Life, Liberty, and Land: Restrictions on Foreign Ownership of Land in Philippines
It’s said that “a true free market economy is an economy in which all resources are owned by individuals, and in which decisions about the allocation of those resources are made by individuals without government intervention”. The laissez-faire doctrine maintains that “private initiative and production are best allowed to roam free, opposing economic interventionism and taxation by the state beyond that which is perceived to be necessary to maintain individual liberty, peace, security, and property rights”. The success of capitalism in the former Soviet Union and China are examples of this. Many nations have adopted doctrines which promote economic freedom and property rights. Whether this can be said of the Philippines is debatable, especially when you take the issue of land ownership into consideration.
While property rights are the linchpin of a free market economy, many developing nations like the Philippines regulate or outwardly prohibit property rights of foreigners. Protectionist policy in the Philippines has several possible explanations: the consequence of 400 years of colonization, concentration of ownership with landed elite, or the promotion of local enterprise and industry. It is surprising, in this day and age to find the following paragraph in Article XII of the Philippine Constitution with regard to National Economy and Patrimony:
“The state shall promote industrialization and full employment based on sound agricultural development and agrarian reform through industries that make full and efficient use of human and natural resources, and which are competitive in domestic and foreign markets. However, the state shall protect Filipino enterprises against unfair foreign competition and trade practices”
Personally, this seems to be an anti competitive backwards policy which promotes inefficiency. For whatever the reason, the bitter consequence is that foreigners are not allowed to own land in the Philippines.
If the Philippines recognizes that inviting and encouraging foreign direct investment is a key factor in economic growth then foreign land ownership is a huge issue which must be addressed for the Philippines development. Real estate ownership is a key property right which allows investors flexibility and the ability to take more risks i.e., make bigger investments.
So, what exactly are foreigners faced with when they want to purchase or use land for their homes or businesses?
Ownership of land in the Philippines is restricted to persons or entities considered Philippine nationals or Filipino citizens. For this purpose, a corporation owned 60% by Filipino citizens is treated as a Philippine national. Acquiring land through aggressive ownership structures forces investors to with the Philippines’ Anti-Dummy Law which restricts the number of alien members on the Board of Directors of a landholding company to 40% alien participation. The property faces forfeiture if the law is breached.
Some of the exceptions to the restriction on foreigners acquisition of land in the Philippines are the following:
- Ownership through a 60/40 company
- Acquisition through hereditary succession if the foreigner is a legal or natural heir
- Purchase of not more than 40% interest in a condominium project
- Purchase by a former natural-born Filipino citizen subject to the limitations prescribed by law. (natural born Filipinos who acquired foreign citizenship is entitled to own up to 1,000 sq.m. of residential land, and 1 hectare of agricultural or farm land)
- Ownership through Filipinos who are married to aliens who retain their Filipino citizenship
Leasing land in the Philippines on a long term basis is an option for foreigners or foreign corporations with more than 40 percent foreign equity. Under the Investor’s Lease Act of the Philippines a foreign national and or corporation may enter into a lease agreement with Filipino landowners for an initial period of up to 50 years renewable once for an additional 25 years.
Foreigners are forced to lease and while it may seem the most viable and realistic option but the plain fact of the matter is that by nature lease is a very complex and hairy contract. This is exacerbated by the fact that most lease agreements in the Philippines are pro-landlord forcing alien lessees to accept commercial practices on advance rental, security deposits, escalation clauses, forfeiture, automatic ejectment that would be looked down upon if not prohibited in most countries. Where the lessor is at fault redress in the Philippine court system is a time consuming and unattractive solution-or not a solution at all.
Foreign ownership of land is a controversial issue nevertheless foreigners have options under the law that they can make use of. More important than what the law says is how it is actually enforced especially in case of conflict. No one should be forced to take the law into their own hands when it comes their property. The legal system should be there to protect property rights. Too often however, foreign investors are faced with an uphill battle when it comes to these issues.
What can a foreign investor or prospective property owner do when faced with these obstacles? My recommendation is first to be aware of your rights and obligations. This will give you an idea of the real risks involved. Second, negotiate to protect your interests in lease contracts/agreements. It is important to thresh out potential issues from the beginning. The law alone often does not offer adequate protection. Finally, establish a good relationship with your lessor. More than anything, a lease is a business relationship which both parties must be committed to. Until the law changes, it must be carefully navigated.
Expat Travel & Lifestyle Magazine – Vol. 1 No. 4 2008