Friday, 4 April 2014

Golden “Land”: Protecting investments in Myanmar from disputes

Foreign legal consultants John Lichtfield and Kyaw Zin Htet report that Myanmar is fast emerging as a destination for foreign companies. Issues remain, however, over land ownership. Globalaw looks at how foreign businesses can obtain land rights.

As Southeast Asia has blossomed into a region attractive for investment, coveted land resources have become scarcer and disputes over land more common. Even with its vast size, Myanmar is no exception to this rule, as the nation struggles with effective land registration and titling issues. In 2012/13, Myanmar's economy grew by 6.3 per cent but land disputes remain a legal issue that developers are having to contend with. There is a huge farming community that have settled on this land for decades, land that foreign businesses will need to build infrastructure and establish operations.

While each nation in the region has its own unique and often historic obstacles to investment in land, Myanmar in particular suffers from the effects of past nationalization of land ownership and a tradition of mixed customary and common law practices with regards to land rights. Although issues within the “Golden Land” have yet to garner the same outside attention as land disputes in other Southeast Asian nations, property rights and ownership are a growing concern for Myanmar citizens, the Union Government and foreign investors alike.

Disputes between farmers and the government

In rural areas, disputes typically emerge between farmers and the government over the classification of farmland, the rights to cultivate land indefinitely and the permanence of the land use rights granted. For investors, this can play out either as a challenge from the government or another interested third party of rights granted to the investor by way of sub-lease, or alternatively, in the form of a citizen protest over otherwise legitimate grants of land from the government to investors. In urban Myanmar, rights disputes are more likely to occur where there is contested ownership over a single parcel of land, or when a local party fails to abide by the rules or limitations of a land grant from the government.

Investors seeking absolute certainty regarding land rights in Myanmar may find it difficult to navigate this labyrinth of seemingly opaque and complex procedures. For example, registration for the rights associated with the land is haphazard in the cities and practically non-existent in many rural areas. In many cases, land has changed hands on an informal basis, with the original or registered owners of property either having died in the interim or moved on from their listed addresses. Despite these difficulties, investors can find some comfort in their dealings by understanding the basics of land rights in Myanmar and following certain best practices. While almost no due diligence in Myanmar can be said to be fool-proof, understanding the basic laws relating to land and taking certain precautions can help develop the confidence necessary to pursue investment in otherwise uncertain conditions.

Land rights generally

There is no overarching land or property law in Myanmar that governs the ownership, use and transfer of immovable property. The general legal framework concerning immovable property in Myanmar today is contained in:
(a) The Constitution of the Republic of Union of Myanmar (2008);
(b) Transfer of Property Act (1882);
(c) Registration Act (1908);
(d) Transfer of Immovable Property Restriction Law (1987);
(e) The Farm Land Law (2012);
(f) The Management of Cultivable, Fallow and Waste Land Law (2012);
(g) Myanmar Foreign Investment Law (2012) and Notification 39/2011 on the Right to Utilize Land; and
(h) Land Acquisition Act (1894).

Additional acts and regulations, such as the Forest Law and the Environmental Protection Law, can have an ancillary effect on the use of land, even if they do not directly regulate the ownership, use and/or transfer of land.

In general, all land in Myanmar is theoretically held by government bodies. While there are sporadic cases of genuine private land ownership, these are rare and represent the exception rather than the rule. Locals with rights to land typically hold land use grants or land leases from a government body, usually for terms of 30, 60 or 90 years. The concepts of lease and grant are often conflated and it is not uncommon to see sub-lease arrangements or assignments referred to as “sales” even if actual title or ultimate ownership of a property remains with the government.

Laws regulating the use of land by foreigners set up a number of restrictions on the ability of foreigners or foreign entities to hold, transfer and/or use land. Of particular importance to foreign investors is the Transfer of Immovable Property Restriction Law (1987) (the “TIPRL (1987)”), which forbids the transfer of immovable property to and from foreigners (including companies with any foreign investment). Furthermore, the TIPRL (1987) restricts foreign investors and individuals from entering into leases extending beyond one year. This affects all manner of immovable property from residential leases to leases involving commercial projects, essentially limiting foreigners and foreign invested entities to a single year lease term. The only present exception to this otherwise onerous restriction is found in Myanmar’s Foreign Investment Law (the “MFIL (2012)”).

Obtaining a permit

Officially passed in November 2012, the MFIL (2012) allows foreign investors to apply for an investment permit (the “MIC Permit”) with the Myanmar Investment Commission (the “MIC”), which, among other benefits, will allow the foreign investor to lease or use land in Myanmar for extended periods beyond what is otherwise allowed under the TIPRL (1987). Pursuant to any MIC Permit application, a potential foreign investor is required to submit to the MIC a draft lease for review. Should the MIC approve of the proposed investment project, the MIC will also generally approve of the submitted lease of immovable property or land for a term of up to 50 years.

The exact period granted may be modified depending on the size and needs of the investment project, but generally, major investment projects seek up to the full 50 year term. Upon the expiry of the initial period, the MIC may then grant two extension periods of up to 10 years each. The MIC may, with the prior approval of the Myanmar Government, provide for an even longer lease term if it is in the interest of the economic development of less-developed and inaccessible regions of Myanmar.

As a foreign investor in Myanmar, it is critical to understand the difference between rights authorized under an MIC Permit and rights actually granted to a local partner pursuant to a land grant from the government. The MIC Permit authorizes a foreign invested company to lease land for up to 50 years, plus the two additional ten year renewal terms; however, should the foreign invested company enter into a lease for land that is subject to an initial grant that ends prior to 50 years, the land will revert to the government upon termination of the initial grant regardless of the MIC Permit’s authorization. Therefore when considering land for investment purposes, it is crucial to determine not just the
suitability of the land for the investment proposed, but also the capacity of the lessor to obtain an extension of their land grant to take full advantage of the MIC Permit’s extended lease period.

Going forward in 2014, there is a general expectation by Myanmar real estate observers that a new Condominium Law will be passed that will offer an additional exception to the TIPRL (1987) single year lease restriction. Although only circulated in an unapproved draft form, the proposed Condominium Law foresees a regulatory regime where appropriately registered land development projects may be allowed to provide ownership and long term leases of condominium units to foreign investors. Certain registration restrictions and local ownership quotas are in the present draft version of the Condominium Law; however, even with these complications, passage of the Condominium Law would represent major progress for land regulation in Myanmar and could result in major changes to the market landscape.

How investors can protect themselves

Foreign investors entering into Myanmar should take precautions when preparing to secure land for investment. One rule, above all others, is to know your local partners. Often, land is provided as in-kind contribution (generally through a long-term lease in the case of MIC approved joint ventures) by a local party, and it is left to the foreign party to ensure that the land is legitimately held and authorized for the its intended use. While the temptation to rush into the market may be high, it is critical to take time to meet with and carefully evaluate potential local partners, and to ask questions about their background and the assets they will be investing in any project. Before signing on the dotted line, it is advisable to engage competent legal counsel to review any lease or other documents related to land to ensure that the land is indeed available and suitable for the investment project contemplated.

Because of the lack of effective central land registration, the performance of due diligence on land in Myanmar typically relies entirely on the documentation provided by the local party contributing the land. The most common documents provided for review tend to be leases or grants, either from a third party to the local party, or more ideally, from a government entity to a local party. Ensuring an accurate chain of title is critical and leases that have been sublet or assigned through multiple transfers can be difficult to verify. Other documents that are useful, though not always immediately available, are the land map and land history setting out the exact parameters of the property in question, as well as its registration history, and other documentation of registration noting where a property has been properly registered with the Registrar of Deeds and Assurances.

While registration of land grants and leases extending beyond one year are required by law, this requirement is frequently ignored, foregone with an eye to avoiding stamp duties or simply misunderstood by local parties. Even when the laws are complied with, there exist structural weaknesses in the system including the extended period in which land transfers may be registered. Transferees have up to four months after completion of lease or grant to register the transfer, thus, if registration does not occur until the four-month deadline, a less than scrupulous landholder could in the interim arrange for the sale or lease of the land to an otherwise unsuspecting third party. Even if the latter lessee should successfully register the property first, a lessee having a legitimate lease entered into prior to the latter lessee’s lease may register at any time up until the four month deadline and take claim to the property. 

While the scenario wherein multiple parties are engaged simultaneously by a lessor to lease a single property is relatively uncommon, is it not that rare for land registration to be incomplete or missing. As mentioned above, tax avoidance and ignorance of the law are common causes for improper or missing registration. As a result, a land lessor’s documents and assistance in working with the Myanmar authorities are critical to establishing the suitability of land for investment; in absence of any truly effective regulatory regime, it is these documents that will hold the key to determining the provenance and suitability of land for investment.

Exisitng investment opportunities

Myanmar simultaneously boasts exciting investment opportunities and a challenging, and at times, inscrutable environment for doing business. Investors considering major projects that require significant land use would be wise to move carefully into the market and avoid making hasty arrangements with unfamiliar partners. Mistakes made early on in the process can have significant and sometimes costly consequences down the road once significant time and money have been invested. Ensuring a good relationship with local partners and any local authorities with oversight of the relevant investor sector is critical.

Almost equally important is engaging experienced counsel, whether legal or general business consultancy, with a firm grasp on the laws and on-the-ground realities of doing business in Myanmar. It is easy to take for granted matters such as continuous electrical and water supply that would be certainties in more developed regions, but are just now being brought online in this developing market. The more established consultancies can help a foreign investor manage these basic complications that might otherwise go unnoticed until they have metastasized into unmanageable problems. An ounce of prevention is worth a pound of cure, and nowhere is this clichéd axiom truer than in the obtaining suitable land for investment in a turbulent, emerging market.

John Lichtefeld is a Foreign Legal Consultant with Kelvin Chia Yangon, Ltd. Kyaw Zin Htet is a Foreign Legal Consultant with Kelvin Chia Yangon, Ltd.

source: Global Legal Post
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