Buying Indonesian land through nominee – legal mortgage, not trust deed, as your only security.
Problem with trust agreement/deed
Not all Nominee arrangement will protect you the investor. The so called “trust and loan” agreement means little in the event that the nominee transfer the land to a third party. Trust is a western legal concept that is supplanted into an Indonesian land transaction – it only gives you a false sense of security that your “interest” is protected. Once the property passes on to a third party, there is little one can do to claim it back. The English legal concept of tracing rights to the third party does not exist in Indonesia.
The trust arrangement contract is only tied to a person. Conceptually, it is no more than a personal contract that is not tied to the land.
To be of real protection, the right must be able to run with the land. In other words, the rights continue to stick even if the land is transferred to a third party.
Legal Mortgage/Hak Tanggungan
A registered mortgage runs with the land. This means the new buyer will need to respect the interest of the party holding the mortgage.
A registered mortgage runs with the land. This means the new buyer will need to respect the interest of the party holding the mortgage.
One has to be careful with terminology – the English word “mortgage” may mean differently to different Indonesian advisors. It might no more than a personal promise to repay and not to sell the property without your approval. We all know what a personal promise is good for in Indonesia. It does not run with the land.
Say the phrase “hak tanggungan” which is the unmistakable term for “registered mortgage” or security interest protected by specific legislation – registered in the land office (Kantor Pertahanan). This is the right that you should at least obtain if you want a stronger Nominee arrangement.
The mortgage (hak tanggungan) is created by the mortgage deed (Akta Pemberian Hak Tanggungan (APHT) – literally Deed of Mortgage Grant). It is then registered with the Land Office. Any attempt to transfer the land will be blocked by this mortgage.
Why is mortgage important
The importance can be understood from the definition of mortgage right under the following law.
Undang-Undang Nomor 4 Tahun 1996 tentang Hak Tanggungan atas Tanah Beserta Benda-Benda yang Berkaitan dengan Tanah (“1996 Mortgage Law”). Dalam Pasal 1 angka 1
Hak Tanggungan atas tanah beserta benda-benda yang berkaitan dengan tanah, yang selanjutnya disebut Hak Tanggungan, adalah hak jaminan yang dibebankan pada hak atas tanah sebagaimana dimaksud dalam Undang-Undang Nomor 5 Tahun 1960 tentang Peraturan Dasar Pokok-Pokok Agraria, berikut atau tidak berikut benda-benda lain yang merupakan satu kesatuan dengan tanah itu, untuk pelunasan utang tertentu, yang memberikan kedudukan yang diutamakan kepada kreditor tertentu terhadap kreditor-kreditor lain.
Law Number 4 of 1996 concerning Mortgage Rights on Land and Objects Related to Land (1996 Mortgage Law). In Article 1(1) define mortgage as follows a:
Mortgage rights over land and objects related to land, hereinafter referred to as Mortgage Rights, are security rights imposed on land rights as referred to in Law Number 5 of 1960 concerning Basic Agrarian Regulations, whether or not these are: other objects which are an integral part of the land, for the settlement of certain debts, which give priority to certain creditors over other creditors.
The most important right is the right to sell the property in the event of default. This right exists even if the borrower or nominee has sold the property to a third party.
Basis – Article 7 of the UUHT which stipulates that even though the object of the mortgage has been transferred to another party, the creditor holding the mortgage still has the right to sell it through a public auction if the debtor defaults.
This solves the problem of unscrupulous nominee who tries to frustrate the lender by selling property to third parties behind the lender back.