Whether to purchase freehold or leasehold properties?

Contributed by Vicky How

Malaysia is currently using the Torrens title system which originated from Australia and was introduced to us by the British during the British colonial period. Torrens system involves the registration of ownership through title in order to certify ownership of property and the recording of all transactions involving dealings and interests over the property in the land registrar.

Under the system, there is a certificate of title for every separate piece of land and property. Here, the certificate of title will include certain details such as whether the property is freehold property or leasehold property.

Pursuant to Section 40 of the National Land Code 1965 (Act 56 of 1965) (“the NLC”), all state lands belong to the state authority. Freehold properties refer to properties that are disposed of by the state to the owner in perpetuity. Leasehold land refers to the land or property belonging to the state government which is leased out to the public for a fixed amount of years.

Upon expiry of the lease, the ownership of the land reverts to the state authority including any construction upon it.

The Torrens title system requires that transactions involving the property to be registered in the Land Registrar which is available to the public through land search.

Why choosing leasehold or freehold matters?

Difficulties in financing purchase and declining value
The shorter the lease, the less value it has and many banks may not approve the loan if the remaining lease of the land is less than half of the 99 years lease. If the tenure of the lease remaining is less than 40-50 years, the purchaser can only purchase with cash in hand.

High premium charges for renewal/extension
In the event that the owner wishes to renew/extend the tenure of the lease, he is required to apply to the state government for approval for renewal/extension and pay the premium with the maximum renewal/extension tenure of 99 years allowed. The premium to be paid will be based on a percentage of the market value of a similar freehold property.

Even if the land is acquired cheaply, the premium to be paid for the renewal/extension of the lease may be more expensive in comparison to the price of purchase which is valued relying on the remaining lease over the land.

The Valuation and Property Services Department (Jabatan Penilaian dan Perkhidmatan Harta) will value the property to determine the market value of the land. The premium is calculated differently in each state and the rules applicable in Selangor is under 7 of the Selangor Land Rules 2003 and Selangor Quarry Rules 2003 entitled “Premium” which is calculated as follow (excluding the price of the building constructed on the Land):-

Premium = 1/ 4 X 1 / 100 X Market Value of the Land X Number of Years of Renewal X Land Area (in Square Feet)

Other factors to consider
There are certain regulations and restrictions in place for all dealings and interests in leasehold properties such as the restriction of the number of owners for leasehold property to two or more person or bodies unless they are trustees or executors or administrators of an estate.

This is further complicated by the requirement for state or equivalent approval for all transactions involving dealings and interests in Leasehold property. As such, any transaction involving the leasehold property may be inevitably delayed pending the approval by the State authority. The Owner may be penalized for late delivery of the leasehold property and vice versa purchasers may be delayed in obtaining vacant possession of the same due to the delay in obtaining state approval.

Another factor is that the State Authorities may exercise their rights forfeit the leasehold property for non-performance or breach of the express and implied terms and conditions of the property including the payment of assessment and other outgoings or the wrong use of the land and the use of the Property i.e. using the residential land for commercial purpose.

So why choose Leasehold properties?
Despite all the aforesaid factors, it would be ideal to purchase the leasehold property as it is more affordable in comparison to a freehold property and the value of the property with 99 years leasehold tends to go up in value for the first twenty-five to thirty years of the leasehold tenure.

Location may also play a factor as a leasehold property or land in preferred locations in Kuala Lumpur and Selangor may be cheaper compared to a freehold property in the same area. Furthermore, leasehold property with less than 40-50 years tenure is ideal for short-term farming purpose or storage purpose in comparison to year to year tenancy to lock in the price.

Sr Vicky How

Sr Vicky How

Vicky How is a licensed valuer registered with the Malaysian Board of Valuer, Estate Agency and Appraisal (BOVAEA). She is currently a director of Henry Wiltshire, an international estate agency company.

The views and opinions expressed on this article are solely those of the original author. These views and opinions do not necessarily represent those of StarProperty.my.

To Read More: How to extend your lease for leasehold properties

To Read More: Tackling tenant-landlord issues and leasehold renewal cost calculation

To Read More: Ask Me Anything: Calculating renewal cost of property leasehold

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