Making a bid at a public auction
30/06/2006 The Sun - Law & Realty
By Andrew Wong
Generally, there are two types of public property auctions taking place in
Malaysia, and anyone who intends to bid at a public auction should know what
additional costs he may have to incur, over and above the purchase price.
Judicial auction
The first type is regulated by the National Land Code (NLC). This will apply
to a property with title and charged to a bank. When the borrower defaults
in his repayment to the bank, the bank will apply to the High Court (land
registry title) or the Land Administrator (land office title) for an order
to sell the property by way of a public auction. This first type is often
referred to as a judicial auction.
In a judicial auction certain statutory requirements under the NLC relating
to, the reserve price, conditions of sale, mode of payment, service on owner
and public advertisement of the sale, must be complied with by the bank,
before and after an order for sale is made. The NLC regulates the
application of the purchase money arising from any sale in a judicial
auction, in particular, requiring that the quit rent payable to the State
and outgoings payable to the local authority, be paid from the purchase
money. An owner of the property or the purchaser in a judicial auction, who
suffers any loss or damage by reason of any act, omission, neglect, error or
default arising from these statutory requirements, is entitled to
compensation.
Non-judicial auction
The second type is not regulated by any legislation and applies to a
property for which no title has been issued. This is usually the case for
flats, apartments or condominiums. Since there is no title, no charge can be
created under the NLC. As security for a loan, the purchaser/borrower will
absolutely assign the rights over the property to the bank. When he defaults
in his repayment, the bank is contractually entitled to sell the property by
way of a public auction, without having to apply for an order for sale. This
second type is often referred to as a non-judicial auction.
This article will focus on the pitfalls that may be faced by a successful
bidder in a non-judicial auction (the purchaser), as the minimum statutory
provisions regulating a judicial auction do not apply to a non-judicial
auction. The bank determines the reserve price and appoints a licensed
auctioneer who will issue a Proclamation of Sale. The auction will be held
under the auspices of the bank's solicitors and the auctioneer. Everything
will be contractual and understanding such contractual obligations and
liabilities of the purchaser is of paramount importance.
The Proclamation
The first thing an intending bidder at a non-judicial auction needs to do is
to get his hands on a copy of the Proclamation and Conditions of Sale (the
Proclamation). There will be a fine print that says something like
“intending bidders are advised to inspect the property, seek legal advice,
conduct a land search and make enquiries with the developer of the property
on the terms of its consent to the sale.” Herein lies the main problem, as
most intending bidders do not bother to do so, until after they have
successfully bid for the property.
Time for payment
The purchaser is usually required to pay 10% of the purchase price
immediately after the fall of the hammer. Some Proclamations stipulate 90
days for payment of the balance, others stipulate 120 days. Some
Proclamations also state that no extension of time will be allowed, others
will say that extension may be granted at the absolute discretion of the
bank, and if so granted will be subject to payment of interest.
In a case of property without title, 90 or 120 days is usually sufficient
time if the purchaser is paying in cash. If a loan is required, the 90 or
120 days may not be sufficient, as the conveyancing procedure is extremely
cumbersome, with lots of exchange of undertakings. If the property is a low
cost flat, 120 days is definitely insufficient, as the purchaser will be
required to apply for consent of the appropriate authority, which usually
takes more than 90 days to be obtained. Having to pay interest for an
extension will be an additional cost.
Developer's consent
Since the title has not been issued, the developer's consent is important so
that when the title is finally issued, the developer will know who should
receive the transfer. Nearly all Proclamations stipulate that it is the
purchaser's responsibility to obtain the developer's consent and to pay any
fee charged by the developer. In some cases, the developer may appoint a
solicitor to handle the consent, and the purchaser may be liable to pay the
said solicitor's fees. Such fees will be an additional cost.
Outstanding service charges, quit rent, assessment and other outgoings
Developers do not usually grant its consent unless all outstanding service
charges are settled. Some Proclamations are quite fair in that any arrears
of service charges, quit rent and assessment up to the date of sale shall be
paid out of the purchase money. Many Proclamations stipulate that arrears of
service charges and utilities bills (water, electricity and sewerage) shall
be borne by the purchaser. In one case, a purchaser successfully bid for a
property at RM128,000, and outstanding service charges was about RM40,000.
These outgoings will be an additional cost.
Fees payable to bank's solicitors
When the balance purchase price is paid, the bank will sign a deed of
assignment in favour of the purchaser. Most Proclamations will require the
purchaser to pay the fees of the bank's solicitors for vetting or preparing
the assignment and this will be another additional cost.
Vacant possession
Most important of all, a bidder really needs to know whether the property is
vacant or occupied. Nearly all Proclamations stipulate that the bank has no
obligation to give vacant possession and that the Purchaser shall take
possession at his own cost. In many cases, a bidder would not be able to
inspect the property as the main door would be locked. The auctioneer will
say he does not have the key. Everyone assumes that the property is vacant.
After payment of the balance price, the purchaser will need to break the
lock or maybe also the door. Once inside the property, he may find that
someone is occupying it as a tenant. Having to pay for a new lock or a new
door or several other locks and doors, and having to initiate eviction
proceedings to obtain possession from the occupant, can be a very
substantial additional cost.
Conclusion
These are some of the more important things which an intending bidder ought
to look out for. If in doubt it is always prudent to consult a solicitor
before you make a bid.
The writer is the Deputy Chair of the Conveyancing Practice Committee
Bar Council Malaysia
www.malaysianbar.org.my
