.
All the foregoing corporate vehicles are able to acquire real estate, with certain limitations. PT or PT PMA are the preferred entities and more commonly used to acquire real estate and invest in the sector, depending on whether the investors are entirely domestic or consist of foreign investor(s).
In addition to the same characteristics as the other aforementioned entities (eg, have their own assets, have a specific purpose as a group, have their own interest), PT and PT PMA also have the following features:
The following can be considered as the benefits of PT and PT PMA:
For a PMA company engaging in the development and management of property, there is a 4:1 debt-to-equity ratio requirement if the property development is not integrated in a building or one housing compound.
Other than the foregoing, there is currently no applicable minimum capital for a company that invests in the real estate sector. However, there are minimum capital requirements for a PT and PT PMA as explained below.
Indonesian law recognises three types of capital of any Indonesian company: authorised, issued and paid-up. Authorised capital may be up to four times greater than issued capital and all issued capital must be fully paid-up. The Company Law provides that the minimum authorised capital of a PT should be IDR50 million. The payment for shares may be in a monetary form or through an in-kind contribution to be valued by an independent appraisal company.
Notwithstanding the minimum capitalisation requirements of the Company Law, in practice, the Capital Investment Co-ordinating Board (Badan Koordinasi Penanaman Modal, or BKPM) and the Online Single Submission (OSS) system require that the total investment in the PT PMA be reasonably sufficient so that the intended business can achieve commerciality. A low level of investment might cause delay as it may not be considered as sufficient by the BKPM.
The BKPM policy on the total investment for a PT PMA is still applicable under the OSS regime. Article 6 (2) of BKPM Regulation No 6 of 2018 Regarding Guidelines and Procedures on Capital Investment Licensing and Facilities (20 July 2018) (BKPM Reg 6/2018) requires that the minimum total investment should be more than IDR10 billion (excluding land and building), which will be further divided into equity (issued and paid-up capital) and loan(s). Under Article 6 (3) (b), the minimum issued and paid-up capital shall be IDR2.5 billion, while the balance of the total investment, IDR7.5 billion, may be contributed by way of loan. In current practice, the OSS system requires the paid-up and issued capital of a PT PMA to be at least IDR2.5 billion, the minimum amount required in BPKM Reg 6/2018. Accordingly, the OSS system will reject any application with paid-up and issued capital of less than IDR2.5 billion.
BKPM Reg 6/2018 also requires the minimum total nominal value of shares that a shareholder needs to own in the PT PMA to be at least IDR10 million.
A PT or PT PMA must have, at all times, at least two shareholders. If for any reason it has only one shareholder for a period longer than six months, it will lose its limited liability status and the sole shareholder's liability will not be limited to the equity invested in the company (ie, it will be personally liable for the actions of the company)
For PT PMA, investors have to determine the business line of the PT PMA and review Indonesia’s valid Negative Investment List to confirm whether the intended business line in the real estate sector is subject to any foreign ownership restriction.
It must have at least one director and one commissioner. A foreign national may serve as a director or commissioner.
The PT or PT PMA will also need to obtain the customary permits and approvals required for the establishment of a company, such as a Business Identification Number (Nomor Induk Berusaha), a Taxpayer Registration Number (Nomor Pokok Wajib Pajak), a Company Registration Certificate (Tanda Daftar Perusahaan), a Certificate of Domicile (Surat Keterangan Domisili Perusahaan) and other regional/sectoral licences.
This depends on the needs of the individual company. Investors will normally engage an accountant or financial adviser to analyse this issue.
The only type of arrangement that is relevant for this is a lease arrangement.
Indonesian law is silent as to the types of commercial leases. However, there are numerous types of commercial leases available in practice, among others:
There are no express legal restrictions on the length of leaseholds in Indonesia. In principle, the lessor and the tenant may freely negotiate the terms of the lease.
Ideally speaking, a lease term shall be subject to the validity period of the underlying title, unless the underlying title is a Hak Milik title, which is valid for an indefinite period.
As explained in 6.3 Regulation of Rents or Lease Terms, the typical and ideal term shall be subject to the validity period of the underlying title, unless the underlying title is a Hak Milik title.
Article 1551of the ICC provides that the lessor shall be bound to deliver the leased asset in a condition of proper maintenance. In this regard, the lessor shall, during the term of the lease, carry out all the repairs that are deemed necessary, with the exception of those that are the tenant's responsibility.
The most common term for rent payment is on an annual basis. However, the determination of rent payment frequency commonly depends on the needs and discretion of the lessor, which should be agreed by the lessee in the lease agreement.
Under Indonesian law, the tenant is protected should the lessor wish to sell or transfer the land to another party while the lease is still effective. Article 1576 of the ICC provides that leases as a matter of law survive the sale of property unless the lease agreement specifically states otherwise.
This can be freely negotiated between the tenant and the lessor based on the freedom of contract principle. Normally, the lessor shall require a rent increase upon the expiry of the initial lease term and the parties will have to agree to extend the lease.
This can be freely negotiated between the tenant and the lessor based on the freedom of contract principle. In some cases, this can be more at the discretion of the lessor. Normally, it will follow the market price of the property.
Rent is subject to VAT, which is payable by the tenant on each instalment of the rent. VAT is currently 10% of each instalment.
This arrangement will differ from one lease to another, considering the freedom of contract principle. However, the costs will normally include:
This can be freely negotiated between the tenant and the lessor based on the freedom of contract principle, although in most cases it is determined by the lessor. Usually, tenants will bear the costs.
This can be freely negotiated between the tenant and the lessor based on the freedom of contract principle, but in most cases it is determined by the lessor. Usually, tenants will bear the costs.
In most cases, the lessor will pay for the cost of insuring real estate. However, there are special cases where the tenant is responsible for providing the insurance, especially in a long-term lease arrangement for a luxury residential property. The events that are typically covered by the policy are as follows:
This can be freely negotiated between the tenant and the lessor based on the freedom of contract principle, but in most cases it is determined by the lessor. Normally, if the property is a complex of condominiums or apartments or villas, the organiser of the complex will set forth tenants’ rules that must be followed by the tenants.
This can be freely negotiated between the tenant and the lessor based on the freedom of contract principle, but in most cases it is determined by the lessor.
GR 44/1994 provides the very fundamental basis of house occupancy. It is stipulated that leasing a house requires an agreement between the landowner and the tenant that shall govern at least the rights and obligations of each party, the term of the lease and the amount of rent.
Additionally, the procedure to lease a state-owned land is stipulated in MOF Reg 57/2016.
There is, nonetheless, no basic specific regulation that provides comprehensive procedural guidelines for leases in Indonesia. The Draft Land Law is expected to provide such comprehensive guidelines when it is enacted.
A lease agreement can include provisions for the tenant’s insolvency based on the freedom of contract principle. Normally, the lessor may terminate the lease agreement if the tenant becomes bankrupt/insolvent, with certain conditions (eg, there must be evidence the tenant is bankrupt/insolvent and prior written notice must be provided).
This can be freely negotiated between the tenant and the lessor based on the freedom of contract principle, but in most cases it is determined by the lessor. The most common form of security that a landlord will usually require is a security deposit, which is to ensure that the lessor is secured against any default by the tenant and for the cost of repairs to cover certain damage to the property caused by the tenant.
This is at the discretion of the lessor. Article 1573 of the ICC provides that if, following the termination of a lease concluded in writing, the tenant remains and is permitted to be in possession of the property, a new lease shall arise and the consequences thereof shall be regulated by the articles that are applicable to oral leases.
The lessor can freely add clauses to the lease to ensure the tenant leaves on the date originally agreed and the implications for a tenant violating such clauses.
The events that typically give the landlord and the tenant the right to terminate the lease are of default (eg, the tenant does not provide payment of rent in a timely manner, the lessee fails to complete the construction of building or either party is guilt of a criminal offence), force majeure and lapse of validity.
This can be freely negotiated between the tenant and the lessor based on the freedom of contract principle, but in most cases it is determined by the lessor and agreed by the tenant.
This firm is not aware of any commercial lease being terminated by any third party while the lease is ongoing, including the government or a municipal authority. Several leases on state land have not been extended after the terms expired for the purpose of public interest.
Under the Construction Law, a procurement arrangement is made through the execution of a construction work contract between the project owner/employer and the service provider/contractor. The Construction Law acknowledges the various types of construction work contracts that are typically used, including contracts based on:
In principle, the type of structure used to price construction projects will depend on the needs of the project owner/employer and the service provider/contractor, as well as the type of construction work.
The parties are free to agree the particular provisions governing the responsibilities and mechanism to appoint a subcontractor, subject to the express provisions under the Construction Law.
Under the Construction Law, subcontracting of work may only be done for 'specialised services'. These specialised services cover:
The above implies that under the Construction Law, subcontracting may not be done for the entire project. The Construction Law further requires that the appointment of subcontractors obtains the approval of the employer.
The Construction Law requires that a construction agreement at minimum shall cover, among other things, guarantee over risks that arise and legal responsibilities to other parties in the implementation of the construction work or from building failure.
The following are risks that are typically allocated to the contractor:
In some contracts, the contractor may be released from bearing the above risks when it is caused by the employer’s gross negligence or wilful misconduct. The freedom of contract principle as elaborated above allows the parties to agree mutually on the allocation of risks among them.
It is quite typical for the parties to put a limitation of liability clause in their contracts. The limitation of liability is usually set based on the contract value. In some instances, provisions in a contract stipulate that any liability arising from gross negligence or wilful misconduct will not be capped. However, the Indonesian courts can refuse to enforce a limitation of liability provision:
Warranties are also commonly included in a construction contract. Parties would be able to negotiate freely the scope and length of warranties provided by the contractor in relation to the work, equipment and materials.
The parties would normally negotiate provisions in the event of delay and the provisions would normally include the following.
It is common to have a construction contract that provides that the owner is entitled to monetary compensation if there is a delay. Parties will negotiate on the amount and cap for delay damage. Delay damages also relate back to the cause of the delay. For example, the contractor should not be subject to delay damages if the delay was due to force majeure.
To secure payment, it is common to require contractors to prepare bonds (eg, advance payment bond, performance bond and maintenance bond) and/or letters of credit issued by banks.
Parties will normally negotiate the form, amount and conditions in relation to performance security or bonds required to be obtained by the contractor in relation to the work.
In addition to an encumbrance in the form of a mortgage, as discussed in 3.2 Typical Security Created by Commercial Investors, it is common in Indonesia for a contractor to lien its property over collateral. For movable goods, the lien will normally be in the form of a fiduciary security or pledge (eg, materials supplied or vehicles in the project). If the construction contract allows the contractor to place a lien on the property, materials and/or supplies used in the project, the construction contract will usually include clauses that require the contractor to provide the owner a lien waiver upon the fulfilment of the payment obligation by the owner. The lien waiver can be in the form of a partial and/or final waiver. The construction contract will also normally include the form of letter that shall be used to waive the lien.
In addition, materials and supplies that are not fixed to the land are covered under Article 1459 of the ICC, which provides that ownership of the goods will not be transferred if there is no handover from the seller (in this case, the contractor) to the buyer (in this case, the owner). As such, the contractor will have the right to hold back the handover of the goods until the contractor has been paid by the owner.
Upon completion of construction, an SLF is required to be obtained in some regions.
VAT is payable on any sale and purchase of real estate unless it is exempted (see 2.10 Taxes Applicable to a Transaction).
Parties will normally hire a tax consultant/adviser to mitigate tax liabilities.
Each region may apply different regional taxes or retributions. Parties must enquire directly at regional tax offices for further details on taxes or retributions and exemptions.
As explained in 2.10 Taxes Applicable to a Transaction, foreign companies and individuals are subject to a 20% withholding tax on dividends from real estate companies, subject to a relevant tax treaty.
Rental income for non-residents is taxed at a flat rate of 20% of gross income in Indonesia.
Income and capital gains earned by companies are taxed at a flat rate of 25% of net income, with several exemptions (eg, foreign diplomatic and consular personnel, SMEs and representatives of international organisations).
VAT is levied at a flat rate of 10% on gross rental income.
Depreciation and credit interest deduction are tax benefits from owning real estate. Investors may wait for capital gain from the future sale of property without having to input the tax income in their cash flow.
Leased property can be used to cut down taxes as a source of income.
A 50% reduction in the property tax rate is given to land and buildings used for non-profit activities, including social and educational activities, and healthcare services.