http://www.businesstimes.com.sg/spec...and-bank-wagon

Published May 16, 2012

Look before you leap onto the land bank wagon

By dorothy marie ng and monica yip


"LAND BANKING" can, very broadly, be said to be the practice or custom of acquiring land with the intention to hold it and subsequently selling it, in a developed or undeveloped state. This is in fact a practice of many real estate developers in Singapore - they purchase pieces of land for immediate or future development, develop it and sell the land and units in the buildings on the land.

However, in recent years, "land banking" has become synonymous with schemes where companies offer for sale, undeveloped "raw" land, which is not commercially useful at that point of purchase, attracting purchasers with advertisements on the potential of an escalation in the value of the land in the future when approval for change of use or re-zoning can be obtained such that the land can be redeveloped.

Such a "land banking" agreement signed between the selling company and the investor would typically contain provisions which include the following:

A description of the land parcel - indicating the location;
The sale and purchase is with respect to a specified undivided share in the land;
The investor's agreement that he will own the land as tenants in common with other investors and/or acknowledges that his interest in the land is an undivided share (ie, the investor's share cannot be carved out from the current title to the whole land parcel);
The investor's agreement that he will not lodge a caveat (where he may otherwise be entitled) against the land;
An agreement that the selling company or its related company will be appointed the "operator/manager" of the land;
The selling company has no obligation to transfer the land to the investors directly. Instead the investor agrees that the selling company or another company holds the land as a bare trustee on behalf of all the investors but with wide powers to deal with the land, including the power to mortgage the land;
An agreement setting out how the land can be dealt with by the selling company or the operator/manager, including provisions as to when the whole or portions of the land can be disposed of, eg, if the majority of all the investors (or co-owners) agree.

Issues that can arise

Numerous issues forming the basis of much litigation and unhappiness arise from such land banking schemes, namely:

The fact that many of these investors are not necessarily sophisticated investors and land is located overseas, makes these investors susceptible to what the selling company tells them. Purchasers outside of the country in which the land is situated are targeted probably because foreign purchasers are less aware of the local laws, planning and regulations. For example, in certain countries, a green belt zoning will denote areas of undeveloped or wild land which is slated by planning authorities to remain undeveloped so as to allow wildlife to be established; perhaps with little possibility of planning permission for development being granted.
The investment is illiquid and the time within which the investment can be realised may be many years. Often, the selling company advertises an optimistic time frame for possible re-zoning or successful planning permission applications which are never legally binding on the selling company. If the re-zoning or planning permission is never given, the land is essentially worthless.
The lack of obligation on the part of the selling company to transfer title of such shares in the land to the investor and the investor's agreement not to lodge a caveat against the land would mean that the investor's interest is not notified on land registers. This, coupled with wide powers granted to or retained by the selling compa-ny/operator/trustee, ostensibly to manage the land, including the power to mortgage the land, would mean that in the event of a liquidation of the selling company/operator/trustee, the investors will have little chance of recovering anything.

Embedded in such schemes are elements of a variety of transactions; the primary ones being a sale of land, a form of collective investment scheme and a form of collective sale scheme. However, none of the current legislation applies to such land banking schemes:

The Estate Agents Act (Cap 95A) regulates how agents may assist in the sale and purchase of real estate. This Act does not apply in situations where the vendor is selling its own property.
The Securities Futures Act (Cap 289) and the Financial Advisers Act (Cap 110) regulate activities in the securities and futures industry and brokers and fund managers and the offering of securities and other financial products to the public in Singapore. These Acts do not apply to sale of land or interest in land.
The regulations on collective sales of properties are found in the Land Titles (Strata) Act (Cap 158). These provisions do not apply to the sale of property in Singapore not registered under this Act, much less property sited out of Singapore.

Given the spate of publicity in the press regarding investors' bad experiences with foreign land banking, it will be timely to consider legislation to cater to land banking schemes. Such legislation should address the above issues as well as the issue of how penalties for non-compliance can be enforced against the foreign-incorporated selling companies with the asset not being located in Singapore.

Many problems arise because the land is located in a foreign jurisdiction. Ordinarily, a person is free to acquire land anywhere in the world so long as he is entitled to do so under the lex situs or the law of that land. If there is such a land banking scheme of Singapore land, Singapore investors may be less likely to take the plunge without any verification as it would not be difficult to verify the authenticity of advertisements on Singapore land, and investors can then have a basis upon which to decide whether or not to believe the alleged potential of the land. These will include:

Checks with relevant authorities that the selling company does indeed own the land.
Checks with relevant authorities on the capacity of the selling company.
Investigations on title to the land to ascertain that title is good and free from encumbrances.
Checks with relevant authorities (commonly known as legal requisitions) on notices or public proposals for the land and that the land can be used for the purpose intended by the investors, eg, for use as a warehouse.

When investors purchase foreign land, they will be faced with the challenge of conducting the checks mentioned above, as well as checks on the financial wherewithal of the seller which can help them in decision-making. Without proper checks, investors will be hard put to make logical decisions. Investors should consider making a trip to the country where the land is situated and carrying out visual checks as well as checks with local authorities as to whether there are restrictions on foreign ownership of the land which they are interested in purchasing.

Ultimately, investors would do well to heed the oft-heard refrain chimed by many investment-seeking advertisements - that investors should seek the advice of relevant professionals before jumping onto the land bank wagon.

Dorothy Marie Ng is Partner and Head of Corporate Real Estate Practice, and Monica Yip is Partner, Corporate Real Estate Practice, WongPartnership LLP