Real Estate

Introduction

Foreclosure is a legal mechanism through which a lender (“Chargee”) attempts to recover the balance of a loan from the owner of the land (“Chargor”) who has defaulted by forcing the sale of the asset used as collateral, typically real estate. In Malaysia, the foreclosure process is a critical component of debt recovery, particularly incases involving secured loans. The process is governed by a stringent legal framework that ensures the protection of both the Chargee’s and the Chargor’s rights. This article delves into the intricacies of foreclosure proceedings in Malaysia, outlining the legal framework, procedural steps, the Chargor’s rights, challenges, and recent developments in the industry.

Legal Framework Governing Foreclosure in Malaysia

Foreclosure in Malaysia is primarily regulated by the National Land Code 1965 (“NLC”). The NLC prescribes the procedures and legal requirements that must be followed when a Chargee seeks to foreclose on a property. Malaysian law mandates that the Chargee obtain an Order for Sale before proceeding with the foreclosure. This legal requirement ensures that the foreclosure process is conducted under judicial oversight, providing a safeguard against arbitrary or unjust actions by the Chargee.

An application for an Order for Sale can be made either to the High Court or the Land Office, depending on the type of land title. For land held under a Registry title, the application must be made to the High Court, while for land under a Land Office title, the application must be made to the Land Office.

The Foreclosure Process in Malaysia for Land Titles Held under Registry Title

Chargor’s Rights and Defenses

Chargors are afforded several rights and defenses in foreclosure proceedings. One of the most critical rights is the Right of Redemption, which allows the Chargor to prevent the foreclosure by paying off the outstanding debt before the sale. This right provides the Chargor with an opportunity to retain their property if they can secure the necessary funds.

Chargor may also challenge the foreclosure on the ground that there is an existence of a Cause to the Contrary, such as proving exceptions to indefeasibility under sections 340(2), (3), and (4) of the NLC, or alleging that the Chargee failed to comply with procedural requirements — e.g., disputing the validity of the Notice of Default, or arguing that the grant of the Order for Sale would be contrary to some rule of law or equity.

‍

Challenges in Foreclosure Proceedings

Despite the structured legal framework, foreclosure proceedings in Malaysia are not without challenges. Delays in the legal process are common, particularly if the Chargor raises multiple defenses or if there are disputes over the property’s valuation. These delays can prolong the uncertainty and financial strain on both parties.

The auction process can also pose challenges, especially if the property attracts low bids or if there is limited buyer interest. This scenario may result in the property being sold below its market value, which can be detrimental to the Chargor and insufficient for the Chargee to recover the full debt.

Recent Developments

1.      A Speedy Departure – Thameez Nisha Hasseem v Maybank Allied Bank Bhd [2023] 5 CLJ 874

Conventionally, actions filed in court are bound by the Limitation Act 1953. However, the issue of whether foreclosure is an “action” coming within the Limitation Act 1953 was recently clarified by the Federal Court.

In 2020, the Federal Court in CIMB Bank Bhd v Sivadevi Sivalingam [2020] 2 CLJ 151 decided in the majority that applying for an Order for Sale within the act of foreclosure is not considered an “action”, thus having liberty over the 12 year limit stated in section 21(1) of the Limitation Act 1953. This was supported by the preceding case of Kandiah Peter v Public Bank Bhd [1994] 4 CLJ 332, which stated that a Chargee merely “enforces their rights” by exercising their statutory remedy against the Chargor in default – i.e., not an “action”.

Just three years later, however, the Federal Court then departed from that decision. In 2023, the Federal Court ruled in Thameez Nisha Hasseem v Maybank Allied Bank Bhd that the act of foreclosure is in fact an “action” when read in conjunction with the NLC, the Rules of Court 2012, and the Courts of Judicature Act 1964, hence being bound by the Limitation Act 1953, wherein no action can be enforced after 12 years from the date of the first payment default.

2.      How Fatal is Fatal? – MIDF Amanah Investment Bank Bhd v Vahana Offshore (M) Sdn Bhd  [2024] CLJU 31

In January 2024, the Plaintiff in MIDF Amanah Investment Bank Bhd v Vahana Offshore (M) Sdn Bhd failed to exhibit the NLC charge in its affidavit in support of its application for an Order for Sale. The key issue was whether it is possible for the Plaintiff to still be granted the Order for Sale despite this technical error which most would consider fatal.

As per Order 83 Rule 3 of the Rules of Court 2012, the Affidavit in support of the Originating Summons “shall comply with the following provisions of the rules”, one of the rules being “the Affidavit shall exhibit a copy of this charge”. The Defendant challenged the application on, inter alia, this ground of failure to exhibit the charge.

The Plaintiff then asserted that the requirements under Order 83 can be waived under Order 1A and Order 2 Rule 1 Rules of Court 2012. This was as it was a genuine oversight wherein the charge was mentioned in the affidavit although it was inadvertently not exhibited and even the Defendant had already acknowledged the charge. Moreover, the Plaintiff had also filed an amended affidavit, quelling the error.

In the High Court, Leong Wai Hong JC ruled in favour of the Plaintiff, highlighting that no prejudice was caused to the Defendant with the exclusion of exhibiting the NLC charge at first instance, suggesting that non-compliance of Order 83 may not necessary be fatal to the entire claim.

However, it is to be noted that the decision of the High Court has since been overturned by the Court of Appeal, suggesting a possible contrary view that compliance with Order 83 is indeed crucial. The grounds of judgment of the Court of Appeal, which has yet to be made available, remains much anticipated to provide clarity on the issue at hand.

Conclusion

When dealing with foreclosures in Malaysia, the NLC sets out the procedural and legal requirements to be followed. When applying for an Order for Sale it has to be clarified that the Order is bound by the 12 year limit stipulated in the Limitation Act 1953, while non-compliance of Order 83 could very well be fatal to an application for Order for Sale.

The law aims to bring a measure of certainty and fairness to legal matters, despite its imperfections. In the case of foreclosure proceedings, it would be prudent to carefully comply with the procedures as have been laid out by the laws.

If you have any questions or require any additional information, please contact Chuah Jo-Shua, Foo Lyn Min, or the partner you usually deal with at Zaid Ibrahim & Co (in association with KPMG Law). This article was prepared with the assistance of Leim Ivan.

This article is for general information only and is not a substitute for legal advice.

‍

Recent amendments to the Solicitors Remuneration Order 2023 (“SRO 2023”), which came into effect on 15 July 2023, apply to transactions involving non-contentious matters such as the sale and purchase of movable and immovable properties, financing and tenancies. It effectively revokes the Solicitors Remuneration Order 2005 (“SRO 2005”).

The increase in legal fees has caused some concern amongst industry stakeholders, however the National House Buyers Association (“HBA”) issued a statement on 21 July 2023 stating that the increase of scale fees is in tandem with the times, and while many people are facing challenging times, professionals and lawyers are equally affected. HBA also added that as the increase in legal fees is reasonable and not significant when compared against the property value or loan amount. It is not expected to cause a domino effect towards the rising cost of living or house prices.

It is not all an increase, however, as the SRO 2023 also charges a lower legal fee of between 25% and up to 50% for properties governed under the Housing Development (Control and Licensing) Act 1966 (“HDA"), i.e. bought directly from housing developers.

Below is a comparison table for the changes to the legal fees for sale and transfer (non-HDA):

The comparison of the changes to the legal fees for HDA transactions:

There is technically no hike for HDA transactions however. Fees have been lowered by 50% for properties of which the consideration or adjudicated value is more than RM1,000,000. This will ease the burden of home-buyers, considering the fact that it is not uncommon nowadays for properties to be priced at more than RM1,000,000, especially in high-development urban areas.

The fees for leases and tenancies have also increased. However, with the proposed ‘Residential Tenancy Act’ in the works, a standard tenancy template may be drawn up, hence the involvement of lawyers may be reduced. Nevertheless, the table below highlights the changes of the legal fees for leases and tenancies:

The fees for financing have also increased. However, for properties under HDA where the loan value is above RM1,000,000, the discount under SRO 2023 (50%) is actually higher than the discount available under SRO 2005 (as amended in 2017) (35%). The table below highlights the changes of the legal fees for financing, discharge of charge and deed of assignment:

Professional Fees for Charges, Debenture and Other Security or Financing Documents

Professional Fees for Discharge of Charge

Professional Fees for Deed of Reassignment

The last revision of the Solicitors Remuneration Order was almost six years ago. The increase can be considered reasonable taking into consideration the higher costs of operations for lawyers. In its press release dated 24 July 2023, the Malaysian Bar stands firmly behind the increase of scale fees chargeable for non-contentious matters under the SRO 2023. They are also of the view that it must ensure that the integrity of lawyers and the ecosystem for lawyers in non-contentious transactional matters are insulated and protected so that the quality of lawyers remains at its highest level and consumers are not short-changed by the professional advice they receive. Likewise, lawyers are prohibited from overcharging, and that is the public interest aspect to the scale fee structure, which acts to protect against overcharging.

If you have any questions or require any additional information, please contact Angeline Cheah, Patricia Chia, or the Zaid Ibrahim & Co (in association with KPMG Law) partner you usually deal with.

This alert is for general information only and is not a substitute for legal advice.

‍