By Richard Wee, Sarah Kambali, Darren Tan & Oh Jia Ling
Purchasing or selling a property in Malaysia can be complicated with layers of administrative challenges. Embedded in these property transactions are statutory rules, legal practices and commercial documentation. For many first time property buyer, or even regular property investor; buying or selling a property is usually left in the hands of the property agent or the conveyancing lawyer to handle the transactions. The word conveyancing relates to a transfer of an asset from one to another, hence the description of lawyers involved in property transaction as “conveyancing lawyer”, or more formally “solicitor”.
In this article we attempt to address some basic legal issues which a property investor need to know when buying or selling a property.
1. The sale and purchase agreement
The Sale and Purchase Agreement (SPA) is a contract which embodies the relevant terms and conditions of the property transactions. Prior to the execution of the SPA, parties may execute a pre contract documents such as option to purchase (OTP). The OTP usually sets the basic terms towards the execution of the SPA. Nonetheless, at the end of the day, the SPA will always be the paramount agreement in the sell and purchase of the property.
The terms and conditions of the SPA normally include the details of the property, details of all parties involved, type of loan/financing and the time of delivery of the vacant possession of the property. The buyer/purchaser in the transaction must be aware of the due date of any outgoing payments. On the other hand, the seller/vendor must ensure delivery of the vacant possession of the property is within the agreed stipulated time as soon as the buyer/purchaser satisfied all the conditions.
Occasionally, parties may find themselves in a situation where they may have to terminate the Agreement prior to the completion of the deal. Can this be done? The SPA would normally include clauses to regulate the premature termination which may include some deposit being forfeited or penalty to be paid.
By Richard Wee & Darren Tan
2. The stamp duty under the Inland Revenue Board (IRB)
Under the Stamp Duty Act 1949, the buyer/purchaser has to pay the stamp duty if the transactions involve a real properties transfers. Effectively, the Stamp Duty is akin to a Property Tax. There are two types of Stamp Duty in Malaysia, namely ad valorem duty and fixed duty. The Stamp Duty for real properties transactions is ad valorem duty which the amount payable will vary depending on the type and value of the transactions.
How is the stamp duty calculated? Who computes the stamp duty? The calculation of the stamp duty for Memorandum of Transfer or any transfer of property follows the schedule in the Stamp Duty Act 1949 and can be summarized as follows:
With regards to the computation of the stamp duty, upon receipt of the application, IRB will refer to Valuation and Property Services Department which is the body which will evaluate the value of the property. From there, IRB will then impose the relevant stamp duty.
Nonetheless, the Stamp Duty (Remission) Order 2016, P.U. (A) 365 which came into force on 1 January 2017 provides some good news for the first house buyers. The said Order prescribes certain exemptions and/or discount of the stamp duty. Pursuant to the Order, the buyer/purchaser shall be remitted from the stamp duty chargeable on any instrument of transfer provided that:-
The amount remitted can be seen as follows:-
Occasionally, some transmissions of property is transferred on the basis of “love and affection”, usually is from a parent to child. The law acknowledges the emotional aspect of such a transfer and grant exemption/discount on the stamp duty. Below is the table to illustrate that:
By Richard Wee & Darren Tan
What is RPGT? RPGT is referred to as Real Property Gains Tax. It is a ‘capital gains’ tax that the Malaysian government levies when a property is sold. Essentially, it is a tax charged on the capital gain a seller makes when the property is sold. This is laid down in s.3 of the Real Property Gains Tax Act 1976.
The RPGT is payable by the seller of the property and it is payable to the Inland Revenue Board (IRB) of Malaysia. If a property is sold in Malaysia at a profit, RPGT will apply, notwithstanding whether you are a Malaysian citizen or a foreign resident. The RPGT rate however differs depending whether you are a Malaysian citizen or a non-Malaysian citizen or a company.
The calculation of the RPGT is fairly simple. It is as follows:
As mentioned above, the RPGT rate differs if you are a citizen or non-citizen or a company. This is provided by the IRB starting from 2014:
However, there are several exemptions to the RPGT:
First, disposal made after 5 years from the date of acquisition of the property by person other than company, and other than non-citizen and non-permanent resident individual.
Second, transfer of asset by way of gift by a donor who is a citizen, where the donor and the acquirer are family.
Third, according to s.8 of the 1976 Act, a Malaysian citizen or permanent resident can enjoy a once-in-a-lifetime exemption on RPGT of the disposal of the property.
By Richard Wee & Oh Jia Ling
4. Land Charges
In property transactions, purchasers often seek financial assistance from the relevant financial institution, such as banks and financing companies. For purposes of this discussion, we will make reference of these financial institution as “the Bank”.
When the Bank provides the loan, as security for the loan of the property becomes the subject of the same. In Malaysia, this is called a “Charge”. The bank will have a Charge over your land under s.241 of the National Land Code Act 1965. This Act gives the Bank the power to Charge the property that you purchased under the loan and shall take effect upon registration as a security for the loan. You are then called the Chargor and the Bank, the Chargee.
Malaysia practices the Torrens System where there is no passing of the legal ownership of the land from the land owner or the borrower to the lender (Bank). The effect of a Charge is merely as a security and not a transfer of the land so charged.
Where there is a Charge, the Chargee will have a legal interest in the land. However, the Chargor retains ownership of the land. The Chargee will hold the original Land Title of the property and shall return the original Land Title once the loan has been fully repaid. Upon full repayment, the owner of the property would need to appoint a solicitor to deal with the Chargee to handle the discharge of charge for the property’s Land Title. Thereafter, the solicitors will forward a Land Title fully discharged and return to the owner of the property.
In some circumstances, the subdivided title specifically for the property that you wish to purchase is not issued yet. Most of the time, this is referred to as “no Land Title”. How then would you gain a Bank’s loan without a title? A contract which is called a “Deed of Assignment” will be executed between the Seller and the Buyer. This Deed of Assignment will then be retained by the Bank (if there is a loan) as a security on your property. Similarly, the Deed of Assignment will be returned to you once the loan has been fully settled.
In the event of an unlikely default of the loan repayment, there are a few routes the bank can take to recover the loan amount, including the interests and other costs. One of the action is to auction off your property. The Chargee can enforce its security by way of a sale of the land if the Chargor defaults. If the amount gained from the auction is sufficient to cover the loan and there is a surplus after the deduction of all the other costs, then the surplus will be returned to the Chargor. However, if the money gained from the sales of the property is insufficient to cover the loan amount, the Chargee may seek further legal action to recover the same.
By Richard Wee & Oh Jia Ling
There may be situations where “Consent” is required as the condition precedent. “Consent” here refers to the application for permission to proceed with the sale.
When is a Consent application needed in a property transaction? To answer this, we would need to check on a few items; which includes the description in a title of the property and/or the person receiving the property.
For the first situation, every property that has its own individual title or a strata title would have a description under the “Sekatan Kepentingan” or loosely translated as the “Restriction in Interest”. If the title of the property mentions the following, an application for consent to the state authority is required:-
“Tanah ini tidak boleh diberi, dipindahmilik, dipajak atau digadai tanpa persetujuan pihak Berkuasa Negeri.”
“This land is not to be transferred, mortgaged or Charged without the consent of the State.”
For situation one above, if such description is in your individual or strata title that you intend to purchase, you would need to get the seller/vendor/transferor/chargor to apply for the consent of state authority before any transfer and/or Charge be registered onto the property’s individual or strata title.
There are other situations whereby the restriction in interest also mentions that transfers to a non-Bumiputra or non-Malay is not allowed at all as the category of the land for the property is a Malay Reserve Land or Bumiputra Land. In such instances any application to the State Authority would be rejected if you are not a Malay or a Bumiputra, as the case may be.
As for the second situation, wherein the person or entity receiving the property is a foreigner; under the National Land Code 1965 (“the NLC”) and the National Land Code (Amendment) 2016, any foreign entity; whether individual or company, would be subjected to the application of foreigner consent from the State Authority.
Prior to the enforcement of National Land Code (Amendment) 2016, there was an exception of foreign entities to the application of consent in the purchase and/or transfer of property with a category of “industry”; but this was deleted in the latest amendments to the NLC.
Presently, with the amendments, all situations of transfer in favour of a foreign entity would require the consent from the State Authority. This would mean that if you are a foreigner, and you intend to purchase or receive a property out of “love and affection” or be appointed as the executor or beneficiary of a property, you would require to make the application for consent to transfer in your favour from the State Authority.
Other than these two kinds of consents, there are other scenarios where a consent application is needed but these types of consent application is not common. Nevertheless, it is best that you refer with your solicitors as to whether an application of consent is needed. The other types of consent that may be required is a consent to obtain low cost property or consent application from the Economic Planning Unit, which was formerly known as the Foreign Investment Committee (“EPU”).
A property that is categorized as a “low cost” housing development requires an application of consent to the relevant authority for any transfer. This kind of property is not transferable to a foreign entity. This is clearly stated in the EPU Guidelines published as of 1st March 2014 (“EPU March 2014 Guideline). As for the application of consent from the EPU, this is clearly outlined in the EPU March 2014 Guideline. In the same EPU March 2014 Guidelines also mentions properties of which that are exempted from any application from the EPU. It would be best that you check this EPU March 2014 Guidelines to ensure that you are well informed of your situation when purchasing or acquiring a property; especially if you are a foreign entity.
Next question you may ask, how long would it take to obtain these consent application? This would depend on the timing the board of the State Authority holds their meeting. As there are plenty of applications for consent to transfer and/or Charge of a property submitted by the public, your application can be reviewed by the board within one month from the submission of the application or three months thereafter or more; depending on the current situation of the state reviewing your application.
Generally, a purchase of property may take maximum of three months to complete the transaction from the date of the sale and purchase agreement. However, in cases where application for consent is required, the timeline of three months will only commence upon receipt of consent from the relevant authorities. The application of consent from the relevant authority, in practice, shall be a condition precedent to the completion of the transaction.
These are merely some issues which usually arises in property conveyancing. Other relevant issues may include foreign investment, conversion of the status of the land (for example, from “residential” to “agriculture”) and many others. Even loans have its own challenges with regards to documentation and legal process. Of course, all these can be daunting, but with the relevant help and assistance, the transaction will proceed accordingly.
By Sarah Kambali
[Richard Wee, Sarah Kambali, Darren Tan & Jia Ling are members of the Real Property Practice Group of MahWengKwai & Associates]