Liability of Financial Institutions in Case of Damaged or Lost Collateral Land Certificates

Understanding Collateral and Security Rights
In his book "Perkembangan Hukum Jaminan di Indonesia", Salim H.S., citing Hartono Hadisoeprapto, states that collateral is something given to a creditor to provide assurance that the debtor will fulfill obligations that are measurable in monetary value arising from a legal agreement.

Collateral agreements are classified as accessory agreements, meaning they follow the main contract. These agreements may be made verbally or in writing. In banking practice, such agreements are typically in written form, either as private deeds or authentic deeds.

According to Article 1(1) of Law No. 4 of 1996 on Mortgage Rights (“Mortgage Law”):
“A mortgage is a security right imposed on land rights as regulated under Law No. 5 of 1960 concerning Basic Agrarian Principles, along with or without objects that are an integral part of the land, for the repayment of a specific debt, granting priority to a particular creditor over other creditors.”

Key Parties
A. Grantor of the Mortgage: An individual or legal entity authorized to perform legal acts on the mortgaged object (the land).
B. Holder of the Mortgage: The party entitled to the debt—typically the bank in a financing transaction.

Thus, the debtor acts as both the borrower and the mortgage grantor, while the bank acts as the lender and the mortgage holder.

Granting and Registering Mortgage Rights
The granting of mortgage rights is formalized through the Deed of Granting Mortgage (Akta Pemberian Hak Tanggungan/ “APHT”) made by a Land Deed Official (Pejabat Pembuat Akta Tanah/ “PPAT”).

The APHT may include specific clauses such as:
1. Restrictions on leasing the mortgaged property without written consent from the mortgage holder.
2. Restrictions on altering the structure or layout of the property without prior consent.
3. Authorization for the creditor to manage or sell the property if the debtor defaults.
4. Provisions for the creditor to safeguard the mortgaged object for enforcement purposes.
5. Right for the creditor to sell the asset independently if default occurs.
6. Guarantees regarding insurance payouts or compensation in the case of expropriation.
7. Obligations to vacate the property upon execution.
8. Requirements to return the land certificate with the mortgage annotation, unless agreed otherwise.

The PPAT must submit the APHT and relevant documents for registration to the Land Office no later than 7 business days after signing. The mortgage becomes effective on the date the mortgage land book is recorded, and the annotation is entered on the land title certificate.

Consequences of Damaged Land Certificates
There are two main possibilities regarding land and its certificates:

1. Full Repayment of the Loan
When the debtor fulfills their obligations, the certificate should be returned and the mortgage annotation removed, in accordance with Article 22(1) jo. Article 18(1)(a) of Mortgage Law. A damaged certificate may delay this return and annotation process.

2. Debtor Default
If the debtor defaults, the mortgaged property may be subject to public auction or private sale by agreement, provided:
i. The private sale results in the highest price favorable to all parties.
ii. Announcement is made in two local newspapers and/or media at least one month after formal notice is given, without any objections.

In both cases, a damaged certificate can obstruct the execution of mortgage rights—whether returning it to the debtor, auctioning, or selling the property. Therefore, a replacement certificate must be issued.

Issuing a Replacement Land Certificate
According to Government Regulation No. 24 of 1997 on Land Registration (“GR 24/1997”), a replacement certificate may be issued under the following conditions:
 The certificate is damaged, lost, outdated, or not delivered to the auction buyer.
 Only the registered holder of rights, or a party with valid legal documentation (PPAT deed, auction excerpt, or other specified legal instruments), may apply for the replacement.

The following requirements and procedures must be fulfilled for lost certificates:
1. The application for a lost certificate must be accompanied by a sworn statement made by the concerned party before the Head of the Land Office or an appointed official, declaring the loss of the land certificate.
2. Prior to the issuance of the replacement certificate, the loss must be publicly announced once in a local daily newspaper, at the expense of the applicant.
3. If within 30 (thirty) days from the date of announcement no objections are raised, or if objections are raised but deemed unfounded by the Head of the Land Office, a replacement certificate will be issued.
4. If the Head of the Land Office considers the objection to be reasonable, the request for the replacement certificate will be denied.
5. A formal report must be made by the Head of the Land Office to document the announcement, issuance, or rejection of the new certificate as outlined above.
6. The replacement certificate will be handed over to the applicant or to another party authorized to receive it.

As mortgage rights are also subject to land registration, financial institutions like banks that are registered as mortgage holders in the land book are authorized and responsible for applying for replacement certificates.

Conclusion
Financial institutions, particularly banks acting as mortgage holders, bear a legal responsibility in the case of a damaged or lost land certificate used as loan collateral. If the certificate is destroyed, it may hinder the enforcement of the mortgage—either through execution or return to the rightful owner. In such cases, the bank must take action to apply for a replacement certificate in accordance with land registration laws.

This obligation aligns with the bank’s role as both creditor and mortgage right holder recorded in the land book, ensuring that all legal processes tied to the land collateral remain valid and enforceable.