Foreigners Leasing Land in the Philippines Under RA 7652: Requirements, Clauses, and Best Practices

Foreigners Leasing Land in the Philippines Under RA 7652: Requirements, Clauses, and Best Practices

Introduction

The Philippine Constitution, under Article XII, Section 7, generally prohibits foreign nationals and foreign corporations from owning private lands in the Philippines to preserve national patrimony and promote Filipino control over natural resources. However, recognizing the need to attract foreign investments for economic development, the government has enacted laws allowing foreigners to lease lands under specific conditions. Republic Act No. 7652 (RA 7652), also known as the Investors' Lease Act of 1993, is a pivotal legislation in this regard. It permits long-term leases of private lands by foreign investors for productive purposes, balancing constitutional restrictions with investment incentives.

This article provides a comprehensive examination of RA 7652 in the Philippine legal context, covering its historical background, eligibility requirements, procedural steps, essential clauses in lease agreements, potential pitfalls, and best practices for compliance. It draws from the law's provisions, related jurisprudence, and practical considerations to offer a thorough guide for foreign investors, legal practitioners, and stakeholders.

Historical and Legal Background of RA 7652

Enacted on June 4, 1993, RA 7652 amends certain provisions of the Public Land Act (Commonwealth Act No. 141) and the Revised Penal Code to facilitate foreign investments. Prior to RA 7652, lease terms for foreigners were limited to shorter durations (typically 25 years, renewable for another 25 under general civil law principles), which deterred large-scale, capital-intensive projects requiring long-term land security.

The law's primary objective is to encourage foreign direct investments in priority sectors by allowing leases of up to 75 years (50 years initial term, renewable for 25 years). It aligns with other investment laws like the Omnibus Investments Code (Executive Order No. 226) and the Foreign Investments Act (RA 7042, as amended by RA 8179), which promote sectors such as manufacturing, tourism, and agro-industry.

Key principles underpinning RA 7652 include:

• Non-Ownership Principle: Leases do not confer ownership; the land reverts to the lessor upon expiration or termination.
• Investment-Oriented Use: Leases must support productive endeavors, not speculative or residential purposes.
• Government Oversight: Approval from agencies like the Board of Investments (BOI) or the Philippine Economic Zone Authority (PEZA) is often required for the underlying project.

Jurisprudence, such as in cases decided by the Supreme Court (e.g., interpretations of constitutional land restrictions in Matthews v. Taylor or Republic v. Register of Deeds), reinforces that leases under RA 7652 must not be disguised sales or mechanisms to circumvent alien land ownership bans.

Requirements for Foreigners Leasing Land Under RA 7652

To qualify for a lease under RA 7652, foreign lessees must meet stringent eligibility, procedural, and substantive requirements. Non-compliance can result in contract nullification, penalties, or deportation.

Eligibility Criteria

1. Lessees:

   • Foreign nationals (individuals) or foreign corporations (entities with more than 40% foreign equity, as defined under RA 7042).
   • The lessee must be an "investor" engaged in a project that qualifies under the Investment Priorities Plan (IPP) issued annually by the BOI. Qualifying projects include:
     • Establishment of industrial estates, factories, or processing plants.
     • Agro-industrial enterprises.
     • Land development for industrial, commercial, or tourism use.
     • Other priority productive endeavors as determined by the BOI.
   • Corporations must be registered with the Securities and Exchange Commission (SEC) if operating in the Philippines, and foreign corporations must secure a license to do business.

2. Lessors:

   • Must be Filipino citizens or corporations with at least 60% Filipino ownership.
   • The land must be privately owned, titled, and free from encumbrances that could impair the lease (e.g., no existing mortgages without consent).

3. Land Specifications:

   • Only private agricultural, commercial, or industrial lands are eligible; public lands, foreshore areas, or protected zones (e.g., under agrarian reform via RA 6657) are excluded.
   • Maximum area: No strict limit under RA 7652, but subject to BOI/PEZA guidelines and local zoning laws. For example, eco-tourism projects may cap at 5 hectares without special approval.

Procedural Requirements

1. Project Approval:

   • Obtain BOI or PEZA registration for the investment project. This involves submitting a project feasibility study, proof of capital infusion (at least US$200,000 for most projects under RA 7042), and environmental compliance certificates (ECC) from the Department of Environment and Natural Resources (DENR).
   • For export-oriented enterprises, PEZA approval grants fiscal incentives like tax holidays.

2. Lease Agreement Execution:

   • Draft a lease contract compliant with RA 7652 provisions.
   • Notarize the agreement before a Philippine notary public.

3. Registration:

   • Register the lease with the Register of Deeds (RD) in the land's jurisdiction within 60 days of execution.
   • Annotate the lease on the land title (Original Certificate of Title or Transfer Certificate of Title).
   • Pay documentary stamp taxes, registration fees, and local transfer taxes.

4. Term and Renewal:

   • Initial term: Up to 50 years.
   • Renewal: One-time extension for 25 years, applied for at least one year before expiration, subject to BOI/PEZA re-evaluation of project viability.
   • Total maximum: 75 years; extensions beyond this require special legislation.

5. Compliance with Other Laws:

   • Adhere to the Civil Code (Articles 1643-1653 on leases), Anti-Dummy Law (Commonwealth Act No. 108), and environmental regulations.
   • Secure local government unit (LGU) permits for land use conversion if agricultural land is involved (under Department of Agrarian Reform guidelines).

Failure to meet these can lead to penalties under RA 7652, including fines up to PHP 100,000, imprisonment, or lease voidance.

Essential Clauses in Lease Agreements Under RA 7652

Lease agreements must be tailored to RA 7652's framework while incorporating standard contractual elements. Below are key clauses, with sample language for illustration (note: these are not templates; consult legal counsel for customization).

1. Parties and Recitals:

   • Identify lessor (Filipino owner) and lessee (foreign investor).
   • Recite the investment project, BOI/PEZA approval, and compliance with RA 7652.
   • Sample: "WHEREAS, the Lessee is a foreign corporation registered with the BOI for the establishment of a manufacturing plant..."

2. Description of Property:

   • Detailed land description: location, area, boundaries, title number, and survey plan.
   • Include warranties on title cleanliness and non-encumbrance.

3. Term and Renewal:

   • Specify the 50-year initial term and 25-year renewal option.
   • Conditions for renewal: continued project operation, no violations.
   • Sample: "The lease shall commence on [date] and endure for fifty (50) years, renewable for twenty-five (25) years upon mutual agreement and BOI approval."

4. Rent and Payment Terms:

   • Fixed or escalating rent, payable in Philippine pesos or foreign currency (subject to Bangko Sentral ng Pilipinas rules).
   • Include adjustments for inflation, taxes, or improvements.
   • Sample: "Lessee shall pay annual rent of PHP [amount], escalated by 5% every five years."

5. Use and Purpose:

   • Restrict use to the approved investment project; prohibit subleasing without consent or residential use.
   • Sample: "The Leased Property shall be used exclusively for [project description] as approved by the BOI."

6. Improvements and Maintenance:

   • Lessee's right to build structures; ownership of improvements reverts to lessor upon termination unless otherwise agreed.
   • Maintenance obligations: Lessee bears costs; lessor ensures no interference.
   • Sample: "All improvements made by the Lessee shall become the property of the Lessor upon lease expiration, without reimbursement."

7. Taxes and Utilities:

   • Allocate responsibilities: Lessee typically pays real property taxes, utilities, and insurance.

8. Termination and Remedies:

   • Grounds: Breach, project failure, force majeure, or eminent domain.
   • Remedies: Damages, ejection, or specific performance.
   • Include arbitration clause under Philippine Dispute Resolution laws.

9. Governing Law and Dispute Resolution:

   • Governed by Philippine law; jurisdiction in Philippine courts or arbitration via the Philippine Dispute Resolution Center.
   • Force majeure provisions covering natural disasters or political events.

10. Miscellaneous:

    • Non-assignment without consent; severability; entire agreement.
    • Compliance with anti-money laundering laws (RA 9160).

Clauses must avoid provisions that could be interpreted as granting ownership rights, per Supreme Court rulings.

Best Practices for Leasing Under RA 7652

To mitigate risks and ensure smooth implementation, foreign investors should adopt the following best practices:

1. Conduct Thorough Due Diligence:

   • Verify land title authenticity via RD and DENR; check for agrarian reform claims or indigenous rights (under IPRA, RA 8371).
   • Engage land surveyors and environmental consultants early.

2. Secure Expert Legal and Financial Advice:

   • Consult Philippine-barred lawyers specializing in investment law; involve accountants for tax implications.
   • Structure the lease within a broader investment framework, leveraging incentives like income tax holidays.

3. Incorporate Flexibility and Protections:

   • Include escalation clauses for economic changes; opt for rent in stable currencies.
   • Add environmental sustainability clauses to align with ESG standards and DENR requirements.

4. Monitor Compliance and Renewals:

   • Maintain records of project progress for BOI audits; apply for renewal proactively.
   • Establish a local joint venture if needed to enhance credibility.

5. Risk Management:

   • Insure against political risks via multilateral agencies like the Multilateral Investment Guarantee Agency (MIGA).
   • Prepare exit strategies, including buy-back options for improvements.

6. Cultural and Community Engagement:

   • Build relationships with LGUs and communities to avoid disputes; comply with corporate social responsibility norms.

Common pitfalls include underestimating bureaucratic delays (e.g., BOI approvals can take 3-6 months) or ignoring zoning changes, which can void leases.

Conclusion

RA 7652 represents a strategic gateway for foreign investors to participate in the Philippine economy without violating constitutional land ownership bans. By adhering to its requirements—eligibility as an investor, project approval, and proper registration—foreigners can secure long-term land access for up to 75 years. Well-drafted lease clauses ensure clarity and protection, while best practices like due diligence and compliance monitoring safeguard investments.

As the Philippines continues to liberalize its economy (e.g., through recent amendments to the Public Service Act and Retail Trade Liberalization Act), RA 7652 remains a cornerstone for sustainable foreign involvement. Investors are advised to stay abreast of regulatory updates and seek professional guidance to navigate this complex landscape effectively.

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