The process of purchasing a property can be rather daunting as the contents of the offer letter is the first legal document you’ll need to sign. It therefore plays a crucial role in determining the overall framework and success of your transaction. Hence this article highlights specific points that one should consider before signing the offer letter, as well as some common mistakes that we see in our conveyancing practice which could lead to delays, aborted deals or even legal disputes.
- Property Information
It is vital to ensure that the offer letter includes specific and accurate information about the property. Not doing so at the outset could lead to a deal breaker eventually. This would include stating whether the property is freehold or leasehold (and its remaining duration). For a buyer, knowing the number of years remaining in a leasehold property can directly affect the buyer’s ability in obtaining a loan financing.
Another common example we often see is leaving out the number of parking bays and their parking bay number(s) that comes with the property, only for the buyer to realize later that the parking bay’s location is unsatisfactory or misrepresented.
- Loan Approval
It would be prudent for buyers to confirm that their loan approval is secured, prior to signing the sale and purchase agreement to allow for the completion of the purchase within the required timeframe, thus avoiding late payment penalties or forfeiture of the deposits. Furthermore, due to the ongoing COVID-19 pandemic and lockdowns, banks are taking a longer time to process and approve loans, therefore it would be beneficial to secure a loan approval and to expressly state within the offer letter sufficient time of 2-3 weeks for the loan application to be processed. Not doing so could result in missing the signing deadline and the seller forfeiting the earnest deposit.
- “As is where is” basis & repairs
The phrase “as is where is” means that the property is being sold in its current condition, whatever this condition happens to be. A buyer is deemed to have checked the property for defects of quality and have found the property acceptable. Any defects spotted on inspection should be documented and raised with the seller specifically during the offer letter stage. Taking photos during the property inspection could also go a long way in proving the condition of the property at that time, should any damage result during the transaction.
For sellers, on the other hand, it is important to check that the phrase “the property is sold on an as is where is basis” is in the offer letter to ensure that there are no future disputes over the condition of the property after the buyer has inspected it and that such a phrase is also reflected in the sale and purchase agreement without fuss from the buyer.
- Signing deadline of the SPA
The time frame given towards signing the SPA should be carefully considered and tailored for both parties, depending on their respective circumstances. For example, parties who may be overseas or stuck outstation due to the unexpected lockdowns will require additional time beyond the typical ’14 or 21 days’ which may not be possible to meet.
Other factors that could legitimately require a slightly longer signing timeframe could include waiting for loan approvals, checking with EPF on eligible withdrawal amounts, additional time for negotiating certain legal points within the SPA during drafting etc. Providing more buffer time is always safer for the buyer than having less time or rushing into a tight timeline.
This is to prevent the earnest deposit being forfeited due to the document not being signed on time, despite the buyer not having any intention to abort the deal.
- Tenancy
A clear specification should be made as to whether the delivery of vacant possession shall be with or without tenancy.
If there is a tenancy, it would be beneficial as a buyer to review and assess the terms of the signed tenancy agreement, with a focus as to whether the duration, rental price, conditions, and renewal terms would be considered fair.
It is also important for a seller to leave sufficient time for the tenant to vacate the property prior to completion of the sale.
We have experienced sellers who were under immense pressure as their then tenant wanted to maximize the time remaining on their tenancy, while the buyer was in a rush to move into the property after terminating their existing tenancy. The seller did not have sufficient time to ensure the property was properly cleaned up and repaired, which ended in a dispute with the buyer due to the pressures the parties faced.
Therefore, engaging in open communication and planning of timelines between the buyer, seller and tenant on the move out and handover dates is critical, to be done early at the offer letter stage.
The points above are just a few examples of what buyers and sellers should watch out for before signing a property offer letter. Relying completely on the person preparing the ‘standard’ offer letter (typically the real estate agents who may not be aware of such factors) could result in costly mistakes or unpleasant legal disputes.
Ultimately, the onus is on the party signing the document to ensure it is customized to their needs, wants and particular circumstances. Taking precaution early can reduce the risk of future disputes or misunderstandings, thus ensuring a smooth and straightforward property transaction process.
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This article was written by Shawn Ho (Partner) & Suzanne Fam (Senior Associate) from the property & tax 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 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. We also advise on property transactions and real-estate related tax planning. Feel free to contact us if you have any queries.
