Leasehold Vs Freehold


 

THREE years ago, Andrea Ooi, 49, inherited her late father's double storey home in Section 2, Petaling Jaya. "I really didn't know anything about owning a leasehold property.

 

I was living in a condominium in Ampang which served me conveniently as it was in close proximity to my workplace and my child's school. I was very comfortable there. But then, on the other hand, the inherited house held sentimental value and I knew my father would want me to keep it in the family for as long as I could."

 

Caught in a dilemma on whether or not she should hold on to the house or let it go, she reached out to friends for advice on what she should do, but was left even more confused.

 

"Everyone had their own valid reasons as to why I should move into the house and why I shouldn't. The bulk of their reasons as to why I should not, had to do with the issue of the house being leasehold. I didn't know that owning a leasehold property could be so complicated. I suppose I was pretty much in the dark as to how these properties work," she adds.

 

THE LAWS STATE…
In Malaysia, land laws are governed by the National Land Code 1965 (Act 56 of 1965). In Section 40 of the National Land Code, 1965, it mentions that all state land belongs to the state authority. Leasehold land belongs to the state and therefore, conceptually, when you purchase a property tied to a lease, you are only buying the right to live there. You will not own the land or any building/s on it, and you are only allowed to reside there for the stipulated timeframe.

 

WHEN THE LEASE EXPIRES…
When a lease reaches its end, the land is reverted back to the state authority, including any construction on it. Therefore, in order to continue residing on it, the 'owner' will need to either apply for a renewal of the lease before its expiry, or in a situation where the lease has already expired, apply for a fresh alienation.


Consent from state authorities (Land Office) may be required before any extension or renewal of a lease can go through. Although it is uncommon, the state has the right to deny approval of extensions and renewals.

 

In the case where the owner does not renew the lease and lets it expire, the land will be reverted back to the state government and be available to any other person who would like to apply for ownership.

 

ITS MARKETABILITY…
Property valuers say that the value of a leasehold property typically goes down when the lease period is coming to an end. The reason for this is because there may be complications related to the lease renewal and in obtaining a bank loan. This affects the property's marketability.

 

Most property consultant's note that the value of 99-year leasehold properties as well as freeholds ones tend to go up at around the same level for about the first 30 years. After this 30-year period, the value of leasehold properties stagnate and eventually depreciate until the lease expires. Freehold properties on the other hand, go through a more stable growth, provided all other aspects of the property are in good condition.

 

Sources from financial institutions explain that most banks can confidently lend on leasehold properties, provided they have at least 75 years left on the lease.

 

DOLLARS AND 'SENSE'…


The price of leasehold property may or may not be cheaper than that of freehold of similar specifications. Typically speaking, assuming that all other details are equal, such as the built-up area of the building and the land size, the price of a leasehold property is often around 20 per cent lower than one which is freehold. A major factor that could affect the price of the property is the location. There have been cases where a leasehold plot at a well established area had greater value than a freehold plot at a less developed location, explains a reliable property valuer source.

 

 

 

EXTENSION OF LEASEHOLD PROPERTIES…

 

Recapping last week's article, once the lease on a property expires, ownership is reverted back to the State government. Extension or renewal of a lease can be done through an application, provided the State government grants an approval and the premium is paid.

 

According to Andy Low Hann Yong, partner at Low & Partners, "Legally speaking, there is no specific provision in the National Land Code (NLC) that deals with the extension of leases per se, some state governments have relied on Section 76 (a), 204B and 197 of the National Land Code for this purpose."

 

"This is because section 76 (a) gives power to the State Authority to alienate land of a term not exceeding 99 years. Section 197 of the NLC provides the procedure where the landowner can surrender their title back to the government. Section 204B provides certain power to the State Authority to approve surrender and re-alienation."

 

WHEN TO EXTEND…

 

Margaret Tan, 55, lives in a leasehold property in Petaling Jaya Section 4. With 49 years left before her lease expires, she is one of the many leasehold property owners who is worried and left in the dark as to how long she should wait before applying for an extension.

 

"I was told that when a property reaches a point where there is only 30 years left for the lease to expire, it's very difficult for a lessee to even get a bank loan with it. So when should I extend the lease?"

 

Property sources say homeowners who want to extend leases on their property can do so according to their choosing and there is no minimum number of years they need to wait before applying.

 

However, they warn that when leasehold properties near their expiry date, the market value of the property will start to decrease, hence the difficulty in getting bank loans.

 

Christopher Chan, associate director of Hartamas Real Estate (Malaysia) and registered real estate agent, says that the Selangor government has come up with two options for extending leases. Under the first, the homeowner need only make a payment of RM1,000. However, this option comes with "restriction", as the owner is not allowed to re-sell the property to profiteer.

 

Transfer of the property to family members is allowed though. The State Authorities will lodge a Registrar Caveat on the property to prevent the owner from disposing the property under this option.

 

The second option is to pay the full rate of premium that is required for the extension of the lease. With this option, the owner can dispose the property as soon as the new title is received.

 

THE "PREMIUM" IN SELANGOR…

 

The calculation of premium varies with each state, therefore it is important to get the information beforehand accordingly.

 

In Selangor, the formula to calculate the premium rate is derived from Section 7 of the Selangor Land Rules 2003 & Selangor Quarry Rules 2003, entitled "Premium".

 

Premium = 1/4 x 1/100 x Market Value of land (in sq ft) x number of years to renew x land area (in sq ft).

 

Leases are usually renewed so that there are 99 years of lease to the title. Therefore, if you have 10 years remaining on your lease, you need only pay for an extension of 89 years (99 years-10 years).

 

Keep in mind that the calculation of the premium rate as mentioned above is for the land itself. It does not include the building constructed on the land.

 

THE "PREMIUM" IN KUALA LUMPUR…

 

Premium on lease to be re-alienated in Kuala Lumpur is referred under the Federal Territory of Kuala Lumpur Land Rules 1995, under part 3 Premium rule 9. Where an expired lease is to be re-alienated to the former registered proprietor, the rate of the premium to be determined by the Government is one quarter of that specified in sub-rule 8(b), and will exclude the value of any building or cultivation then found on the land.

 

Sub-rule 8 (b) states that where alienation is by way of lease, the rate of premium to be charged shall be calculated as follows. The value of the land to be calculated shall be determined by the Government based on the market value of the land.

 

The valuation of the land is done by the Valuation and Property Services Department of the Finance Ministry. It is based on the latest transaction values in the area.

 

Calculation of premium for residential land where the lease has expired:


:: Premium = 1/4 x value of land x 1/99 x term of lease

 

Calculation of premium for residential land where the lease has NOT expired:


:: Premium = 1/4 x category of the land use x value of the land x 1/99 x (term of new lease minus balance of existing lease)

 

Once the premium has been paid, the process and action required is very simple. One has to wait for the Land Office to inform the property owner when he or she can collect the Land Title.

 

While in principle the government has the authority to evict an "owner" upon expiry of the lease, all parties we spoke to opine that the government is unlikely to do so. So leaseholders are advised to read our notes on lease extension and renewal carefully.

 

Quote :
"Legally speaking, there is no specific provision in the National Land Code (NLC) that deals with the extension of leases per se..."

 

 

Source : The Sun Daily, 01 & 08 November 2013



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