In brief: real estate acquisitions and leases in Malaysia

SKRINE

Malaysia November 28 2022

Acquisitions and leasesOwnership and occupancy

Describe the various categories of legal ownership, leasehold or other occupancy interests in real estate customarily used and recognised in your jurisdiction.

The State Authority may:

• alienate a state land to any owner in perpetuity or for not exceeding 99 years, and under a qualified title or final title (if the land has been surveyed by the State Authority);
• lease any reserved land not exceeding 21 years (Reserved Land Lease);
• issue a temporary occupation licence (TOL) not later than the end of the calendar year in which it commence; or
• issue a permit for not exceeding 21 years to erect structure on/over a State land or reserved land as an adjunct to any structure on the adjoining land.

An owner is empowered to assign/transfer his property title (whether freehold/leasehold), and such ownership does not extinguish upon his death/bankruptcy. Any Reserved Land Lease transfer may be restricted under the relevant agreement with the State Authority, and TOL is not capable of assignment. Both Reserved Land Lease and TOL also terminate on the lessee/holder’s death or dissolution.

An easement can be registered with the relevant land registry/office using the National Land Code (Act 828) (NLC)-prescribed form. Other rights of way, air rights and access in respect of an alienated land may be created by contract with the landowner.

Condominium and its communal ownership are usually stratified scheme which is legally governed. Master lease for multiple properties is not common. Depending on the type and use of properties, the covenants required from the lessee/tenant may differ.Pre-contract

What are the typical pre-contractual steps?

A pre-contract document typically in the form of letter of intent/offer, or term sheet or heads of term is common but not mandatory to set out the agreed salient terms and exclusive negotiation period. A document expressed to be subject to contract does not necessarily prevent the formation of a contract. The courts will look into certainty of the transacting parties, the subject properties and the essential terms, and whether any intention for a concluded contract.

A Real Estate Agent (REA) may be engaged by seller/purchaser. He shall not provide professional services where he has a personal/contemplated interest unless having disclosed this to all affected parties. A REA needs to complete the requisite course and test of professional competence, and be registered under the Register of Valuers, Appraisers, Estate Agents and Property Managers and issued with an authority to practise. Estate agency fees are legally regulated, for instance a maximum fee of 3 per cent in a property sale whereas 1.25-months’ gross rental for a tenancy.Contract of sale

What are typical provisions in a contract of sale?

The typical down payment amount is 10 per cent of the sale price out of which a 1 per cent to 3 per cent earnest payment (depending on the sale price) is commonly required from a buyer to reserve the property pending execution of the sale contract. If there is any condition(s) precedent (CP) to be fulfilled, such payment is usually held by a stakeholder. Upon completion of the sale contract, the purchaser will be registered at the relevant land registry/office as the proprietor. If separate title has yet to be issued, the purchaser’s interest in such sale will be evidenced by a stamped Deed of Assignment which will be notified to the developer.

A title search is usually done at the purchaser’s cost. Customary seller’s warranties include:

• seller is the legal and beneficial owner and has capacity to sell;
• there is no other subsisting sale/dealing which may affect his rights to sell;
• there is no claim by third party(ies) on the sale property; and
• not to permit further encumbrance upon execution of sale contract.

Any real property gains tax assessed for a property sale will be imposed on the seller, and the year of assessment is calendar year. The land’s outgoings may be apportioned as at the full payment of the sale price or the delivery of possession. Risk of loss remains with the seller until such payment/delivery.Environmental clean-up

Who takes responsibility for a future environmental clean-up? Are clauses regarding long-term environmental liability and indemnity that survive the term of a contract common? What are typical general covenants? What remedies do the seller and buyer have for breach?

Based on the Contaminated Land Management and Control Guidelines issued by the Department of Environment (DoE Guidelines), the current landowner is responsible for determining any subsurface contamination through an Environmental Site Assessment (ESA) and thereafter undertaking subsequent remediation for the land clean-up unless they can identify the actual polluter to undertake the remediation themselves. However, under a sale and purchase agreement, if there is no contamination found at the closing through an ESA conducted by the current landowner, or if the purchaser does not require the same as a CP, then the maxim caveat emptor (let the buyer beware) applies and the responsibility for future environmental clean-up will fall on the purchaser. It is also not unusual for contracting parties to agree for the environmental warranties and indemnities to survive for a longer period than other warranty claims. Typically, there will be provisions for a clean-up by the landowner of any contamination found on the site as a CP, and indemnities for any claims arising from such contamination, in addition to usual provisions for termination for breach of warranties as to condition of the land.Lease covenants and representation

What are typical representations made by sellers of property regarding existing leases? What are typical covenants made by sellers of property concerning leases between contract date and closing date? Do they cover brokerage agreements and do they survive after property sale is completed? Are estoppel certificates from tenants customarily required as a condition to the obligation of the buyer to close under a contract of sale?

Typical representations include:

• no variation (except as disclosed) nor default of the lease/tenancy agreement; and
• the lease/tenancy is in effect and enforceable.

Typical covenants include:

• not to terminate the lease/tenancy, or enter into any settlement with the lessee/tenant, without the buyer’s approval;
• to execute and deliver to the buyer a transfer of the lease or novation of the tenancy; and
• to pay the security deposit and apportioned rental to the buyer on completion of the sale.

Leases and real estate security instruments

Is a lease generally subordinate to a security instrument pursuant to the provisions of the lease? What are the legal consequences of a lease being superior in priority to a security instrument upon foreclosure? Do lenders typically require subordination and non-disturbance agreements from tenants? Are ground (or head) leases treated differently from other commercial leases?

A lease generally is not subordinate to a registered charge. The owner of a charged land however is not capable of granting a lease without the registered chargee’s consent. The interests of a registered lessee under the National Land Code (Act 828) are not distinguished between a ground lease and other commercial leases.Delivery of security deposits

What steps are taken to ensure delivery of tenant security deposits to a buyer? How common are security deposits under a lease? Do leases customarily have periodic rent resets or reviews?

The seller usually covenants under the sale contract to remit the security deposits to his buyer on completion of the sale. If such deposits are in the form of letter of credit, the seller should cause the tenant to provide a new letter to the buyer.

Security deposits are common under a lease to secure the lessee’s performance. It is also typical to have rent resets/reviews at such agreed interval.Due diligence

What due diligence should be conducted before executing a contract? Is any due diligence customarily permitted or conducted after contract but before closing? What is the typical method of title searches and are they customary? How and to what extent may acquirers protect themselves against bad title? Discuss the priority among the various interests in the estate. Is it customary to obtain government confirmation, a zoning report or legal opinion regarding legal use and occupancy?

Depending on the complexity of the sale property, legal due diligence is usually completed before executing a property sale contract. A purchaser should conduct title search at the relevant land registry/office to verify, amongst others, the registered proprietorship, the category of land use and conditions of title, and any registered encumbrance. If separate title has yet to be issued, a purchaser should (1) review the previous contract of the landowner acquiring the property to determine, amongst others, if there is any surviving covenant or subsisting default by him, and (2) obtain the developer’s written confirmation that the landowner is the beneficial owner and whether the property is assigned to any financier. Malaysia practises the Torrens System and registered title/interest enjoys indefeasibility unless in the cases spelt out in the National Land Code (Act 828) such as fraud or misrepresentation. Government confirmation or legal opinion regarding legal use and occupancy is not commonly obtained as the condition of use of the land will be stated in its title. For the zoning which is not stated therein, buyer will and should check with the relevant local authority.Structural and environmental reviews

Is it customary to arrange an engineering or environmental review? What are the typical requirements of such reviews? Is it customary to get representations or an indemnity? Is environmental insurance available?

An Environmental Impact Assessment is required under the Environmental Quality Act 1974 of Malaysia before carrying out any activity prescribed under the environmental laws as having a significant environmental impact (ie, agriculture and manufacturing activities with specified production values). Furthermore, under the DoE Guidelines, the current landowner is responsible for identifying any subsurface contamination through an ESA.

Please see above on ESA.

Insurance policies for pollution incidents and other environmental issues are also available in Malaysia.Review of leases

Do lawyers usually review leases or are they reviewed on the business side? What are the lease issues you point out to your clients?

Lease agreements are usually reviewed by lawyers. Issues normally highlighted are such as:

• if advising lessee – indemnities from lessor, consequence of termination, restriction on lessee’s change of control, any lessor’s right to sell without being subject to the lease, and the mechanism to determine renewed rent (if not fixed); and
• if advising lessor – whether the lease is subject to registered chargee’s consent, and who to carry out the lease registration.

Lenders in a retail and commercial property financing generally do not require subordination of property management agreements.Other agreements

What other agreements does a lawyer customarily review?

Depending on the nature of and issues surrounding the subject property, lawyers will review agreements to where the sale will be subject or which the buyer will assume such as service contracts, lease agreements and management agreements.Closing preparations

How does a lawyer customarily prepare for a closing of an acquisition, leasing or financing?

The seller’s lawyer will prepare to deliver title, the required closing documents and latest outgoings’ receipts to the buyer’s lawyer. The common completion period is three months with an automatic one-month extension subject to interest. Apportionment of outgoings is on completion or possession.

If financing is involved, the financier’s lawyer will advise on fulfilment of conditions for the loan disbursement towards settlement of the sale price within the completion period, including differential sum settlement, and presentation for registration of the transfer and charge instruments.

After execution of a lease agreement and fulfilment of any CPs therein, the lessee/lessor’s lawyer will attend to stamping and presentation for registration of the lease instrument.

If the contracting party is a corporate body, the constituent documents and resolutions will be checked to verify their authorisation to enter into the transaction and execute the transaction documents.Closing formalities

Is the closing of the transfer, leasing or financing done in person with all parties present? Is it necessary for any agency or representative of the government or specially licensed agent to be in attendance to approve or verify and confirm the transaction?

Signing of the contract documents and closing need not be done with all parties present but they need to be witnessed/attested accordingly. The signing of land-related instrument for malay reserved lands, has to be attested by a land administrator. The property transaction need not be verified/confirmed by a government agency/representative (except currently, the State of Selangor Registry requires biometric fingerprint verification of the transfer instrument’s signatories if the property to be transferred is valued at five million ringgit and above) but the registrable instruments must be registered with the Registry.Contract breach

What are the remedies for breach of a contract to sell or finance real estate?

The remedies for breach are usually provided under the sale/financing contracts. Typically, parties will agree, under the sale contract, on an agreed liquidated damages sum to be paid/forfeited by the non-defaulting party upon termination. Alternatively, the non-defaulting party may apply for specific performance of the contract, but such remedy is at the court’s discretion.

If there is payment default under the financing contract, the registered chargee may apply for an order for sale under the National Land Code (Act 828) and enforce any other securities.Breach of lease terms

What remedies are available to tenants and landlords for breach of the terms of the lease? Is there a customary procedure to evict a defaulting tenant and can a tenant claim damages from a landlord? Do general contract or special real estate rules apply? Are the remedies available to landlords different for commercial and residential leases?

The remedies for breach are usually provided under the lease/tenancy agreements (whether for commercial/residential property) which includes forfeiture of the security deposit if tenant breaches, and the power of forfeiture under the NLC.

To distrain for arrears of rent, a landlord may apply to court for a warrant of distress directing a bailiff to distrain movable property found on the premises to realise the rent when they are sold. Whereas to recover possession from tenant who continues to remain there, owner must obtain a court order pursuant to the Specific Relief Act 1950.

Ref:

Verbatim from
SKRINE - Engy Tan, Eo Shao Dong, Francine Ariel Paul, Jesy Ooi and Lee Ai Hsian