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Cash or financing when buying property
09/03/2007 The Sun - Law & Realty By Tan Kim Soon

WHEN a Purchaser has selected a new property to be purchased from a developer, he is often undecided whether he should pay cash or to seek financing from a lender. Apart from the economic and financial constraints for having made the decision, the legal implications of making a choice on mode of payment runs deep into the root of ownership rights or title to the property.

A Purchaser has obligations under the Sale and Purchase Agreement (SPA) to pay the developer, whether for the commencement of the construction of the particular stage or for the particular stage completed. Any default in progress payments will normally entitle the developer to terminate the SPA and forfeit certain sums from the progress payments made.

In the SPA, the obligation of the developer to deliver the title (ownership) to the Purchaser is upon the delivery of vacant possession of the property purchased. This means that until all required payments are made to the developer, the interest of the Purchaser in the property purchased is subject to all other legal interests which have priority over that of the Purchaser.

Although the Purchaser will have a beneficial interest in the property when the SPA has been executed, such interest will be subservient to any prior interest created by the developer over the Property. When a Purchaser pays cash for the property, he will be exposed to the inherent risks as contained in the SPA. This is due to the structure of the SPA which is currently in use, wherein the title will pass only on full payment of the purchase price and other contractual payments.

For example, there may be instances where the SPA is executed but the origin of the transaction is from a debt settlement arrangement wherein no cash is in fact exchanged. It must be specified in the debt settlement arrangement when in point of time the rights to pursue the debt are exhausted as against the obtaining of title to the property. The detailed terms will determine whether the interest of the Purchaser, who is also a creditor, is protected or otherwise.

Protection of financing

When a Purchaser obtains financing from a lender, his legal position is somewhat modified. Since the lender is in a position to insist that the title in the property is passed from the developer to the Purchaser, who in turn either assigns it or creates a legal charge in favour of the lender, the Purchaser and the lender will therefore get instant title to the property.

Risks when foreclosure, receivership or liquidation of developer takes place

When a developer faces foreclosure action, goes into receivership or liquidation, a Purchaser who does not have title to the property will be deemed an unsecured creditor. The Purchaser will have no priority whatsoever to the property as any interest that may be residually accrued to the Purchaser is subject to prior legal interest of the bridging financier or any party who has taken security on the property.

As there is no obligation on the part of the developer to redeem the property until the delivery of vacant possession and payment of the final progress payment together with late interest and all other charges, in the event the project is abandoned, the Purchaser will have an uphill battle with the developer, as well as to pay the bridging financier the redemption sum payable to redeem the property. This may result in the Purchaser having to cough out more money than the sale and purchase price to obtain the title to the property. Even if the property is fully completed, there may be a situation where a Purchaser only realises that he has no title to the property when he intends to sell his property to a third party or until he intends to raise financing with the property as security.

If the developer is still in business, the Purchaser may compel the developer to deliver title by specific performance. In the event the developer is either in receivership or liquidation, the remedy of specific performance may not be available as the Receiver and Manager and the Liquidator is not liable for contractual obligations prior to their appointment.

If the Purchaser already has title to the property, the events of foreclosure, receivership and liquidation will not affect the legal rights of the Purchaser as the property is not the asset of the developer and the chargee, the Receiver and Manager or Liquidator has no control of it. In addition, any execution of judgment on the developer will not affect the title of the Purchaser in the property.

Protection for cash purchaser

A cash Purchaser may protect his interest by forwarding all progress payments through his solicitors, who have the duty to ensure that all progress payments are released to the developer upon verification of the supporting documents like Architect’s Certificate etc and to ensure that the title to the Property will be given to the Purchaser upon the final progress payment being released to the developer.

Another alternative will be for the cash Purchaser to deposit the full purchase price with his solicitors or an appointed independent party as the stakeholder or to a bank, who will in turn issue a letter of undertaking or bank guarantee, as the case may be, to pay to the developer all progress payments due under the terms of the SPA, subject to the developer agreeing to effect the title of the property to the Purchaser free from all encumbrances in exchange thereof.

It would therefore make good commercial sense to borrow from a lender to finance the acquisition of a new property as the title would be obtained by the Purchaser prior to actual full payment of the purchase price. In the event any problem should occur, the lender is always there to protect its interest while at the same time protecting the interest of the Purchaser. It is therefore crucial for a Purchaser to seek independent legal advice when considering possible options to finance the purchase of a new property so that the interest of the Purchaser is protected at all times.

The writer is a member of the Conveyancing Practice Committee, Bar Council Malaysia


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