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This article was originally published on March 22, 2018 and has been updated to reflect recent legal developments.
The following post does not create a lawyer-client relationship between Alburo Alburo and Associates Law Offices (or any of its lawyers) and the reader. It is still best for you to engage the services of a lawyer or you may directly contact and consult Alburo Alburo and Associates Law Offices to address your specific legal concerns, if there is any.
Also, the matters contained in the following were written in accordance with the law, rules, and jurisprudence prevailing at the time of writing and posting, and do not include any future developments on the subject matter under discussion.
AT A GLANCE:
Many foreigners find the Philippines to be an attractive place to invest their money, and to establish their own enterprises. Because of the relative affordability of organizing a business in our country, there is no reason why the Philippines cannot be transformed into an investment hub of various countries in this part of the globe. We could also throw in the fact that investors from English speaking countries find it easy to adapt in the Philippines because of the Filipinos’ fluency in speaking their language. All of these factors contribute in making our country a bright investment prospect.
However, there are restrictions on nationality when it comes to owning and acquiring lands in the Philippines. Under our Constitution, only Filipino citizens and corporations with at least 60% Filipino ownership are allowed to own land. This restriction poses an obstacle on many foreign investors who would want to do business in the country. Thus, many of them simply entered into long-term leases of private lands, which they are allowed to do, as long as they comply with all the conditions imposed by law.
Foreign corporations doing business in the Philippines
Section 140 of the Revised Corporation Code provides that a foreign corporation is one formed, organized or existing under laws other than those of the Philippines’ and whose laws allow Filipino citizens and corporations to do business in its own country or State. It shall have the right to transact business in the Philippines after obtaining a license for that purpose in accordance with this Code and a certificate of authority from the appropriate government agency.
Conditions for lease of private lands by foreign investors
Under the Investors’ Lease Act, as amended, any foreign investor in the Philippines shall be allowed to lease private lands in accordance with the laws of the Republic of the Philippines subject to the following conditions:
- The aggregate period of the lease contract shall not exceed ninety-nine (99) years: Provided, That upon the recommendation of the Fiscal IncentivesReview Board (FIRB) or other relevant government agencies, the President of the Philippines may impose a shorter lease period for investors engaged in vital services or industries considered as critical infrastructure, in the interest of national security or pursuant to government-identified priorities for national development;
- The leased area shall be used solely for the purpose of the approved and registered investment upon the mutual agreement of the parties;
- The leased premises shall comprise such area as may be reasonably be required for the purpose of the approved and registered investment upon the mutual agreement of the parties;
- The leased premises shall comprise such area as may be reasonably be required for the purpose of the approved and registered investment subject however to the Comprehensive Agrarian Reform Law and the Local Government Code;
- The lease contract shall be registered with the Registry of Deeds of the province or city where the leased area is located and annotated on the certificate of title covering the leased area; and
- The Register of Deeds shall register the lease contract if all of the following conditions exist:
- The investor presents proof of an approved and registered investment;
- The date of commencement and maximum duration of the lease are certain;
- The technical description of the property subject of the lease is clearly specified;
- The lessee has performed preparatory acts for the commencement of its investment project; and
- There is a provision in the lease contract providing for its termination in case of a change in the purpose or project for which the lease was intended, or in case of failure to commence the investment project within a reasonable period from the signing of the lease contract.
The leasehold right acquired under the long-term lease contracts entered into pursuant to this Act may be sold, transferred, assigned, or may serve as security for a loan: Provided, That when a buyer, transferee, assignee, or creditor is a foreigner or foreign-owned enterprise, the conditions and limitations in respect to the use of the leased property as provided under this Act shall continue to apply. (Section 4)
The term “investing in the Philippines” shall mean making an equity investment in the Philippines through actual remittance of foreign exchange or transfer of assets, whether in the form of capital goods, patents, formulae, or other technological rights or processes, upon registration with the Securities and Exchange Commission. [Section 3 (1)]
Withdrawal of approved investment
Withdrawal of the approved and registered investment in the Philippines within the period of the lease contract entered into under this Act, or use of the leased area for the purpose other than that authorized, shall warrant the ipso facto termination of the lease contract without prejudice to the right of the lessor to be compensated for the damages the lessor may have suffered thereby.
The term “withdrawal of approved investment” shall mean either; (a) the failure to operate the investment project for any 3 consecutive years; or (b) outright abandonment of the investment project at any time during the approved lease period.
However, failure to pay lease rental for 3 consecutive months coupled with the failure to operate the investment project for the same period shall be deemed an outright abandonment of the project. [Section 3(2)]
Renewal of lease agreement
Any lease contract under this Act which is renewable at the option of the lessee subject to the same terms and conditions of the original contract shall be interpreted to mean as renewable upon the mutual agreement of the parties. [Section 5(3)]. In addition to the conditions for the renewal of a lease contract, the foreign lessee shall show that it has made social and economic contributions to the country. [Section 5(4)].
Lease for purposes of tourism projects
In the case of tourism projects, lease of private lands by qualified foreign investors shall be limited to projects with an investment of not less that Five million US dollars (USD 5,000,000.00), seventy percent (70%) of which shall be infused in said project within three (3) years from the signing of the lease contract.
Termination of Lease Contract
In case of failure to commence the investment project within three (3) years from the signing of the lease contract, the FIRB, Board of Investments (BOI), or the relevant IPA, as applicable, shall order the lessee to explain the delay and if merited, require such lessee to commence the project within a reasonable period. Failure to comply with the order and to initiate the project within the period provided may, after due notice and hearing, cause the revocation of all entitlements granted under this Act. (Section 6)
Prohibitions and penalties for violation
Any contract made or executed in violation of any of the following prohibited acts shall be null and void ab initio and both contracting parties shall be punished by a fine of not less than One million pesos (PhP1,000,000.00) but not more than Ten million pesos (PhP10,000,000.00) or imprisonment of six (6) months to six (6) years, at the discretion of the court:
- Any provision in the lease contract stipulating a lease period in excess of that provided in paragraph (1) of Section 4;
- Use of the leased premises for a purpose contrary to existing laws of the land, public order, public policy, morals, or good customs;
- Any agreement resulting in the lease of land in excess of the approved area: Provided, That, where the excess of the totality of the area leased is due to the acts of the lessee, the lessee shall be held solely liable therefor: Provided, further, That, in the case of corporations, associations, or partnerships, the president, manager, director, trustee, or officers responsible for the violation hereof shall bear the criminal liability.
The penalties provided under this section shall likewise apply to all sublease contracts. (Section 7)
Surely, the economy will benefit from allowing foreigners to lease parcels of land in the Philippines for long periods, especially in the face of ownership restrictions based on nationality. But considering the need to regulate foreign leases, it is advisable not only for foreign investors, but also for Filipino lessors who lease out to such foreign investors, to be aware of the restrictions and limitations imposed by law on foreign leases. consistent with the constitutional mandate to conserve and develop our own patrimony, the State has adopted a flexible and dynamic policy on the granting of long-term lease on private lands to foreign investors for the establishment of industrial estates, factories, assembly or processing plants, agro-industrial enterprises, land development for industrial or commercial use, tourism, agriculture, agro-forestry, ecological conservation and other similar priority productive endeavors. (Section 2)
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- Key Takeaways from the New Rules on the Employment of Foreign Nationals
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