Buyer Beware: Asking the right questions before signing the offer letter for your Malaysian property
Throughout our conveyancing practice, we have come across unfortunate instances where purchasers of property, in their enthusiasm to sign off on the offer letter and before consulting a lawyer, find themselves having to abort the deal or having their earnest deposit forfeited by the seller after discovering unacceptable points about the property that could have been discovered earlier with some basic checks.
It is important that purchasers conduct sufficient due diligence on the property, especially so for higher-value properties OR for commercial or industrial properties, before proceeding to sign the Offer Letter. Never ASSUME that the real estate agent, who is focused on closing the deal and represents the seller’s interests only, has done the homework for you, and always ASK the right questions.
In this article, we will share what potential purchasers should look out for, and some important questions to ask before placing the earnest deposit:
- What does the title search reveal?
After viewing the property, ASK the seller to furnish a copy of the Sale and Purchase Agreement (pages containing the ownership and property details) and if available, a copy of the property title. Then, get a fresh title search done immediately as a title search will provide a treasure trove of important information about the property.
Once you have obtained a fresh title search, the following questions should be asked:
- Is the seller you are dealing with the true and only property owner?
A basic check on the Sale and Purchase Agreement or the copy of the title allows you to verify the identities AND number of true owners of the property. We had encountered a matter where it was discovered that the property’s true owner was already deceased, and that the person ‘acting as the seller’ was actually the deceased’s brother trying to sell the property without the proper grant of probate, letters of administration or power of attorney to deal with the property.
- Are there any encumbrances / claims on the property that may impede my ownership?
Encumbrances, which include a caveat, charge or lien, that is not lodged by a bank, may indicate a claim or dispute on the property by a third party. If the property is still charged under a financier, you may come across the bank charge details such as the name of the bank and when the charge was created on the title search which is normal. While it is the seller’s obligation and costs to remove the encumbrance, you as the purchaser might be stuck in a long drawn out transaction or caught between a legal dispute over the property, when you have already placed cash down. Worse, you might be embroiled in legal challenges that the property should not have been sold, even after your transaction is completed. Encumbrances on the title represent red flags which should raise further and thorough questions by any potential purchaser.
- Is the property leasehold, and how many years are left on the lease?
You may also be able to check the tenure of the property, whether it’s a freehold or a leasehold property. This is especially relevant for industrial land where the full leasehold tenure may be just 30 or 60 years rather than 99 years for most residential property. If the property is of a leasehold tenure, check the remaining number of years left on the lease term. The number of remaining years on the lease directly affects the value of property. While you can renew the lease by submitting your application at the respective land office by paying a premium, it will cost you time and money. Also, banks often out-rightly refuse to grant loans on property with too few years remaining in the lease.
- What is the category of land use and express conditions on the property?
A title search can reveal the specific use that the land is designated for (e.g. building, industry, agricultural) or any other express conditions or restrictions. If for instance the land has been designated for agricultural use, and you wish to build a factory on it, then you will need to apply for a conversion into an ‘industry’ title before being able to obtain a loan or submit your building plans. The premium payable on the land conversion can be very costly, time consuming and an incorrect land use will affect your business plans, ability to obtain business licences, or your bank loan, not to mention the book valuation of your property.
- What is the actual lot size and boundary lines based on the pelan tanah?
Our eyes may sometimes play tricks on us. It is easy to confuse parts of the empty land that you wish to purchase with the adjoining land, being to the state, a neighbour, or small parcels of land leased out to public utilities (such as TNB sub-stations). Always verify the actual size, shape and boundaries of the land based on the copy of the land title. It is usually possible to extract a full land title search that comes with the ‘pelan tanah’.
- How many car park accessory parcels are there and where are they physically located?
When buying strata property, especially residential condos, a purchaser may only discover after signing or even completing the sale and purchase agreement, that the car parks are located in undesirable locations within the building. Neither side’s lawyers are obliged to check or verify this for you, so it is better to take extra precaution in checking the actual location of the car parks.
- Is the Property tenanted and on what terms?
It is quite common to come across a tenanted property for sale. Therefore, before you proceed to sign the offer letter, check if there is a tenant occupying the premise and if so, insist on a copy of the full tenancy agreement to study the terms. Some important provisions that need to be checked are rental term, renewal option, rental increment, and ability to terminate. Unless negotiated otherwise, any ongoing tenancy will likely be novated to you on the same terms once you become the owner of the property. If the tenant is renting a commercial or industrial lot, you may also need to check if they have the proper and valid licenses to operate legally on the said property, or if they have done any illegal extensions or renovations to the building.
- Does the Property have valid Insurance, CCC and maintenance records?
For property with attached buildings (especially for commercial shop lots, industrial factories, warehouses, hotels etc), check with the real estate agent or owner if there is valid and sufficient building insurance, usually up to the reinstatement value of the property, should the property be damaged by fire during the transaction period.
Additionally, ask if the property has been issued with the valid Certificate of Completion and Compliance (“CCC”) to verify that a building is safe and fit for occupation and legally constructed, as having a valid CCC is a typical requirement imposed by the Bank if you wish to obtain a loan to finance your purchase, especially for commercial and industrial properties.
If the property is a stratified commercial unit or an industrial factory with multiple storeys that comes with mechanical equipment such as passenger or cargo lifts, check with the owner if regular repairs and maintenance had been carried out and request for the maintenance records as proof. Valid insurance coverage of these mechanical fixtures are also useful to inspect.
Appoint a third party professional surveyor to inspect the property for any pre-existing cracks or structural damages as these are issues that involve a huge sum of money to rectify. Once the surveyor hands you the building dilapidation report, it can also be used to negotiate on the purchase price with the owner, or for appropriate indemnities to cover any serious defects. Alternatively, the purchaser can put in a request to the seller to repair the damages before the transaction can proceed.
The above are just some examples of the questions that a seasoned and experienced property purchaser should ask and verify, prior to signing any offer letter. Remember, a standard term for any sale and purchase of property is for the property to be sold on an ‘as is where is basis’ unless there are compelling reasons not to, and the fundamental principle of ‘caveat emptor’ or ‘buyer beware’ will apply accordingly to any purchaser of property.
This article was written by Shawn Ho (Partner) & Suzanne Fam (Senior Associate) from the corporate practice group of Donovan & Ho. Shawn leads the corporate practice group of Donovan & Ho, and has been recognised as a Notable Practitioner, whilst the firm has been recognised as a Notable Firm for Corporate and M&A by Asialaw Profiles 2020. We are also ranked as a Recommended Firm by IFLR1000 2020.
Our corporate practice group advises on corporate acquisitions, restructuring exercises, joint venture arrangements, shareholder agreements, employee share options and franchise businesses, Malaysia start-up founders and can assist with venture capital funds in Seed, Series A & B funding rounds. We also advise on property transactions and real-estate related tax planning. Feel free to contact us if you have any queries.