A Q&A guide to corporate real estate law in Indonesia.
The Q&A gives a high level overview of the corporate real estate market trends; real estate investment structures, including REITs; legislation; title and public registers of title; confidential information; state guarantee of title; tenure; sale of real estate; seller's liability; due diligence; warranties; cost; taxes and mitigation, including VAT and stamp duty/transfer tax; climate change targets; third party outsourcing; restrictions on foreign ownership or occupation; finance; leases; planning law and consents; and proposals for reform.
To compare answers across multiple jurisdictions, visit the Corporate Real Estate Country Q&A tool.
This Q&A is part of the PLC multi-jurisdictional guide to corporate real estate law. For a full list of jurisdictional Q&As visit www.practicallaw.com/realestate-mjg.
Recent trends in real estate investment in Indonesia are as follows:
Construction of residential/serviced apartments and condominiums.
Construction of office buildings.
Development of cluster housing areas.
Construction of shopping centres/malls.
The notable deals in the last 12 months are, among others:
Renovation and development of the Ngurah Rai International Airport of Bali.
Construction and development by PT Ciputra Property Tbk. of the 5.5 hectares Ciputra World Superblock in Jakarta, consisting of malls, apartments, and a hotel and office complex.
The most common investment structure is through limited liability companies engaging in property business or joint venture partnerships. Indonesian individuals can also invest by directly purchasing real estate. However, there are restrictions on ownership by foreign individuals (see Question 22).
Although a concept similar to REITs has been acknowledged by the Indonesian market, it has not been deemed as an attractive investment, due to the absence of implementing regulations.
Institutional investors tend to invest in securities of listed property companies, or participate in mutual funds with portfolios that include securities of property companies.
Small-scale private investors mostly invest in leases of properties, or pursue profit margins in the sale of real estate assets. Others also invest in mutual funds and securities of property companies.
Real estate is governed by Law No. 5 of 1960 regarding Basic Principles of Agrarian Law (Agrarian Law). The Agrarian Law sets out the principles of land use in Indonesia. It is based on local common and customary laws.
In addition:
Law No. 1 of 2011 regarding Housing and Residential Areas contains provisions on government responsibilities in the housing and residential sector, including providing land.
Law No. 20 of 2011 regarding Apartments contains provisions on government responsibilities and developer's rights and obligations in the construction of apartments.
Leases of business premises are partly regulated under the Civil Code.
Zoning and environmental matters are regulated under Law No. 32 of 2009 regarding Environment Protection and Management.
In Indonesia, real estate comprises:
Land.
Buildings.
Fixtures attached to land.
The Agrarian Law adopts the horizontal separation principle, where the owner of a plot of land is not necessarily the owner of the building and/or fixtures constructed on it.
Land and any buildings on it (owned by the same entity) are registered under the same title in the same register.
Title over real estate is evidenced by a land title certificate issued by the relevant land office.
The government institution authorised to issue land title certificates is the National Land Agency (Badan Pertanahan Nasional) (BPN) (see box, Real estate organisations). The National Land Agency's head office is in Jakarta. It has regional land offices (Kantor Pertanahan) across Indonesia, at the regional/municipal level and provincial levels.
The information and documents registered in the public register of title are:
Details of the land (for example, location, size, borders, and a sketch or drawing of the land).
Detail and identity of the owner (title holder).
Issue date and validity period of the land title.
Any historical transfer (for example sale) of the land title.
Any encumbrance (mortgage) over the land title.
Information about land titles that are registered at the land office is in principle open to the public. There is no procedure for prohibiting disclosure of confidential information in documents which are registered in the public register of title.
There is no absolute title guarantee from the state. A land title certificate is the strongest evidence of land ownership, unless proven otherwise. Land ownership under a land title certificate held in good faith by the owner for five years from its issue cannot generally be claimed by a third party, on the basis of the certificate being invalid.
Title insurance is uncommon and not generally made available by insurance providers in Indonesia.
The Agrarian Law recognises a number of types of land titles, of which the following are the most important:
Right of ownership.
Right to build.
Right to cultivate.
Right to use.
All of these land titles are granted by the government and allow the holder to use the land concerned. However, they differ in their duration, the nature of use allowed and the ability of the title to be used for security purposes.
There are various common marketing options for real estate, such as:
Media advertising (printed, visual, or audio media).
Real estate exhibitions.
Third party marketing (such as real estate brokers).
Commercial negotiation can be made at any time before the sale.
The most common pre-contractual arrangement for the sale of real estate is usually a down payment, which may be evidenced by a conditional sale and purchase agreement.
The sale is effected by executing a deed of sale and purchase, drawn up and executed before a land deed officer (Pejabat Pembuat Akta Tanah) (PPAT), a general officer authorised to make authentic land deeds. The PPAT's fee is a maximum of 1% of the transaction value. The seller and buyer negotiate and decide on which party is to pay the PPAT's fee.
The parties are legally bound when the deed of sale and purchase is duly executed by the parties.
Registration is conducted by the PPAT at the relevant land office, after all the following conditions are fulfilled:
Title transfers to the buyer on due execution of the deed of sale and purchase before a PPAT and payment of the purchase price to the seller.
The seller must hand over the original land title certificate (or, if the land certificate is missing, other documents to prove the seller's ownership of the real estate to the buyer) immediately after execution of the deed of sale and purchase and the entire payment of the purchase price. The seller's other obligations to the buyer are set out in the deed of sale and purchase.
A potential buyer typically obtains the information he requires about encumbrances and other rights affecting the real estate from the relevant land office. This information is available provided the land is registered and the original land certificate has been shown to the land office for verification.
The following warranties are usually required from the seller:
The land is validly owned and registered in the seller's name.
The land is not the object of or not involved in a dispute.
The land is free from any foreclosure or attachment ordered by a court, the Tax Office or any other authorised institution.
The land is free from encumbrances.
Warranties are not a substitute for due diligence, which is carried out on the buyer's own initiative.
When the title is transferred, the new owner assumes all of the rights and liabilities relating to the land. However, the liabilities can be limited by way of an indemnification clause in the deed of sale and purchase, to the effect that the seller indemnifies the buyer for any prior liabilities.
The new owner or occupier can inherit environmental liability relating to the land, even if it was caused by the previous owner. However this can be negotiated, and a clause may be inserted in the sale contract to the effect that the seller or previous owner is responsible for all environmental liabilities relating to the land as a result of events that occurred before execution of the deed of sale and purchase.
The parties may contractually agree that the seller or occupier retains certain liabilities after the land title is transferred. The seller can retain environmental liability relating to the land even after the disposal of the land (see Question 14).
Costs normally paid by the buyer are:
VAT (if the seller is a real estate developer) (see Question 17).
Stamp duty (see Question 18).
Land acquisition duty (bea perolehan hak atas tanah dan bangunan) (BPHTB) (see Question 18).
Payment to a PPAT for preparing the deed of sale and purchase (the seller and the buyer negotiate and decide which party will pay the PPAT's fee; see Question 10, Sale contract).
Costs normally paid by the seller are (see Question 18):
Income tax.
Land and building tax.
Payment of the PPAT's fee is subject to agreement between the seller and buyer.
If the sale involves a real estate developer that supplies real estate services to consumers, VAT at 10% is payable by the buyer as a consumer.
The buyer pays:
Land acquisition duty at 5% of the transaction value or market value, whichever is higher.
Stamp duty at a nominal amount of IDR6,000 (as at 1 September 2012, US$1 was about IDR9.5).
The seller pays income tax at 5% of the transaction value or market value, whichever is higher.
The stipulated rate of the land and building tax is 0.5% of the land value, which is usually payable by the seller up to the date of the sale. The land and building tax is not a local municipal tax.
Generally, there are no commonly used methods to mitigate real estate tax liability on acquisitions of large real estate portfolios. Transfer tax liability may be mitigated by purchasing shares of the entity owning the land title.
Regulation No. 08 of 2010 of the Minister of Environment regarding Criteria and Certification of Green Buildings encourages green buildings, and provides facilities for mitigating environmental damage. It defines a green building as a building that applies environmental principles in its design, construction, operation and management, and the handling of the impact of climate change.
There are targets to reduce greenhouse gas emissions from buildings. They are regulated at municipal level. An example is Regulation No. 38 of 2012 of the Governor of Jakarta regarding Green Buildings, which states that all buildings must meet the stipulated energy efficiency requirements, such as:
Energy conservation and efficiency.
Water conservation and efficiency.
Indoor air quality.
Proper maintenance by the building's management.
It is common for companies engaging in the business of building management to outsource certain support services, such as housekeeping and maintenance, marketing, and internal security.
Foreign individuals can only hold a right to use under the Agrarian Law (see Question 9). In practice, this can only be granted for one single residential unit to a foreign individual who is resident in Indonesia. Alternatively, foreign individuals can lease land and/or a building on a contractual basis from an Indonesian title holder. There are limited exemptions, for example persons who have stayed in Indonesia for quite some time, and their presence benefits Indonesian society. The same restrictions apply to ownership or occupation of real estate by foreign companies.
A change of control of a company does not affect its holdings of real estate, except if contractually agreed otherwise.
Central and regional government, including state owned companies, can compulsorily purchase business premises located in a certain area, for the purpose of developing public interest facilities such as railways, airport or infrastructure.
The purchase price usually depends on negotiation between the authorities and the owner.
The regional governments have authority to issue regulations concerning regional taxes, which are in line with their regional conditions. However, they must still be in line with the broad policy guidelines set under Law No. 28 of 2009 regarding Regional Tax and Retribution. Therefore, regulations concerning regional taxes (including possible exemptions) vary, depending on the policy of the regional government.
The methods of financing vary, and include issuance of bonds, public offerings, or loans from banks or financial institutions.
The land title of the real estate is usually used as security for debt (by way of a mortgage) (see Question 28).
The most common form of security over real estate is a mortgage (HakTanggungan). In a mortgage, the borrower grants the lender an interest in the borrower's real estate, as security for the debt.
Mortgages are created and perfected through:
Signing a mortgage deed in the Indonesian language, before a PPAT with jurisdiction over the land to be mortgaged.
Registration of the mortgage deed at the relevant land office.
The mortgage is created and perfected at the moment it is entered in the public register of title kept in the relevant land office.
Real estate securitisation is not common in Indonesia.
Contractual lease provisions are generally freely negotiable. The Civil Code sets out provisions regarding contractual leases, but they can be waived by mutual agreement of the parties.
There are no specific formal legal requirements to execute a lease. A lease is valid if it fulfils the following general conditions for an agreement under Indonesian law:
Consent of the parties.
Capacity to enter into an agreement.
A specific subject.
A lawful purpose.
Rent levels are usually reviewed at the end of the lease period, except for mandatory utility price increases such as electricity and water.
VAT is payable on rent, at 10% of the gross lease rent amount, if the landlord is registered for VAT purposes.
The length of the lease period is subject to contractual agreement between the parties. Leases normally contain a warranty from the landlord that the tenant's occupation is secure, and an option for the tenant to extend the lease.
The tenant is usually prohibited from assigning or subleasing the premises without obtaining prior written approval from the landlord.
Tenants can usually share their business premises with companies in the same corporate group, with prior approval from or notification to the landlord.
The tenant is usually responsible for keeping the leased premises in good repair. However, the parties may contractually agree otherwise.
The landlord is usually responsible for insuring the leased premises, but in some cases the landlord may impose this obligation on the tenant. The parties can contractually agree otherwise.
The landlord can normally terminate the lease on occurrence of the following events:
Rent payment default by the tenant.
Assignment or sublease without prior approval from the landlord.
Bankruptcy of the tenant.
The tenant can terminate the lease on the landlord's bankruptcy.
The tenant's insolvency can usually trigger early termination of the lease by the landlord.
At national level, the relevant government ministry responsible for spatial layout/zoning is the Ministry of Public Works. Implementation is decentralised and assigned to the regional governments.
Spatial planning is governed by Law No. 26 of 2007 regarding Spatial Layout (Law No. 26/2007).
All development of any type must be made in accordance with the applicable spatial layout plan. The spatial layout plans consist of the following:
National spatial layout plan. This is directly governed by government regulations.
Provincial spatial layout plan. This is prepared by the provincial government, in co-ordination with the governor, subject to approval by the Minister of Public Works.
Regency spatial layout plan. This is prepared by the regency government, in co-ordination with the regent, subject to approval by the Minister of Public Works.
Municipal spatial layout plan. This is prepared by the municipal government, in co-ordination with the mayor, subject to approval by the Minister of Public Works.
Development requires permits for the construction and operation of buildings, or for land use. They are only issued if the development plan complies with the applicable spatial layout plan.
The spatial layout plan is prepared and approved by the relevant authorities (see Question 41).
Consents for the construction and operation of buildings as well as use of land are issued at the regency/municipal level, and are issued by the head of the municipal land office where the land is located.
Third parties are entitled to (Law No. 26/2007):
Proper compensation for loss incurred due to development carried out according to the relevant spatial layout plan.
File an objection with the relevant authority to development that deviates from the spatial layout plan.
Claim annulment of a permit and suspension of development by the relevant authority, for development that deviates from the spatial layout plan.
Claim compensation for losses incurred from the government and/or permit holder, if the development deviates from the spatial layout plan.
The public are involved in spatial planning through (Law No. 26/2007):
Preparation of the spatial plan.
Use of the space.
Control over space use.
The public can submit a report and/or complaints to the central and regional government.
Examination of a provincial, regency or municipal spatial layout plan must be conducted at the latest 24 months from the initial preparation.
Building construction or operation permits and land use permits are usually issued within two weeks and up to one month after receipt of the correct and complete application.
The public can appeal to the relevant government authority if the development is not performed according to the applicable spatial layout plan.
The government and the House of Representatives are currently working on the Bill on Land. At this stage, it is not clear when the Bill of Land will be enacted into law, since discussions are still ongoing.
Main activities. The BPN is a government institution generally responsible for land administration duties, at national, regional and sectoral level. It issues land right certificates.
Indonesian Real Estate Companies Community (Persatuan Perusahaan Real Estat Indonesia) (REI)
Main activities. REI consists of real estate companies aiming to develop housing and residential areas.
Indonesian Association of Real Estate Brokers (Asosiasi Real Estate Broker Indonesia) (AREBI)
Main activities. AREBI is an organisation consisting of companies and individuals engaged in property brokerage services.
Description. This is the official website of the BPN. It provides the laws and regulations relating to land matters, in Indonesian.
Description. This is the website maintained by a private institution which provides a constantly updated database of Indonesian laws and regulations, in Indonesian and English. The English translation is for guidance only. This website is accessible to members by subscription.
T +62 21 2505 125/5136
F +62 21 2150 5001/5121/5122/5392
E nadwani@abnrlaw.com
W www.abnrlaw.com
Qualified. Indonesia, 1984
Areas of practice. Real estate; corporate law; labour law.
Recent transactions
T +62 21 2505 125/5136
F +62 21 2150 5001/5121/5122/5392
E aderadjat@abnrlaw.com
W www.abnrlaw.com
Qualified. Indonesia, 1996
Areas of practice. M&A; real estate, corporate law.
Recent transactions.
Acting for multinational companies in the manufacturing sector, advising on real estate transactions.
