When buying secondary market property, make sure your lawyer applies for a “Certificate” to check for outstanding charges

Aspiring buyers of secondary strata homes should be aware of the ‘Certificate’ clause in Section 73 of the Strata Management Act 2013 – A Certificate should be issued by the property’s Management Body to ensure any outstanding charges such as maintenance fees have been paid in full by the previous owner.

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When purchasing a subsale strata home, it is your lawyer’s duty to ensure all outstanding charges to the Joint Management Body (JMB), Management Corporation (MC) or Subsidiary MC and debts incurred by the parcel unit’s previous owner are paid in full before the transaction is completed. This is to ensure that you, as the buyer will not be burdened with the oversight of ‘past debts’.

There has been numerous cases of such oversight:

Scenario 1: Rahim joined the job market after graduating from university three years ago. Using his savings, he sought to buy an apartment in Subang Jaya. However, Abdul Rahim is a newbie to stratified development – he is not well-versed in the selling and buying process and sought the professional service of a lawyer.

The lawyer attended to the usual subsale transaction with Rahim and eventually took vacant possession and obtained the keys to the property from the seller. After shifting into his apartment with his family, Rahim received a ‘service charge statement’ from the Joint Management Body (JMB) that evidenced there are outstanding arrears from the previous owner to the tune of RM5,280. Apparently, the seller had defaulted in paying his monthly dues for maintenance fees and sinking fund.

Rahim sought help from his lawyer but was informed that he will have to litigate and sue the previous owner for reimbursement. Rahim’s lawyer will have to charge him separately for the court proceedings. The legal fees is estimated to be about RM5,000. Rahim was extremely frustrated and felt disgusted for being the victim of such an oversight.

Scenario 2: A ‘standard’ Sale & Purchase Agreement was prepared by the law firm in a subsale transaction property for Sally. One of the clauses stated that ‘All the outstanding arrears are to be borne by the vendor prior to the completion of the sale transaction’.

The owner collected his portion of the balance purchase price (after redemption from the Bank) and migrated overseas. Sally was lumbered with an outstanding amount of RM7,830 in arrears of maintenance fees, sinking fund, insurance and apportioned quit rent.

The management corporation (MC) took Sally to the Strata Management Tribunal to recover the ‘indebtedness’ in the account. Sally reluctantly chose to pay up the arrears (by instalments) to avoid the legal quagmire.

The lesson from the above 2 cases is about the inexperience and flaws of certain less-than-diligent lawyers attending to the sale and purchase transaction for a residential or commercial property in Malaysia.

Importance of Certificate clause in Strata Management Act 2013 for new property owners

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It is the duty of the lawyers to ensure all outstanding charges, debts incurred in the parcel unit by the owners, to the Joint Management Body (JMB), Management Corporation (MC) or Subsidiary MC, collectively known as Management Bodies are paid in full before the transaction is completed so as to ensure that the buyer(s) are not burdened with the oversight of ‘past debts’.

In Brightvite Sdn Bhd v. Pantai Towers Management Corporation & another, (2019) 2 CLJ 439, the Court of Appeal made an important ruling on the recoverability against a new proprietor of management charges and other dues accrued before property transfer/conveyance. In that case, the Judge, commenting on Section 45 of the Strata Titles Act 1985 (similar provisions can be found at Sections 60, 61 and 68 of the Strata Management Act 2013 ruled that the debt is recoverable from two parties, namely the existing proprietor or the proprietor’s successor in title – that is the new owner.

But the Section clearly refers to one and the same debt, being the sum outstanding as management fees. In other words, that single debt is recoverable from either the proprietor or the proprietor’s successor in the title when he/she becomes the new owner. But the debt incurred by the previous owner is not divisible, hence it cannot be transferred to the new owner.

It is pertinent to consider Section 73 of the SMA 2013. This provision, implemented on June 1, 2015, allows conveyancing lawyers to apply for a certificate on behalf of the new owner or potential buyer of the unit for a fee not exceeding RM50. The Management bodies are to issue to that person a ‘Certificate’ certifying the amount that is due to the unit owner. It also stipulates the time and manner of payment of the amount determined and other matters. This certificate provides conclusive evidence of the total debts due to a particular unit.

The issuance of this certificate by Management Bodies is to ensure any outstanding dues by a previous owner is paid in full. It also enables a prospective buyer to find out what is the total debt, if any, that is outstanding to the management bodies and to decide if he is getting a fair deal from the purchase. And if there are any debts outstanding, he can then negotiate a further quantum to be considered during the negotiation process and before finalising the property purchase price.

This can be referred to in Form 19 of the Strata Management (Maintenance & Management) Regulations, 2015 (‘SMR’) – Regulations 19.

READ: A beginner’s guide for strata property owners in Malaysia

New owners cannot evade the obligation to pay any outstanding contributions

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The aim of Section 73 is to enable a prospective buyer to ascertain the outstanding dues attributable to a parcel prior to transfer/ conveyance so to avoid an unpleasant situation where the prospective buyer has to ‘foot’ the dues accrued by the previous owner.

The purpose of the section is to ensure that the Management Bodies recover their dues so as not to make all the other unit owners subsidizing the debt incurred. This would amount to a considerable prejudice to the other unit owners. So conveyancing lawyers should ensure that settlement of debts due to the Management Bodies prior to transfer be made a condition in the sale and purchase agreement and such ‘figures’ to be calculated on a strata unit shares basis.

Prior to Brightvite case referred to above, the High Court in Sri Wangsaria Management Corporation v Yeap Swee Oo @ Yeap Guan Cheng (2009) MLJU 1461 made a similar ruling. The subsequent buyers refused to pay arrears of maintenance fees for the period prior to vacant possession, denying all liability for such arrears. The Judge held that Section 45(5) of the Strata Titles Act, 1985 (STA) allows the amount to be recoverable from the proprietor, or who may no longer be a proprietor as defined.

Although this Section 45 of the STA has been deleted (amongst others) and now ‘migrated’ to the newly minted SMA, the principle of law established in the Brightvite case continues to be applicable. To our mind, the provision shows the intention of the legislature that neither a proprietor nor a successor in-title nor that category of ‘proprietor’ may evade the obligation to pay contributions ie debts.

It is incumbent for the buyer(s)’ lawyers to make a written requisition under Sec 73 of the SMA to inquire about the number of charges and contribution to the sinking fund payable; time and manner of payment and any levied contributions owing by the sellers or any amounts outstanding pursuant to the SMA. If they have failed or neglected to do so, the buyer(s) and/or their lawyers cannot later allege that they are not aware of the indebtedness because of their own omission.

Litigation process could be avoided if the parties entrusted had done what is required of them under the SMA. The liability of buyers to be duly registered as proprietors and successor-in-title are clearly provided for in the law. It is also the obligation of the buyer(s), as prospective buyers to be vigilant of the need to conform to the SMA and its Regulations if they are to choose to stay in a stratified property.

There is a corresponding Section 31 in the SMA that relates to the same issue titled: ‘Right of parcel owners or prospective purchaser’ for those developments still under developer management period or JMB status, where individual strata titles have not been issued. The pre-requisite form is under Form 10 of the SMR – Regulations 19.

Strata ownership is a three-fold legal relationship

A person who purchases a unit in a strata development enters into a 3 folds relationship; firstly, he is the individual owner of his unit. Secondly, he is a co-owner with all other owners of the common property and the land of the strata development, and thirdly, he is automatically a member of the owner’s body (management body) to whom the management and maintenance of the scheme are entrusted.

Harmony can only be achieved if the strata development is managed properly, the common property and facilities maintained adequately and regularly. The proper maintenance, efficient management and ultimately the success of the strata development will depend on a steady flow of payments to the coffers of the common funds. This includes ‘the debts’.

This article was written by Datuk Chang Kim Loong is Secretary-General of the National House Buyers Association (HBA), a non-governmental and not-for-profit organisation manned wholly by volunteers.

If you enjoyed this article, read this next: A beginner’s guide to the Memorandum of Transfer (MOT) and Stamp Duty in Malaysia

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