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Acquisitions and leases
Describe the various categories of legal ownership, leasehold or other occupancy interests in real estate customarily used and recognised in your jurisdiction.
Below are the types of land title and the parties who are permitted to acquire each of them:
What are the typical pre-contractual steps?
The Indonesian Civil Code (ICC), as the regulatory foundation for contracts, does not regulate pre-contract documents, such as letter of intent, memorandum of understanding, term sheet or other non-binding agreements, although these are customary to be entered into by the transacting parties prior to executing a binding contract.
Before signing a contract, the buyer will conduct due diligence to identify any material risks that may affect the transaction. The result of the due diligence is crucial to determine the terms and conditions of the binding contract to be entered into by the parties, such as the conditions precedent to be imposed on the seller, representations and warranties from the seller and indemnity in favour of the buyer. The parties will usually execute a non-disclosure agreement before making any disclosure of documents, data and information for the purpose of the due diligence.
The use of a real estate broker is common for the sale or lease of property, but a real estate broker’s business activity does not cover real estate financing. Pursuant to Minister of Trade Regulation No. 51/M-DAG/PER/7/2017 Regarding Property Brokerage Companies (3 August 2017), the activities of a real estate broker include services for property analysis, marketing, consultation and dissemination of information regarding property. A real estate broker will receive a commission for its services. For sale transactions, the commission ranges from 2–5 per cent of the transaction value, while for lease transactions it is 5–8 per cent of the transaction value.
The real estate brokerage business is closed for foreign investment and real estate brokerage companies must obtain a business licence from the Minister of Trade. The experts employed by brokerage companies must obtain a competence certificate.
What are typical provisions in a contract of sale?
Land is legally acquired in Indonesia upon the execution of a Sale Purchase Deed (AJB) by the seller and buyer, or an Land Relinquishment Deed (APH) in favour of the buyer. An AJB is used if the buyer wishes to acquire certificated title to the land with the same type as the seller’s certificated title. An APH is used if the seller has certificated title to the land that is not the same type of title that the buyer can or wants to acquire, or if the seller does not yet have certificated title to the land to be sold.
An AJB or APH must be drawn up by a Land Deed Official (PPAT) having jurisdiction over the land and be executed in the Indonesian language before such PPAT. The clauses in the AJB or APH are normally standard clauses (eg, details of the land object, purchase price, transfer of proceeds and liabilities upon transfer of title or execution of the deed, allocation of fees, and dispute settlement forum). As AJBs and APHs are documents that would need to be submitted or provided to governmental authorities or other third parties for various purposes, the transacting parties usually refrain from disclosing therein arrangements that are commercial, sensitive or confidential in nature. These arrangements are customarily regulated in a separate sale and purchase contract between the parties.
Matters that are generally regulated in the contract include conditions precedent, representations and warranties of both the seller and buyer, undertakings or covenants, events of default, and indemnity.
Who takes responsibility for a future environmental clean-up? Are clauses regarding long-term environmental liability and indemnity that survive the term of a contract common? What are typical general covenants? What remedies do the seller and buyer have for breach?
Upon the transfer of the title, the buyer assumes the rights and liability of the land, including any environmental liability. Therefore, it is crucial that environmental due diligence is performed before executing a contract. Any environmental issues identified at the due diligence stage will usually be included as the seller’s conditions precedent to be settled prior to closing. If the severity of the issue makes it unfeasible to be resolved prior to closing it would become a condition subsequent, the seller’s undertaking or a ground to adjust the purchase price. To further protect the buyer, the seller would be asked to provide environmental representations and warranties, and indemnity in case of breach or future environmental claims arising from environmental issues not previously disclosed by the seller.
The indemnity period can be freely negotiated between the buyer and seller. The buyer will usually take into account the statute of limitation for environmental claims. Pursuant to Law No. 32 of 2009 Regarding Environmental Protection and Management (3 October 2009), the statute of limitation for filing an environmental lawsuit refers to the statute of limitation for general civil lawsuits under the ICC (ie, 30 years) as from the time the environmental pollution or damage is known. However, there is no statute of limitation if the environmental lawsuit concerns toxic waste and hazardous materials (B3 waste). For a criminal lawsuit, pursuant to the Indonesian Criminal Code, the statute of limitation depends on the possible length of imprisonment, ranging from six years to 18 years.
In many transactions, the parties usually agree to use the criminal statute of limitation for the indemnity period (usually six years), as it would be unreasonable to request a 30-year indemnity period.
What are typical representations made by sellers of property regarding existing leases? What are typical covenants made by sellers of property concerning leases between contract date and closing date? Do they cover brokerage agreements and do they survive after property sale is completed? Are estoppel certificates from tenants customarily required as a condition to the obligation of the buyer to close under a contract of sale?
Under Indonesian law, the tenant is protected should the lessor wish to sell or transfer the land to another party while the lease is still effective. Article 1576 of the ICC provides that leases as a matter of law survive the sale of property unless the lease agreement specifically states otherwise.
It is uncommon for a buyer to purchase land and a building with existing leases, unless the buyer also intends to acquire the business of the seller, in which case the transaction would be structured as a shares acquisition rather than an asset acquisition. Therefore, the typical representation made by the seller is that the property is not subject to any existing leases, and it will not enter into any lease prior to the closing of the transaction.
If the buyer wishes to purchase land and a building with existing leases, the seller will not be permitted to enter into new leases, or the buyer would normally request the seller to deliver the land and building in vacant condition. As such, the seller will need to terminate the existing leases in accordance with the relevant lease agreements. If, pursuant to the lease agreement, the termination of the lease would entitle the tenant to claim compensation or damages, the seller and the buyer can freely negotiate who will bear such payment.
Estoppel certificates are not common in Indonesia.
Is a lease generally subordinate to a security instrument pursuant to the provisions of the lease? What are the legal consequences of a lease being superior in priority to a security instrument upon foreclosure? Do lenders typically require subordination and non-disturbance agreements from tenants? Are ground (or head) leases treated differently from other commercial leases?
Lease agreements and security agreements are two separate agreements, hence a lease is not subordinate to a security instrument.
Unless otherwise provided under the lease agreement, the lease shall survive the encumbrance and execution of security right. The Deed of Granting of Security Rights may provide that the security right grantor can lease the secured land or modify the term of the existing lease on the secured land only with the prior written approval of the security right grantee.
The concept of ground and head leases is uncommon in Indonesia.
What steps are taken to ensure delivery of tenant security deposits to a buyer? How common are security deposits under a lease? Do leases customarily have periodic rent resets or reviews?
It is common for a lessor to impose security deposits on the tenant. Although Indonesian law is silent on the form of deposits, the most common form is cash deposit. The payment of this deposit, including the amount, schedule and method of payment, is regulated in the lease agreement.
Rent resets or reviews can be freely negotiated between the lessor and the tenant based on the freedom of contract principle. Normally, the lessor shall require a rent increase upon the expiry of the initial lease term and the parties will have to agree to extend the lease.
What due diligence should be conducted before executing a contract? Is any due diligence customarily permitted or conducted after contract but before closing? What is the typical method of title searches and are they customary? How and to what extent may acquirers protect themselves against bad title? Discuss the priority among the various interests in the estate. Is it customary to obtain government confirmation, a zoning report or legal opinion regarding legal use and occupancy?
It is customary to conduct due diligence before execution of a contract, as the result of the due diligence may be one of the bases to negotiate the terms and conditions of the contract (eg, conditions precedent, representations and warranties, indemnity). The due diligence would normally cover the following:
Is it customary to arrange an engineering or environmental review? What are the typical requirements of such reviews? Is it customary to get representations or an indemnity? Is environmental insurance available?
Legal due diligence for environmental issues is typically limited to compliance that can be assessed based on documentary due diligence, such as licences, reports or the existence of warning letters from governmental authorities. The buyer should also engage an environmental consultant to identify potential environmental liability from the seller’s business activities that may require technical or on-site assessments.
An engineering review is typically performed by a technical team established by the buyer or a consultant engaged by the buyer.
It is customary, and in fact advisable from the buyer’s perspective, for the seller to provide representations and for the buyer to be entitled to indemnity due to breach of such representations.
Environmental insurance is available.
Do lawyers usually review leases or are they reviewed on the business side? What are the lease issues you point out to your clients?
Yes, lawyers usually review lease agreements. While lawyers may not dwell on technical matters of the lease, they will review key material provisions, which include:
In a sale transaction, an issue that needs to be highlighted is whether there is any existing lease, and whether it is a short or long-term lease. The lease agreement needs to be reviewed to identify the rights of the tenant that may be triggered (eg, the right to terminate the lease), and any financial obligation that may arise therefrom. If the buyer does not wish to continue the lease, the lease agreement needs to be reviewed to identify whether it allows unilateral termination by the lessor and any financial obligation that may arise therefrom.
A property management agreement may be entered into by the building owner with a third-party professional, and it constitutes a separate agreement with financing security instruments. The agreement may regulate the terms and conditions in the event that the property is used as collateral.
What other agreements does a lawyer customarily review?
A lawyer will also customarily review financing or loan agreements, brokerage agreement, management agreement, and other services agreements relating to the use of real estate.
How does a lawyer customarily prepare for a closing of an acquisition, leasing or financing?
For any transactions, the lawyer shall ensure that all conditions precedent are satisfied or duly waived, and all closing deliverables are in order.
Typical deliverables for a land acquisition include:
The payment of purchase price will be on the closing date.
For a lease, as this is a contractual arrangement between the lessor and the tenant, the procedure to close a lease agreement is more straightforward. The lessor will usually require the tenant to deliver its corporate documents or personal information (as applicable) and payment of deposit and rent, as well as initial payment of mandatory maintenance charges and administrative fees, with the amount and method of payment as agreed between the parties under the lease agreement.
For financing, it depends on who the lender is. If the lender is an affiliate company or a shareholder, the procedures are more straightforward and usually what is required is corporate approval of the borrower, as may be required under its constitutional documents. If the lender is a non-affiliate third-party lender, it will additionally perform due diligence to identify any material risks that shall be resolved prior to closing as conditions precedent (eg, non-compliance that may affect the borrower’s business operations or project). The closing deliverables may include corporate approval of the lender and borrower and finance documents of the borrower to evidence the borrower’s financial condition.
Is the closing of the transfer, leasing or financing done in person with all parties present? Is it necessary for any agency or representative of the government or specially licensed agent to be in attendance to approve or verify and confirm the transaction?
The closing is normally done in person attended by all parties and a notary or PPAT because certain closing documents are required to be signed in notarial deed form before a notary or PPAT. For example, for a land acquisition, the AJB is signed before a PPAT. In the case of lease or financing, the lease agreement or loan agreement is also usually prepared in a notarial deed form signed before a notary.
Upon the signing of the notarial deeds, the notary or PPAT will prepare original copies of the deeds for each of the parties.
The presence of a governmental authority or official from the land office is not required.
What are the remedies for breach of a contract to sell or finance real estate?
The non-breaching party may claim for damages against the breaching party in Indonesian courts or another dispute resolution forum chosen by the parties under the contract. Other forms of remedy, such as retainment of down payment or penalty, are to be freely negotiated between the parties based on the freedom of contract principle.
What remedies are available to tenants and landlords for breach of the terms of the lease? Is there a customary procedure to evict a defaulting tenant and can a tenant claim damages from a landlord? Do general contract or special real estate rules apply? Are the remedies available to landlords different for commercial and residential leases?
The available remedies, including eviction, in the context of commercial or residential leases, can be freely negotiated between the lessor and the tenant based on the freedom of contract principle.
Normally, the remedy clause will stipulate that the remedy provided under the contract shall not be exclusive or limit any other remedies that may be available by law.
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