Due Diligence Part III: Know your legal options – leasehold

due diligence 3

In the first two parts on due diligence, I talked about knowing your agent and the neighborhood of your property.

Today, we are taking the next step and prepare to buy the property that was selected. Before we begin, let me state that I am not a lawyer and don’t intend to give legal advice here. For that matter, there are qualified legal experts at your service and we are happy to point you in their direction. All I am telling you here comes from observation of actual cases we have witnessed at Exotiq over the past 15 years.

Being a foreigner you have several options to legally own a property in Bali – or in fact anywhere in Indonesia. Let’s start with the simplest form of ownership, the leasehold. Here the law is rather simple: all you need to show the transacting notary on the day of signing the deed is a valid passport with a valid visa for Indonesia. This can be any kind of visa, tourist, social, business, or permanent stay etc. And note that you have the right to own as many leasehold properties as your money can buy.

The trickier part about a leasehold is the term or the extension thereof. Typically, leasehold terms in Bali vary between 25 to 30 years. But they can be longer. I have seen anything up to a 99 year lease terms. Is that legal? Well, I am told that the law doesn’t stipulate a minimum nor a maximum term for a leasehold. So this is all back to jurisprudence or the interpretation of the law and its intentions. And there we have different views as you might expect. Let me say this, I am not aware of any leasehold being challenged in court because it was deemed to be for too long a term.

But then, the advantage of buying a leasehold is that you can afford to acquire a property that would otherwise cost you multiples of the leasehold value. So why go for a super long leasehold term that will bring the acquisition cost of the land close to its freehold price? More importantly, you should focus on the extension options that you can negotiate and that’s where you really have to pay attention.

The typical leasehold templates your notary will provide will simply say that you have the right to extend the lease based on mutual agreement by the parties. That’s not even worth the paper it’s written on. If you want a proper and enforceable lease extension written into your deed, this needs to drafted carefully. One of the best options I have come across seems to be a lease that is structured along defined payment terms. Say the overall lease term is 75 years and that you pay the lease down every 25 years for the next 25 years at an amount that is predefined. This is the safer option than having a 25 year initial lease term with two extensions of 25 years each, even if you define the price of the following 25 year terms. The trick is that in the second option you or more importantly, the landowner actually need to appear in front of a notary and sign a new deed – the lease extension deed, whereas in the first example you simply have to make the pre-agreed payments on time to keep your 75 year lease intact.

My advice is to get really solid legal assistance when it comes to drafting that lease deed. Don’t just go with the usual templates notaries have ready in their drawers. After all, the value of your leasehold property is substantially dependent on the lease term and the quality of your lease agreement.

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