Real Estate 2020

Last Updated April 14, 2020

Indonesia

Law and Practice

Authors



Makarim & Taira S is one of Indonesia’s leading full-service law firms and has a proven track record of successfully navigating Indonesia's complex and fast-changing environment. The firm covers both the traditional practice areas of corporate services, banking, finance, foreign investment, litigation, infrastructure and employment, as well as emerging growth areas such as antitrust/competition, power and energy, intellectual property, TMT and fintech. The firm has been involved in all aspects of business in Indonesia and has built an extensive global network with law firms and agencies across the globe.

The main sources of real estate regulations in Indonesia are:

  • Law No 5 of 1960 on the Basic Agrarian Law (Basic Agrarian Law);
  • Government Regulation No 40 of 1996 on The Right to Cultivate, Right to Build and Right to Use Land (GR 40/1996);
  • Government Regulation No 24 of 1997 on Land Registration (GR 24/1997);
  • Government Regulation No 103 of 2015 on the Ownership of Houses or Residential Units by Foreigners Domiciled in Indonesia (GR 103/2015);
  • Regulation of the Minister of Agrarian Affairs and Zoning/Head of the National Land Agency No 7 of 2019 on the Second Amendment to Regulation of the Minister of Agrarian Affairs and Zoning/Head of the National Land Agency No 3 of 1997 on the Implementing Regulation for Government Regulation No 24 of 1997 on Land Registration (BPN Reg 7/2019);
  • Regulation of the Minister of Agrarian Affairs and Zoning/Head of the National Land Agency No 17 of 2019 on Location Permits (BPN Reg 17/2019);
  • Law No 26 of 2007 on Spatial Management (Law 26/2007);
  • Law No 32 of 2009 on the Protection and Management of the Environment (Environmental Law);
  • Regulation of the Ministry of Public Works and Housing No 06/PRT/M/2007 on General Guidelines for Buildings and Neighbourhoods (PerMenPU 06/2007);
  • Law No 28 of 2002 on Buildings (Building Law);
  • Law No 1 of 2011 on Housing and Residential Areas (Housing Law);
  • Law No 20 of 2011 on Condominiums (Condominium Law);
  • Law No 2 of 2012 on the Procurement of Land for Development for the Public Interest (Law 2/2012);
  • Articles 1548 – 1580 of the Indonesian Commercial Code (ICC);
  • Government Regulation No 44 of 1994 on the Occupancy of Houses by Non-Owners (GR 44/1994);
  • Regulation of the Ministry of Finance No 57/PMK.06/2016 on the Procedures for Leasing State-Owned Goods (MOF Reg 57/2016);
  • Presidential Regulation No 20 of 2015 on the National Land Office (PR 20/2015);
  • Law No 2 of 2017 on Construction Services (Construction Law);
  • Government Regulation No 35 of 2005 on the Implementation of Law No 28 of 2002 on Buildings (GR 36/2005), PerMenPU 06/2007;
  • Regulation of the Ministry of Public Works and Housing No 2 of 2020 on the Second Amendment to Regulation of the Ministry of Public Works and Housing No 05/PRT/M/2016 on the Building Construction Permits;
  • Regulation of the Ministry of Public Works and Housing No 3 of 2020 on the Amendment to Regulation of the Ministry of Public Works and Housing No 27/PRT/M/2018 on Certificates of Functional Worthiness for Buildings (PerMenPU 3/2020);
  • Law No 4 of 1996 on Mortgages (Mortgage Law);
  • Regulation of the Minister of Agrarian Affairs and Zoning/Head of the National Land Agency No 9 of 2019 on the Electronic Integration of Mortgage Services (BPN Reg 9/2019).

According a report from Bank Indonesia (the Central Bank), the real estate market grew slightly in 2019, except for the apartment market which shrank minimally. This positive trend was in spite of the presidential and general elections in April 2019, and the growth was mainly driven by the backlog in supplying to the need for housing, particularly in the middle to low income segment, while the decline in the apartment market was attributed to macro-economic conditions, licensing issues, tax and banking regulations.

The government’s effort to continue expanding infrastructure also made positive contributions to the property sector due to the development of the Mass Rapid Transit (MRT), Light Rail Transit (LRT) and road access (toll roads and non-toll roads). As a consequence, several large developers began to focus on transit-oriented development and entered into co-operation with PT Kereta Api Indonesia to develop areas near railway stations for residential or commercial use.

From the commercial aspect, the growth in commercial property in Indonesia was increasing, although competition for commercial office buildings or retail spaces was getting tighter.

Significant residential property deals in 2019 were Toba Lake Villas in East Jakarta by PT Astra Modern Land, Citraland Surabaya in Surabaya, East Java by Citraland, SQ RES in South Jakarta by PT Intiland development Tbk, and Crown Group development in North Jakarta. Commercial deals included Menara Astra by Astra Property and Modern Cikande Industrial Estate by PT Modernland Realty Tbk.

The Indonesian real estate market was expected to show a positive trend in 2020 due to the steady increase in property prices since mid-2018 and Bank Indonesia’s lowering of the interest rate in 2020. However, this may change due to the COVID-19 pandemic and the resulting sharp decline in the stock exchange composite index.

Disruptive technologies are not yet a significant trend in Indonesia in the real property sector, partly due to government issued regulations prohibiting the use of crypto currency as a method of payment, and due to requirements for banks with regard to providing financing for developers and property buyers. 

For example, Bank Indonesia imposes a limit on electronic money with a monthly transaction limit of IDR20 million, and although the Indonesian Financial Services Authority (Otoritas Jasa Keuangan or OJK) issued a regulation allowing peer-to-peer lending institutions to provide loans of up to IDR2 billion, the typical ceiling for lending to consumers is IDR50 million. These are lower than the value of typical real estate transactions in Indonesia for the purchase of real property.

The government proposed a new land law in early 2019. However, discussion of the draft bill by the House of Representatives has been postponed. The government is now preparing an omnibus law, releasing a draft in February 2020. Aimed at creating employment opportunities, there are also several provisions on agrarian matters that are aimed at clearing the bottlenecks that are hindering investment in Indonesia. 

Specific to real estate, the omnibus law will allow foreign citizens, holding the regulation-required permits, to own apartment units with strata title. The draft law also requires the central government to establish a land bank agency to manage land in order to ensure the availability of land for public and social interest and for development.

As of early March 2020, discussions in parliament remain in early stages.

For certificated land, the following types of land title are recognised in Indonesia.

Right to Own outright (Hak Milik)

Hak Milik has no time limit and may only be held by Indonesian citizens (ie, individuals) and by special legal entities appointed by the government (eg, government banks, co-operatives and religious or social bodies).

Right to Cultivate (Hak Guna Usaha – HGU)

HGU is issued to cultivate State land for agriculture and plantations. HGU may be held by Indonesian citizens or Indonesian legal entities domiciled in Indonesia (including foreign investment companies). HGU also includes the right to construct buildings for certain purposes related to the principal activity to be engaged in on the land. HGU may be granted for a maximum term of 25 years (up to 35 years for companies that require a longer term), extendable for a further 25 years, then renewable when the extension expires.

Right to Build (Hak Guna Bangunan – HGB)

An HGB is issued to construct and possess a structure on State land or on land held under Hak Milik or Hak Pengelolaan (see below on “Hak Pengelolaan”/HPL). An HGB may be held by Indonesian citizens or Indonesian legal entities domiciled in Indonesia (including foreign investment companies). An HGB is granted for a maximum term of 30 years, extendable for a further term of up to 20 years, then renewable when the extension expires.

Right to Use (Hak Pakai)

Hak Pakai is a right to use land for a certain term for a specific purpose or business. It can be granted over State-owned land, HPL or Hak Milik land. Hak Pakai may be held by Indonesian citizens, legal entities established and domiciled in Indonesia (including foreign investment companies), government institutions, religious/social organisations, foreign citizens domiciled in Indonesia, foreign legal entities with representatives in Indonesia, and representatives of foreign countries or international agencies. Hak Pakai is granted for a maximum term of 25 years, then extendable for up to 20 years, then renewable when the extension expires. Hak Pakai can be granted for an undetermined term for specific purposes. 

Hak Pengelolaan/HPL (Right to Manage)

Thisis not covered in the Basic Agrarian Law. It is not a right to manage and determine the use of land and usually granted to a state-owned company or agency for an indefinite period for certain development purposes (eg industry, or ports, tourism, commercial areas, etc). HPL holders may lease the land to third parties. Under a long term lease agreement (20 to 30 years), lessees may apply for HGB or Hak Pakai land title over HPL.

Right of Ownership over Apartment Units (Hak Milik atas Satuan Rumah Susun, or HMSRS)

An HMSRS, or strata title, is issued for the ownership of a unit in a condominium.

Lease (Hak Sewa)

Hak Sewa is granted to a lessee to construct and use a building on the land, in return for the payment of rent to the landowner.

Adat Land

Indonesia also recognises adat land that can best be described as land which belongs to a local community on a collective basis, but title to parts of the land may be given to individual members of the community. For adat land to be recognised, there must be a local community which still maintain its customs and is registered with the Ministry of Home Affairs. Adat rules vary from one community to another.

Adat land can be acquired. The process generally requires the owner of the adat land to relinquish title to the State (under a deed of relinquishment of title) for the benefit of the buyer in return of the granting of compensation in the form of replacement land, seeds and other non-monetary compensation and the buyer will then apply for a registered title under the Basic Agrarian Law.

The laws applicable to transfer of title are the Basic Agrarian Law and GR 24/1997 and to transfer of title to apartment units, the Condominium Law. No specific laws apply to transfer of title to specific types of real estate.

Land titles are transferred upon the signing of a land sale and purchase deed (Akta Jual Beli or AJB) if the buyer is eligible (eg, a Hak Milik title cannot be held by a company). If the buyer cannot own the title in the land certificate, the title is transferred indirectly by signing a deed of relinquishment of title (Akta Pelepasan Hak or APH). The landowner/seller relinquishes its land title to the State so the buyer can apply for a new land title.

It is now common for the seller to first convert its ownership title to the land title which the buyer may hold (eg, from Hak Milik to HGB) then sign the AJB to expedite the transfer of the land title.

An AJB or APH must be drawn up in Indonesian by an authorised Land Deed Officer (Pejabat Pembuat Akta Tanah or PPAT) with jurisdiction over the location of the land being transferred. After the land transfer deed has been signed, the PPAT will arrange for the registration of the buyer’s title, or application for the new land title (in the case of an APH), to the relevant office of the National Land Agency (Badan Pertanahan Nasional or BPN).

Government Regulation 24/1997 requires plots of land under Hak Milik, HGU, HGB, Hak Pakai, Hak Pengelolaan, land under a religious grant (wakaf), to be collateralised under a mortgage and state land be registered with BPN.

Title insurance is not yet common in Indonesia, although some insurers now offer cover for risks associated with land acquisition.

A buyer in an Indonesian land transaction is always recommended to engage local legal counsel to conduct land due diligence.

Land Title Search

This is necessary to ensure that the seller is the legal owner of the land and has the legal right to transfer the land title. It also checks for any mortgage or claim registered over the land. The documents involved are the land certificates. Through the local counsel, the buyer can ask the relevant BPN office to issue a land registration statement (Surat Keterangan Pendaftaran Tanah or SKPT) as evidence of the title search. Otherwise, the evidence is only an annotation stating that a title search was conducted on a certain date.

Licences

The licences associated with the land relevant to the buyer must be checked. The review usually covers the term of the licences, any obligations imposed (eg, reporting obligations, transfer restrictions, compliance with the requirements under the land utilisation permit (eg, a Surat Izin Penunjukan Penggunaan Tanah or SIPPT in DKI Jakarta), or provision of public facilities or social facilities imposed by the regional government).

Agreements

The buyer is recommended to review agreements entered into by the seller related to the land (which may include a lease agreement, loan agreement and the related security over the land). The buyer also needs to review the agreements to see if they impose any obligations that may restrict the transaction.

Information About the Seller

The buyer is recommended to review the seller’s Articles of Association and other corporate documents or corporate licenses relevant to the transaction, if the seller is a business entity. This will enable the buyer to identify the authorised representative of the seller in the relevant transaction and the corporate authority required. If the seller is an individual, the buyer needs to check their marital status because assets such as land obtained during a marriage are joint property and the consent of the spouse is required to dispose of their jointly owned land. If the land is sold by the heirs, the inheritance statement from the local authority or court ruling must also be reviewed.

Other Documents/Requirements

Other documents may include evidence of payment of land and building tax (Pajak Bumi dan Bangunan or PBB) for the past ten years and utility bills for the past three months, ensuring there are no arrears. The buyer must ensure the seller is paying capital gain tax by deducting 2.5% capital gain tax and depositing it in the Tax Office account. Without capital gain tax, the PPAT cannot draw up the transfer deed and the buyer cannot register the transfer of title. 

The buyer should check the zoning of the land to ensure intended developments are possible. The zoning search should cover the building coverage ratio (KDB) or the total land area that can be built on (usually 60% to 70%) and the floor coverage ratio (KLB). A zoning search will also reveal whether the land is earmarked for a government development (eg, MRT, road expansion or toll road).

If the land certificate was issued more than ten years ago, or has no plot identification number (Nomor Identifikasi Bidang or NIB), the land area should be measured again.

Under the ICC, a buyer of land acting in good faith is protected by law. Under a circular issued by the Supreme Court in 2016, to be categorised as a buyer acting in good faith, the buyer must perform due diligence on the land that will be bought. Only then can the buyer be protected by law.

Indonesia applies the freedom of contract principle under the ICC and, therefore, the parties are free to include any provisions they wish, but must include those which are mandatory under Indonesian law. However, a sale and purchase deed must be in the standard form issued by the BPN office and some offices do not allow additional provisions. The representations and warranties in the standard form are limited to the following:

  • the seller warrants that the object of the sale is free from any claims and/or seizures, is not collateralised as security for an unregistered loan and is free from any other liens; and
  • the buyer represents that following the land acquisition, its ownership of the land does not exceed the limit for the possession of land under the regulations.

However, buyers, especially sophisticated buyers, often request additional representations and presentations such as:

  • if the seller is an entity, that the establishment of the company is legal, the entity has the authority to own and transfer the land, obtained all the consents and approvals required to sell the land and confirmation that the sale of the land does not violate its constitutional documents, approvals, licences or any contract entered into by the seller;
  • the seller paid all the tax due on the land before the transfer of title;
  • confirmation the land is free and clear from any security rights, mortgages, claims or liens;
  • confirmation there are no ongoing legal actions or proceedings against the seller that may prevent the sale of the land;
  • if the seller is an individual, that the seller has obtained the required spousal consent (if applicable), and if the land was obtained through inheritance, there is no claim from other heirs;
  • confirmation that the land is free from any toxic waste.

Regarding sophisticated sellers, the following additional representations and warranties may be requested from buyers:

  • if the buyer is an entity, that the establishment of the company is legal, that the entity has the authority required to acquire the land, that the entity has obtained all the consents and approvals required to acquire the land, confirmation that the procurement of the land does not violate its constitutional documents, approvals, licenses, or any contracts entered into by the seller;
  • confirmation of the ability of the buyer to pay the purchase price of the land;
  • confirmation that there is no ongoing legal action or proceedings against the buyer that may prevent the sale of the land to the buyer;
  • if the buyer is an individual: the buyer has obtained the required spousal consent (if applicable).

No specific remedies are available to the buyer against the seller for any misrepresentation. However, under the ICC, if a party suffers a loss due to breach of contract, it can submit a claim to the court for damages or for the cancellation of the contract. Under the freedom of contract principle, the buyer and the seller are free to agree on remedies in the event of any misrepresentation by the seller.

The important areas of law for an investor to consider when purchasing real estate are the following:

The Investment Environment

Before purchasing real estate, if the purchaser is a foreign entity, it is important to identify all the regulatory requirements for its investment (eg, any foreign share ownership restriction, the minimum capital requirement, any restriction on the activities that a foreign entity or foreign investment company (PT PMA) may engage in).

Tax

Before purchasing real estate, investors need to identify all the taxes that can be imposed on them related to the ownership of real estate, as well the procedures for and timing of the payment of the taxes. On transfer of land, the land acquisition tax (Bea Perolehan Hak atas Tanah dan Bangunan or BPHTB) is to be paid by the buyer and income tax on the transfer of rights are to be paid by the seller.

The Land’s Legal Status

Before purchasing the land, the investor must identify the legal status of the land, which may include:

  • the ownership of the land;
  • the validity of the title certificate and other documents related to the ownership of the land;
  • the zoning and permitted use of the land;
  • the location of the land; and
  • the technical requirements imposed by the local government for the development of real estate (such as the relevant business licence, a location permit, compliance with the requirement to provide public facilities and social facilities, compliance with the requirements for the sale of housing or apartment units).

Under Indonesian law, liability for a violation of the Environmental Law and regulations lies with the party that is causing harm. The following sanctions can be imposed:

  • Administrative sanctions: a written reprimand, coercive measures taken by the government, a suspension of the environmental license or the revocation of the environmental licence.
  • Criminal sanctions: may be imposed for wilfully engaging in activities that cause the quality standards that apply to the ambient air, water, sea water or environmental damage level to be exceeded or changed. If the environmental crime is committed by or on behalf of a business entity, the criminal charge and the sanction is imposed whoever gave the order to commit the crime or was acting as the executive when the crime was committed.
  • Civil liability: born by those responsible for the business or activity causing pollution or damaging the environment which causes others to suffer losses or harms the environment. They must pay compensation or take certain actions.

However, if it is not known who caused the environmental pollution, the owner or occupier of the land may be held liable. It is therefore advisable to conduct soil tests, especially before the acquisition of a site where the seller engages in industrial activities which may produce contaminants, and to include representations and warranties on environmental pollution in a side agreement with the seller.

Ascertaining the zoning and permitted use of land can be achieved through a zoning search, which covers checking or reviewing the zoning regulations or obtaining a confirmation from. It is recommended that searches are conducted at the regional or municipal planning office where the land is located. The buyer will also need a Location Permit (Izin Lokasi) (subject to requirements under BPN Reg 17/2019), one of the requirements for which is an official document providing information about the land (Fatwa Tata Guna Tanah) issued by the local BPN office.

Entering into development agreements with relevant public authorities to facilitate a project is possible, provided the project is required for the public interest. Most development agreements  are in the form of a co-operation agreement or a public private partnership. Agreements with developers for real estate projects are usually in the form of a Kerjasama Operasi (Co-operation Agreement) or BOT (Build, Operate and Transfer).

If the development agreement covers participation by the local/regional government in developing a real estate project, the requirements/approvals required must be assessed carefully; even more so if, under the co-operation agreement, the local/regional government provides assets for the project.

Under Law 2/2012 the government can only procure land for the “public interest”, defined as the interest of the people, the state and society that the government must act in and the land must be used for the maximum prosperity of the people. The procedure for the government to take over land under Law 2/2012, is the following:

  • once the location has been designated for development for the public interest, the government agency that needs the land submits an application for the procurement of the land to BPN;BPN appoints a property valuer to conduct a valuation of the land to be procured;
  • following the valuation, the valuer determines the amount of compensation to be paid for the land and submits it to BPN;
  • BPN negotiates to reach an agreement with the landowner on the form or the amount of the compensation;
  • if the landowner does not accept the compensation, the owner can submit its objection to the local District Court;
  • if either party does not accept the ruling of the District Court it can submit an appeal to the Supreme Court, and its ruling, once it is final and binding (berkekuatan hukum tetap) is the legal basis for the payment of the compensation; and
  • the compensation must be paid directly to the landowner and, in return, the landowner must relinquish the land title and submit the evidence of its ownership of the land to the relevant government agency through BPN. 

If the landowner objects to the determination of the location, it can submit a lawsuit to the administrative court. If either party does not accept the ruling of the administrative court, it can submit an appeal to the Supreme Court. The court ruling is then the legal basis for procuring or not procuring the land for the public interest.

Sales of Real Estate Through Asset Deal

The asset is transferred under a sale and purchase of land with an entity or individual. The taxes, charges and fees to be paid for the sale and purchase of the land are the following:

  • PPAT’s fee for preparing and processing the AJB or APH (up to 1% of the purchase price);
  • if the area of the land must be measured, the measurement fee calculated using the formula under Government Regulation No 128 of 2015 on Non-Tax State Revenue Tariffs Applicable in the Ministry of Agrarian Affairs and Spatial Planning/The National Land Agency (GR 128/2015);
  • if the land needs to be investigated by the Land Investigation Committee (Committee A), the investigation fee calculated using the formula under GR 128/2015;
  • if the land needs to be investigated by the Land Investigation Committee (Committee B), the investigation fee calculated using the formula under GR 128/2015;
  • the tariff for the approval of the extension of the land right for HGU, HGB or Hak Pakai or renewal of the land right for HGU, HGB or Hak Pakai, calculated using the formula under GR 128/2015;
  • the Tariff for the registration of the transfer of title to the land for an individual or legal entity calculated using the formula under GR 128/2015;
  • BPHTB amounting to 5% of the taxable tax object acquisition value (Nilai Perolehan Obyek Pajak Kena Pajak) is to be paid by the buyer;
  • income tax at 2.5% of the total gross value of the transfer of the right over the land is to be paid by the seller;
  • 10% VAT of the purchase price (applicable if the seller is a company which is a taxable entrepreneur (Pengusaha Kena Pajak); 
  • the fee for the registration of the title and issuance of the land book and certificate is IDR50,000 per title; and
  • stamp duty on each agreement or document of IDR6,000.

The taxes due are paid by the buyer and the seller as applicable. It is normal for the buyer to bear the costs and fees of the sale and purchase of the land, although in some cases, the buyer and seller may agree to share the PPAT’s fee.

For real estate transactions, an exemption from VAT are available on the sale of a simple house (rumah sederhana) or very simple house (rumah sangat sederhana) with a total area of not more than 36 square metres, and simple apartment unit (rumah susun sederhana) with a total area of 21 square metres up to 36 square metres.

BPHTB is exempt for:

  • a diplomatic representative or consulate;
  • the State for a government function or development for the public interest;
  • an international agency or body determined by the Ministry of Finance;
  • or a transfer to a religious institution to be used as land for worship.

BPHTB is also exempt for a land transaction if the Untaxable Tax Object Acquisition Value (Nilai Perolehan Obyek Pajak Tidak Kena Pajak or NPOPTKP) is not more than IDR60 million.

An exemption from the income tax to be paid by the seller can be granted:

  • to an individual whose income is below the Untaxable Income (Penghasilan Tidak Kena Pajak or PTKP) for a transfer of land with a gross transaction value of less than IDR60 million;
  • for a grant by an individual to a family member, religious entity, educational entity, social entity, not for commercial purposes;
  • for a transfer of land in conjunction with a merger, consolidation or expansion of a business if the transaction value is determined by the Ministry of Finance based on the book value;
  • to an individual or an entity for transferring land to implement a build-operate-transfer agreement or for the utilisation of State land/or buildings;
  • to an individual or an entity not categorised as an Indonesian tax subject.

The Sale of Real Estate Through a Share Deal

A share deal is not a transaction involving a transfer of title to land from one party to another as the shares to be sold would have to be in a company owning real property. In general, without taking into account any specific transaction structure, the taxes or charges on a share deal are usually the following:

  • a final tax of 0.1% of the transaction value on a sale of shares on the Indonesian Stock Exchange; if the seller is a founding shareholder, an additional income tax of 0.5% of the company’s share value at the closing of the stock exchange at the end of 1996 (since 1 January 1997, the value of the shares is the value at the initial public offering);
  • if the seller is a foreign shareholder in a PT PMA, capital gains tax of 5% applies, depending on the tax treaty;
  • the notary’s fee for processing the notarial deed stating the company’s approval for the transfer of the shares and the fee for preparing the share sale and purchase deed if the sale of the shares constitutes a change of control;
  • stamp duty on each agreement or document of IDR6,000.

In addition, subject to relevant tax treaty, 20% withholding tax is payable on dividends paid to foreign shareholders.

The Basic Agrarian Law only allows foreigners who are domiciled in Indonesia to hold a Hak Pakai land title. Further, GR 103/2015 only allows foreigners holding a stay permit to own a house or apartment unit under a Hak Pakai title.

A PT PMA, because it is an Indonesian company, can acquire real estate under a HGU, HGB or Hak Pakai title.

Financing for commercial real estate, for either large real estate portfolios or companies holding real estate is possible through the following.

Regarding loans from third parties, real estate companies in Indonesia may obtain funding from third parties, including banks and international lenders. There are no specific statutory regulations on Indonesian banks providing financing to real estate companies. However, OJK Regulation No 40/POJK.03/2019 on the Valuation of the Quality of Assets of Commercial Banks (OJK Regulation 40/2019) requires Indonesian banks to assess the borrower’s business prospects, performance and ability to pay, and the assessment of its business prospects includes an assessment of:

  • its potential for growth;
  • the condition of the market and the position of the borrower compared to the competition;
  • the quality of the borrower’s management and any employment issues;
  • the support available from the business group or affiliates; and
  • the measures the debtor takes to preserve the environment. 

Therefore, real estate companies that do not meet the requirements for banks to maintain the quality of their assets under OJK Regulation 40/2019 find it difficult to secure financing from Indonesian banks.

For internal funding, real estate companies can also use their own capital (eg, paid-up capital or retained earnings).

Listing on the Indonesia Stock Exchange (Bursa Efek Indonesia or IDX) allows many real estate companies in Indonesia to obtain funding by going public and listing some of their shares on the IDX.

In Indonesia, the main form of security interest over land is a mortgage (Hak Tanggungan). The related land titles are Hak Milik, HGB, HGU, Hak Pakai over State land and HMSRS over HM, HGB or Hak Pakai land, and must be drawn up in notarial deed form and registered with the BPN office where the land is located. A mortgage certificate confirming the creditor(s) as a mortgage holder will be issued by the BPN office upon completion of its registration and the mortgage gives the holder (creditor) priority in the repayment of the loan.

In addition to a Hak Tanggungan, Law No 42 of 1999 on Fiduciary Security (Fiducia Law) allows a building constructed on a plot of land to be owned by a different party from the landowner but cannot be encumbered under Hak Tanggungan as the object of fiduciary security. This is because Indonesian law adopts the principle of horizontal separation, under which the owner of the building on a plot of land can be different from the owner of that plot of land.

There is no restriction on granting security over real estate or repayment under a security or loan agreement to foreign lenders. Under Indonesian law, a holder of security may not own the secured assets in the event of a default on the secured loan agreement. To execute or enforce a mortgage, the holder can sell the security object in a private sale if it will secure a better price or at a public auction under a writ of execution.

The fees for the granting and enforcement of security over real estate are the following:

  • the PPAT’s fee for preparing a mortgage deed and registering the mortgage deed with the relevant BPN office, which differs from one PPAT to another but under the regulation it should not be more than 1% of the transaction value stated in the deed; if the amount secured is substantial, the PPAT’s fee can be negotiated;
  • stamp duty of IDR6,000 for the execution of a mortgage deed;
  • the fee for land certificate verification to be paid to the relevant land office which depends on the number of land certificates to be verified; and
  • the fee for registering a mortgage, known as Non-Tax State Revenue (Penerimaan Negara Bukan Pajak or PNBP) and is set under a Government Regulation which may be amended from time to time; the PNBP depends on the amount secured by the mortgage (the mortgage value), up to IDR50 million (approximately USD3,500) for a secured value exceeding IDR1 trillion (approximately USD69,700,000).

Under Indonesian law, security is an accessory to an underlying agreement which, in this case, is a loan or credit agreement. Therefore, unless the parties first sign a loan or credit agreement, no security can be granted. If the property belongs to a limited liability company, the company acts as the guarantor and, therefore, it must provide a “corporate benefit”, which must be included in the corporate approval documents related to the granting of the security. If this is missing, the security will not necessarily be void against the grantor but the grantor can use the fact to invalidate the security upon a request for a writ of execution to enforce the security by the lender.

A mortgage certificate which is issued by the relevant BPN office has conferred to it an executorial title under which the mortgage has the same power as a final and binding court ruling. Given this, a mortgage is not enforced through an ordinary civil procedure but by serving a writ of execution from the court.

The Mortgage Law provides two alternative mortgage execution methods: a public auction or a private sale.

Auction houses will ask for the writ of execution from the court. A ruling of the Supreme Court in 1986 states that a sale at auction requires the consent of the Chairman of the Court to avoid the misuse of authority, a reason why auction houses refuse to sell secured assets under executory titles (parate execution).

Another difficulty concerning parate execution is that the mortgage holder will not be able to benefit from the protection of the authorities when enforcing the mortgage unless the sale is conducted under a court order. For example, if the mortgaged object is in the possession of a third party who refuse to surrender the mortgaged object for sale at public auction, the mortgage holder can ask for the court’s assistance (often accompanied by the police) to force the third party to release the secured asset. Otherwise, a separate lawsuit must be filed.

In practice, a clear procedure must be followed to foreclose and subsequently sell real security in Indonesia. First, the demand for payment letters; upon a default by the borrower, the creditor is normally required to serve the borrower three warnings/demand of payment letters. The normal practice is to deliver one letter every week. Following this, a court order to foreclose the secured property must be obtained using the following procedure:

  • the creditor submits a petition to the district court seeking enforcement of the real security;
  • approximately four to six weeks after the date of the creditor’s petition, the district court issues the (first) Penetapan (aanmaning), which is a court order to the borrower to pay what it owes according to the creditor’s request;
  • if no payment is made, the creditor petitions the court for a Penetapan Sita Eksekusi (an execution order) which orders the confiscation of the assets of the borrower specified by the creditor. A Penetapan Sita Eksekusi is normally issued by the court within one week of receipt of the petition from the creditor alleging that the debt was not paid within eight days of the payment date specified in the aanmaning; it is at this point that the borrower normally objects; if the borrower does not object, the court will order the attachment of the assets of the borrower specified by the creditor which assets are then sold at public auction; or
  • if the borrower objects, there are two possibilities:
    1. The court will postpone the execution of the Penetapan Sita Eksekusi and the auction. Court hearings will then take place to review the merits of the borrower’s objections. These court proceedings can take about six months. If the creditor wins, the Penetapan Sita Eksekusi will be withdrawn, but the creditor can appeal to the court of appeal and later the Supreme Court, which takes two and a half to three years; and
    2. The court will not postpone the execution of the Penetapan Sita Eksekusi, and the sale of the assets will take place. The court hearings will continue. This can go all the way to an appeal to the Supreme Court. If the borrower wins on appeal, the creditor will have to pay damages for the auction of the assets, etc.

After this comes the attachment of the secured property by the bailiff; after the issuance of the Penetapan Sita Eksekusi, the bailiff places an attachment on the secured property. Finally, there is a public auction; two weeks after the announcement is published in a local newspaper the public auctioneer will hold the public auction of the secured property.

Regarding fiduciary security, a recent ruling of the Constitutional Court now requires fiduciary grantees (ie creditors) to obtain an execution order from the District Court if fiduciary grantors (ie, borrowers) are reluctant to release the fiduciary object. Moreover, if there is no agreement on what constitutes a default, the execution is ultimately for the District Court to decide on, specifically whether a default has occurred or not. Therefore, fiduciary grantees are now no longer at liberty to immediately execute their fiduciary objects.

In this case, the Constitutional Court has taken the opposite view from that under the previous procedure by requiring court intervention. This would not be a serious problem if Indonesia had an efficient court system, but unfortunately, Indonesia's court system remains plagued by unpredictability, high costs and inefficiency.

Although how this ruling will be applied in practice is yet to be seen, it must be acknowledged that it is a step backward as it makes it more difficult for creditors to enforce their rights over secured property. An even bigger issue is whether the courts will apply the same principles to other types of security (eg, Hak Tanggungan), pledges, hypothec, etc) in the future.

Secured debt means that the lender holding the security has priority over other creditors from the sale of the secured object. A secured lender can agree with a new creditor that, despite having a priority right, the secured lender will subordinate its loan to the new lender. However, in the event of the bankruptcy of the borrower, such an agreement is not enforceable on the receiver or other creditors as it is a commercial agreement between the parties.

Under Indonesian law, it is the party causing harm to the environment which is liable, but occasionally, international lenders have been sued in Indonesian courts or offshore for financing a project which has harmed the environment. Article 11 of OJK Regulation No 51/POJK.03/2017, requires among others, banks to submit their Action Plan for Sustainable Financing and Sustainability Report to the OJK.

NGOs can use this requirement to claim that lenders must ensure that borrowers comply with the environment requirements. However, creditors can argue that they are satisfying this obligation if they impose such a requirement under their loan documents. As yet, no creditor has been held liable for financing a borrower who caused pollution or any other harm to the environment.

A mortgage is one of the security rights available under Indonesian law and has the following characteristics:

  • it can only cover specific property or goods of a borrower;
  • it can be exercised against any party;
  • it generally follows the encumbered goods to whoever the goods may thereafter belong; and
  • the beneficiary has a preferential right over other creditors that cannot be revoked by reason of the bankruptcy or liquidation of the party granting security.

Therefore, a security created should not be affected by the insolvency of the borrower. However, under Law No 37 of 2004 on Bankruptcy and Suspension of Debt Repayment (Bankruptcy Law), creditors holding security rights must wait for 90 days before enforcing the security in the event of the bankruptcy of the borrower in order to give the borrower and opportunity to restructure its debts.

In practice, it is uncommon for the London Interbank Offered Rate (LIBOR) to apply to Indonesian contracts. However, if the parties to a contract agree to apply LIBOR, the contract should include a clause on changing the interest rate and allowing the bank to substitute a new rate to replace the LIBOR based on its calculations. In Indonesia, it is more common to use the JIBOR (Jakarta Interbank Offered Rate).

The Basic Agrarian Law requires regional governments in Indonesia to prepare a plan for the utilisation of land, with further details provided in Law 26/2007. Zoning in Indonesia comprises national zoning, provincial zoning and regency/municipal zoning.

Under Law 26/2007, regencies and municipalities determine the zoning under a regional regulation (Peraturan Daerah or Perda) which refers to the Central Government’s Zoning Regulation. The regional zoning regulation issued by the regency or municipality serves as the basis for the issuance of permits related to the development and administration of land.

The Ministry of Forestry and the Environment also has the authority to issue zoning regulations or determine the intended use of space that is likely to affect rural areas. In addition, the Ministry of Marine Affairs and Fisheries has the authority to issue zoning regulations or determine the intended use of coastal areas, small islands, and fishing zone waters.

In Indonesia, the construction of buildings must adhere to the technical requirements set by the government. The Building Law and GR 36/2005 impose certain technical and administrative requirements for buildings and regional governments must determine the further technical and administrative requirements for buildings.

The government usually determines the following factors (under PerMenPU 06/2007) to control the construction of new buildings, or to some extent, the major refurbishment or demolition of buildings for reconstruction:

  • KDB (Koefisien Dasar Bangunan or Building Base Coverage): the total floor area of the building that can be constructed as a percentage of the area of the land owned;
  • KLB (Koefisien Lantai Bangunan or Building Floor Coverage): the total floor area that can be constructed compared to the total area of the land owned;
  • KDH (Koefisien Dasar Hijau or Green Base Coverage): the total open space area outside the building designated a green area as a percentage of the total area of the land owned; and
  • KTB (Koefisien Tapak Besmen or Basement Floor Coverage): the area of the basement as a percentage of the total area of the land owned.

The government has also issued several Indonesian National Standards (Standar Nasional Indonesia or SNI) for houses and buildings (eg, SNI 1727:2012 on the Procedures for Earthquake Survivability Design for Buildings and Non-buildings, SNI 03-6197-2000 on the Procedures for Designing Structures to Prevent Fire Hazards in Houses and Buildings, SNI 03-2847-1992 on the Procedures for Calculating Concrete Structures for Buildings, etc), and several technical building construction guidance regulations (eg, Regulation of the Minister of Public Works No 05/PRT/M/2007 on Technical Guidance for the Construction of High Rise Simple Storeyed Dwellings, Regulation of the Minister of Public Works No 29/PRT/M/2006 on Guidance for the Technical Requirements for Buildings).

Regional governments regulate the development and designated use of individual parcels of real estate based on the KDB, KLB, KDH, KTB and other building standards described in 4.2 Legislative and Government Controls Applicable to Design, Appearance and Method of Construction.

The following licences are required before a party can construct buildings or a real estate project: a Location Permit (Izin Lokasi) to acquire land for its intended use; a Land Utilisation Permit (Surat Izin Penunjukan dan Penggunaan Tanah or SIPPT if in DKI Jakarta); a Building Permit (Izin Mendirikan Bangunan or IMB); a Certificate of Functional Worthiness (Sertifikat Laik Fungsi or SLF); and an Environmental Licence (Izin Lingkungan).

The owner of a building must apply for certain permits, technical recommendations or approvals to perform any major refurbishment, subject to relevant regional regulations and policies. For a major refurbishment or to demolish a building for reconstruction, the licences for the construction of a new building are required. For the major refurbishment of a building that is more than 50 years old, in certain areas, the outside appearance cannot be changed.

No regulation allows a third party to participate in a development project without approval from the project developer. However, third parties can sue if a project violates the zoning or in the event of construction failure and they suffer harm or losses. As a part of the Environmental Licensing process, the project owner must involve the surrounding communities that will be affected by the project through social awareness events and public consultations, and their input must be taken into consideration.

If the intended use of the land is not in line with the designated zoning, a landowner may file an application to the relevant regional government to amend the zoning so that the land can be used as intended. However, the process is complicated because to change the zoning the regional regulations must be amended, and requires approval from the local parliament.

Under the prevailing regulations, zoning is only usually reviewed once every five years. It can be reviewed more than once every five years if the environment has changed strategically because of a large scale natural disaster declared in a regulation, changes to the national territory declared under a law, or changes to the borders of the region declared under a law.

For the zoning to be reviewed one of the following is required: a decision of the Minister of Agrarian Affairs and Spatial Planning for the zoning of an island/islands, or strategic national zoning; a decision of the governor for provincial zoning and strategic provincial zoning; or a decision of the regent/mayor for regency/municipality zoning, strategic regency/municipality zoning or the details of the zoning. This will be followed by an order to review the zoning, the review, and the recommendation follow up on the result of the review.

If the zoning needs to be changed for a strategic national project which has not yet been accommodated in the zoning or the details of the zoning, the permit to use the location can be obtained with a recommendation from the Minister of Agrarian Affairs and Spatial Planning (zoning), if the strategic national project is listed in Government Regulation No 13 of 2017 on the Amendment to Government Regulation No 26 of 2008 on The National Spatial (zoning) Plan.

This depends on the scale of the project. For a small-scale project, it is sufficient just to agree on a subscription with the local utility supplier. For a large-scale project, a power purchase agreement is usually entered into with the State Owned Electricity Company (PT Perusahaan Listrik Negara or PLN) and similarly, an agreement for the supply of other utilities is entered into with other (regional) State Owned Utility Companies.

If the agreement covers the participation of the local/regional government in a co-operation for developing a real estate project, care must be taken to make sure that the requirements/approvals are obtained; even more so if the local/regional government provides any of its assets.

This depends on the regional government regulations and policies. GR 36/2005 delegates authority to monitor and control the plans for buildings and the environment to the regional government.

The government can also restrict the development and utilisation of land by imposing the criminal sanctions available under Law 26/2007, which include imprisonments or fines for not complying with the designated zoning, for utilising space not in accordance with the relevant license and for not complying with the requirements under the licence to utilise the space.

Indonesian domestic investors that can hold real estate assets can be:

  • a non-legal entity such as (a maatschap (civil partnership), partnership (firm); commanditer venootschap (limited partnership or CV); or
  • a legal entity such as a limited liability company (perseroan terbatas or PT), a co-operative or a foundation.

Under Law No 25 of 2007 on Capital Investment (Investment Law) foreign investors are required to establish a limited liability company with foreign shareholdings (commonly referred as a PT PMA).

All the above entities can acquire real estate but, in the current business environment, a PT (or PT PMA) is generally preferred.

Under Indonesian law, a PT (or PT PMA) has the following features:

  • it can own assets which are separated from the assets of its shareholders;
  • it has specific purposes and objectives;
  • the capital consists of shares subscribed to and paid for by the shareholders;
  • it has a Board of Directors, Board of Commissioners and the General Meeting of The Shareholders as its organs; the General Meeting of Shareholders has authorities not granted to the others; and
  • the shareholders enjoy the profits derived from the business activities of the PT in the form of dividends distributed according to its Articles of Association.

Under Law No 40 of 2007 on Limited Liability Companies (Company Law), a PT must have at least IDR50 million in authorised capital. At least 25% of this must be issued and paid up by the shareholders.

Meanwhile, the Regulation of the Investment Coordinating Board No 6 of 2018 (BKPM Reg 6/2018) requires a PT PMA to have a minimum total investment of IDR10 billion (not including the value of any land or building it owns). Out of the minimum total investment, BKPM Reg 6/2018 requires the minimum issued and paid up capital to be IDR2.5 billion; the remaining IDR7.5 billion can be derived from loans. 

The BKPM also requires the minimum capital to be reasonable given the project’s capital needs. However, the debt to equity ratio is set at a maximum of one to four. If it exceeds this, unless approval from the Tax Authority is obtained, the financing costs cannot be treated as tax deductibles.

No specific governance requirements apply to real estate companies. In general, the following governance requirements to PT and PT PMAs under the Company Law apply:

  • a PT is required to have at least two shareholders at all times; if it ever has only one shareholder for longer than six months, it will lose its limited liability status and the lone shareholder will become personally liable;
  • a PT must have at least one Director and one Commissioner;
  • the shareholders must convene the annual general meetings to, amongst other things, ratify the annual report of the company for the preceding financial year; and
  • the purpose and objectives of a PT PMA must comply with the requirements under the current Negative List of Investment which sets different foreign shareholding limits in companies engaged in real estate/real property activities depending on their activities.

In addition, as part of the good governance, a PT must obtain the licences and approvals required to engage in its business activities, the main ones being

  • a business identification number (Nomor Induk Berusaha or NIB);
  • a business licence;
  • a tax registration number (Nomor Pokok Wajib Pajak or NPWP); and
  • other relevant licences or approvals issued by the relevant regional government or government agency in charge of the specific sector.

No requirements, which specify the annual maintenance and accounting compliance cost, apply. It is common to engage an Indonesian accountant or financial adviser to manage this aspect.

Lease arrangements are allowed under Indonesian Law. No limit applies to the term of a lease agreement. Foreign investors often enter into long-term lease agreements with landowners to develop property in Indonesia.

No specific Indonesian regulation differentiates between types of commercial lease.  Lessors of commercial real estate usually have their own template lease agreement which is not negotiable except for anchor tenants. Under the most common commercial lease agreement, the lessee pays the rent, service charges, utility invoices and VAT, and withholds the income tax due from the rent payment to the lessor (unless the lessee is an individual who is not required to withhold taxes).

No specific Indonesian regulations apply to rents or lease terms. The lessor and the lessee negotiate them freely, under the freedom of contract principle. 

No specific regulation applies to the term of a lease as it is usually negotiated by the lessor and the lessee. For the lease of land, it is normal to tie the terms of the lease to the term of the certificate of land title. However, if the underlying land title is Hak Milik, the lease term is negotiated between the lessor and the lessee.

A lease agreement for a personal residence usually contains articles on:

  • payment of the rent for the house and the garden as a unit;
  • the provision of furniture by the lessor (if applicable);
  • the items that must be repaired by the lessor and those that can be repaired by the lessee, etc.

Meanwhile, a lease agreement for commercial purposes often contains more complicated articles on, for example:

  • the calculation of the area leased (eg, the gross lettable area, the semi-gross lettable area and the nett lettable area);
  • the insurance cover to be paid for by the lessor and by the lessee;
  • the maintenance of the building and the leased area;
  • access during operating hours;
  • applicable charges; and
  • the lessee’s fitting out period, heavy objects, etc.

Under Article 1551 of the ICC, the lessor is required to repair and provide maintenance of the leased property during the term of the lease, with the exception of minor repairs and maintenance that are the responsibility of the lessee. The lessee is required to keep the leased premises in good and clean condition; normal wear and tear excepted.

There is no specific regulation on the frequency of rent payments. Under most commercial lease agreements, the rent is paid annually in advance. For the lease of an office building or shop in a mall, it is common for the rent to be paid every three months, in advance, with a security deposit of one to three months’ rent. Under a house lease, it is common to pay the rent one to three years in advance.

For a lease of two to three years, it is common for the rent remain the same for the full term of the lease, especially if the rent is paid in advance. The lessor may increase the rent when the lease term expires if the parties wish to extend or renew the term. It is also common, if the lease term exceeds three years, for the rent to be reviewed periodically.

Rent is normally negotiated by the lessee and the lessor based on the freedom of contract principle. However, in some cases (especially if the lessee is not a major tenant), it can be at the discretion of the lessor, following the applicable market rate for comparable property. For an anchor tenant or a lease for a major development, the increase in the rent is usually based on an agreed to formula.

If the landlord is a taxable entrepreneur, the lease is subject to 10% VAT payable by the lessee.

The most common items that a lessee must pay at the start of a commercial lease are:

  • a security deposit of one month’s rent;
  • the initial three months’ rent; and
  • a service charge (which may cover a sinking fund, management fee, repair and maintenance fee, etc).

Under most commercial lease agreements, the lessor bears the maintenance and repair costs but the lessee pays a service charge.

It is common for the lessor to have metres installed so that each tenant’s consumption of electric power and other utilities can be recorded. The lessee bears the utility and telecommunications costs.

The lessor pays the cost of insuring the real estate. The lessee arranges and pays for insurance cover for its own property within the leased premises. The insurance typically covers the following:

  • comprehensive/all risks;
  • fire, lighting, explosions, airplane crashes, smoke;
  • riots and civil commotions,
  • theft, burglary;
  • third party liability; and
  • business interruptions.

The lessor normally specifies the permitted use of the building. However, for property in a condominium, the occupants’ association (perhimpunan penghuni) may determine what the tenants/occupants may use the property for. Municipal regulations prohibit the use of residential property for business activities. Zoning regulations also prevent the use of property for business activities other than those designated.

In general, a building may not be altered as it is related to the safety of the building/real estate. However, in the case of a lease with a major tenant, the lessee and the lessor may agree on alterations or improvements of the real estate, subject to certain requirements imposed by the lessor (eg, the lessor has to approve the design and the contractor and the building must be restored to its original condition upon the expiry of the lease).

No specific regulations apply to leases of industrial, offices, retail or hotel real estate.  However, GR 44/1994 requires the occupancy of a house by a party who does not own it to have the approval of the owner and be subject to a lease or a written agreement between the owner and the lessee.

The leasing of state-owned land is regulated under MOF Reg 57/2016, which optimises unused state-owned land  to obtain facilities required to support the function, or prevent illegal use, of state-land. Approval from the Ministry of Finance is required.

Under most commercial lease agreements, the lessor and the receiver may terminate the lease agreement if the lessee is declared insolvent or bankrupt.  However, if the lease has already been paid in full in advance, the lease agreement cannot be terminated before its expiry and the paid rent is treated as a bankruptcy asset.

The most common form of security to protect the lessor from the failure of the lessee to meet its obligations under the lease agreement is a security deposit, the amount of which is usually determined by the lessor. The rent under a commercial lease is usually paid three months in advance.

Under Article 1573 of the ICC, if the lessee continues to occupy the leased premise and is permitted to be in possession of the property after the termination of lease is made, a new lease begins (ie, the lease will expire when one party notifies the other party that it intends to terminate the lease, with due observance of the grace period according to local custom). 

However, the lessee and the lessor may negotiate the right of the lessee to occupy the premises upon the expiry or termination of the lease. For example, if the lessee does not vacate the premises upon the expiry of the lease, the lessee must pay a certain fine for every day of delay.

Usually, the lessee is allowed to sublease the premises with approval from the lessor. The lessor usually requires the lessee to remain liable despite the sublease.

A default can be:

  • the late or non-payment of the rent by the lessee, the lessee using the leased premises not for the purpose specified in the lease agreement; or
  • the lessor cannot extend its title to the land or ensure the quiet enjoyment of the premises by the lessee although the lessee has paid the rent. 

A lease can also be terminated if a force majeure event continues for a certain period.

No specific requirement applies under Indonesian law to register a lease. However, for evidentiary purposes, a long term lease agreement can be drawn up in notarial deed form.

The parties can agree on the circumstances that will allow eviction under the lease agreement. Under most commercial lease agreements, in the event of default, the lessee may be required to remedy or cure the default before the lessor can evict the lessee. However, to evict a lessee, court assistance is required.

No early termination by such a third party of a commercial lease is known to have occurred. If the leased premises are on state-owned land, the government may choose not to extend or renew the lease upon its expiry. Unless the lessee commits a material breach, the lease arrangement is usually allowed to expire.

The following structures used to price construction projects are recognised under the Construction Law (and its implementing regulations):

  • lump sum;
  • unit price;
  • cost-plus fixed fee; and
  • a combination of lump sum.

However, this is not exhaustive; the parties may agree on another structure to price the construction services.

The pricing structure for a construction project depends on the agreement between the parties taking into consideration the type of construction project. For example, for an engineering procurement contract it is more common for the project owner wanting to set a lump sum price.

The Construction Law requires a construction contract to clearly state the rights and obligations of the parties and the division of responsibility for the design and construction of the project depends on this.

Typically, if the design is provided by the owner (service user), the owner should be responsible for any error or inconsistency in the design. However, the parties may agree that, although the design is provided by the owner, the contractor will be responsible for verifying the accuracy and correctness of the design.

The project owner may include several articles in the construction contract on the management of the construction risk by the contractor.

The contractor is required to provide warranties for a certain period after taking over the project. A common warranty is one to two years after the acceptance certificate is signed by the parties (or its occupation by the owner); however, under the Construction Law, contractors are responsible for any building failure for the agreed period according to the intended life of the building. 

If the intended life of the building exceeds ten years, the contractors’ liability for the building’s failure is limited to ten years as of the final delivery of the building; the period for which the contractor is liable for the building’s failure must be stated in the construction agreement.

The contractor is also required to indemnify the owner (service user) against any injury, loss of life and damage to property.

It is common for a contractor to want to limit its liability under the construction contract. Contractual limitations on liability are generally enforceable in Indonesia under Article 1338, Article 1247 and Article 1248 of the ICC. While contractual limitations on overall liability are generally enforceable as a matter of contract law, they may not be enforced if the underlying act or omission giving rise to liability also constitutes a crime, a violation of certain statutory laws (eg, the Environmental Law or Consumer Protection Law), or an unlawful act violating norms of good faith or public decency (such as fraud or wilful misconduct).

In addition, as way to manage the construction risk, typically, there is a requirement to have the construction covered by Construction All Risk and Third Party Liability insurance.

The parties to the contract may agree on certain liquidated damages to be payable for a delay in completing the construction. The concept of liquidated damages (LD) is governed by the ICC.

No specific definition of LD prevails in Indonesia. However, under Article 1249 of the ICC, if an agreement requires a defaulting party to pay a certain amount of money as compensation, the compensation given to the non-defaulting party may not be more or less than the amount agreed to.

Anticipatory breaches are not known in Indonesia, therefore, it is important to set project milestones so the owner can claim LD or sue the contractor if they are not achieved, rather than waiting until the contractor fails to complete the construction. It is also common for the owner to retain 5% to 10% of the contract value for the warranty period.

To secure the performance of the contractor under the construction contract, it is common for the owner to require a performance guarante. The guarantee may be in the form of a bank guarantee, surety bond or even a parent company guarantee.

Under Article 1139 (7) of the ICC, contractors, carpenters, masons and other construction workers have priority regarding the payment of their unpaid fees or wages from the sale of property containing their work, provided that the debt is not more than three years old and the property has not been transferred to a third party. 

Upon taking over the construction work, the construction contract usually requires the contractor to provide confirmation that the works handed over to owner are free from any lien and encumbrances. This may be supported by a contractor written statement stating the same.

The Indonesian building regulations require the building to be able to be used after the issuance of the SLF, following the completion of the construction. To issue the SLF, the officials will check, amongst other things, the safety of the construction works.

VAT is payable on any sale and purchase of real estate by a developer. The VAT payable by the buyer is 10% and 20% sales tax on luxury goods (Pajak Penjualan Barang Mewah or PPNBm) is also payable if the value of the property acquired is IDR30 billion (approximately USD2 million) or more.

The parties to the transaction usually engage an Indonesian tax consultant to mitigate their tax liability. For example, for the seller, it is better that the acquisition is conducted through a transfer of land because the seller only has to pay 2.5% Income Tax.

However, if the transfer is conducted through an acquisition of shares, the seller will must pay income tax at the maximum rate of 25% (unless it is a public company in which case the tax is 0.1% of the gross transaction value).

For the buyer, it is more tax efficient to have the acquisition of the property conducted through the acquisition of shares as the buyer will not pay any income tax. If the acquisition is conducted through the transfer of property, the buyer pays 5% BPHTB.

To our knowledge, no municipal taxes are payable for the occupation of property in Indonesia. The authority of local governments to impose tax is very limited.

Foreign investors must pay the following taxes on revenue derived from the lease of property:

  • if the property is leased by a real estate company that pays dividends, 20% withholding tax on dividends distributed applies, unless there is a tax treaty on double taxation;
  • the tax payable on income from rental for non-residents is a flat rate of 20% of the gross income in Indonesia, subject to any international tax treaty;
  • a final tax rate of 10% on the rental of land and buildings, payable by the lessor; and
  • 10% VAT of on the gross rental income of the developer, payable by the lessee.

Depreciation and taxable interest are tax benefits that companies can enjoy from owning real estate. In addition, one of the benefits under the Investment Law for a PT PMA is accelerated depreciation or amortisation.

For land that is used for social, educational or healthcare activities, a 50% reduction in PBB is available.

Makarim & Taira S

Summitmas I, 16th -17th Floors
Jl. Jendral Sudirman Kav 61-62
Jakarta 12190
Indonesia

+6221 5080 8300

+6221 252 2750

Rahayu.Hoed@makarim.com www.makarim.com
Author Business Card

Law and Practice

Authors



Makarim & Taira S is one of Indonesia’s leading full-service law firms and has a proven track record of successfully navigating Indonesia's complex and fast-changing environment. The firm covers both the traditional practice areas of corporate services, banking, finance, foreign investment, litigation, infrastructure and employment, as well as emerging growth areas such as antitrust/competition, power and energy, intellectual property, TMT and fintech. The firm has been involved in all aspects of business in Indonesia and has built an extensive global network with law firms and agencies across the globe.

Compare law and practice by selecting locations and topic(s)

{{searchBoxHeader}}

Select Topic(s)

loading ...
{{topic.title}}

Please select at least one chapter and one topic to use the compare functionality.