Property ownership in Malaysia ultimately requires the owner’s name to be registered on a “document of title” maintained by the respective land office or land registry. This is because our land law in the Peninsula of Malaysia is governed by the National Land Code 1965 where we use the “Torrens System”, being a title deed system maintained by the land registry evidencing ownership to property, which was inherited from South Australia by Sir Robert Richard Torrens in 1858.
What is a “Strata Title”?
Strata Title refers to a form of property ownership or property title that is issued for multi-story, high-rise buildings or houses (some guarded and gated housing developments) that are sub-divided into different smaller parcels. After the master title for a strata development is submitted for sub-division, the allocated parcels in the building are divided into separate strata titles and issued to individual parcel owners.
If you had purchased any of the above-mentioned types of strata property, especially those completed prior to 2015, the strata title may not yet be issued or transferred to your name upon getting the vacant possession of the property. This step will likely only happen a couple of years after handover, where the developer or its solicitors will write to you informing that the strata title has been issued and that you need to ‘perfect the strata title’.
What do the terms “Memorandum of Transfer” or “Perfection of Transfer” mean?
In the present context, a Memorandum of Transfer (also known as Instrument of Transfer), is a legal document prescribed by the National Land Code 1965, which is used to effect the transfer of the property, once the strata title is issued, from the developer to the purchaser. “Perfection of transfer”, on the other hand, is the process of the changing of the name of the registered proprietor from the developer’s name to the current owner’s name.
So, what happens after the Developer informs an owner that the Strata Title has been issued?
Once the developer has informed that you need to perfect the strata title, the developer’s panel lawyers and your bank’s panel lawyers will be in contact with you to execute the Memorandum of Transfer (MOT) and the Memorandum of Charge (MOC) i.e. the bank’s charge documents if you took a loan to finance the purchase of the property. At this stage, you may need to have about 2%-3% of the property’s purchase price, to pay for the legal fees, bank charges and stamp duty in the perfection of transfer process.
Speaking of stamp duty, if you had purchased the property directly from the developer, you are now required to pay the full ad valorem stamp duty on the MOT based on the property price stated in the sale and purchase agreement (SPA). This is because you would have previously only paid a nominal stamp duty of RM 10 at the point of purchase from the developer.
On the other hand, if you had purchased the property via a sub-sale, you will only need to pay the nominal stamp duty of RM 10 on the MOT, since the full ad valorem stamp duty would have previously been paid on the Deed of Assignment at the point of purchase from the previous owner.
The scale rates for ad valorem stamp duty on a conveyance of property imposed under the Stamp Act 1949 are as follows: –
- First RM 100,000: 1%
- Next RM 400,000: 2%
- Next RM 500,000: 3%
- Above RM 1,000,000: 4%
What are the issues that may arise if an owner delays perfecting the transfer of the strata title?
It is not uncommon for property owners to be reluctant to perfect the transfer of strata title for the simple reason of the costs and fees involved in doing so. However, here are some reasons, just as food for thought, why one should not delay the perfection of strata title.
- Delay in the sale
If the strata title has been issued by the developer and you have yet to perfect the title, you are unable to sell your property as the strata title will show that the developer is still the registered owner of the property. If your property is a freehold title, you may be able to obtain the developer’s consent to provide a ‘direct transfer’, to transfer the title directly from the developer to the new purchaser during the sale of your property.
On the other hand, if your property is a leasehold title, the developer will not consent to a direct transfer as state authority consent will be needed for the transfer. You may then need to proceed with the sale by way of ‘double transfer’, firstly from the developer to you, and thereafter from you to the purchaser. If the double transfer is done during your sale transaction, it will take a longer time to complete the transaction and delay your receipt of the purchase price from the sale. This lengthy procedure may result in either a very frustrated purchaser or worst, an aborted transaction.
Another scenario that may also complicate the sale transaction is when the property owner passes away without perfecting the strata title even though the strata title has been issued. The beneficiary will not be able to dispose the property right after the grant of probate is issued. The property has to be first transferred from the developer to the executor, and thereafter from the executor to the beneficiary, before the beneficiary may sell it.
- Loan rejection (by purchaser)
There are some instances where the owner of a strata property has yet to perfect the strata title, and wishes to dispose the property, a potential purchaser may face difficulties in getting loan approval on the basis that banks are often reluctant to grant loans where strata titles either have not been issued or are issued but not yet perfected.
- Developer wound up or liquidated
We often come across property owners who are not willing to perfect the transfer of the strata title for various reasons, including wanting to sell the property soon, that they have no time or have simply forgotten to do so, or they do not sufficient cash to proceed with the perfection process.
However, do keep in mind that should the developer go into liquidation before the perfection of the strata title transfer, the owner will have to go through the trouble of locating the liquidator or the receiver of the property, and the owner may even have to pay an additional to the liquidator, for the application of the strata title and to perfect it.
- Management Corporation
As a property owner, unless a minimum of 25% of owners in your development has perfected their strata titles, the management corporation cannot be formed.
To be involved in your management corporation which is formed by the owners of the development, including the right to attend to and vote at the annual general meeting, or to volunteer as a committee member, your strata title first needs to be perfected and your individual name registered in the strata title roll maintained by the management corporation.
- Additional storage charges
One of the consequences of not perfecting the transfer of the strata title within the specific period as informed by the developer, is the imposition by the developer of an additional storage charge on the property owner. Some developers may impose storage charges that range between RM 100 to RM 150 per month, for every month of failure or delay to effect the perfection of transfer.
In conclusion, when informed by the developer that your strata title has been issued, do not delay the perfection of strata title until the point of disposal, as having an issued strata title registered in your name conclusively evidences your indefeasible ownership of the property, and allows you to fully exercise the rights over your property, including voting on the management affairs of the development and also disposing it with greater ease.
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.