July 27, 2016
When Chinese developer Qingjian Realty signed a conditional contract to buy the 358 units Shunfu Ville for S$638 million in May this year, some believe that this could herald the dawn of a new wave of collective or en bloc sales in Singapore. This prospect comes at the back of a lowered land supply by the Government, which seems to barely satisfy the appetite of property developers who have participated actively in the recent government land tenders.
Property owners may seek an en bloc sale of their development, pursuant to section 84A of the Land Titles (Strata) Act (LTSA) where a collective sale supported by 80% of the owners (in terms of both share value and strata area) and where the development is at least 10 years old, could receive the order of sale from the Strata Titles Board or the High Court. Such property owners should, however, be mindful of the salient issues for starting an en bloc sale.
Starting an En bloc Sale
The election of avid and responsible Collective Sale Committee (CSC) members marks a good starting point. Owners of developments which had failed in an earlier round of en bloc sale should note a higher threshold requirement of 50% (by way of total number of owners or by their total share value) for the signing of a requisition for an Extraordinary General Meeting (EOGM) to elect a CSC within two years from the relevant event of a failed en bloc sale attempt. Otherwise, the usual requirement for such requisition is to get the signatures of owners holding 20% of total share value or of owners comprising 25% of the total number of owners. Owners should aim to appoint CSC members representing all types of units in the development so as to ensure better cross representation of different interests. Candidates for CSC should, at the time of election and at other relevant times, make full disclosure of any actual or potential conflict of interests.
Appointment of lawyers and property consultants
The CSC could be empowered at the EOGM to appoint the lawyers and the property consultants to act for the owners in the en bloc sale process. Otherwise, the respective appointment of the lawyers and property consultants should be made at an EOGM. The experience track record and commitment levels of the lawyers and the property consultants respectively should be fully considered before their respective appointment.
Reserve price in the Collective Sale Agreement (CSA)
CSC should propose a reserve price in the CSA taking into consideration a myriad of factors including but not limited to development gross plot ratio, development baseline, special height controls (if any), lease top-up premium (if any) and general market conditions. CSC should be mindful that, while a high reserve price will facilitate the collection of signatures to the CSA from owners, a high reserve price may turn away potential buyers. CSC should understand the importance of enticing developers to invest time and money to do feasibility studies on the land of the development with a reasonable reserve price and allowing the spirit of competition to take the eventual winning offer above the reserve price.
Method of Apportionment of sale proceeds (MOA)
The CSC should propose a MOA that is fair and reasonable to all owners, and that should not disadvantage any particular type of units or class of owners. There is no “one size fits all” MOA for distribution of sale proceeds for en bloc sale. The Singapore Institute of Surveyor and Valuers recommends one or a combination of two or more of the following methods or factors for a MOA, namely valuation, strata area and share value. Valuation could be made of a typical unit of each type ignoring renovation, facing or floor level. However, the siting or location of a unit should be taken into consideration for such valuation of retail units. While valuation is an important factor for commercial or mixed uses development, it is rarely used for pure residential developments. Strata area is understandably a commonly adopted factor for the MOA. Owners of smaller units may argue for weightage to be given to their share value in the MCST since a collective sale relates to unlocking the potential of the land. However they should also appreciate that share value is approved by the Commissioner of Buildings at the onset of the development for purpose of determining the maintenance contributions and voting rights of owners in the MCST, and not for the purpose of apportionment of en bloc sale proceeds.
MOA is often an emotional topic, as everyone thinks his unit or unit type deserves more than others. Practically speaking, the MOA to be adopted must also be able to garner the support of 80% owners; otherwise the en bloc sale effort will fail.
Good faith and fiduciary duties
It is provided explicitly in the LTSA that the Strata Titles Board or the High Court will not approve a collective sale that is not in good faith taking into consideration only of the factors of the sale price, the MOA and the relationship (if any) between the buyer and any of the owners. The importance of the CSC’s role in a collective sale was explained by the Singapore Court of Appeal in the landmark case of Horizon Towers. It was opined by the court that CSC members are fiduciaries of all the owners including the owners who do not consent to the sale. The duties of the CSC members include the duty of loyalty, the duty of even handedness, the duty to avoid any conflict of interest, the duty to make full disclosure of relevant information and the duty to act with conscientiousness to exercise its powers in the best interests of all owners. The duty to act with consciousness in relation to the sale price requires CSC to discharge its duty to use all possible diligence to secure the best price reasonably obtainable.
Non-consenting owners can raise a valid objection on ground of financial loss. The CSC should get the property consultants to check whether any owner will suffer a financial loss, meaning the proposed sale proceeds for his unit, after such deduction as the High Court may allow, is less than the purchase price. Such deductions include what is stated in the Fourth Schedule of the LTSA, namely stamp duty on the purchase, legal fees in the purchase, costs related to privatisation, and costs incurred pursuant to the collective sale which are to be shared by owners under the CSA.
Incentive payment arrangements made or participated by CSC members or the property consultants in breach of their fiduciary duties would constitute bad faith in the transaction and are disallowed in law. This was established by the court in the case of Harbour View and affirmed in the subsequent case of Thomson View where the court regarded such incentive payments as affecting the MOA of the sale proceeds.
Sale by public tender or auction
The need to ensure that the highest market price is achieved is safeguarded by this requirement of a sale by public tender or auction. This will allow maximum exposure of the development to the potential buyers so that there is competition to get the highest offer. It is also mandated that the CSC shall obtain a valuation report prepared by an independent property valuer on the date of close of the public tender or auction. The CSC may, within 10 weeks from the close of the public tender or auction, enter into a private treaty contract with a buyer.
The CSC should seek the advice of experienced lawyers and property consultants to guide them through the aforesaid issues and more, so as to ensure that they do not trip over the legal pitfalls as they strive towards their en bloc dream.
An edited version of this article first appeared in The Straits Times Singapore on 18 July 2016.