How will the Movement Control Order affect your sale & purchase of property in Malaysia?
The spread of the COVID-19 pandemic globally has led the Malaysian government to impose the Movement Control Order (MCO) from 18 March 2020 to 28 April 2020 (with the possibility of further extension), resulting in significant adverse impact to many businesses and transactions, including the property market and ongoing property transactions.
This article explores a few situations that buyers and sellers of Malaysian properties, who have signed the offer letter or are midway into a property transaction, may find themselves in:
1) After the signing of the Offer Letter
In light of the current MCO situation, if both the buyer and the seller have signed the offer letter to purchase prior to the lock-down but are now unable to execute the sale and purchase agreement (“SPA”), both parties, in particular the buyer, with the assistance of the real estate agent and the appointed solicitors, should clarify and revise a mutually agreeable new time frame to sign the SPA as stated in the offer letter, to avoid any forfeiture of the buyer’s earnest deposit by reason of a lapse of time.
To elaborate, the typical time frame in an offer letter for a buyer to execute the SPA is within 14 to 21 days from the date of the offer letter. Given the past 2 extensions of the MCO to 28 April 2020 and the possibility of yet another extension thereafter, the buyer should renegotiate the time frame to extend the signing date of the SPA to, for example, 14 to 21 days after the date when the MCO is finally lifted, together with the possibility of a further extension should the MCO be re-introduced yet again.
If the offer letter contains a special condition where the execution of the SPA is “subject to loan approval”, it may be difficult or slow to obtain a bank loan approval as the buyer’s financial creditability, such as CCRIS, account statements or EPF statements, may not be readily available. In such situation, the buyer should try to renegotiate to extend the time frame given for the bank loan application. The buyer can avoid having its earnest deposit forfeited by the seller by requesting the bank to issue their rejection letter or letter explaining the delay in the processing time and to notify the seller’s solicitors early, instead of staying silent and waiting for the time to lapse.
2) Drafting of the Sale and Purchase Agreement (SPA)
While it is possible for some solicitors to be working from home (with access to a secured internet connection and available reference documents) and attend to the reviewing and drafting of agreements, emails and calls, there are several challenges faced by solicitors in obtaining critical information for the SPA, such as:
- Title Search – it is important to conduct a fresh title search on the property before drafting the agreement as it may reveal some important details such as a new title number, property ownership, encumbrances, tenure, type of land use, lot size, and additional notes or interest on record. As a result of the lock-down, many solicitors will face a problem in conducting a fresh title search as the land offices, as well as the online searches, are closed.
- Winding up / Bankruptcy search – a winding up or bankruptcy search has to be conducted to determine the solvency status of a buyer and a seller. However, the MCO has led to websites for these online services such as MyEG and the Companies Commission of Malaysia (SSM) to be temporarily offline and will only resume upon the MCO being lifted.
- Letter of Confirmation from Developer / Liquidator – if the property falls under a “master title property”, the necessary confirmation from the developer or the liquidator needs to be obtained in order to confirm the ownership, title details etc. However, as the developer and liquidator offices fall under the ‘non-essential’ category, their offices are closed during this MCO period and the solicitors will be unable to obtain the necessary confirmation.
Taking into account the current situation, both parties may wish to renegotiate the completion period of the agreement as this is a foreseeable issue that may affect the sale transaction completion (as the standard 3 months now may not be applicable due to MCO).
The parties can also consider incorporating a specific force majeure clause into the SPA to address the probable event of a recurring MCO, which could be re-imposed during the transaction. A force majeure clause generally exempts a party from liability for non-performance or a delay in performing its contractual obligations or even provides for termination of the agreement, where such an inability can be caused by an event that is beyond the reasonable control of either party involved, provided that certain requirements are satisfied.
3) Execution of Documents
During this period, getting both parties to execute the SPA may be difficult or even impossible, as neither party is allowed to travel. However, with modern technology today, signing meetings and witnessing of parties can be done via electronic signature and video conferencing tools.
That said, conducting and witnessing the signing of legal documents in this manner, as compared to having a solicitor present in person, may open the transaction to risks such as identity fraud or signing by a person under duress or of unsound mind. Additional precautionary steps to verify the real identity (e.g. presentation of original identity documents during the video conference) and asking critical questions to test the mental soundness or absence of duress in the parties, should be taken by both parties and their solicitors before adopting such technology. The possibility of recording such a video meeting as evidence of the event becomes possible with digital technology, subject to parties expressly consenting to the use of such personal data and proper storage of the recordings.
However, if the parties are in a hurry for the transaction to proceed, certain documents such as the SPA, resolutions (for a company), letters to developers or banks etc., can first be signed electronically. Electronic signatures have been legally recognised in Malaysia with the passing of the Digital Signature Act 1997 regulating ‘digital signatures’ and later with the Electronic Commerce Act 2006 conferring legal effect on agreements entered into by electronic means.
Notwithstanding the above, as most if not all, land offices in Malaysia still do not accept electronically-signed documents (especially for statutory forms prescribed by the National Land Code 1965), the physical copies must still be distributed for signing between parties after the MCO period.
4) Mid-transaction of the SPA
Prior to the MCO, if the parties have already signed the definitive agreements and are caught in the mid-transaction of the SPA, do NOT assume that the time frame for the transaction will automatically be suspended or extended. This is especially important for the buyer who is usually obliged to complete the transaction within 3 months, failing which late interest penalties will be payable.
During the MCO, both parties will likely be unable to perform their respective obligations for a myriad of reasons, including the closure of banks, stamp office, land office, valuation department, law offices etc.
If the SPA has a force majeure clause, both parties should seek specific legal advice from their solicitor on whether it can be relied upon with respect to the MCO (act of government) arising from the COVID-19 pandemic. That said, even though the force majeure clause may provide for a suspension or an extension of time, be very careful in relying on a force majeure clause to terminate the SPA due to the MCO. Case laws have disallowed contracting parties seeking to rely on force majeure to terminate the agreement where the event had merely created a temporary impossibility in performing their obligations. Thus, a unilateral termination of the agreement on the ground of force majeure, if done so improperly or without proper legal basis, may result in liquidated damages payable to the other party.
Given the current circumstances and depending on the status of each conveyancing transaction, both the seller and the buyer via their respective solicitors should first assess their respective situations, anticipate repeated delays arising from MCO (or a repeated MCO) and then negotiate in good faith for a workable solution to ensure the continuity and success of the transaction.
This article was written by Shawn Ho (Partner) & Suzanne Fam (Senior Associate) from the corporate practice group of Donovan & Ho. Shawn leads the corporate practice group of Donovan & Ho, and has been recognised as a Notable Practitioner, whilst the firm has been recognised as a Notable Firm for Corporate and M&A by Asialaw Profiles 2020. We are also ranked as a Recommended Firm by IFLR1000 2020.
Our corporate practice group advises on corporate acquisitions, restructuring exercises, joint venture arrangements, shareholder agreements, employee share options and franchise businesses, Malaysia start-up founders and can assist with venture capital funds in Seed, Series A & B funding rounds. We also advise on property transactions and real-estate related tax planning. Feel free to contact us if you have any queries.