What do words like ‘encumbrance’ and ‘defect liability period’ mean? Familiarise yourself with the legal aspects and common terminologies used in the Sales and Purchase Agreement and your bank loan agreement.
Buying your first property can be very exciting! Soon enough, you will be a homeowner and nothing beats that feeling of holding the set of keys to your own home for the first time.
Now, like most first time buyers, you would have engaged a property lawyer to help you with the documentation and loan application process. Or you might have found a good deal on a new property development that has an all-inclusive payment scheme which includes lawyer fees in the package.
But hold your horses, do not sign on the dotted line before having scrutinised the SPA first.
From the types of properties available in the market to the various documents used and payable fees, below are seven things that every first-time buyer should be aware of. This is by no means a comprehensive list but it may hopefully help you understand the whole home purchasing process better.
1) Property types
You’ve just seen a fantastic deal on a condominium and it is located above a brand-spanking-new shopping mall. You think to yourself, “This is great! Grocery shopping will be a breeze.” Plus, the developer is offering an attractive payment scheme that can be tailored to your budget and is willing to absorb part of the downpayment.
However, before you jump onto the deal, you should check to see if the property bears a commercial or residential title. Commercial titled properties have higher maintenance fees, utility tariffs and generally, the owners pay higher premiums on the property.
Furthermore, the buyers may not have the same protection as residential titled properties which are all governed by the Housing Development Act (HDA). Commercial titled properties which bear similarities to residential-purposed units, i.e Small-office, Flexible-office (SoFos) and Small-office Versatile-office (SoVos) do not fall under the HDA’s jurisdiction. Hence, developers are not obliged to observe the rules and regulations under HDA and are free to set all terms in the SPA as they see fit.
This means that if the deal turns sour, buyers of SoFos and SoVos would not have the right to bring a legal claim against the developer based on the set terms in the SPA. Do not hesitate to confirm with the developer’s marketing representative if the property is subject to the HDA, ultimately you would want your rights as a homebuyer to be protected by the Act.
2) Land title types and tenure
A residential property is not limited to just the physical structure of the building, it also includes the land that the structure is built upon. Malaysia practises the Torrens system which is a system of registration of land titles. If the title is registered in your name, you are the owner of that piece of land and any physical structures upon it.
There are three types of land titles in Malaysia:
A) Master title: Also known as the developer’s title. The developer obtains permission to develop a piece of land and is granted this title for property development projects.
B) Individual title: This title is issued for landed properties. The developer is required to apply for a subdivision of the Master title into Individual or Strata titles upon handing over the completed houses to the buyers. Individual titles show that you are the owner of the land that the house is built upon.
C) Strata titles: This title is issued to high rise properties and certain gated and guarded communities. Strata titles show that you are the owner of the property unit that you have purchased.
On top of land title types, buyers should also be aware of the types of land tenure in Malaysia:
A) Leasehold: This means that you are leasing or renting the land from the Government. The period of a leasehold is normally 99 years, however, most of the time if you purchase a secondary property the lease would be less than 99 years. Once the lease expires, you would either have to return the land to the state or pay a lease extension premium.
B) Freehold: This means that you own the land forever! Keep in mind however if the Government wants to acquire your land for public works, they have the right to do so.
C) Bumiputera reserve (BR): Most property developments will have a designated amount of BR units/houses and buyers of secondary property need to be aware of this. Land that is BR can only be bought and sold among the Bumiputeras unless the consent of the state is given, but the consent is quite difficult to obtain and may take years for approval.
3) Letter of Offer
This is a legally binding document which states that you as a buyer wish to purchase the property from the seller for a sum of money – the purchase price. You would usually need to pay a certain percentage of the purchase price as a downpayment to secure your purchase, the typical amount is 10%. There are two basic forms of a letter of offer that depends on whether you are buying the property from a housing developer or a secondary seller.
If you are purchasing from a housing developer, the terminology used would be an ‘Intent to Purchase’. The most common scenario is where you arrive at the property sales office, sign the Intent to Purchase and pay a 2%-5% (of the property’s purchase price) as an earnest deposit. The remainder amount is paid to the developer upon signing the SPA.
Although with the current property market situation, quite a few developers are offering to absorb part of your downpayment or having staggered/delayed payments for a few years. These will be detailed below.
When purchasing from a secondary seller, the term used would be ‘Offer to Purchase’ and the initial 10% downpayment would be split into 2-3% as agent fees to the property agent and the remainder 7-8% is paid directly to the seller.
4) Different types of properties have different documents
This can be quite overwhelming for most first-timers as the respective land title type would have different forms of documents for both the property purchase and the bank loan. The simplified list below will be of great help:
DEVELOPER / MASTER TITLE
A) SPA: Under the HDA, it should be either Schedule G (landed property) or Schedule H (high rise property). The SPA is a statutory document which means that the developer is not allowed to change the terms of the agreement to their benefit.
B) Deed of Mutual Covenant: This applies to multi-storey and strata schemed property. It sets out the rights and liabilities of the co-owners and the management and maintenance of the common property. However, since the SMA 2015 was introduced, the DMC is now a futile action. Developers are now bound by the by-laws in the 3rd schedule of the SMA 2015. Certain developers may still insist on preparing a DMC but this is redundant.
C) Deed of Assignment: This applies to secondary properties. It is the transfer document that is signed by the buyer and secondary seller and is prepared by the property lawyer.
STRATA / INDIVIDUAL TITLE
A) SPA: This document sets out the details of the buyer, seller, property details and land title details and is prepared by the property lawyer.
B) Form 14A: The statutory property transfer form. This form must be submitted to the land office in order for the land title to be transferred to the buyer.
5) Fees payable to the property lawyer
Buyers are highly encouraged to hire a property lawyer to help them during their property purchasing transaction. Many homebuyers are not aware that in their quest to lessen the cost of property purchasing, they might just be losing out in other aspects.
Find out more here: 5 Things a lawyer can do for you when purchasing a house.
There are many new launches that are marketed as ‘SPA fees are waived’ and if the buyers use the developer’s panel lawyers for the bank loan agreement as well, they would only be charged the bank loan preparation fees. However, once the title is out, the purchasers would be charged full lawyer fees as they will need to use the Developer’s panel lawyer.
Another thing that secondary property purchasers need to be aware of is that the buyer will be charged the full fees for both SPA and bank loan preparation.
It is recommended for buyers to engage their own lawyer and not utilise the seller’s lawyer, even though it might be the cheaper avenue. Most of the time, the seller and the lawyer will have a long-standing relationship and if the deal turns sour, the lawyer might assist the seller in securing a good attorney to fight their case. The buyer would be told to either look for their own attorney or might not be given as good a defence.
6) Important terms to be aware of
The documentation required in any property purchase contains numerous jargons and terms that can be difficult to understand as a first-time buyer.
Below are some important terms in the SPA and bank loan, that buyers should familiarise themselves with:
A) ‘Encumbrance’: This means that there is a claim on the title, either a bank charge or lien. Whenever a bank loan or mortgage is borrowed from the bank, the bank will register a charge or lien on the title. This means that before the title can be transferred to the new buyer, the charge or lien must first be removed from the title in order to make the title ‘clean’.
B) ‘Vacant possession’: The dateline when you can expect to receive your keys to the property.
C) ‘Time for delivery of vacant possession’: For landed property, it is 24 months, while for apartments and condominiums, it is 36 months.
D) ‘Completion period’: This is in relation to secondary property, where the sale must be completed within 3 months. The additional one month is like a grace period, however, a penalty will be charged for the delay. If after the four months the sale has not been completed, the seller or the buyer may sue for completion of the sale.
E) ‘Restriction in interest’: The land requires the consent of the various authorities for the sale and purchase or the master title requires the consent of the developer for the subsale.
F) ‘Late payment fees’: In relation to the late completion of a (subsale) property sale, the fee charged is usually at 8% of the purchase price on a daily basis but it may be at any agreed rate.
G) ‘Liquidated damages’: Payment by the developer for late delivery of vacant possession.
H) ‘Defect liability period’: The warranty period where the developer would be responsible for any defects. However, the scope of coverage may vary from developer to developer. For secondary property, it is on an ‘as-is basis’ i.e. what you see is what you get.
I) ‘Lock-in period’: The duration where you must maintain the loan with the bank. It’s usually a three year period.
7) Extra Tips
At the end of the day, it’s very important to do your research before investing your hard earned money into a property. Here are a few more quick tips that will save you significant grief:
- Always inspect the property before you sign the Letter of Offer. This applies more for subsale as the property has already been built and has usually been lived in before. Because subsale properties are on an ‘as-is basis’, any defects that are uncovered after the keys have been handed over cannot be recovered from the vendor.
- For new launches, do ensure that the developer will start construction of the property at the date that it is supposed to. This is because residential developments are governed by the HDA, and as per Schedule G (landed property) or Schedule H (strata property), there are set statutory requirements for the timely delivery of vacant possession by the developer.
- Find out what is the lock-in period for both your loan and your developer property purchase. This period refers to the length of time where you would be charged a penalty should you choose to settle your home loan early either by full settlement, refinancing or sale.
- Be prepared to sign and initial multiple bank documents. The bank will only accept original signed documents and as they need to make sure that the borrowers have read through all the documents, borrowers are required to initial every single page.
Edited by Reena Kaur Bhatt