Published — March 22, 2018
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 your own lawyer to address your legal concerns, if 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.
Related Topic: Understanding How Lease Agreements Work
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
The Corporation Code defines a foreign corporation as one that is formed, organized or existing not under the laws of the Philippines, and whose laws allow Filipino citizens and corporations to do business in its own country or state. In order for it to have the right to transact business in the Philippines, the law further requires for it to obtain first a license to transact business in this country, and to secure a certificate of authority from the appropriate government agency [See: Sec. 123].
Conditions for lease of private lands by foreign investors
Under the Investors’ Lease Act, any foreign investor investing in the Philippines shall be allowed to lease private lands, subject to the following conditions:
- No lease contract shall be for a period exceeding 50 years, renewable once for a period of not more than 25 years;
- The leased area shall be used solely for the purpose of the investment upon the mutual agreement of the parties;
- The leased premises shall comprise such area as may reasonably be required for the purpose of the investment [Sec. 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 [Sec. 3(1)].
Withdrawal of approved investment
Withdrawal of the approved investment in the Philippines within the period of the lease agreement, or use of the leased area for the purpose other than that authorized, shall warrant the termination of the lease agreement without prejudice to the right of the lessor to be compensated for the damages he may have suffered [Sec. 5(2)].
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 [Sec. 3(2)].
Renewal of lease agreement
Any lease agreement 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 [Sec. 5(3)]. In addition to the conditions for the renewal of a lease agreement after the period of 50 years (as mentioned above), the foreign lease shall show that it has made social and economic contributions to the country [Sec. 5(4)].
Lease for purposes of tourism projects
In the case of tourism projects, lease of private lands by foreign investors qualified herein shall be limited to projects with an investment of not less than five million US dollars, 70% of which shall be infused in said project within 3 years from the signing of the lease contract [Sec. 5(5)].
Power of DTI to terminate the lease
The Secretary of Trade and Industry shall terminate any lease contract entered into under the provisions of the Investors’ Lease Act if the investment project is not initiated within 3 years from the signing of the lease contract [Sec. 6].
Prohibitions, and penalties for violation
The law prohibits the following acts:
- Any provision in the lease agreement stipulating a lease period longer than the allowable periods under the law;
- Use of the leased premises for the purpose contrary to existing laws of the land, public order, public policy, morals, or good customs;
- Any agreement resulting is the lease of land more than the area approved by the DTI. However, if the excess of the totality of the area leased is due to the acts of the lessee, then such lessee shall be held solely liable [See: Sec. 7].
Any contract or agreement made in violation of any of the following prohibited acts shall be void ab initio. Also, both contracting parties shall be punished by a fine ranging from P100,000.00 to P1,000,000.00, or imprisonment of 6 months to 6 years, or both, at the discretion of the court [Ibid].
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 mandate of conserving and developing our own patrimony, the State has adopted such flexible and dynamic policies in the granting of long-term leases 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, and other similar priority productive endeavors [See: Sec. 2].
Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/0917-5772207.
All rights reserved.