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New Regulations on Prenuptial Agreements & Changes in Property Ownership Rules

Bali Update Interview with Notary Rainy Hendriany SH, Sanur, Jl. Danau Buyan NO. 52, Phone: 7800532 or 7800541 regarding New Regulations on Prenuptial Agreements & Changes in Property Ownership Rules!

With the general consensus that property sales, particularly those involving foreign purchasers, have declined significantly in Bali, Balidiscovery.com thought it was time to catch up with the invariably well-informed Sanur-based Notary to find out what, if anything, has changed in regulations affecting foreign land ownership in Indonesia.

A good deal of confusion within the international community surrounds the use of “Prenuptial Agreements” to secure property purchase rights when marrying an Indonesian. There is a perception that the regulations have changed and that a Prenuptial Agreement” is no longer necessary to protect future rights to buy land.  There also looming uncertainty about the long-awaited changes in regulations regarding the liberalization and opening up of property ownership in Indonesia to foreign buyers.

Bali Sanur Notary

Bali Update Interview with Rainy Hendriany

Bali Update: Ibu Rainy, thank you once again for generously giving your time to explain to the international community in Indonesia the latest Indonesian Laws and Regulations on matters affecting foreign land ownership. I know from reader feedback that your inputs are always appreciated.

Rainy Hendriany: I’m always happy to contribute but I’d like to say first that my comments in such an interview have to be general in nature and are not intended to be, or to replace the need for, professional legal counsel.

Bali Update: Let’s talk about Prenuptial Agreements. There seems to be a widespread belief that because of certain changes in regulations, Prenuptial Agreements, let’s call them Prenups, are no longer necessary to secure property purchase rights when marrying an Indonesian citizen. Would you please help to clarify what is the situation?

Rainy Hendriany: I’m not surprised by what you say because many clients asking whether a Prenuptial Agreement is still necessary have also contacted me. So the confusion does seem to be quite widespread.

There have been some important changes to regulations, which I will get to in a minute, but first, let’s back up and review why Prenups have been important for a foreigner marrying an Indonesian.

First, the main reason that Prenups have been used by mixed couples is that Indonesian Law, including provisions of both The Indonesian Constitution and The Basic Agrarian law of 1960, make it illegal for non-Indonesians to own landed property in Indonesia, which includes both Hal Milik (Ed: Freehold with unlimited duration) and HGB (Ed: The Right to build and use with long but limited duration).

Second, under Indonesian law, like in most countries, assets acquired within a legal marriage become the joint property of the partners in the marriage.

So that means that if the Indonesian partner in a marriage to a non-Indonesian was to acquire such landed property in his or her name, the foreign partner would own half of it, which is illegal. In turn, that explains why Prenups have been used by mixed couples because with a Prenup, often in Indonesia called a “Separation of Assets,” entirely separates the assets of the spouses, both before and after marriage so that the Indonesian partner is then able to legally acquire landed property in his or her name.

Bali Update: Understood. So what has changed to cause such confusion?

Rainy Hendriany: The problem with the law as it stood was that many, in fact most, mixed couples only ever discovered these points of law after they were already married, by which time it was too late. Indonesian law does not provide for Postnuptial Agreements so in the conveyance of property aNotary/PPAT will always ask for a copy of a Prenup when the Indonesian buyer or seller is married to a non-Indonesian, which is identified from the“KK” or Family Registration Card, which all Indonesian Households are required to have and which is also required by the Notary in a property transaction.

Bali Update: So the failure to create a Prenup before marrying results in making it legally impossible for such couples ever to own property held in the name of the Indonesian partner? Is there no solution for such an oversight?

Rainy Hendriany: Correct, and it could be argued that the Constitutional right of all Indonesian citizens to own property in Indonesia was being denied to an Indonesian simply because he or she married a foreigner. And that is what resulted in changes to the regulations. An Indonesian woman, finding herself in that very position, made a submission to the Constitutional Court requesting an examination of whether the existing legal framework was inconsistent with the Indonesian Constitution.

In summary, the Constitutional Court ruled that the provisions of both The Constitution and The Basic Agrarian law regarding restrictions on the foreign ownership of landed property in Indonesia are a matter entirely at the discretion of the Sovereign State. However, it also found that the Constitutional right of all Indonesians to own property was being denied to Indonesians in mixed marriages without a Prenup.

The Court, therefore, ruled that to protect the Constitutional property ownership rights of all Indonesians, it should be made possible to enter into a “Separation of Assets Agreement” after marriage as well as before!!

Rulings of the Constitutional Court take effect immediately and other laws and regulations, including the Marriage Law, will have to be revised and brought in line over time.

Bali Update: So what does that mean for mixed couples in practical terms?

Rainy Hendriany: What it means is that such couples who are already married without a Prenup are now able to obtain a “Separation of Assets Agreement” which then legally allows the Indonesian spouse to buy landed or residential property in his/her name.

For couples who are not yet married, in general, it is still preferable to enter into a Prenup before marriage, especially where the Indonesian spouse already owns property and will bring it into the marriage because ownership of that property within the marriage would still be illegal during the period after marriage but before the Separation of Assets Agreement was entered into. However, with the new ruling, even if a mixed couple were unaware of the law prior to marriage, they may still now maintain the Constitutional property ownership rights of the WNI (Indonesian Citizen) partner by executing a Separation of Assets Agreement after marriage.

Bali Update: So, back to the original question, it is not correct that a Prenup is no longer necessary, just that it can now be obtained after marriage not only before marriage as before?

Rainy Hendriany: Exactly. It should also be understood that the legal restrictions on the ownership of landed property by non-Indonesians remain exactly the same as before this Constitutional Court ruling. In summary, it is illegal for non-Indonesians to buy landed property in Indonesia and Indonesian law does not recognize the beneficial ownership of landed property through the use of nominees.

Bali Update: Which brings me to the second topic I wanted to raise with you about the changes to regulations that were supposed to liberalize the foreign ownership of property. Here again, there is a lot of confusion in the community. Can you help clarify?

Rainy Hendriany: Yes, I’ll try. We did discuss the new Foreign Ownership Regulation previously but since then two sets of Implementing Regulations have been issued, which have made matters even more uncertain, contributing to the confusion.

Let’s start with some facts. First, as I just said, it is important to be aware that Freehold and HGB titles can still only be held by Indonesian citizens and, in the case of HGB Title, also by legally established Indonesian Legal Entities, for example, a company.

Second, turning to the matter of foreign properly ownership, there have been some changes to regulations, which I will get to shortly. These actually only affect Hak Pakai Title which is available to qualified foreigners, which means they must be legal residents of Indonesia with a KITAS Visa or higher.

Third, although commonly misunderstood, a Hak Pakai title is not a leasehold but a form of ownership Title involving the issuance of a Land Certificate, which is a Title Deed, in the name of the owner. Like HGB title, it is issued for a limited initial period but through extension and renewal the total duration of both is now eighty years.

Fourth, and without going into the legal history, a Hak Pakai Title is granted to a qualified foreigner for residential purposes only, so the property may not be used for other purposes. So, for instance, it can’t be rented out on a commercial basis during periods that the foreign Hak Pakai owner is not in residence.

Fifth, Indonesians, in general, do not buy properties under Hak Pakai Titlebecause it is difficult to get the Title upgraded and there are always many properties available with HGB or Freehold Title.

Bali Update: OK, but as I recall none of that is new, so why all the confusion if basically nothing has changed?

Rainy Henriany: I think in part it’s because the changes to regulations were extensively hyped in advance by the English language media in Indonesia and by some parties with vested interests in selling property to foreigners depicting any changes as being revolutionary in nature; so the expectations were very high.

Getting back to the actual changes in regulations. The Indonesian Authorities, under a lot of pressure from Nationalist interests in Parliament, finally issued a new Government Regulation, the “Foreign Ownership Regulation” which was largely cosmetic, applied only to foreign residents of Indonesia and even then really didn’t change much of anything other than tinkering with the renewal and duration timelines of Hak Pakai Title to bring its duration in line with HGB Title. In fact, in some respects, the new situation is even more restrictive than under the previous Regulations.

The regulation now requires that a property may only be bought by a qualified foreigner as a new property (House or Apartment) from an Indonesian person or entity and there are minimum values placed on the value of a property, which a qualified foreigner can buy. This requirement from whom a foreigner can buy, and therefore to whom he can in turn sell, was not in the previous regulation and it is problematic.

In both cases, the title has to be changed into Hak Pakai, which can be costly and difficult because it requires a Land certificate to be issued by The Land Office (BPN) in the name of the foreigner.

For Apartments, I don’t think this is realistic because as developers in general sell ownership of individual Apartment units – Actually more correctly described as condominiums – under Strata Title over HGB land,which is only available for Indonesians. Obviously, Indonesians are the main buyers of Apartments.

So to sell Apartments to foreigners, a developer would need to offer all units in a development with Strata Title over Hak Pakai land and sell all the units to foreigners because Indonesians would not be interested. The is not an attractive business proposition.

As usual with government regulations, the “Implementing Regulations” are often as important as the regulation itself. In the case of this regulation, there have been two sets of implementing regulations, both issued since we last talked.

These regulations have clarified various aspects of Hak Pakai ownership, including inheritance and established the minimum price for houses and apartments allowed for purchase by foreigners. They also confirm that a property owned under Hak Pakai title by a qualified foreigner must be sold within one year of the foreigner becoming no longer qualified (generally no longer resident in Indonesia).

The first implementing regulation provided that if the property was not sold within this period, it would be auctioned by The Indonesian State and the proceeds transferred to the owner. None of my clients felt comfortable with that provision. The second regulation, replacing the earlier version, went silent on this state auction provision whilst confirming the one-year limit. It also made a concession that a used Hak Pakai Apartment (Not a House)could be bought but it was also silent as to whether the seller could be another foreigner.

So the main issue with the so-called “New, liberalized Foreign Ownership Regulation” is this: Having bought a property with Hak Pakai Title, should you no longer be qualified or should your circumstances change and you want to sell, who is going to buy? Foreigners can only buy new properties from Indonesians, other than perhaps a used apartment, which is probably irrelevant because of the title issues we discussed earlier. It is also unclear whether a foreign owner of an apartment may sell the used unit to another foreigner but until clarified otherwise it is safer to assume it may not, so there cannot be other foreign buyers. And the largest groups of potential buyers, Indonesians, in general, don’t buy property with Hak Pakai Title.

I hope that explains my earlier comment that in some respects this new Regulation and its Implementing framework may actually have taken a step backward in opening up the ownership of property in Indonesia to non-Indonesians.

As of now, the vast majority of my foreign clients still prefer the legal certainty of leasehold arrangements, which are available to all foreigners irrespective of their residential status in Indonesia. A leasehold, although conveying no ownership rights, if constructed professionally, provides that the remaining duration of the leasehold can be subleased to another party at any time, often at very attractive terms reflecting increases in property values, especially in prime locations. So this also provides a more legally certain “exit route”. Also, in a leasehold transaction, only the lessor not the lessee has any Indonesian Tax liability on the income from the transaction.

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