July 8, 2007


No clear rule on interest earned on collective sale monies

In some cases, the sum is shared by lawyers and sellers, in other deals, the lawyers claim the amount

By K.C. Vijayan and Gabriel Chen

COLLECTIVE sales have become a huge business in recent months as more condominiums vote to sell up for ever higher prices.

Now bickering is emerging over who gets the considerable interest earned on deposits lodged for such sales well ahead of the final settlement - the lawyers acting for the sellers or the sellers themselves.

So far, there seems to be no clear rule of thumb.

In the recent record-setting $1.3388 billion Farrer Court collective deal, the interest on the $130 million deposit advance is being shared by the lawyers and the sellers.

This is understood to be one of the first deals involving Rodyk & Davidson, a leading law firm in the collective sale business, where the interest is being shared, according to contract terms. The firm has handled more than 100 collective sale deals in 10 years.

A Waterfront View resident, Ms Jasmine See, 30, said that similarly, lawyers for that deal completed in May shared the interest on the advance deposit with the sellers.

By contrast, in the highly contentious $500 million Horizon Towers deal, which has yet to be finalised, the deposit interest is due to be returned to the sellers by agreement with law firm Drew & Napier.

The interest sum in this case involved is considerable - possibly $500,000 on the $50 million deposit already advanced by joint buyers HPL and two others. But why did the lawyers not get the sum? It was a matter of contract and negotiations, said a Horizon Towers unit owner contacted by The Sunday Times.

The issue prompted several letters to The Straits Times Forum Page recently.

Separately, fees charged for various transactions with the lending bank, purchaser and borrower also need to be fully explained to the client by the lawyers handling the deal.

This became apparent from a letter last week and from the experience of resident Bobby Ng, 35, in the collective sales for Hong Leong Gardens.

'There are Law Society guidelines on this and there is no issue if both lawyer and client had sat down to discuss the different standard transactions required,' said senior lawyer R. Kalamohan.

Law Society president Philip Jeyaretnam said the interest issue is a matter of contract. 'As a matter of law, if there is no agreement otherwise amongst buyer, seller and stakeholder, the interest earned on the stake belongs to the stakeholder.'

In collective sales, the law firm acting for the sellers is regarded as the stakeholder under certain contracts.

Real estate businessman Sunder Daswani, 54, agrees. He said: 'Lawyers, as a matter of obligation, should tell the seller upfront about the interest issue to enable an informed decision to be made, before the contract is signed. A layman cannot be expected to know this unless told.'

Technology consultant Teo Kim See concurs, after a bad experience in a recent collective sale where the lawyer was a veteran sole proprietor who claimed the interest.

'We were not aware of the interest and we thought the lawyer was supposed to be on our side. Instead he told us the contract was silent on the interest issue and we realised he was on his own side,'' he said.

But The Sunday Times spoke to lawyers who argue that as lawyers keep the deposit on behalf of owners, they are entitled to the interest earned on the sum. The lawyer's role as a stakeholder still remains the most popular mechanism despite the availability of alternatives, said Mr Jeyaretnam.

The Horizon Towers deal is a case in point. If the lawyer holds the deposit and the sale is aborted, the buyer may take him to court for giving the interest to the seller, pointed out another lawyer.

If the buyer wins and gets reimbursed, the lawyer may have to seek the return from the seller but the issue is what happens if the seller is bankrupt and unable to pay for some reason or other.

But if the deposit is kept by the lawyer, he has to decide who it is to be given to based on the written contract. He runs a risk in this because if he gives to the wrong party he can be sued. So he needs to be compensated for the responsibility he shoulders, he argued.

Rodyk & Davidson partner Lee Liat Yeang warns of possible undercutting between lawyers and the prospect of service delivery standards falling if the issue gets overblown. He said that because lawyers do not have fixed rates, some firms could outbid competitors in order to secure the job.

This may include an offer to forgo or share a greater portion of the interest earned on deposits with the sellers to clinch the deal.

But they may do less work for the lower rates and increase the risks of the deal going sour. 'What the client can expect depends on what the client is prepared to pay. A cheap handbag bought from a wet market is obviously of different quality from one bought in an upmarket boutique,' said Mr Lee.

[email protected]

[email protected]