The distinctive feature of leashold properties

Unlike freehold properties, the imposition of limitation on the tenure of leasehold has several important implications, which must be borne in mind. Perhaps, the most crucial is the possibility of an owner losing his house at the expiration of his lease. This is because, once the lease expires, he cannot continue to stay on the land. Once a lease has expired, the property reverts back to the Government, which has the discretion to alienate it to a new applicant.

Nevertheless, an owner is entitled to apply to the State Government under Section 197 of the Act for an extension of his lease, or where the lease has already expired, for a renewal of the same. An owner must first surrender the relevant lease, before making an application. The process of surrender, up to the time of obtaining approval for extension or renewal of the lease, could take approximately 12 months.

It is therefore advisable to commence the process about 3 years before the expiration of the lease. Some owners may decide to do so much earlier. Whilst this is a prudent step, it should be noted that the tenure of the new lease, if approved, begins to run immediately from the time of approval. This means that an owner who surrenders a lease about 12 years earlier, will automatically forfeit that part of the original lease as it would not added or carried forward to the new one.

Although an application for renewal or extension will usually be approved, the decision to approve or reject might be influenced by policy considerations existing at the time of the application, which are not always foreseeable. This is another challenge likely to confront an owner of a leasehold property. For example, the government might decide to rezone an existing residential area as a commercial or industrial area, in order to meet a newly emergent national need. In such a situation, no renewal or extension of lease would be granted, and an owner is likely to lose his home when all residential buildings in the rezoned area are demolished.

Even where no rezoning occurs, and renewal or extension is possible, the tenure of the new lease might fall short of the original one, to the disappointment of the owner. Moreover, premium escalation might accompany any renewal or extension that is granted. In some cases, the new premium payable could exceed the amount paid for the original lease.

Generally, the present market value of the property in the affected area features prominently in the computation of the premium payable. Other factors considered are the size of the land and the tenure of the lease.

Under the Land Rules of the State of Selangor (1966), for example, the premium payable, in the case of commercial properties, is computed as follows: ¾ x 1/100 x market value of property x tenure of lease. For residential properties, the premium payable is arrived at as follows: ½ x 1/100 x size of land x market value of property x tenure of lease.

The direct role played by the current market value of a property in the determination of the premium payable, means that rising property prices will correspondingly result in the escalation of premiums. Because of this, some owners often prefer to delay their application for the extension of lease, in hopes that prices will plummet. Of course, any unexpected rise in prices would defeat such expectations.

It may be possible to request for rebate from the State Government on the premium payable, but requests are usually considered on a case-by-case basis, subject to the State Government’s discretion. Where a request for rebate is granted, the reviewed sum must be paid within the time stipulated, usually 3 months from the time of approval.

In order to surmount the challenges associated with leasehold, some owners may opt to sell the residue or remaining tenure of their lease. Although this is possible, finding buyers is not always an easy matter. This is because as its remaining tenure decreases, a lease declines in value. For example, it is a lot easier to sell a lease that still has a life of 80 - 90 years than one with just 40 years remaining.

Studies have, however, shown that in Malaysia, tenure is not a barrier to the sourcing of finance. Thus, even where a lease has about 50 years left, a potential buyer may still be able to obtain a bank loan to finance the purchase. What appear to matter more to the banks are that, the loan repayment period be shorter than the remaining lease tenure; the property has some resale value; and the customer has both a satisfactory repayment record and repayment capacity. Nevertheless, banks generally prefer to have leases that have at least 50 years left, and in any event, not less than 40 years.

In addition to the points already considered, it should be remembered that leases vary in duration. As said, although the standard tenure of a lease in West Malaysia is 99 years, it could be less than that. There are variations of 30, 40, 60, 70 years and so forth. Even where the original lease is 99 years, a substantial part of the tenure may have elapsed, with a residue of about 60 years left. This clarification is important because, often, when lease properties are advertised for sale, particularly in dealings between private parties, these facts are not sufficiently disclosed or not disclosed at all. Hence, potential buyers must make every effort at appropriate verification.

In addition, if a property being offered for sale has adjoining facilities, for example, a swimming pool, it is important to verify whether the relevant lease covers those facilities, as well. Sometimes, the land on which the facilities are constructed may be under a different lease that has a shorter tenure. Should this be the case, the house owner may be denied the enjoyment of the facilities, if the lease is not renewed after expiration. Even if it is renewed, the house owner may become liable to pay the new and often higher premium.

Apart from the limitation of tenure, leases are subject to other controls. They are restricted to the uses contained in the conditions attached to the grant, in addition to controls contained in land, environmental, and town planning laws. Leaseholders may be required to engage in town planning, apart from being responsible for the development and maintenance of improvements. A high level of duty of care is also placed on leaseholders.

Finally, lease transfers cannot take place without government approval. Given these characteristics of leasehold, it is inevitable that freehold would strike buyers as a better option The latter has only a few limitations on transfer, with an unlimited right to subdivide and aggregate, subject to town planning controls. Indeed, it has a higher level of security of tenure.

Yet, this is not to say that the grant of freehold is absolute. Although exposed to less onerous controls than leasehold, it remains subject to continuous compliance with the conditions attached to the grant, and may be revoked and the land retrieved by the government, in the event of persistent breach. Even in the absence of any breach, government may still retrieve such land under the Compulsory Land Acquisition Act of 1960, subject to the payment of adequate compensation to the owner. There is also an attendant duty of care, based on the rules of common law, and statutory provisions, such as environmental protection laws

Furthermore, in certain situations, leasehold property may be more valuable than freehold property. For example, leasehold property in Kuala Lumpur capital city would generally be more valuable than freehold property at a suburb about 100 km away. In fact, some buyers are prepared to pay high prices for short leases, which are comparable to freehold prices, as can be observed in Sungai Buloh village, near Kuala Lumpur, with leases of just 30 years. In these situations, factors, such as proximity to the city centre, major road networks, shopping malls, recreation facilities, greenery, amongst others, tend to come into play.

This preview is an excerpt from the following publication. this publication for access to all the commentary and precedents.

Jump to this this section below.