Invisible clock starts ticking after an en bloc deal is agreed upon
It can be a source of anxiety for homeowners and developers.
Thu, Dec 21, 2017
CARLA BARKER
ALEX TOH
ALL eyes are on the en bloc frenzy that is brewing within Singapore's property industry. Already, the number of collective sales of around 20 projects year-to-date has surpassed the seven deals recorded in 2015 and 2016 in total.
Along with this comes the fear of soaring private home prices, as buyers fear that developers who put in high bids would push up their eventual selling prices.
This is a real concern, especially to homeowners who may need to purchase a replacement property after signing the collective sale agreement.
Against this backdrop, one common question is: When should these homeowners purchase a replacement property?
If the homeowner is using the proceeds of the collective sale to buy a replacement property, he or she would only be able to collect the full sale proceeds upon handing over the keys to the developer.
In Singapore, there is no statutory timeline for homeowners of a successful en bloc to hand over the keys. This timeline is usually determined by contract between the developer and the homeowners - and this can be a source of anxiety for both parties.
THE INVISIBLE CLOCK
To address this question, we shall examine the existing process. Since Dec 7, 2011, developers are required to pay Additional Buyer's Stamp Duty (ABSD) of 10 or 15 per cent (depending on the profile of the shareholders), including interest, on the land cost of a project, unless they finish the foundation works within two years and sell all units within five years from the date of acquisition of the site.
It is, therefore, no surprise that the developers would want homeowners to hand over the keys as soon as possible in order for them to meet the deadline for the remission of ABSD imposed by the authorities.
Once a developer has offered a tender price that is accepted by the collective sale committee, a conditional sale and purchase agreement is entered into by the developer and the collective sale committee, on behalf of the owners of the development.
The clock starts ticking - the collective sale committee has to obtain the sale order from the Strata Titles Board. Common questions that we encounter include: When do homeowners need to move out, and when do they need to hand over the keys to the developer?
The Strata Titles Board will give a date for hearing the application for approval once all the documents are in order but with the current en bloc craze, it is already taking more time to empanel and hear each application.
After the sale order is obtained, there will be another waiting period, of at least three to four months from the date of the sale order, to prepare for completion, when the homeowners will hand over title deeds and keys to the developer, and receive their sale proceeds.
Homeowners who require their share of sale proceeds to finance the purchase of a replacement home will find the timing crucial.
The above processes can run between at least six months to one year from the time that the tender price is accepted by the collective sale committee.
Completion may be delayed by the death of an owner or the loss of legal capacity of an owner to sign the transfer of title due to bankruptcy or insolvency.
An application for an ancillary court order has to be obtained to empower a member of the collective sale committee to sign the necessary documents to complete the sale. These may all add to the waiting time.
THE EAGER BEAVERS
The eager beavers are the homeowners who are persuaded to find a substitute property as soon as a conditional sale and purchase agreement is entered into by the developer and the collective sale committee. There are of course good reasons to do so - for example, the market may be expecting home prices to climb in six months' time.
For such homeowners who have committed to buying their substitute property (ie they have exercised the Option to Purchase for the substitute property and have paid one per cent plus 4 per cent of the sale price), they run the risk of not being able to complete the purchase of the substitute property by the stipulated completion date if they are reliant solely on the sale proceeds from the collective sale to fund their purchase. These homeowners may be faced with payment of late completion interest of 8 per cent per annum in accordance with the Law Society Conditions of Sale 2012.
Unforeseen circumstances may also crop up on the developer's end which could delay completion. We have encountered a completion which had to be postponed to a later date as the developer had to re-submit Outline Planning Permission to Urban Redevelopment Authority before they were able to obtain a lease top-up from Singapore Land Authority.
FILLING THE GAP
Some homeowners may think that they no longer have an interest in their en bloc properties upon the execution of the conditional sale and purchase agreement, and they need not pay ABSD upon the exercise of the option for the substitute property.
The better view is that the en bloc property is disposed of only when the sale order from the Strata Titles Board is obtained. However, this has not yet been considered by the courts.
If the en bloc sale order is not granted for whatever reasons, the homeowner who has committed to purchase a substitute property will have to pay ABSD on the substitute property.
The eager beavers should be aware that there is usually sufficient time for them to move out of their homes, as agreed in the conditional sale and purchase agreement between the collective sale committee and the developer. All homeowners are usually given a timeline of six months after completion to hand over their keys to the developer, and on completion, they would receive a portion of their sale proceeds from the developer (90-95 per cent), which should be sufficient to finance the purchase of their substitute property.
During negotiations of the conditional sale and purchase agreement, the developer's lawyers would often ask for this timeline to be shortened as the developer would like as much time as possible to meet the deadline of completing foundation works and sale of all the units so as to be eligible for the remission of ABSD.
ALIGNING INTERESTS
In light of the current ABSD regime and the most recent round of amendments to the Land Titles Strata (Act), the authorities should consider aligning the timeline from which the developer would be eligible for the remission of ABSD to commence on the date that the developer has collected the keys from all owners of the development. This move will help to alleviate the anxieties faced by developers, as well as the uncertainties of homeowners in handing over the keys and finding a substitute property. The existing process can remain, where homeowners and the developer negotiate freely in private and agree on a date for the handover of the keys. At the same time, homeowners' interests are protected as there is less likelihood that they would be under pressure to move out quickly.
With the surge of successful collective sales and the current ABSD remission deadlines that developers face, it is very likely that we will see a number of these projects launching for sale in one to two years' time. Depending on the global economic performance and business sentiments, there may be an oversupply of homes if there is weak or insufficient demand.
Hence, adjusting the commencement timeline to a later date for developers to be eligible for the remission of ABSD is a viable tool for the government to consider. This may be a possible measure to ensure that the supply of housing does not spike to unhealthy levels in the short term, as developers would be able to propose to homeowners the long stop date for the collection of keys based on the anticipated demand for new homes.
The writers are from Withers KhattarWong. Carla Barker is consultant; and Alex Toh, real estate & finance lawyer.
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