What is being sold to property purchasers through a Private Lease Scheme (PLS)? It is actually a long tenancy or leasing, where a buyer pays the entire property sales price upfront. It should be noted that homebuyers do not have any proprietary rights on leases.
Not all new house buyers know what to look out for when signing the Sales and Purchase Agreement (SPA). Quite a few only check their personal details, property address and purchase price before proceeding to arrange for a bank loan to finance the property purchase. Some are also not aware of the differences between buying a property and taking on a long land lease which disguises itself as a property purchase. The latter is known as PLS, a scheme that is capable of causing complications for current and future homebuyers.
Leasehold properties and Private Lease Scheme properties are similar yet hold key differences. Before continuing on your journey to learning what is the Private Lease Scheme all about, you may first want to familiarise yourself with the Freehold and Leasehold titles to better understand what are the key differences.
What is Private Lease Scheme (PLS)?
The previous government was looking to introduce a new Chapter into the National Land Code and Strata Titles Act, which would allow land owners (individuals and public / private corporations) to lease out their freehold land for development for a term of 30 – 99 years under a Certificate of Private Lease (Sijil Pajakan Persendirian).
This PLS will give a developer the rights to develop and construct condominiums on the land and sell them to the public. This gives rise to a pertinent question – what is being sold to the public, a freehold or leasehold property?
Buyers are actually “Renting” for the duration of the lease period
Buyers of PLS properties must be made aware that they are not buying said property but are instead merely renting or leasing the property from the sellers for a specific number of years. At the end of the lease period, the future descendants of the buyer (lessee) must surrender the property back to the seller (lessor).
PLS properties depreciate and become worthless in the long run
Conventional wisdom says that because land is a scarce resource, property prices will appreciate in the long run. This applies to both freehold and traditional state-owned leasehold property. However, traditional leasehold properties are normally cheaper than freehold properties due to the costs involved in leasehold renewal.
However, the market value of PLS property will depreciate in the long run as the lease approaches its maturity and the property has to be surrendered back to the lessor upon expiry of the lease period. Imagine paying RM600,000 for a house and when your son takes over the property, its value falls by 50%. When your grandchildren inherit it, the value may drop to below 25% of the original purchase price and eventually fall to “zero”.
What is the difference between the PLS scheme and traditional leasehold properties?
As its name suggests, PLS is a private sector creation that is essentially a contract between a seller (lessor) and buyer (lessee) with no guarantee of lease renewal or extension at the end of the lease period. A traditional leasehold property is governed under the National Land Code, with an option to either renew or extend the lease. Therefore, a PLS buyer could possibly end up with nothing at the end of the lease period.
On the other hand, a leaseholder under the National Land Code could stay on the property with a favourable extension/renewal premium like what happened in Old Town PJ about ten years ago. In other words, PLS is leasehold property’s evil twin, concocted as a means to hoodwink uninformed buyers.
Controversy surrounding PLS schemes
An example of how PLS can be detrimental to the interest of homebuyers can be found in England which Malaysia has a close historical connection. In England, it is common for consumers to purchase leasehold property from private parties/developers who own the freehold land. The leases sold are usually long term ones at 90+ years, similar to the proposed PLS in Malaysia, except that the trend in Malaysia is to have the entire lease consideration paid upfront at the beginning of the lease.
In England, buyers will pay a lease consideration upfront as well as ground rent on an annual basis and other payments on a periodical basis for purposes of upkeep of the communal areas and for the alteration of said properties. However, we envisage that it is possible for the lessor to impose certain additional payments on the lessee to ensure that the property can be handed over in good working condition at the end of the lease period.
An important point to note is that in England, the controversy surrounding the leasehold system in newly built homes has gathered huge momentum in recent years. It has prompted the English government to promise to outlaw the sale of newly built leasehold houses.
So what are the pitfalls of the PLS that would prompt the authorities in England to clampdown on such schemes? After all, England is a fully developed country where ‘market forces’ are usually the norm and government intervention is rare.
If you are interested to build a home from scratch, find out how you can buy your own land in Malaysia.
What are the disadvantages of a Private Lease Scheme Property?
A report entitled ‘Leasehold: A Life Sentence?” published 2 years ago by the National Association of Estate Agents (‘NAEA’) of the UK discussed the problematic PLS in England. Amongst others, homebuyers generally lack understanding between a freehold vs leasehold property during the buying process, exacerbated by the fact that the majority simply choose to be advised by the developers’ recommended solicitors on the details of the contracts.
Some of the issues highlighted in the NAEA report could happen in Malaysia if the PLS is allowed:
62% of leasehold home owners felt they were mis-sold; 57% didn’t understand what being a leaseholder meant until it was too late
Most of the aforementioned buyers did not engage the services of other professionals such as estate agents or lawyers when buying directly from developers. This situation is also true in Malaysia, where buyers of primary property fully rely on the developer for information.
Some developers will use the term “virtual freehold” when marketing PLS properties, i.e. a lease period of 99 years (or even 999 years in England) is as “good as freehold” or is “virtually freehold”. However, when marketing such properties, crucial information is often omitted such as the requirement to vacate the property upon lease expiry without any compensation or the requirement to make annual maintenance payments to the lessor.
65% used lawyers recommended by developers
Most, if not all buyers, who purchase directly from the developers (whether in England or Malaysia) will use lawyers appointed by the developers. These lawyers act for the developers and not the buyers. The developers are not obliged to inform homebuyers of the pitfalls of buying a PLS property. Here is why you should hire a lawyer when purchasing a house.
48% were unaware of escalating ground rent
House buyers were only vaguely informed about the need to pay annual maintenance charges and were later surprised to discover that these charges can increase exponentially over the lease period. However, at this juncture, it would be very difficult to challenge the validity of maintenance charges and most buyers have no choice but to pay. We envisage that some developers will also impose additional maintenance charges if the PLS is allowed as such payments represent a “perpetual cash cow” to the developers.
Challenging to resell PLS properties
While it might be easy to buy PLS properties directly from the developer, reselling them in the future is another story altogether. Typically, banks with many business dealings with a developer would be willing to provide 90% end-financing to the first batch of buyers who purchase directly from the developer. During this stage, the maturity of the lease period is also very far away at 99 years.
However, as time passes and the maturity period approaches, most banks will hesitate to provide full end-financing. To illustrate, Albert buys a PLS property and he has a 2-year old son. At the time of purchase, the balance lease period is 95 years. 35 years later, Albert’s son who is now 37 years old wants to sell the PLS property to upgrade to a better home. The remaining term on the PLS property is now 60 years.
In assessing whether to provide end-financing, banks must consider the worst-case situation if the borrower defaults and the bank has to auction the collateral property. Due to the low demand for PLS properties, most banks would probably only be willing to provide a 50% margin of financing, which would considerably burden the next buyer who must fork out 50% down payment. Albert’s son might never be able to attract a buyer and proceed with his plans to upgrade.
Government intervention is necessary in Malaysia
Property developers often preach that the property market should be driven solely by “market forces” and that government intervention is unsavoury. However, “market forces” is only applicable when there is a level playing field between consumers and sellers, and if consumers can easily switch to other sellers.
When it comes to property and land transactions, a level playing field does not exist. Land is a scarce resource and most property developers are multi-million ringgit corporations with deep pockets. If the government allows PLS to continue freely, many property developers, housing or commercial alike, will jump on this bandwagon which offers a one-sided, highly beneficial undertaking for developers/proprietors as the land owner.
Eventually, many housing projects will be under PLS. Future generations of homebuyers, instead of becoming titled home owners, could be reduced to mere renters in perpetuity. The entire housing landscape will change from buying a house to ‘taking on lease’ of a property. The government should look into PLS and work on the necessary precautions to protect the interest of all homebuyers.
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