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Crackdown on foreign ownership laws

Crackdown on foreign ownership laws

As a result of the Ministry of Land Management, Urban Planning and Construction’s (MLMUPC) decision to enforce long-standing soft title ownership regulations, all khans (districts) of Phnom Penh will stop allowing the processing of titles under a foreigner’s name.

Previously, many khans such as Daun Penh have openly allowed foreigners to take possession of soft titles on landed properties, despite it being a direct contradiction of the 2010 law on providing foreigners with ownership rights in private units of co-owned buildings.

Desmond Yap, managing director of Yong Yap Properties, an expat-focused agency based in the Daun Penh/Riverside area, says, “As we understand now, throughout Phnom Penh, foreigners can only own condominiums as stipulated in the 2010 Foreign Ownership Law (the Strata Law). The purchase of townhouse flats can only be done through a nominee or company structure.”

In order to better implement the 2010 Foreign Ownership Regulations, the MLMUPC issued a notification letter on May 25 instructing chiefs of all 12 khans in Phnom Penh City that from June 13 onwards, the transfer of possessory rights to a foreigner is only legal if the property subject to the transfer is on or above the first floor; and the property being transferred into the foreigner’s name exists in a co-owned building constructed with the proper construction permit issued by the relevant government authority.

This means that any co-owned building constructed without the proper construction permit will not be considered eligible for foreigner ownership, and paperwork signed by a chief of any khan in Phnom Penh City relating to the transfer of possessory rights under a soft title to a foreigner will not be legally binding.

Following this, Khan Daun Penh officials announced in early June that the sangkat (commune) will no longer transfer soft titled property into a foreigner’s name.

Grant Fitzgerald, general manager at Independent Property Services (IPS) Cambodia, said that “these laws have always been there, they are just now enforcing them across the board.”

“This new announcement for Daun Penh follows on from a similar change made in Khan 7 Makara late last year which saw a flurry of activity as foreigners who held property in their own name sought advice and solutions to ensure that their property was secure,” Fitzgerald added.

However, the notification letter sent by the ministry on May 25 did not specify the legal consequences to the co-owners of the building if a transfer of possessory rights is made to foreign co-owners when there is no correct construction permit in place.
The new enforcement is unlikely to directly affect foreigners currently owning soft titles until it comes time to sell, suggests Yap.

“If Daun Penh follows the precedence of 7 Makara which did allow foreigners to purchase flats in previous years, foreigners who have properties under their name can still live in it and rent it and are under no pressure to sell. Just when they do eventually sell, it has to be in the name of a Khmer national.”

Further, Yap notes that “the worst case scenario is that they will force you to sell the property – though if this happens, you can just transfer the property into a nominee’s name with the protection of a trusted lawyer.”

An overseas investor of Yong Yap Properties said the crackdown was a “bit of a surprise, but not totally unexpected”.

“I thought it wouldn’t come for a while. Anyway, at least I am glad I bought one before the change although it may be harder for me to sell it now.”

The new policy, according to Yap, may slow down sales in the short-term in Daun Penh, though the rental market will not be affected.

In fact, Yap explains, “Rental prices may increase in the future. With many renovation teams potentially out of the game now, the future supply of quality Western renovated flats may slow down, though demand should continue to grow.”

Fitzgerald agrees, saying, “Despite the restrictive law on foreign property ownership there are a number of tried and tested mechanisms, the most effective for soft titled property being the nominee structure.”

Under the current law regarding the nominee structure, all foreign buyers must engage a Khmer national, be it a friend, spouse, colleague or professional third party, to hold their property in the nominee’s name.

This title protection for the foreign buyer is then strengthened via the use of nominee security contracts (contracts between the foreign buyer and nominee) which can restrict the nominees’ ability to sell, transfer or move the property to any other third party without permission of the foreign buyer.

Yap adds that “lawyers can draft up mortgage and long-term rental agreements with the nominee as added protection.”

“We would predict a slower sales numbers until the law is widely accepted by the masses, then the market will sort itself back to normal,” Yap concludes.

James Whitehead is content director at www.realestate.com.kh.

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