Many people wonder if they can build property on leased land in Indonesia, as leasehold is one of the most popular ways for foreigners to invest in Indonesian real estate. This form is popular because foreigners can’t buy freehold land in Indonesia. Only Indonesian nationals can do this through the highest property ownership form, Hak Milik (HM). However, foreigners can still build their property on land they lease from an Indonesian individual, entity, or the state. This article explains how you can build property on leased land and what happens to the building once the lease agreement expires.
What you need to know about leasing property in Indonesia
Leases in Indonesia are not registrable, so there is no required form of leasing. The lease conditions are freely negotiable, and the parties are free not to follow the Indonesian Civil Code (ICC) provisions. The provisions of the ICC standard apply unless stated otherwise in the lease agreement signed between both parties.
Before looking into whether you can build property on leased land, you need to be aware of the obligations and responsibilities, such as the following two standard conditions in the ICC:
- A sublease of the lease object is subject to the landlord’s approval.
- The sale of the lease object only terminates the lease if it has been agreed upon at the entry of the lease.
There is no maximum term for leases. The lease can be extended as many times as both parties want. It is essential to include the lease term in the contract. Most leasehold agreements are valid for 25 years, which then can be extended for another 25-year and 30-year period, up to 80 years in total. After that, starting a new lease agreement in Indonesia is possible.
It is common for rent to be paid in advance (mostly yearly), although there is no mandatory term of payment for the lease. Both parties have the freedom to settle these conditions themselves. In the case of leasing off-plan property, it’s common to pay in several installments until the moment of completion.
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Can foreigners build property on leased land?
It is possible to build property on leased land. As foreigners cannot buy land in their name, they can still invest in the Indonesian real estate market by leasing land. To build and own property on top of someone else’s land, you must acquire the Hak Guna Bangunan (HGB) land title, meaning the Right to Build. This title allows you to construct and own a building on land you do not own. Hak Guna Bangunan is valid for 30 years and can be extended for another 20-year and 30-year period. It’s possible to acquire a new HGB title on the same plot of land with the same terms and conditions once the first title has expired.
How to obtain Hak Guna Bangunan in Indonesia?
Legal entities such as a PT PMA, Indonesian nationals, and foreign individuals with valid passports and KITAS/KITAP can apply for the Hak Guna Bangunan title. They first have to conduct a land survey to ensure the legality, gather all the leasehold agreements, and determine the land’s and building’s boundaries. Applying for Hak Guna Bangunan can be done at the local land office by submitting the application form and required documentation and paying all the relevant fees.
Remember that a Building Approval certificate (called Persetujuan Bangunan Gedung/PBG), formerly known as a Building Permit (IMB), is needed to build property on leased land. This certificate provides the technical requirements for the building.
What happens to my property when the leasehold of the land expires?
You can lease land from the landlord (who owns the land with Hak Milik) and build your house or villa on this land. When you build property on leased land, you are the owner of the building through Hak Guna Bangunan. But what happens to your facility when the land lease expires while your HGB title is still valid?
What happens depends on the lease agreement you have signed with the landlord. In most cases, you can sell the building and HGB title to the landlord, who can convert the HGB title to Hak Milik. But again, this depends on the agreement you have signed with the landlord. That’s why it’s crucial to add a clause to the contract with conditions that apply to the possible transfer or sale of the building you have constructed on the land.
In most cases, once the lease contract has expired, you can extend the lease for another term. Extending the lease is possible – the same counts for the HGB title. Once the lease contract expires, you can set up a new one with the landlord.
You can also sell the leasehold contract of the land and the HGB title of the building to a new leaseholder and tenant. You can do this anytime, although it’s important to communicate about it with the landlord constantly.
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Frequently Asked Questions (FAQs)
What is a leasehold in Indonesia?
Leasehold in Indonesia means that the renter has the right to use and inhabit the property for a fixed duration, typically 25 years. Once the lease term expires, the property is reverted to its original owner unless the tenant chooses to extend the leasehold for another 25-year and 30-year period.
What are the disadvantages of leasehold in Indonesia?
The main disadvantage of leasehold in Indonesia is that you are not the legal owner of the property or land. You rent the property for a certain period. After that, the property’s ownership is returned to its original owner.
Can you sell a leasehold property in Bali?
Yes, you can sell a leasehold property in Bali at any point unless stated otherwise in the lease agreement signed between both parties.
Is leasehold or freehold in Indonesia better?
Choosing between leasehold and freehold in Indonesia largely depends on the individual’s eligibility and needs. Freehold gives the owner full rights and lasts forever, which is why many Indonesians think it’s better because it won’t change. On the other hand, foreigners can’t individually own land with freehold; they can only get a leasehold that lasts 30 years but can be extended.