Property Security PDF

T O (N SE FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO ) CHAPTER 10 PROPERTY SECURITY 10-1 PROPERTY SECURITY 10. PROPERTY SECURITY Learning Outcome At the end of the chapter, you will be able to: ) Describe the law and process of creating security over properties and the related FO P R RIN C...

T O (N SE FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO ) CHAPTER 10 PROPERTY SECURITY 10-1 PROPERTY SECURITY 10. PROPERTY SECURITY Learning Outcome At the end of the chapter, you will be able to: ) Describe the law and process of creating security over properties and the related FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO Key Topics SE documentation. In this chapter, you will be able to read about: Introduction: Land and Properties Alienation of Land Land and Land Laws Dealings Over Land: Transfer, Charges, Assignments, and Liens Types of Charges Bankruptcy Search Documentation of a Charge Documentation of the Deed of Assignment Documentation Process Disbursement of the Loan Assessment Criteria T During the exam, you will be expected to: O Explain aspects of the law, particularly essential provisions of NLC 1965, relating to (N property security documentation. State the process relating to property security creation under different transaction scenarios. Describe the security documentation process for properties without titles and nonlanded properties. 10.1 INTRODUCTION: LAND AND PROPERTIES Land, landed and strata properties are often accepted as security by the lending bank. The creation of security interests by the bank must be made in accordance with the relevant land laws and law of contract in respect of properties without sub- divided titles. Any defect in legal documentation can result in difficulties for the bank to realise the security asset for loan settlement. CERTIFICATE IN CREDIT PROPERTY SECURITY 10-2 The lending bank and solicitors must ensure the security documentation is proper and complete in accordance with the terms of the loan and must have the security documents stamped and presented or registered with the Land Office. Land mortgages and land title transfers must be presented to the Land Office for registration of the mortgagee’s and transferee’s interest in the property. SE ) 10.2 ALIENATION OF LAND Under the National Land Code 1965 (NLC 1965), all land belongs to the state. All FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO persons or entities interested in acquiring or owning state land may apply for a title to the land from the state authority, that is, the land office, which will grant a title to the property after due consideration. The title confers legal ownership to the acquirer of the land. This is referred to as alienation of land. The land granted by the state comprises freehold land, leasehold land, tenancies, Malay reserved land, customary land, and native land. The credit officer must be conversant with the different types of land that can be accepted as security: 10.2.1 Freehold Land Freehold land is land where the title is generally referred to as grant in perpetuity or freehold title. The land is vested in the individual and successors in title for an indefinite period. 10.2.2 Leasehold Land and Sub-Leases T Under the NLC 1965, a leasehold title vests in the owner and successors, title to O the leasehold land for periods such as 30, 60, or 99 years. After this period, the (N title reverts to the state, unless the lease is renewed. The maximum tenure of lease granted by the state is 99 years. In Sabah and Sarawak, the maximum tenure can extend up to 999 years. Some lenders may accept leasehold property with a balance lease period of not less than 20 years as security. This is provided the remaining lease period is at least 20 years at the end of the loan repayment period. In Peninsular Malaysia, a ‘lease’ is the letting of land for a term exceeding three years. In Sabah and Sarawak, this is called a ‘sub-lease’ and applies to land that is let for a period exceeding one year. Only registered leases and sub-leases are legally valid. A lease is defined as an interest in land granted by the lessor, whether he is the owner of the land or not, to a lessee for a certain agreed period. CERTIFICATE IN CREDIT 10-3 PROPERTY SECURITY 10.2.3 Tenancies In Peninsular Malaysia, a tenancy refers to the letting of land for a term of up to three years, whereas in Sabah and Sarawak it refers to the letting of land for a period not exceeding one year. Tenancies need not be registered. *Note: In common usage, the term ‘rent’ is used interchangeably to mean SE ) ‘lease’, as well as ‘tenancies’. FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO 10.2.4 Forms of Title—Final Title, Qualified Titles, Grants, State Leases There are two types of land titles under the NLC 1965: final title and qualified title. A final title confers on the person or entity concerned a title to land which is indefeasible, that is, which cannot be annulled or revoked. A qualified title is issued in the event that a final title cannot be issued. Qualified titles confer similar rights to the final title, except that the boundaries are provisional and no subdivisions or partitions are permissible. Qualified titles (Q.T.) are referred to as Hakmilik Sementara (H.S.) in Bahasa Malaysia. Both final and qualified titles may be registered at the Registry of the State or the Land Office. A Registry Title is registered by the Registrar of Titles in the Registry of the State. Every state has a State Registry typically located in the capital of the state. A Land Office Title is registered by the Collector of Land Revenue at the Land Office of each district. The collector is the local registering authority. O T 10.2.5 Temporary Occupation License (TOL) (N This type of license does not confer an interest on the land and is normally granted for one year and renewed annually. For example, Temporary Occupation Licenses are commonly issued to vegetable growers in Cameron Highlands. 10.3 LAND AND LAND LAWS 10.3.1 Land as Security Though financial institutions do not usually transact in the sale and purchase of land in the ordinary course of their business, land and properties have always represented an important form of security for their loans. In addition, financial institutions are inevitably involved in land when they finance the borrower’s property acquisition. CERTIFICATE IN CREDIT PROPERTY SECURITY 10-4 10.3.2 Applicable Land Laws—National Land Code 1965, Sarawak Land Code, Sabah Land Ordinance The applicable land laws relating to land matters in Malaysia are: FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO the Sabah Land Ordinance Chapter 68. SE the Sarawak Land Code Chapter 81; and ) the National Land Code 1965, which is applicable throughout Peninsular Malaysia and provides a uniform system governing all dealings in land, including transfer, charge, and lien-holder’s caveat; It is important to note that these laws are applicable only to land for which documents of title have already been issued. On the other hand, in respect of land without the issuance of documents of title, the respective rights and liabilities of the parties are governed by contract i.e. under Contracts Act 1950 (revised 1974), for instance, under the Loan Agreement and Deed of Assignment. 10.3.3 Registration System and its Effect of Indefeasibility One of the most important characteristics of the land laws in Malaysia is that they attach great importance to the registration of land dealings. Registration confers indefeasibility of title or interest, meaning that it cannot be challenged or set aside, and is good against all other competing claims. Section 340(1) of the NLC 1965 states as follows: O T “The title or interest of any person or body for the time being registered as proprietor of any land, or in whose name any lease, charge or easement is for the time being registered, shall, subject to the following provisions of this section, be indefeasible.” (N The importance of the registration of land dealings in Sabah and Sarawak is highlighted under Section 88 of the Sabah Land Ordinance and Sections 119 and 132 of the Sarawak Land Code. Under Section 304 of the NLC 1965, the effective date of registration of any instrument shall be the time and date of its presentation as entered in the Presentation Book maintained by the Registrar of Land Titles. Once a charge is executed by the chargor and chargee, registration of the charge document effectively conveys the legal interest of the financial institution, and no other persons can claim an interest on the property. Hence, it is important to send the charge document for stamping and registration as soon as the charge document is executed and signed. The practical importance of registration and the effect of indefeasibility are illustrated by the following examples: CERTIFICATE IN CREDIT PROPERTY SECURITY A charge may have been executed by both the chargor and chargee but is not registered. The statutory rights of the chargee would be lost by the entry of a subsequent private or a registrar’s caveat, a prohibitory order or the registration of subsequent charge. The chargee’s interest would be at risk if the loan has already been disbursed to the borrower. This is because the charge in question cannot now be registered in view of the existing ) encumbrances over the land in question. SE A Loan Agreement cum Assignment was created over a property, where a document of title has not been issued yet. The assignee bank will not FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO be able to register its interest on the land until a title is issued by the land authority. The assignee bank must wait for the title to be issued before a charge can be created and registered at the land office or registry, since a charge is normally preferred over an assignment. The assignee bank requires the developer to undertake to forward to the bank the document of title, when it is issued free of encumbrances in the developer’s name, together with the registrable memorandum of transfer. This is to facilitate the creation of a charge. This process of sub-division may take years to complete. Notwithstanding the undertaking given to the bank, the developer may negligently or inadvertently deliver the title directly to the purchaser/ borrower. If we assume that the purchaser/borrower is dishonest, there is nothing to prevent them from transferring the property to someone else, or from charging it in favour of another financial institution. If such a transfer or charge is registered first, the transferee or chargee, as the case may be, will be conferred indefeasible title over the land, which is good against any claims by the assignee bank. The loan granted by the assignee O T bank is now deemed to be unsecured. In such a case, the assignee bank can only rely on its contractual rights provided for under a Loan Agreement cum Assignment as provided for in the Contracts Act 1950 (Revised 1974). (N 10-5 Under a normal sale and purchase of land, the common conveyancing practice would require the purchaser to pay a deposit of 10% of the purchase price to the vendor upon signing the sale and purchase agreement. Even though the memorandum of transfer is executed, it cannot be presented for registration immediately since time is required to complete the sale. So long as the transfer is not registered, the vendor can still re-sell and transfer the land to another person, who may take immediate steps to register the transfer first. If the transfer to such person is registered, his title or interest again is recognised as indefeasible. His claim over the land is as good as the first purchaser’s. The remedy of the first purchaser against the vendor lies only in damages for breach of contract. CERTIFICATE IN CREDIT PROPERTY SECURITY 10-6 This is why purchasers are always advised by their solicitors to lodge a private caveat immediately upon the signing of the sale and purchase agreement. This is to prevent the vendor from re-selling the property to another person who may be prepared to offer a higher price. ) 10.3.4 Exceptions to Indefeasibility SE The indefeasibility principle is not absolute. There are important exceptions to the rule. For instance, even though a transfer or charge has been registered, FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO it can still be challenged or set aside. Accordingly, it is prudent for financial institutions to ensure that none of these exceptions apply. a. Sections 340(2) and 340(3) of the NLC 1965 Section 340(2) of the NLC 1965 provides for the following exceptions: ▶ where there has been fraud or misrepresentation; ▶ where the registration was obtained by forgery or by means of an insufficient or void instrument; or ▶ where the title or interest was unlawfully acquired. This is provided that nothing shall affect any title or interest acquired by any purchaser in good faith and for valuable consideration, or by any person or body claiming through or under such a purchaser. b. Practical Implications in Banking The above-mentioned proviso has important practical implications in banking. The chargor is the owner of the land or lease, and the chargee is the person to whom it is conveyed. Notwithstanding the existence of the abovementioned vitiating factors such as fraud, misrepresentation O T or forgery, only a bona fide purchaser who has provided valuable (N consideration shall continue to enjoy the benefits of indefeasibility. In the case of Tan Ying Hong v Tan Sian San & 2 Ors (2010), a dispute arose when a crook used a forged power of attorney of Tan Ying Hong (‘Tan’), the original registered owner to mortgage Tan’s property to United Malayan Banking Corporation (‘the bank’). This was to obtain credit facilities totalling RM300,000 favouring Cini Timber Industries Sdn Bhd (‘Cini Timber’). When Cini Timber defaulted in their payment, the bank commenced foreclosure proceedings against Tan. The leave to appeal to the Federal Court was granted on the following issue, namely, whether an acquirer of a registered charge or other interest or title under NLC 1965 by means of a forged instrument acquires an immediate interest or title. The court replied with a firm ‘No’. The Federal Court held that the bank is an immediate purchaser/ chargee within the meaning of s340 (2) NLC 1965. The proviso in s340(3) that protects a subsequent bona fide purchaser for value will not assist CERTIFICATE IN CREDIT PROPERTY SECURITY the respondent bank. The ownership of the land which is now worth a few million Ringgit, reverted to the applicant. Effectively, the latest court decision has reinstated the principle of deferred infeasibility. In this principle, the first purchaser who acquired the property in good faith and for value will not enjoy indefeasibility if exceptions under s340(2) of the NLC 1965 is proven. Subsequent purchasers will however SE obtained the title. The charge instrument is likewise protected. ) enjoy indefeasibility irrespective of the manner in which the first purchaser FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO While the Federal Court ruling was welcomed, it failed to solve the problem completely. Fraud can still affect the title and the scope of protection afforded to an innocent registered owner is still limited. It should be noted that forgery is a common problem in the implementation of land title registration system in Malaysia. Nearly all forgery cases involve identity theft, that is, either the identity of the landowners are forged, or ‘faked’ identity cards and forged signatures and attestations are involved. It has implications for the financial institution. A forged document including a charge is void. It cannot be enforced in a court of law. It is difficult to appreciate how a charge can be forged when the chargee’s signature is always attested. Attestation is normally done by solicitors acting on behalf of both the chargor and chargee. When the attestation is undertaken properly and professionally by solicitors, the risk of forgery can be eliminated or minimised. Solicitors, however, may advertently or inadvertently participate in fraud by: i. allowing the chargor to sign the charge without personally being present to attest; O T ii. failing to attest the chargor’s signature immediately after it has been (N 10-7 signed; or iii. by allowing the charge document to be taken out of the solicitors’ premises. This practice is fraught with risk. There is little that the solicitors can do to verify the signature of the chargor except to confirm with the chargor. It would be extremely naive to expect the chargor to own up to forging the document. CERTIFICATE IN CREDIT PROPERTY SECURITY 10-8 10.3.5 Strata Title (Amendment) Act 2013 and Strata Management Act 2013 The shortage of land in urban areas has led to the acceptance and increasing popularity of multi-density dwellings such as apartments, town houses, condominiums, and gated communities. These developments have common areas and facilities for residents, requiring community-based management SE ) and financial contributions to maintain. As a result, the Strata Act 1985, now amended as the Strata Title (Amendment) Act 2013 together with Strata In summary, the original Act and FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO Management Act 2013 were gazetted. amendments require: the application for the subdivision of land, and the issue and transfer of strata titles to individual owners of multi-density development on the land, by the original landowner or property developer; the formation and operations of a management corporation for each development, which is empowered to collect financial contributions for the on-going maintenance of the common areas and facilities in the multidensity development; the establishment of a Strata Titles Board to hear and determine any disputes under the Act which may be brought about by an owner of a strata unit or the management corporation for a multi-density development; the application of the Act to be consistent with the provisions of the National Land Code, with the latter provisions prevailing in the event of any inconsistencies. The Strata Titles (Amendment) Act 2013 (“STAA 2013”) is now in force and brings about a significant change to the legal landscape relating to strata T developments and common property management. Briefly, the other O amendments of significant note under the STAA 2013 include: (N the extension of the Strata Titles Act 1985 to Labuan; the introduction of the Electronic Land Administration System of Strata Titles; a compulsory requirement for the original proprietor to apply for subdivision of a building or land at the super structure stage, thereby requiring the application for subdivision to be made in two stages; in the case of phased developments, the issuance of a provisional strata title for a provisional block comprising of land parcels will now be allowed; the designation of limited common property and the creation of one or more subsidiary management corporations to represent the different interests of parcel proprietors; and the execution of transfer documents of ownership of strata titles by the purchaser within thirty (30) days from the date of issue by the Land Administrator or any extended period by the Director. CERTIFICATE IN CREDIT 10-9 PROPERTY SECURITY 10.4 DEALINGS OVER LAND: TRANSFER, CHARGES, ASSIGNMENTS, AND LIENS 10.4.1 Transfer The transfer of land is referred to in Section 214 of the NLC 1965. A transferor refers to the person or entity transferring the land, while the person to whom SE FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO memorandum of transfer. ) it is transferred is referred to as the transferee. The transfer is perfected by a 10.4.2 Charge A charge as provided in Section 5 of the NLC 1965 is a transaction whereby the registered proprietor (owner) of a land or a lease conveys its legal interest to another for repayment of a debt or any sum other than debt, or the payment of any annuity or other periodic sum. The owner of the land or lease is called the chargor and the person to whom it is conveyed (normally the financial institution) is called the chargee. *Note: The word ‘charge’ is used in the context of the NLC 1965. While in Malaysia, the word ‘mortgage’ is often used interchangeably, ‘mortgage’ really applies to English Land Law. 10.4.3 Assignment An assignment is a contract in writing whereby the assignor assigns all his rights, title, and interest in the property to the assignee as security for a loan T extended by the financial institution to the borrower. O Three documents are executed in relation to assignment that concern rights (N to land or property: a. Deed of assignment—The instrument that creates the assignment. b. Loan agreement—The document that lays out all the terms and conditions of the loan. c. Deed of power of attorney—The instrument that vests the power to sell, assign, lease, deal with, and take possession of the property. The above three documents are sometimes made into a single document called Loan Agreement cum Assignment (LACA). A first party Loan Agreement cum Assignment is created where the assignor is also the borrower. Where the assignor and borrower are different parties, it is referred to as a third-party Loan. CERTIFICATE IN CREDIT PROPERTY SECURITY 10-10 10.4.4 Lien Holder’s Caveat This is another form of security that can be taken over land. However, like a charge, it is available only when the land in question has been issued with the document of title. A lien is defined as a right to retain possession of an asset for a debt that is unpaid. ) A lien-holder’s caveat is created when the proprietor of a land surrenders SE possession of his document of title to the bank. The security over the land by way of a lien-holder’s caveat is created when Form 19D prescribed under FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO the NLC 1965 is lodged and registered with the Registrar of the Land Office. The caveat therefore prevents another party from dealing with the property without consent or notice to the caveat holder. The mere deposit of the land title with the bank is insufficient to create the security. Form 19D must be lodged and registered. In the case of United Overseas Bank (Malaysia) Sdn Bhd v UJA Sdn Bhd [2007}, the Court of Appeal ruled that Section 281 of the NLC 1965 is not limited to the creation of a security by way of a lien on title only for the benefit of a registered proprietor. It extends to third party borrowers as well. The advantages of a lien-holder’s caveat are: Fewer formalities as compared to a charge; and No stamp duty payable. The practical disadvantage of a lien-holder’s caveat lies with its enforcement. Under the provisions of Section 281(2) of the NLC 1965, a judgment of the court must first be obtained against the borrower before the property secured under the lien-holder’s caveat can be formally foreclosed. In other words, a O T lien-holder’s caveat does not confer the power of sale to the holder. (N The litigation process in securing the judgment may be protracted, and there is no certainty that the bank can successfully secure a judgment against the borrower. Even if a judgment is obtained against the borrower, the bank is now required to commence formal foreclosure proceedings in the High Court. It is only after the order for sale is granted that the property can be sold by public auction. Further delay is thus inevitable. In respect of a charge, there is no requirement for any prior judgment to be obtained against the borrower. Upon any default under the charge, the bank can proceed immediately with foreclosure. A lien-holder’s caveat is normally created for short-term and small amount of advance. However, and most importantly, it is created as a temporary measure to secure a loan, pending the registration of a charge. CERTIFICATE IN CREDIT 10-11 PROPERTY SECURITY The most important difference between a private caveat and a lien-holder’s caveat is that the former is not recognised as a security. A private caveat does not give any rights or powers of sale to the caveator. The private caveat will expire automatically after six years, whereas there is no time limit for the expiry of a lien-holder’s caveat. It is to be noted that FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO 10.5 TYPES OF CHARGES SE Ordinance or the Sarawak Land Code. ) there are no provisions for a lien-holder’s caveat in either the Sabah Land A charge is the most important form of security taken by financial institutions in granting a loan. Under Section 5 of the NLC 1965, a charge means a registered charge. It is a security transaction whereby a land is pledged for repayment of a debt or other periodical sum of money secured over land. A charge is the best security over land, because, in the event of default of repayment of the debt, the chargee is entitled to enforce the security by foreclosure as provided for by the NLC 1965, to recover the money advanced by the chargee. 10.5.1 First Party and Third-Party Charge A first party charge is taken where both the borrower and the chargor are the same. A third- party charge is taken where the chargor and the borrower are different. For instance, if the purchaser of the property is the wife of the borrower, the charge to be taken is a third-party charge. On the other hand, if a sole proprietorship is the borrower and the proposed chargor is the sole proprietor T himself, then the charge to be taken is a first party charge. Both the sole O proprietorship and the sole proprietor are the same. There is no separate (N legal entity here. 10.5.2 First Legal Charge and Second Legal Charge Once a charge is registered, the chargee’s interest is well protected. Upon registration, the charge creates an encumbrance on the land, which prevents any further dealings (whether by way of sale, transfer, and/or creation of a second or subsequent charge or leases) without the consent of the first or existing chargees. Under Section 246 of the NLC 1965, it is permissible to create more than one charge on the same property. No consent from the chargee is required if the subsequent chargee is the same. However, consent must first be obtained if the second or subsequent chargees are different. CERTIFICATE IN CREDIT PROPERTY SECURITY 10-12 Under Section 268 of the NLC 1965, the rights of such subsequent chargees shall rank after the first chargee, in the event that the land is foreclosed. The proceeds from the sale of the land are always paid to the first chargee before the subsequent chargees, unless the subsequent charges are ranked in priority or pari-passu to the first charge. It should be obvious that, as far as the first chargee is concerned, it is not ) to their benefit to consent to any creation of subsequent charges in favour SE of another bank, which will rank either in priority or pari-passu to its existing FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO charge, unless there are special or exceptional circumstances as in certain loan syndications. It is clear from Section 268 of the NLC 1965 that the first chargee shall enjoy priority of the proceeds in the event that the land is foreclosed either by themselves, or by the second or subsequent chargees. In addition, the first chargee’s right to foreclose the land is not affected by the status of the loan granted by the second or subsequent chargees. As provided under Section 244(1) of the NLC 1965, the first chargee always retains the issue document of title. The only disadvantage is that the second or subsequent chargee has similar rights of foreclosure even when the loan granted by the first chargee is not in default, subject only to the priority of the first chargee over the proceeds of sale as provided under Section 268. Therefore, whether consent should be given to the creation of a second or subsequent charge is always a business decision. It always remains the prerogative of the first chargee to decide whether such consent is granted. If the request for consent to create a second or subsequent charge is refused, T the unhappy chargor may redeem the property on his own accord, or upon O the advice of another bank. In that case, the entire loan may be transferred to (N that other bank instead. 10.5.3 Principal and Subsidiary Charge The difference between a principal and a subsidiary charge lies neither in law nor in documentation. The difference lies in the stamping of the charge instruments. It is not uncommon to require two or more different pieces of land to secure a single or particular facility. Different memoranda of charge are required since they are different pieces of land. The loan amount stated in the respective memorandum of charge is always the full principal amount of the loan, notwithstanding the respective valuation of the land concerned. The ad valorem stamp duty payable is based on the said loan amount stated in the CERTIFICATE IN CREDIT PROPERTY SECURITY memorandum of charge. The ad valorem stamp duty for this purpose does not include interest on the loan. FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO SE ) Under the Stamp Act 1949 as at 1 July 2014, it is not required that the ad valorem stamp duty be paid on each and every memorandum of charge, since all are intended to secure the single loan facility granted to the borrower. The ad valorem stamp duty is payable on one of the memoranda of charge only. The rest of the charge instruments merely attract a nominal stamp duty of RM10 each. Each of the charge instruments are, however, required to include a declaration as to which of the respective instruments in question shall constitute a principal or a subsidiary charge. The charge wherein the ad valorem stamp duty is paid is called the principal charge, whereas those charges on which nominal stamp duties are paid are called the subsidiary charges. Notwithstanding the classification, the bank as chargee is entitled to enforce both the principal and the subsidiary charges, to recover the whole amount outstanding under the loan. 10.5.4 Endorsement and Payment Method Under Section 294 of the NLC 1965, the instrument of charge must be duly stamped or it will not be accepted for registration. Endorsement will be made on the instrument upon payment of the required stamp duty. Under Section 2 of the Stamp Act 1949 as at 1 July 2014, an instrument is “duly stamped” when it bears an adhesive or impressed stamp of no less than the proper amount and when such stamp has been affixed or used in accordance with the law in force in Malaysia at that time. O T 10.5.5 Land Searches Whenever land is taken as security for loans, it is always prudent that banks, either by themselves or through their solicitors, conduct the relevant searches on the registered documents of title. (N 10-13 a. Types of Land Searches In conveyancing practice, there are two types of searches made, that is, preliminary searches and final searches. i. Preliminary search A preliminary search is conducted before the purchaser enters into a legally binding contract with the vendor. ii. Final search A final search is made as soon as possible before the completion of the sale, so as to uncover any flaws in the title since the preliminary search and the making of the requisition on the title. CERTIFICATE IN CREDIT PROPERTY SECURITY 10-14 b. Ways to Conduct a Land Search Land searches can be conducted either by way of a private search or an official search. i. Private search A private search can be conducted by the person himself during normal office hours at the Registry or Land Office upon payment of the ii. Official search SE ) required fee. FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO An official search is done by applying to the Registrar for an official search to be conducted in respect of any land upon payment of the required fee. The Registrar will then issue a certificate of search under Section 385 of the NLC 1965. A certificate of search will specify the details of the registered proprietor of the land and include a summary of all the entries on the register document of title. It is preferable to rely upon the official search as this grant complete protection on completeness and authenticity of the search. c. Purpose of Land Searches The purpose of land searches is as follows: ▶ to ascertain the ownership of the land; ▶ to re-confirm particulars of the document of title; ▶ to ascertain the existence of any encumbrances; ▶ to verify the existence of any restrictions in interest; ▶ to ascertain the conditions of title; ▶ to verify whether the land in question is either Malay Reserved, T Customary or Native land; and (N O ▶ to ascertain any expressed conditions on the land that might subject it to forfeiture. i. Ownership of Land This will determine whether the proposed charge in question will be a first or a third-party charge. This will further ensure that the land to be charged is in fact registered in the name of the prospective chargor. ii. Particulars of the document of title Re-confirmation of the particulars of the document of title will ensure that there is no mistake on the proposed land to be charged. iii. Existence of encumbrances: Private and Registrar’s caveats The existence of any encumbrances on the land in question is of great importance. If there is an existing charge in favour of another bank, no further charges can be registered without the consent of the CERTIFICATE IN CREDIT 10-15 PROPERTY SECURITY existing chargee. Consequently, the question of redemption becomes important. The existing chargee will only consent to discharge the property provided the redemption sum is paid in full. The bank is put on enquiry if there are either private or Registrar’s caveats entered against the land in question. The existence of a private or Registrar’s caveat will prohibit the registration of any instruments of SE ) land dealings such as the memorandum of transfer and a charge. Under Sections 322(1) and 323 of the NLC 1965, a private caveat can be FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO entered by any person having a registrable interest in the land. Under Section 322(5A), where the caveator’s claim is in respect of a part of the land or an undivided share in the land, no consent is required from the caveatee for any person who wishes to register any dealings, so long as the dealings do not affect the caveatee’s interest. Under Section 328(1), a private caveat will remain in force for a period of six years. It may be shorter, however, if it is withdrawn by the caveator under Section 326, or removed by the Registrar under Section 326, or removed by the court under Section 327 pursuant to a successful application by the caveatee or any other aggrieved person. However, regarding documentation and presentation of the memorandum of charge for registration, it is important to note the exception provided under Section 322(4) of the NLC 1965. Under this provision, the existence of a private caveat shall not prohibit the registration, endorsement, or entry of any such instrument of dealing where the instrument was presented, or where the application (N O T for endorsement or entry was received prior to the the private caveat taking effect. Accordingly, as long as the memorandum of charge has been presented for registration before the entry of any private caveat, even where it is not yet registered, the memorandum of charge will not be rejected for registration subsequently. However, the same cannot be said on the effect of a Registrar’s caveat. Section 319(2) of the NLC 1965 provides that the prohibition imposed by a Registrar’s caveat shall continue to apply to any instrument of dealing notwithstanding that it was presented for registration before the caveat was entered. The bank’s interest will obviously be at risk. Even where the land search conducted prior to the presentation of the charge reveals no registrar’s caveats, the charge can still be rejected for registration if such Registrar’s CERTIFICATE IN CREDIT PROPERTY SECURITY 10-16 caveats are entered before the actual registration of the charge in question. Under Section 320 of the NLC 1965, a Registrar’s caveat can be entered by the Registrar of Land under the following circumstances: i. to prevent any fraud or improper dealings of the said land; ) ii. to protect the interests of the Federation or State authority, any minors FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO be absent from the federation; and SE or persons suffering from mental disorder, or any persons shown to iii. to satisfy the whole or part of any debt due to the federation. This normally would include non-payment of taxes. The land search may also reveal the presence of a prohibitory order, which has the similar effect of prohibiting the registration, endorsement, or the entry of any instrument of land dealings. This is provided for under Section 336 of the NLC 1965. A prohibitory order is entered by creditors to satisfy a judgment debt due and owing by the landowner. However, Section 338 of the NLC 1965 provides that the prohibitory order shall lapse after a period of 6 months unless extended by an order of the court. iv. Restrictions in interest It is common for some land, particularly leasehold land, to be subject to certain restrictions in interest. Land subject to such restrictions cannot be transferred or charged without the consent of the state authority or the Ruler of the State in Council. In United Malayan Banking Corporation v Syarikat Perumahan Luas (N O T Sdn. Bhd. 3 MLJ 352, the court held that if such consent was not obtained, the subsequent transfer or charge can be rendered void. Accordingly, financial institutions must always ensure that such consent is first obtained before any disbursement of the loan. This is always made a condition precedent before any disbursement of the loan. v. Conditions of title This is related to the categories of land use specified in the NLC 1965. For example, it may be categorised as agriculture, building, or industry. The usage of the land in question must comply with the specified category of land use and the conditions imposed thereupon. Non-compliance may render the land liable for forfeiture by the state authority, or a fine may be imposed under Section 127 of the NLC 1965. Land can be only used for another purpose when approval is obtained from the state authority to convert the use of the land. Conversion of land CERTIFICATE IN CREDIT PROPERTY SECURITY use can be costly, for example, authorities may require an agricultural land to be raised to a certain level to qualify for residential use. vi. Malay Reserved, Customary and Native Land i. Malay Reserved Land The Malay Reservations Enactments of the respective Malay states seek to secure to the Malays their interests in land. The prohibitions SE ) imposed by these Enactments provide that any dealing, disposal or attempt to deal in or dispose of Malay reserved land in contravention FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO of these Enactments shall be null and void. No action shall lie for the recovery of any loan or the foreclosure of the land in the event of any contravention of these Enactments. For instance, in Ho Giok Chay v Nik Aishah MLJ 49, the court held that a charge created over Malay reserved land in favour of a non-Malay is null and void and cannot be enforced. There are certain exceptions to this prohibition. Approval can be obtained from the Ruler of the State in Council of the respective states to permit dealings in Malay reserved land in favour of specified persons or bodies. It is important to note that the definition of “Malay” varies from state to state. In addition, any dealings effected by a body corporate where not every shareholder or member is a Malay may also be similarly void, unless such body corporate, including financial institutions, have applied to be gazetted as “Malay” upon approval from the Ruler of O T the State in Council. (N 10-17 A power of attorney executed in favour of a person who is not Malay, or the creation of a trust of such land to persons who are not Malays, is similarly prohibited. Such dealings in Malay reserved land with the use of such power of attorney are also void. CERTIFICATE IN CREDIT PROPERTY SECURITY 10-18 ii. Customary Land It is important to note the importance of dealing with customary land in Malacca. Under the National Land Code (Penang and Malacca Titles) Act 1963, customary land in Malacca and Penang can be transferred, charged, leased or transmitted to a Malay. A Malay is a person who professes the religion of Islam, habitually speaks ) the Malay language, conforms to Malay custom, and was before SE Merdeka Day born in the Federation or born of parents at least one of whom was born in the Federation, or on that day is domiciled in the FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO Federation, or is the issue of such a person. iii. Native Land Any instruments of dealings affecting native lands in Sabah and Sarawak are subjected to such similar restrictions and prohibitions. Under Section 64 of the Sabah Land Ordinance, a non-native may not purchase any land held by natives or acquire any interest therein by way of a charge or otherwise. Under Section 8 of the Sarawak Land Code, it is illegal for a non-native to acquire any rights or privileges over land held and enjoyed by natives or native land. Any consideration or monies paid under any agreement purporting to transfer or confer any rights or privileges in contravention of this section is void, and no action shall lie to recover such monies paid or the consideration provided. In addition, any person who contravenes this section shall be guilty of a criminal offence. T 10.6 BANKRUPTCY SEARCH O A bankruptcy search is conducted with Jabatan Insolvensi Malaysia to ascertain (N whether the chargor has been adjudicated a bankrupt. Although the law does not prohibit the bankrupt from transacting or charging the land to the financial institution, it becomes a criminal offence if the individual does not surrender the land to the Director General of Insolvency under Section 109(1) (b) of the Insolvency Act 1967 as at 1 November 2017. CERTIFICATE IN CREDIT 10-19 PROPERTY SECURITY 10.7 DOCUMENTATION OF A CHARGE Figure 10.1 below depicts the process flow of the stages in the preparation of a charge. Stamping Presentation Registration at the relevant land office SE Execution by all parties & attestation FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO Preparation of charge document ) Figure 10.1: Stages in the Preparation of a Charge (Process Flow) BACKGROUND: Is a bankruptcy search on the borrower and/or chargor necessary? In Re: Kwan Chew Shen t/a Syarikat KAAF (Official Assignee of the Property of Kwan Chew Shen, a bankrupt) 1 CLJ 314, the court held as follows: Under Section 24(4) of the Bankruptcy Act 1967 (since renamed Insolvency Act 1967 as at 1 November 2017), the property of the bankrupt shall vest in the Official Assignee. However, this is always made subject to Section 349 of the National Land Code 1965 which requires transmission and registration of the land in favour of the Official Assignee. Upon the adjudication of bankruptcy, land and interest in the land belonging to the bankrupt shall only vest in equity and not in law in the Official Assignee. It shall vest in the Official Assignee in law only upon registration under Section 349. Accordingly, unless the land has been transmitted to and registered in T the name of the Official Assignee pursuant to Section 349 of the NLC 1965, a O bankrupt is competent to enter into any contracts affecting his land before (N such registration is made. Section 349(3) of the NLC 1965 provides: “No land, share or interest shall vest in the Official Assignee under any adjudication of bankruptcy, or order for administration in bankruptcy, until it has become registered in his name pursuant to this section.” In Hock Hua Bank Bhd v Choo Meng Chiong & Anor 5 MLJ 312, the court further held that the Bankruptcy Act 1967 (since renamed Insolvency Act 1967 as at 1 November 2017) does not prohibit a bankrupt from entering into a contract to charge his land to the bank, nor does the land code prohibit a bankrupt from being registered as a proprietor. However, if a borrower is already a bankrupt, the bank may not grant him the loan in question since his ability to repay is seriously in doubt. CERTIFICATE IN CREDIT PROPERTY SECURITY 10-20 10.7.1 The Memorandum of Charge The instrument creating the charge is Form 16A as prescribed under the NLC 1965. It is mandatory that Form 16A be used and the documentation procedures provided thereunder be followed strictly. Failure to do so will result in the charge being rejected by the Registrar at the land office. ) In Sabah, the Memorandum of Charge is provided for under Schedule XV of FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO a. Particulars of Land, the Chargor and the Chargee SE the Sabah Land Ordinance. In Sarawak, either Form H (1) or H (2) must be used. In addition to ensuring that the full particulars of the land title, the chargor, and the chargee are stated correctly, and other such particulars must be type-written. Other such particulars include the chargor’s name, address, identity card number, the loan amount to be secured, and the date of the charge. In the case of a company, the company’s registration number must be correctly stated. Any errors therein cannot be rectified or corrected by using an eraser or correctional fluid. Paragraph 11A of the Tenth Schedule of the NLC 1965 stipulates the manner in which errors in Form 16A can be rectified: Erroneous entries must be neatly cancelled so as not to be rendered illegible and are to be duly initialled by the attesting officer. No correction, deletion or cancellation of any entry in the Form shall be made by erasing any words or figures or otherwise rendering them illegible. 10.7.2 Execution and Attestation Under Section 210(2) of the NLC 1965, the execution of any instrument of T dealing including a charge by a natural person shall consist of his signing it (N O or affixing his thumbprint thereto. The signature of the chargor must be in permanent black or blue-black ink. This is required under paragraph 11 of the Tenth Schedule of the NLC 1965. The use of pencils or ballpoint pens is strictly prohibited. The signature of the chargor must be attested under Section 211 of the NLC 1965. Attestation is the act of witnessing the signature of the chargor, which is made compulsory by law. No bank officers are empowered to attest a charge. Only the following officers or persons specified under the Fifth Schedule are authorised to attest any instruments of dealings under the NLC 1965: 1. In any state to which this Act applies: a. a Magistrate; b. the State Director; c. the Registrar; CERTIFICATE IN CREDIT PROPERTY SECURITY d. a Land Administrator; e. an Advocate & Solicitor; and f. a Notary Public. If either or both the parties are residing either in Sabah or Sarawak, the charge can only be attested by the following specified persons: FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO b. a Land Administrator of Lands and Surveys; SE a. a Magistrate; ) 2. In the state of Sabah: c. a Superintendent of Lands and Surveys; and d. an advocate. 3. In the state of Sarawak: a. a Magistrate; b. the Director of Lands and Surveys; c. a Superintendent of Lands and Surveys; and d. an advocate. However, in respect of Malay reserved land, the signature of the chargor must be attested by the Land Administrator. This is required under paragraph 3 of the Fifth Schedule. This requirement is not necessary in the event that the charge is executed by a person on behalf of a body corporate under a lawful power of attorney. 10.7.3 Stamping A charge is an instrument that attracts ad valorem stamp duty. Under O T paragraph 27(a) (iii) of the First Schedule of the Stamp Act 1949 as at 1 July 2014, the amount of stamp duty payable on a charge is calculated on the basis of RM5 for every RM1,000 of the loan secured under the charge. (N 10-21 Under Section 47 of the Stamp Act 1949 as at 1 July 2014, the stamp duty payable must be paid within 30 days from the date of the execution of the charge. If the required stamp duty is not paid within the prescribed time, the charge is impounded under Section 51 of the Stamp Act 1949 as at 1 July 2014. Once the charge is impounded, it will be inadmissible in evidence in a court of law in the event of any litigation unless the penalty is paid. Under Section 47A of the Stamp Act 1949 as at 1 July 2014, the penalty is payable as follows: RM25 or 5% of the amount of the deficient duty, whichever sum is greater, if the instrument is stamped within three months after the time for stamping; CERTIFICATE IN CREDIT PROPERTY SECURITY 10-22 RM50 or 10% of the amount of the deficient duty, whichever sum is greater, if the instrument is stamped after three months but not later than six months after the time for stamping; or RM100 or 20% of the amount of the deficient duty, whichever sum is greater, in any other case. For instance, if the amount of the loan to be secured is RM1 million, the amount SE ) of stamp duty payable will be RM5,000. However, if the stamp duty is not paid within the prescribed period of 30 days, but is paid within the next three FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO months, the penalty to be paid would be RM250, being 5% of the outstanding duty, plus the original duty of RM5,000. For this reason, it is common practice that the charge will only be dated and the required stamp duty paid prior to the presentation for registration. It is not advisable to date the charge immediately upon execution by the chargor unless it can be presented for registration within the prescribed period of 30 days. 10.7.4 Presentation for Registration The loan sum would normally be disbursed to the borrower when the bank’s solicitors have confirmed, inter-alia, that the charge has been presented for registration. It is to be noted that, at this point, the charge has merely been presented for registration. The actual registration has not yet been perfected. However, as mentioned earlier, Section 304 of the NLC 1965 assures the chargee that the effective date of registration of the charge shall be taken as the time and date of its presentation as entered in the Presentation Book. T Once the entry in the Presentation Book is made, it is conclusive evidence as O to the time of the presentation of the charge. (N Once it is deemed effectively registered, the charge confers indefeasible title and interest on the chargee. It is good against all other conflicting claims. Prudence requires the bank to ensure that the solicitors have conducted another title search of the land in question before the presentation of the charge. Notwithstanding that an earlier search has already been conducted by the solicitors, subsequent private caveats, Registrar’s caveats, or prohibitory orders could have been filed and registered by aggrieved persons after the first title search had been done. The existence of such encumbrances will reject the registration of the charge. The bank or its solicitors will only be notified of the rejection later. The bank’s interest will then be affected since the loan would have already been disbursed. CERTIFICATE IN CREDIT 10-23 PROPERTY SECURITY 10.7.5 The Importance of Charge Annexure and Loan Agreement The chargor’s and chargee’s rights and duties are either implied by the NLC 1965 or by express agreement between the parties. All obligations and liabilities, rights, powers, and privileges of the parties are clearly stated in the annexure of the charge executed by the parties. Express conditions are clearly spelt out in the Annexure. For instance, the types of loans or facilities will be indicated in SE ) the annexure. The annexure must be registered together with the instrument of charge at the Land Registry or Registry Office. However, it is to be noted that the FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO annexure cannot be treated as equivalent to the registered charge. 10.7.6 Documentation of a Charge for the Purchase of Residential Properties Under a Sub-Sale (where the issue document of title has already been issued) Below is a summary of a sale and purchase transaction where the purchaser obtains a loan for the completion of the purchase of a residential property. EXAMPLE: Executing a Sale and Purchase Agreement The vendor and purchaser execute a Sale and Purchase Agreement. Prior to the execution, the purchaser’s solicitors would have conducted a search on the document of title at the relevant land registry to ascertain the following: the registered proprietor; encumbrances on the land such as private caveats, charges, prohibitory orders; (N O T express conditions of the title; restrictions in interest affecting the title; and accuracy of the particulars of the land in question. The purchaser’s solicitors may also conduct a bankruptcy search with the Official Assignee on the status of the vendor. The purchaser will normally be required to pay a deposit of 10% of the purchase price. This is merely standard practice. The required deposit to be paid may either be more or less than the 10% of the purchase price. It is a matter of contract between the vendor and purchaser. If the property is presently charged to another financial institution, the purchaser’s solicitors must ascertain that the balance of the purchase price is sufficient to redeem the property from the existing chargee. CERTIFICATE IN CREDIT PROPERTY SECURITY 10-24 The vendor and purchaser will then be required to execute Form 14A which is a memorandum of transfer. The duly executed Form 14A will then be deposited with the purchaser’s solicitors as stakeholders. In addition, the purchaser, on the advice of his solicitors, will lodge a private caveat on the property. This is to ensure that the vendor will not commit ) any fraud on the purchaser in attempting to dispose of the property to SE someone else. The vendor may not be able to resist that temptation, especially when a higher price or better terms are being offered. The FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO private caveat will prohibit the registration, endorsement, or entry of any instrument of dealing. To facilitate the eventual registration of the transfer and charge, the purchaser would also be required to execute Form 19G to withdraw the private caveat. The duly executed Form 19G will be deposited with the purchaser’s solicitors. The purchaser’s solicitors will then submit the memorandum of transfer for adjudication and stamping. Section 292(4) of the NLC 1965 provides that the validity of any instrument of dealings shall not be affected by the death of any person who had executed any such instruments but whose death occurred before the registration. Similar provisions are found under Section 124 of the Sarawak Land Code. Notwithstanding the abovementioned provisions, the bank may consider withholding the disbursement of the loan if notice of the borrower’s death has been brought to its attention. The death of the borrower will inevitably T result in the default in the repayment of the loan. In such an event, the (N O bank may have to deal with the legal representatives of the deceased borrower, a process which is both complex and protracted. 10.7.7 Adjudication of the Memorandum of Transfer It is to be appreciated that the memorandum of transfer cannot be presented for registration until and unless the transfer is adjudicated, and the required stamp duty paid. The relevant authorities require a valuation of the property to be done. Under the Stamp Act 1949 as at 1 July 2014, the stamp duty payable on the transfer is assessed on the current market value. This process is referred to as the adjudication of stamp duty. The authorities will not rely on the purchase price as stated in the Sale and Purchase Agreement as the basis to determine the market value, since both CERTIFICATE IN CREDIT 10-25 PROPERTY SECURITY the vendor and the purchaser may have colluded to understate the purchase price. This may be done to help the purchaser avoid paying a higher stamp duty. The temptation to do so is great, as the stamp duty payable on a transfer is progressively steep. Pursuant to section 68 (d) of the Finance Act 2019, Item 32A of the First SE Conveyance Assignment, Transfer or Absolute Bill of Sale: ) Schedule to the Stamp Act 1949 as at 1 July 2014 has been amended. FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO Higher stamp duty rate under the amended Item 32 (A) of the First Schedule Stamp duty rate applicable to instruments for the conveyance, assignment, transfer or absolute bill of sale, for the sale of any property (except stock, shares, marketable securities and accounts receivables or book debts) are as follows: First RM100,000 1% RM100,001 to RM 500,000 2% RM500,001 to RM1,000,000 3% Above RM1,000,000 4% Effective 1 January 2019, the stamp duty rate applicable for any instrument of transfer of property that is valued in excess of RM1 million has been increased from 3% to 4%. The bank must ensure that the memorandum of transfer is registrable. In a housing loan situation, both the transfer and charge will normally be presented for registration together. Where the documentation of the charge is perfected but the transfer is not, the bank will be at risk since the rejection of T the transfer necessarily means that the charge will also be rejected. Without O the initial transfer of the property to the purchaser, he or she will not be able (N to create a charge in favour of the bank. 10.7.8 Documentation and Procedure if the Purchase of Residential Property or Shop Office is Made Directly from the Developer Unlike a sub-sale, the Sale and Purchase Agreement for a purchase of residential property made directly with the developer is strictly governed by the Housing Development (Control and Licensing) Act 1966 as at 2 March 2016 (hereinafter referred to as the “HDA”). However, in respect to the purchase of a shop office or a shop lot in a shopping complex, the HDA has no application to the purchase. The HDA has no application for any development built on land designated or approved for commercial development. The form of the relevant sale and purchase agreement which must be followed strictly without any variations is provided as follows: CERTIFICATE IN CREDIT PROPERTY SECURITY 10-26 Schedule G for land and building such as landed property; and Schedule H for sub-divided building such as apartments or condominiums. For shop offices and shop lots, by contrast, there is no necessity to follow the standard sale and purchase agreement as provided under either schedule G or H. FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO SE ) For agreements governed by schedule G or H, the release of the loan, which is done progressively, must follow strictly the schedule provided under the Third Schedule of the HDA. For instance, the first progressive release of 10% of the purchase price as provided under the Third Schedule must be for foundation works only and not for earth works. By contrast, in respect of the financing of shop offices and shop lots, the HDA and hence the Third Schedule do not apply, and so the first progressive release of the 10% of the purchase price need not necessarily be for foundation works only. It could instead be for earth works undertaken. From financing aspects, it is important that the loan be released progressively in accordance with the respective schedule of payments, whether they are governed by the HDA or not. In addition, there must be proper presentation of the certificate by either the developer’s architect or his engineer which will certify the various stages of completion. Under clause 4(2) of the standard Sale and Purchase Agreement as provided under schedule G or H, the certificate by the architect or the engineer shall be proof of the fact that the works undertaken therein have been completed. 10.8 DOCUMENTATION OF THE DEED OF ASSIGNMENT (N O T Not all properties in Malaysia are issued with separate documents of title. These include both landed and sub-divided properties, either residential or commercial, such as shop offices or shop lots in shopping complexes. In the event that a financial institution finances the purchase of such properties, the documentation of the loan and security is as follows: a. A Loan Agreement cum Assignment This is usually taken in a first-party situation where both the purchaser and borrower are the same. b. A Loan Agreement and a Deed of Assignment This is taken in a third-party situation where the purchaser and the borrower are different. c. Power of Attorney The main function of an assignment is to secure the financier’s interest. In the case of default by the assignor, the assignee may enforce the remedies that can be made available to him. CERTIFICATE IN CREDIT 10-27 PROPERTY SECURITY The effect of an assignment generally depends on whether the assignment in question is an assignment (by way of charge) or an absolute assignment. An assignment (by way of charge) does not absolutely transfer the property to the assignee/financier, as stated in the case of Chung Khiaw Bank Ltd v Hipparion (M) Sdn. Bhd. 2 MLJ 62. It only gives a right to payment out of the property, without transferring the property. ) On the other hand, an absolute assignment will serve as a security for the loan SE granted to the assignor/purchaser/borrower, who will occupy the property as a FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO bare licensee of the end financier. All the rights, title and interests of the purchaser/ borrower/assignor in the property provided for under the Sale and Purchase Agreement will be assigned absolutely in favour of the end-financier. 10.8.1 Procedures to Adopt to Reduce or Eliminate Risks It is to be appreciated that since there is no issue document of title, it is impossible to conduct any title searches at the land registry. There is thus initial uncertainty as to whether the property had already been assigned. However, if the following procedures are adopted strictly, the risks of any fraud can be reduced or even eliminated: a. Documentation of the Loan Agreement cum Assignment The developer shall no longer be required to give consent to any assignment, either for a sub-sale or the financing of such a sub-sale. Instead, express notice in writing must be given to the developer of any such assignment. Upon such notice received by the developer, the assignment shall be deemed effectual in law to pass and transfer the proprietary right, interest, chose in action, and all legal and other remedies for the same to (N O T the assignee. However, the notice must be given in the following manner. Such notice must be delivered by the assignor or his solicitors to the housing developer, accompanied by: i. A duly stamped sale and purchase agreement between the assignor and the new purchaser; ii. A duly executed Deed of Assignment and the relevant letter of undertaking to deliver the Deed of Assignment within 14 days after it has been stamped; and iii. Full payment of all sums and outgoings due to the developer under the Sale and Purchase Agreement. The developer is now required by law to keep and maintain an up-todate, proper, and accurate register of all purchasers of the housing accommodation until the separate or strata titles for all the housing CERTIFICATE IN CREDIT PROPERTY SECURITY 10-28 accommodation have been issued and registered in the names of all the purchasers. Upon payment of a fee not exceeding RM50, the developer shall provide, upon request, the purchaser, his solicitors, or his financiers with all necessary and accurate information of the records in the register, such as: FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO iii. the current purchaser of the housing accommodation; SE ii. postal address of the housing accommodation; ) i. full particulars of the housing accommodation; iv. the current chargee or assignee; and v. the total amount due to the developer. b. Obtain original copy of the Sale and Purchase Agreement The bank must also require the borrower to surrender his original copy of the Sale and Purchase Agreement signed with the developer. In the absence of the issue document of title, the original copy of the Sale and Purchase Agreement will be proof of his title and interest over the property in question. The bank’s suspicion ought to be aroused if the borrower cannot furnish his original copy of the Sale and Purchase Agreement, unless this can be satisfactorily explained. Notwithstanding any satisfactory explanation for not being able to furnish the original Sale and Purchase Agreement, prudence will dictate that the bank must further require the following: i. a statutory declaration from the borrower that the original copy of the sale and purchase agreement is either lost or misplaced; and/or ii. a police report to be lodged. T Unless the original copy of the Sale and Purchase Agreement is actually (N O lost or misplaced, the borrower will not normally provide either the statutory declaration or the police report, since any false information provided therein will constitute a serious criminal offence, punishable with a fine, imprisonment, or both. c. Ensure the lodgement of a private caveat against the master title A private caveat must also be lodged against the master title unless there is a prior arrangement with the developer that the private caveat is not necessary. The purpose of the private caveat is to prevent the developer from fraudulently dealing with the property in a manner prejudicial to the interests of the purchasers and end-financiers. This can happen if the bridging loan has been settled by the developer, and they unscrupulously create another charge on the master title to secure fresh facilities. CERTIFICATE IN CREDIT 10-29 PROPERTY SECURITY As a result of the Federal Court’s decision in Chor Phaik Har v Farlim Properties Sdn. Bhd. 3 MLJ 345, it is now not in dispute that such a private caveat can be lodged against the master title. This is so even where the bank’s interest in the land is only confined to a portion thereof. However, the lodgement of a private caveat may also entail certain practical difficulties on the part of the developer. The presence of private caveats SE ) certainly will not facilitate the process of sub-division of the master title. Most developers will not proceed to apply for sub-division. The reason for FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO this is that if any such private caveats are not removed, they will appear in all the individual titles after the sub-division. This will incur the wrath of innocent individual purchasers and end-financiers, who will not be able to transfer, charge, or deal with the property until the private caveats are removed. The number of private caveats could be in the hundreds, depending on the size of the project launched by the developer. Faced with potential multiple lawsuits, developers understandably will not proceed to apply for sub-division unless all the private caveats are removed. The cost of removing all the private caveats appearing on all the sub-divided titles is usually prohibitive. The undertakings from some end-financiers to withdraw their private caveats upon proof that the developer is genuinely applying for sub-division may not be helpful. This is because not all developers will give such proof. Moreover, there are no restrictions on the number of subsequent sub-sales. If there is a sub-sale, another private caveat will be lodged as soon as the first is removed, since such a sub-sale will also similarly be financed by a bank. T This is one of the primary reasons why the process of sub-division of the (N O master title is always protracted. It may sometimes take years for the individual titles to be issued. The only practical solution lies with the developer. They can impose a prohibition against the lodgement of private caveats either in their consent to any assignment or under the Deed of Mutual Covenant. 10.8.2 Execution of the Deed of Receipt and Reassignment In the event that the loan is fully settled and the assigned property redeemed, the Deed of Receipt and Reassignment must be executed. The power of attorney which was earlier registered in the High Court should be revoked. Stamp duty payable on the Deed of Receipt and Reassignment is similar as in the case of a discharge of charge. CERTIFICATE IN CREDIT PROPERTY SECURITY 10-30 Contrary to a charge, there is no procedure available for the creation of a “second legal assignment”. This is because an assignment, when created, is absolute in nature, and the owner of the land is left with no further interest in the land that could be the subject of a “second assignment”. Only a Supplementary Loan Agreement is required to be signed by the assignor to secure any additional facilities. The Supplementary Loan Agreement will ) include a declaration that the additional facilities shall be secured by the FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO SE existing assignment. 10.9 DOCUMENTATION PROCESS 10.9.1 For Land with Individual Title (Charge Document) a. Purchase Made Directly from Developer House/Property Sale and Purchase Agreement executed Vendor (Developer) Individual Purchaser (N O T Title Deed Bank Bank Developer’s financial institution N.B. This is in the event the title is encumbered by the developer to financial institution for bridging loan Developer’s Solicitors Individual Purchaser’s financial institution lending bank Individual Purchaser’s solicitors Figure 10.2: Purchase made directly from developer (land with title) CERTIFICATE IN CREDIT 10-31 PROPERTY SECURITY SCENARIO: Purchase made directly from developer (land with title) An individual purchaser has an approved loan of RM100,000 to purchase a house from a developer and the house has been issued with the individual title deed. Process Flow FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO 3. Purchaser accepts FI letter of offer. SE 2. Purchaser applies for loan from FI and gets approval. ) 1. Signing of Sale and Purchase Agreement (SPA) between developer and purchaser. ▶ The security documentation is mentioned in the letter of offer. A registered first charge for RM100,000 on a residential property, also known as 88 Jalan Belimbing, Taman Zas, Perak. The freehold title particulars are Lot No. 666, Mukim of Manjoi, H.S. (D) No 123456 Daerah Ipoh, Perak. 4. The lending bank’s solicitors prepare a charge document and the purchaser’s solicitors lodge a private caveat. This is to prevent the developer or vendor from making a sub-sale transaction by fraudulently selling to another person at a higher price. It is the purchaser, on the advice of his solicitor, who will lodge the private caveat on the property. 5. Lending bank’s solicitors get undertaking from the developer’s solicitors to: i. forward the title together with the registerable memorandum of transfer to the lending bank; ii. refund the loan amount in the event that the transfer cannot be affected, or a Certificate of Fitness cannot be issued; iii. refund the loan amount in the event that the project is abandoned and cannot be completed; and iv. obtain a Letter of Undertaking cum Redemption from the developer’s bank. T 6. Execution of the charge document by Purchaser (Chargor), the lending bank’s Power of Attorney Holders (Chargee) and attestation by solicitors. (N O 7. Stamping for a charge document is ad valorem, a tax levy imposed on the value of the property. 8. Lending bank’s solicitor will conduct a land search to ensure that there are no encumbrances, and will lodge a private caveat for cases where there is a redemption sum to be paid to the developer’s bank. 9. The lending bank’s solicitors will issue a legal opinion and inform the bank to release the redemption amount to the developer’s bank. After full redemption, presentation of memorandum of transfer and charge at the relevant land office for registration. 10. Registration of memorandum of transfer and charge and simultaneous withdrawal of private caveats at the relevant land office. 11. Lending bank’s solicitors make a search to confirm that there are no encumbrances on the land. 12. Lending bank’s solicitors issue a legal opinion and inform the lending bank to release the loan to the developer through solicitors. 13. Subsequent release against the architect’s certificate and developer’s billings. CERTIFICATE IN CREDIT PROPERTY SECURITY 10-32 b. A Sub-Sale (Subsequent sale—refers to sale of property after buying ) from a vendor) FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO SE House/Property Title Deed Sale and Purchase Agreement executed Vendor Individual Purchaser Bank Bank Vendor’s Financial Institution Individual Purchaser’s financial institution i.e lending bank Vendor’s Solicitors (N O T Individual Purchaser’s solicitors Figure 10.3: A sub-sale (land with title) c. For Land without Individual Title (Assignment) i. Purchase made directly from developer The security taken by the financier in this case would normally be by way of an assignment of the rights and interest of the purchaser/ borrower, who is the owner/beneficial owner of the property under the Sale and Purchase Agreement. The purchaser/borrower who assigns the property is called the ‘assignor’, whilst the financier who accepts the assignment is called the ‘assignee’. One must bear in mind that the rights of the financier (assignee) are unlike the indefeasible rights of a chargee under the NLC 1965. CERTIFICATE IN CREDIT 10-33 PROPERTY SECURITY SCENARIO: A sub-sale (land with title) An individual purchases a house from an individual vendor. He has an approved loan of RM80,000. The house has an individual title deed which is charged to the vendor’s financial institution (FI). 2. Purchaser applies for loan from the FI and gets approval. FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO 3. Purchaser accepts FI letter of offer with the following security: SE 1. Signing of SPA between vendor and purchaser. ) Process flow: ▶ The security documentation mentioned in the letter of offer is a registered first charge for RM80,000 on a residential property, 58 Perajurit, Taman Ipoh Mali, Perak. The leasehold title particulars are Lot No 786, Mukim of Pulai, H.S. (D) No 80091 Daerah Gersang, Perak. 4. Purchaser’s FI’s solicitors prepare a charge document and the purchaser, on the advice of his solicitor, lodges a private caveat (to prevent the vendor from fraudulently selling to another person at a higher price). 5. Purchaser’s FI’s solicitors get undertaking from existing chargee to: a. forward the title together with the registrable memorandum of transfer to the purchaser’s FI solicitor; b. request a Redemption Statement cum Letter of Undertaking from the vendor’s FI to forward the duly executed discharge of charge, title, and charge upon receipt of redemption sum, and to refund the redemption sum in the event that the discharge of charge is rejected for registration for any reason whatsoever; and c. refund the loan amount in the event the transfer cannot be affected. 6. Execution of the charge document by Purchaser (Chargor), FI’s Power of Attorney holders (Chargee), and attestation by solicitors. O T 7. Stamping for a charge is done ad valorem. (N 8. Purchaser’s solicitor will conduct a land search to ensure there are no encumbrances and will lodge a private caveat for cases where there is a redemption sum to be paid to the vendor’s bank. Lending bank’s solicitors will issue a legal opinion and inform the bank to release the redemption amount directly to the vendor’s FI. 9. Upon receipt of the title, charge, and discharge of charge from the vendor’s bank, presents the memorandum of transfer and charge at the relevant land office for registration. 10. The bank’s solicitors obtain the undertaking from the vendor’s solicitor as stakeholders to refund monies if registration of Memorandum of Transfer (MOT) is rejected. 11. Registration of memorandum of transfer and charge and simultaneous withdrawal of private caveat at the relevant land office. 12. Lending bank’s solicitors make a search to confirm that there are no encumbrances on the land. 13. Lending bank’s solicitors issue a legal opinion. 14. Lending bank releases the loan to the vendor’s solicitor on behalf of the borrower. CERTIFICATE IN CREDIT PROPERTY SECURITY 10-34 SE FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO Property without individual title and is a subdivided lot in the master title ) One MASTER Title belonging to the developer with sub-divided lots, where individual titles have not been issued by the land office Individual Purchaser Bank Bank Developer’s financial institution Individual Purchaser’s financial institution i.e. lending bank Developer’s Solicitors Individual Purchaser’s Solicitors Figure 10.4: Purchase made directly from developer (land without title) (N O T Vendor (Developer) CERTIFICATE IN CREDIT 10-35 PROPERTY SECURITY SCENARIO: Purchase made directly from developer (land without title) Process flow: 1. Signing of SPA between developer and purchaser. 2. Purchaser applies for loan from FI and gets approval. 3. Purchaser accepts letter of offer with the following security: SE ) ▶ The security documentation mentioned in the letter of offer is a Loan Agreement cum Assignment for RM150,000 on a residential property at 10 Jalan Pipit, Taman FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO Taiping, Perak. The title particulars are Lot No 963 under master title H.S.(D) 65444 Mukim of Larut, Perak. 4. Purchaser’s FI’s solicitors prepare a Loan Agreement cum Assignment. 5. Purchaser delivers the original SPA. 6. Purchaser’s FI’s solicitors get undertaking from the developer to forward: a. an undertaking to deliver to the assignee the individual issue/strata document of title to the assigned property, upon the issuance thereof, together with a duly stamped and registrable memorandum of transfer and other relevant documents pertaining thereto. b. an undertaking not to further encumber the master title to the land without the prior consent of the assignee. c. an undertaking to refund to the assignee all monies, progressive releases, and all whatsoever monies released to the assignee in the event that: i. the memorandum of transfer in respect of the assigned property in favour of the assignor is rejected for registration by the relevant land authority, for any reason whatsoever; SPA; T ii. the construction of the assigned property is not completed as stipulated in the O iii. the certificate of completion and compliance in respect of the assigned property (N cannot be issued by the relevant authority for any reasons whatsoever. d. a guarantee to complete the construction of the assigned property until the issuance of individual issue/strata document of title. e. letter of undertaking from the developer to deliver a registerable memorandum of transfer in the event the title is issued. f. letter of undertaking from the SPA solicitors to deliver the individual title upon issuance and upon receiving the title from the developer. g. letter of disclaimer from the developer’s bridging financier to exclude the financed lot in the event of foreclosure proceedings if the master title is encumbered. CERTIFICATE IN CREDIT PROPERTY SECURITY 10-36 ii. When the master title is charged to another bank (say Bank AFTA) as security Here, the assignee’s solicitors would request an undertaking from the developer’s FI (chargee for the developer), by securing the following documents: ӽ an undertaking to inform the assignee in the event foreclosure SE ) proceedings or other legal proceedings are instituted by the chargee (Bank AFTA) in respect of the master title to the land; FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO ӽ an undertaking to exclude their rights, title, and interest in the assigned property before the issuance of an individual/strata document of title to the assigned property in the event of any foreclosure proceedings or other legal proceedings instituted by the chargee in respect of the master title; ӽ a declaration to have no further rights, title, or interest in the assigned property; ӽ an undertaking to execute a discharge of charge over the assigned property upon the issuance of an individual issue/strata document of title by the relevant authority to enable the assignee to take a first legal charge; ӽ an undertaking to refund to the assignee all monies so released by the assignee to the chargee in the event that the discharge of charge is rejected for registration by the land authority for whatsoever reasons; and ӽ an undertaking from the purchaser’s solicitors, a letter of undertaking to the effect that the solicitors undertake to deliver to the assignee (N O T or the assignee’s solicitors a duly adjudicated and stamped memorandum of transfer to the assigned property together with the required registration fees upon the issuance of an individual title/ strata document of title. It must be borne in mind that every loan transaction may be different. The financier may have to secure additional documents as the need arises. CERTIFICATE IN CREDIT 10-37 PROPERTY SECURITY iii. A sub-sale (Subsequent sale—refers to sales of property after buying from a developer) SCENARIO: A sub-sale (land without title) An individual purchases a house from an individual vendor for ) RM110,000, where the house has not been issued with an individual title SE deed. FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO Process flow: 1. Signing of SPA between vendor and purchaser. 2. Purchaser applies for loan from lending bank and gets approval. 3. Purchaser accepts letter of offer with the following security: The security documentation mentioned in the letter of offer is a Loan Agreement cum Assignment for RM110,000 on a residential property at 14 Jalan Valentine, Taman Romantica, Perak. The title particulars are Lot No. 69 under master title H.S. (D) 1245 Mukim of Lenggong, Perak. 4. Lending bank’s Assignment. solicitors prepare a Loan Agreement cum 5. Lending bank’s solicitors get undertaking from vendor’s solicitors to undertake to forward original sale and purchase agreement between: a. vendor and developer; and b. receipt and reassignment from the vendor’s bank. (N O T 6. Execution of the LACA by Purchaser, bank’s Power of Attorney holders (Assignee), and witnessed by solicitor. 7. Stamping for an assignment is on ad valorem basis. 8. Lending bank’s solicitors issue a legal opinion and inform it to release the progressive payments directly to the vendor’s solicitor. CERTIFICATE IN CREDIT PROPERTY SECURITY 10-38 House/Property FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO SE ) Sale and Purchase Agreement executed Individual Purchaser Bank Bank Individual Vendor financial institution Individual Purchaser’s financial institution, lending bank Vendor’s financial institution’s Solicitors Purchaser’s financial institution Solicitors Figure 10.5: A sub-sale (land without title) (N O T Individual(Vendor) 10.9.2Redemption Redemption of the property becomes necessary when the property is currently charged to another financial institution. Until and unless the charge is effectively discharged, no transfer can be registered and no fresh charge can be created. The existing chargee will not consent to any discharge of the existing charge unless the outstanding loan is fully settled. The vendor, who is the existing chargor, must make the arrangement to settle the outstanding loan before the property can be redeemed, to enable him to obtain the duly executed discharge of charge and the issue document of title from the existing chargee. This can be done by the chargor settling with the chargee directly. CERTIFICATE IN CREDIT 10-39 PROPERTY SECURITY Alternatively, the redemption sum can be settled by utilising either a part or the whole loan amount under application. In the event that the redemption sum is to be settled by utilising either a part or the whole of the loan amount, the bank should proceed carefully to ensure that its interests are protected. This is because the release of the loan amount at this stage is unsecured, since the proposed charge cannot, at the moment, SE adopted by the bank: ) be presented for registration. The following procedures must, therefore, be FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO a. The purchaser’s bank solicitors will, upon the request by the vendor’s solicitors, make a written request to the existing chargee for the redemption sum. b. The chargee will then forward the redemption sum statement together with the following undertakings: i. refund the redemption sum in the event that the discharge cannot be registered; and ii. forward the duly executed discharge of charge in Form 16N, together with the issue document of title and the duplicate charge. In addition to the abovementioned undertakings from the existing chargee, it is prudent for the purchaser’s bank to require its solicitors to further confirm the following: a. That the differential sum has been settled by the purchaser This is the difference between the purchase price and the loan amount. The purpose of this confirmation is to ensure that the vendor is fully paid under the sale. If he is not fully paid, the vendor can legally refuse to proceed with T the transfer of the property. In the event that the vendor refuses to allow (N O the transfer, the charge cannot be presented for registration. The purchaser’s bank will now be on the losing end, since either part or the whole loan amount will have already been released for purpose of redemption. So long as the discharge of charge can be registered, the chargee is not bound by its undertaking to refund the redemption sum. b. That a private caveat in Form 19B has been lodged against the property The purpose of the private caveat is to prohibit the registration of any unlawful dealings in the said property. Such unlawful dealings may occur in the event that the duly executed discharge of charge, the issue document of title, and the duplicate charge forwarded by the chargee are lost or have fallen into the hands of dishonest persons. This can happen at any time and at any stage of the transit of these documents from the existing chargee to the bank or its solicitors. CERTIFICATE IN CREDIT PROPERTY SECURITY 10-40 10.10 DISBURSEMENT OF THE LOAN 10.10.1 Confirmation from the Bank’s Solicitors The loan is disbursed upon confirmation from the bank’s solicitors that the charge has been presented to the Land Office for registration, provided SE borrower and, where applicable, by the chargor and guarantor. ) that all other terms and conditions of the loan have been observed by the FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO The solicitors must further confirm that another land search has been conducted prior to presentation and there are no encumbrances, the presence of which will prevent the charge from being registered. PRACTICE QUESTIONS (INDICATIVE ANSWERS CAN BE FOUND IN THE TOPICS LISTED FOR THE RESPECTIVE QUESTIONS) 1. Explain the creation of a National Land Code charge when taking landed assets as security. (10.4.2, 10.5) 2. Differentiate between a legal charge and a lien over a landed property and the legal effects. (10.4.2 & 10.4.4 & 10.5) 3. Discuss how a lender can take security over a property under construction for which no individual title is available. (10.9.1 (c)(i)) 4. Explain what a private caveat is and how useful it is in taking security over landed assets. (10.4.4, 10.8.1(c) & 10.9.2(c)) 5. What is the difference between a lien-holder’s caveat and a private caveat? (10.4.4 and 10.9.2 (b)) T 6. Can a loan be given with a security agreement in the form of a legal charge but with no (N O loan agreement? (10.7.5) KEY TERMS Charge Leasehold title Document of title Principal charge Encumbrance Private caveat Final title Qualified title Subsidiary charges CERTIFICATE IN CREDIT T O (N SE FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO )