Nominee arrangement – foreign ownership

Foreigners are not allowed to own freehold land (Hak Milik) in Indonesia. Nevertheless, they can acquire rights to the use of land (up to a maximum duration of 70 years) but not freehold ownership rights; and such limited duration ownership is on condition that the foreigner holds residency right at the time of acquiring the property.

One hotly debated mode of holding freehold interest in land is through a nominee arrangement.

Broadly speaking, this is an arrangement with an Indonesian citizen to hold the property in his own name where the funds provided by the foreigner for the Indonesian to acquire the property.

The arrangement involves the following documentation/steps :

a. A loan agreement between the foreigner and the local nominee in the sum of the property purchase price;

b. An agreement with the nominee confirming the permanent occupation/use of the property by the forgotten;

c. Power of attorney giving the foreigner the right to sell, lease or mortgage the property.

As the saying goes, the devil is in the details of the paper work..

The main risk in such an arrangement is that the right of the foreigner only attaches to the individual nominee personally only but not necessarily to the land.

To be of any meaningful protection, it is important to understand that the rights/interest must attach to the land (not just a mere personal right against the individual (the nominee).

This is important because the foreigner might be deprived of the land should the nominee betray the arrangement by selling the land to another Indonesian.

This will leave the foreigner only with a personal claim against the nominee which may not be worth much if his or her assets cannot be traced in an opaque country such as Indonesia. A personal right against the nominee has no effect against a third party who is assigned title to the land.

The new buyer of the land from the nominee is not bound by the obligations of the nominee vis-a-vis the foreigner – these obligations are personal to the nominee and does not run with the land. In order words – in layman lingo, personal right is much weaker than real property right. Real property right attachs to the land (run with the land) regardless of change in ownership of the land.

It is therefore important to get a real right that attaches to the land.

We do not openly advocate holding land through nominee arrangement on this website but if you have already entered into such an arrangement, we strongly advise that you review the arrangement to see if the arrangement can be strengthened.

We strongly recommend that this be strengthened by taking a mortgage on the land to protect against such unauthorized transfer.

The objective would be whether you can attach any right to the land instead of just relying on the personal obligation of the nominee which may not be worth much once he has transferred the title in the land to a third party.

You will need to have a mortgage agreement over the land by virtue of the loan and have this registered so as to create real interest right as a security holder. A mortgage interest runs with the land and follows to any third party that the nominee may sell the property to.

If anything, this will effectively prevent the third party from buying the property unless the mortgage is paid off. This means that the nominee will not be able to sell off the property without your knowledge.

Another scenario of how this would unravel is when the nominee passes on. It is said that the beneficiaries that inherit from nominee estate are not bound by the nominee arrangement. This is not entirely correct since the arrangement includes a loan agreement that is owed by the estate of the deceased nominee. In other words, the debt of the estate has to be paid off which includes the loan agreement between the foreigner and there nominee.

However, the foreigner may still be left high and dry if the heirs sells off the property to a third party leaving only a personal claim against the estate. Certain nominee arrangements try to anticipate this problem by having the nominee make a will to give the property to the foreigner in the event of his passing. However, such wills may not be effective where the nominee is a Muslim because Sharian law allows only one third of the testator estate to be given away to non-next of kin. It may work in Bali where the majority of the population is Hindu. A mortgage arrangement if instituted will at least protect your interest to the extent of the loan plus interest. See this link on inheritance in Indonesia.

In another variant, there is also an option agreement to be granted by the nominee to the foreigner so that he is able to purchase the property back from the nominee. But this begs the question whether the investor is able to exercise such an option to acquire the property since he cannot legally buy the property.

We recommend that you review your arrangement and consider strengthening your rights suggested above.

You would want to avoid the fate of this Australian widow (reported in SMH) who was tormented by local thugs after they took over title of the land from the nominee. These thugs took over title in the property because of gambling debt chalked up by the nominee who was forced to sign over her title in the land to the thugs.

Further, this news report demonstrate how hairy things can get when the nominee is less than scrupulous. Due diligence on the nominee is crucial – to check on his background and known associates.

Not all nominee arrangements are equal. The devil is in the implementation details and the effectiveness depends on the professionalism of the local advisor. It cannot be assume that they will always act in your best interest. There is no fool proof way because foreign land ownership is generally frown upon. But you would want to strengthen your position as much as possible now that you have plonked down a chunk of your life’s savings to acquire your dream house in tropical paradise.

One common misconception is that the sale from owner of Hak Milik to a foreign investment company (who will then hold as Hak Guns Bangunan for a period of up to 80 years) is that the original Hak Milik owner will resume ownership of the balance period after the end of the 80 years. This is a mistaken understanding. The sale from the Hak Milik owner to the PMA is an outright she. There is nothing left for the original Hak Milik owner once the sale is made.