We have explored certain considerations from a buyer’s and seller’s perspective in the sale of an industrial factory / warehouse in Part 1. In summary, a company can choose to either sell the shares of the company along with the industrial property, or to sell the industrial property on its own.
In Part 2 of this case study series, we discuss the practical steps involved to prepare for a sale of the industrial factory / warehouse.
First, the company should determine the current market value of the property. This is done by engaging a professional valuer to prepare a valuation report. Alternatively, it is possible to request for an informal bank valuation of the property. There is a duty for a company’s directors to ensure that the sale price is properly determined, in the best interests of the company.
Second, a company should check that their shareholders agree on the property disposal and the indicative price of the disposal. As the process involves disposing a substantial asset of the company, a member’s resolution needs to be passed successfully.
Third, the property should be free of encumbrances or claims by third parties before the offer letter is signed. A lawyer can assist the preparation by vetting through the original documents of the property including the original title, original Sale and Purchase Agreement (“SPA”) and conducting a fresh title search. This can identify unexpected encumbrances or claims on the property. Caveats could be lodged on the title by third party creditors without the company realizing.
During the Sale
It is important to understand the procedure and the estimated timeframe for the specific conveyancing transaction. However, the process may take up to 1 year if it requires a state authority’s consent, or if there is a closure of the land office due to the movement control order in light of the COVID-19 pandemic. We have previously written about the timing and process of sale of property here.
If the company owned the property for a long time and has enjoyed significant gains, the 3% retention sum remitted by the buyer on behalf of the seller may not be sufficient for the real property gain tax (“RPGT”) payable. As such, the company should consider if a ‘top up’ is required, where the assessed RPGT amount exceeds the retention sum. In such a situation, sufficient cash needs to be provisioned to pay the additional assessed amount within the 30 day deadline. Failing which, penalties will be imposed.
Prior to signing the sale and purchase agreement (“SPA”), the seller should gather all its original documents such as the original SPA, receipts of legal fees and stamp duty incurred on the previous purchase, receipts of expenses to increase or maintain the property value (including renovations or fixtures and fittings permanently affixed to the property). This helps in reducing the total RPGT exposure.
If the buyer requires vacant possession, the seller should make plans to vacate the premises once the SPA is signed between parties. This process may take a time depending on the nature of business.
If the property is rented out, the seller should check the tenancy terms to ensure a timely surrender of the property by the tenant prior to completion of the sale.
Once the sale is completed, the company needs to consider how the sales proceeds received from the buyer can be distributed back to the shareholders of the company.
Generally, this can be done by repaying outstanding loans to the shareholders, or via a declaration of dividends, subject to meeting specific requirements under the Companies Act 2016.
The above provides an overview of just some practical considerations that should be taken into account in preparing for a sale of an industrial factory. There are other considerations depending on the nature of the property, the identity of the buyer, whether there is an existing bank loan or charge on the title, which will give rise to different implications. A seller of a high value industrial property should prepare early, in order to avoid pitfalls or to identify valuable opportunities.
This article was written by Shawn Ho and Natalie Ng. 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 and 2021. We are also ranked as a Recommended Firm by IFLR1000 2020 and 2021.
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. Feel free to contact us if you have any queries.