Freehold or Leasehold

FREEHOLD OR LEASEHOLD

There are two main types of property ownership in Bali: Freehold and Leasehold. In considering your reasons for purchasing a villa, it will quickly become clear which ownership structure is most suitable.

Five or ten years ago, the leasehold structure was the preferred method of purchase in Bali, mainly as it was the easiest system to follow, and land prices were not particularly expensive. Now, due to subsequent land depreciation inherent in this type of ownership structure (the purchaser does not own or control the underlying title of the land, so that they benefit little from the land price increases), it is no longer the preferred method of acquisition. Rising property values, in areas such as Seminyak, Umalas and Petitenget however, now discourage Balinese land owners from selling land outright, and they would still generally prefer Leasehold in some areas of Bali, the leasehold structure is the only option available for acquiring a villa.

It is necessary to carefully examine how a contract is written when acquiring an existing house through a leasehold structure, with careful considerations to pricing and lease extensions. Most lease agreements have some sort of extension option, although you should be careful to fully understand the means by which the extension may be activated. Sometimes the extension can only be activated by mutual agreement, which means that the time at which extension discussions can begin must also be agreed upon mutually by the landowner and the leaseholder. This can lead to problems if the landowner does not agree to give an extension at the time the leaseholder requires it.

Secondly, many contracts are unclear about the cost of extending and often use the term “market price” to indicate the price for the extension. Oftentimes the leaseholder (who has invested considerable money into a villa) might wind up in a disadvantaged situation where the landlord can set a price and say, “Pay this amount or give me back the house.” The best forms of lease extensions are the ones that are indexed to physical commodities and the option is exercised by the sole decision of the leaseholder.

When choosing whether to buy land freehold or leasehold, you should be aware of the ramifications of each with regards to the potential value of the investment. Purchasing land freehold allows you to enjoy the appreciation in the value of the land, which has been fairly dramatic in Bali in past years.

If you opt to purchase land leasehold, you lose out on this, as depreciation starts relatively soon, depending on the term of the lease. Every year that passes on a lease devalues the entire deal. For example, if you have got 30 years on a lease, it actually might appreciate for the first 5 years, but over the next 25 years the value of the whole package goes down. Depreciation is even more dramatic if you invest a large sum of money into renovating the house 5 or 10 years before the end of your lease, as you are improving a facility which you are not going to own in 5 or 10 years. A rising value of the land or improvements of any structures on the land can, in certain situations, offset time driven depreciation.

At the end of any lease, the building and the land is returned to the original landowner. So, by purchasing leasehold, you are, essentially renting the property long term. In the intermediate period you will enjoy the benefits of the property, including the possibilities if sub-letting, but you are denying yourself the potential for capital appreciation on the property. By purchasing freehold, you get the best of all worlds. You have a house in Bali, which you can continue to add to, safe in the knowledge that you have a sellable asset at such time as you choose to sell.

A Typical Transaction

The following summary outlines the essential steps involved in a foreign investor transacting a Hak Milik (“Freehold Title”) property in Indonesia and creating a Hak Pakai (“Right of Use”) certificate of title directly in the name of the foreign investor as an en encumbrance on the underlying Hak Milik.

This certificate of title is highly secured and known as Hak Pakai atas tanah Hak Milik which translates as “Right of Use over Freehold Land”.

Phase A- Due Diligence

The Notary initially checks all aspects of the Hak Milik property and advises in relation to any impediments to acquisition of the Hak Milik property.

Phase B – Hak Milik Transfer

Should the foreigner decide to proceed on the basis of the favorable outcome of the due diligence, the Indonesia Hak Milik owner executes with the nominee/designee of the foreigner, who must be an Indonesian citizen, either:

(a) an Akta Jual Beli (“AJB” or “Sale and Purchase Agreement”) pursuant to which 100% of the purchase price is paid; or

(b) a Perjanjian Pengikatan Jual Beli (“PPJB” or “Agreement Binding for Sale and Purchase”) pursuant to which a deposit is paid subject to payment of the balance of the purchase price. The deposit is generally not held by a stakeholder but is typically paid to the vendor.

(c) Hak Pakai atas Tanah Hak Milik

The Notary executes a Deed of Grant of Hak pakai (“Akta Pemberian Hak Pakai atas Hak Milik”) between the Hak Milik owner/designee and the foreigner pursuant to which the Hak Milik owner grants the Hak Pakai title to the foreigner.

By separate Notarial Deed, the Hak Pakai owner may also prepay to the Hak Milik owner a number of agreed twenty-five year renewals (i.e. 25 years + 3 x 25 year renewals + 100 year tenure).

The Hak Pakai owner obtains a certificate of title in his name and with the agreement of the Hak Milik owner is entitle to keep the original Hak Milik title in his possession until expiration of the term.

 

Tags: Untagged
 

Blog Categories

Property News
9 post(s)