Land may serve as a primary form of security in credit facilities. However, when land pledged as collateral is subject to a dispute, the creditor’s legal position may face different issues, both before and after a Mortgage Right (Hak Tanggungan) is created over the land.
The eligibility of land as collateral should be assessed based on the status of the land right, the authority of the security provider, and the substance of the dispute concerning the property. In this context, several legal questions arise: Can disputed land still qualify as collateral before a Mortgage Right is created? If a dispute arises only after the Mortgage Right has been created, can the creditor still enforce the security over the relevant property? The following provides an explanation.
Conduct Due Diligence Before Creating a Mortgage Right
Land that is subject to a dispute cannot be immediately classified as eligible or ineligible collateral solely based on the existence of a land certificate. The creditor must first understand the substance of the dispute and its potential impact on the authority of the registered rights holder and the legal certainty of the property to be pledged. Accordingly, the authority of the security provider is one of the key aspects that must be examined before the Mortgage Right is created.
This examination is conducted through legal due diligence. The creditor should review the land’s juridical data, the history of acquisition of the land right, the authority of the security provider, the physical condition of the land, and any legal proceedings involving the rights holder or the land itself.
At a minimum, before accepting land as collateral, the creditor should conduct an examination of the juridical aspects and legal status of the land, including:
- who holds the land right and whether such person has the authority to encumber the land as security;
- whether there are any lawsuits or legal proceedings involving the rights holder;
- whether the land itself is the subject matter of a dispute;
- whether any other party claims ownership or possession of the land;
- whether there are any blocks, attachments, or other annotations recorded in the land registry; and
- whether such circumstances may affect either the creation or enforcement of the Mortgage Right.
Accordingly, due diligence serves to determine whether the land possesses sufficient legal quality to function as effective collateral. It is not sufficient for a creditor merely to establish that the certificate can legally be encumbered with a Mortgage Right. The creditor must also ensure that the land right is legally capable of providing enforceable security if the debtor defaults on its obligations.
After the Mortgage Right Is Created: A Dispute Does Not Automatically Extinguish the Creditor’s Rights
If a Mortgage Right has been validly created and a dispute subsequently arises, the dispute does not automatically extinguish the Mortgage Right.
Article 6 in conjunction with Article 20 paragraph (1) letter a of Law No. 4 of 1996 concerning Mortgage Rights over Land and Related Objects (the “Mortgage Law”) grants the first-ranking Mortgage Right holder the right to sell the object of the Mortgage Right through a public auction under its own authority if the debtor defaults. This right is known as parate executie, which allows the creditor to enforce the security without first obtaining an execution order (fiat eksekusi) from the court.
This mechanism differs from enforcement based on the executorial title of the Mortgage Right Certificate as referred to in Article 14 paragraph (3) in conjunction with Article 20 paragraph
(1) letter b of the Mortgage Law, which involves an execution mechanism through the court.
Accordingly, the emergence of a dispute after the creation of a Mortgage Right does not automatically eliminate the creditor’s rights. The creditor must nevertheless determine the type of dispute and its legal consequences for the enforcement mechanism.
Ownership Disputes and Their Impact on Mortgage Right Enforcement
The situation is different where, before the auction is conducted, a third party files a lawsuit concerning ownership of the object of the Mortgage Right.
Where such an ownership lawsuit has been filed before the auction is conducted, the creditor cannot immediately use the Executive Auction mechanism under Article 6 of the Mortgage Law. Article 34 of Minister of Finance Regulation No. 122 of 2023 provides that, under such circumstances, the auction must be conducted based on the executorial title of the Mortgage Right Certificate, with a fiat eksekusi obtained through the court.
This provision applies to lawsuits filed by third parties concerning ownership of the object of the Mortgage Right, including claims by parties holding other ownership documents or parties that had entered into a notarized sale and purchase agreement or other binding arrangement before the Mortgage Right was created.
Accordingly, not every lawsuit against the debtor or the land itself will prevent the auction from being conducted. The creditor must determine whether the lawsuit is genuinely related to ownership of the object of the Mortgage Right and whether it falls within the scope of Article 34 of Minister of Finance Regulation No. 122 of 2023.
The existence of such an ownership lawsuit does not extinguish the Mortgage Right or the creditor’s right to repayment of its receivables. Instead, it changes the enforcement mechanism from parate executie to enforcement based on the executorial title of the Mortgage Right Certificate through the court. The Mortgage Right Certificate retains its executorial force as provided under the Mortgage Law.
Blocks and Attachments over the Object of the Mortgage Right
In addition to litigation, creditors should examine whether there are any blocks or attachments recorded at the Land Office.
Minister of Agrarian Affairs and Spatial Planning/Head of the National Land Agency Regulation No. 13 of 2017 regulates the recording and removal of blocks and attachments over land rights. A block may be recorded due to a land dispute or conflict. Article 3 provides that where a land book contains a block annotation, land registration data maintenance activities cannot be carried out.
For a block requested by an individual or legal entity, Article 13 of Minister of Agrarian Affairs and Spatial Planning/Head of the National Land Agency Regulation No. 13 of 2017 provides for a period of 30 calendar days from the date on which the block is recorded. This period may be extended based on a court order in the form of a determination or judgment.
Therefore, the existence of a block must be examined specifically. The creditor should determine who requested the block, when it was recorded, the legal basis for the request, whether there is a court order, and whether the block remains valid.
The same applies to attachments. The creditor should identify the legal basis of the attachment, the institution that ordered it, the underlying proceedings, the property subject to the attachment, and the position of the Mortgage Right in relation to the attachment.
Reassessment Before Enforcement
Due diligence does not end once the Mortgage Right has been registered.
When the debtor defaults and the creditor intends to enforce the collateral, the creditor should reassess the legal condition of the property. This reassessment is necessary because the legal status of the land may change after the Mortgage Right has been created.
At a minimum, the reassessment should cover:
- the latest status of the land right;
- the physical and juridical data of the land;
- the record and ranking of the Mortgage Right;
- the existence of any block;
- the existence of any attachment;
- any ongoing legal proceedings;
- the parties bringing the lawsuit;
- the subject matter and legal basis of the lawsuit;
- the relationship between the lawsuit and ownership of the land; and
- the enforcement mechanism appropriate to the latest legal
The results of this reassessment will determine whether the creditor may proceed with an Executive Auction under Article 6 of the Mortgage Law or must use the executorial title of the Mortgage Right Certificate through the court.
Land Disputes and Their Resolution
Where a dispute concerns land administration, the creditor should also consider the mechanism for handling land cases under Minister of Agrarian Affairs and Spatial Planning/Head of the National Land Agency Regulation No. 21 of 2020 concerning the Handling and Resolution of Land Cases.
The regulation governs mechanisms for handling land cases, including the assessment of cases and the determination of appropriate resolution measures by the Ministry of Agrarian Affairs and Spatial Planning/National Land Agency.
Reviewing the handling of a case at the Land Office is relevant where there is a complaint, dispute, conflict, or particular application that may affect the administrative status of the object of the Mortgage Right.
The creditor must distinguish between the authority of the Land Office and that of the court. The Land Office handles land-administration matters within its authority, while the court examines and adjudicates civil disputes and other disputes within its jurisdiction. This distinction is important in determining the appropriate legal strategy for collateral that is subject to a dispute.
Legal Risks for Creditors
Failure to conduct proper due diligence may affect the creditor’s ability to exercise its rights.
- Risk to the creation of the security, where legal issues existed from the outset that could restrict or challenge the authority of the security provider.
- Litigation risk, where a third party challenges ownership or the validity of a legal act relating to the collateral.
- Enforcement risk, where the circumstances fall within Article 34 of Minister of Finance Regulation No. 122 of 2023, preventing the creditor from directly conducting an Executive Auction under Article 6 of the Mortgage Law.
- Time and cost risks, where the creditor is required to pursue court proceedings before the auction can be conducted.
- Economic value risk, where the dispute reduces the interest of potential auction participants or affects the value of the property to be sold.
Legal Steps for Creditors
When dealing with land collateral that is subject to a dispute, creditors may undertake the following examination steps:
- Conduct a review of the land certificate and land-registration data;
- Examine the history of acquisition of the land right;
- Verify the authority of the security provider to create the Mortgage Right;
- Conduct a physical inspection of the property;
- Conduct a litigation search concerning the rights holder and the land;
- Check for any blocks or attachments;
- Identify the substance and legal position of the dispute;
- Determine whether the dispute concerns ownership of the property;
- Review Article 34 of Minister of Finance Regulation No. 122 of 2023 if the creditor intends to conduct an auction;
- Determine whether enforcement may proceed under Article 6 of the Mortgage Law or whether a fiat eksekusi based on the executorial title of the Mortgage Right Certificate is required; and
- Develop a litigation strategy where a lawsuit may impede the exercise of the creditor’s
This examination enables the creditor to determine the appropriate course of action based on the concrete legal circumstances of the collateral, rather than relying solely on the existence of a land certificate or a registered Mortgage Right.
Conclusion
A dispute over land does not automatically extinguish a Mortgage Right or the creditor’s enforcement rights. However, where the dispute concerns ownership of the object and falls within Article 34 of Minister of Finance Regulation No. 122 of 2023, enforcement must be carried out through the executorial-title mechanism with a fiat eksekusi obtained through the court.
Accordingly, due diligence should be conducted both before the Mortgage Right is created and before enforcement is carried out.
For banks, financial institutions, companies, and asset owners facing issues relating to Mortgage Rights, land disputes, enforcement of security, or auction proceedings, Mangatur Nainggolan Law Firm is prepared to provide legal analysis and assistance in identifying legal risks and developing appropriate legal strategies.
References
- Law 4 of 1996 concerning Mortgage Rights over Land and Related Objects.
- Minister of Finance Regulation No. 122 of 2023 concerning Guidelines for the Implementation of Auctions.
- Minister of Agrarian Affairs and Spatial Planning/Head of the National Land Agency Regulation 13 of 2017 concerning Procedures for the Blocking and Attachment of Land Rights.
Author: Fawzy Gomgom Sinaga, S.H.
Editor: Robby Simamora, S.H.,M.H.