Dr Ernest Cheong, senior partner, Ernest Cheong PTL Chartered Surveyors

The five lines of defence you as a borrower can employ to protect your property

When times are good and when times are bad there always are people who cannot repay their loans to the Banks.During the 1997/1998 Asian Economic Crisis, thousands of Malaysians who could not repay their bank loans lost their properties when the banks foreclosed and sold them through public auctions. Today, we read in the local newspapers and also the online internet news that the global economy is slowing and that Britain, Europe and the United States are on the verge of falling into another recession, if they are not already there.

Will the Malaysian economy be affected and follow Britain, Europe and the United States into another recession? Will what happened to thousands of Malaysian property owners during the 1997/1998 Asian Economic Crisis happen again?

In anticipation of this, I ask Malaysian Banks a question: “Can Malaysian Banks be relied upon to self-regulate and to act with caution and compassion and not to commence with wholesale foreclosure proceedings against their defaulting borrowers that would cause not only the economic destruction of their borrowers but also precipitate a crash of the Malaysian property market with dire consequences for ALL Malaysians?”

When recession actually hits the Malaysian economy and many families cannot repay their bank loans, will the Government led by Prime Minister Datuk Seri Najib Tun Razak intervene to save the thousands of Malaysian families drowning in their housing loan debts or barely keeping their heads and noses above water and instruct Bank Negara Malaysia to impose a Malaysia-wide housing loan repayment moratorium for durations of between 3 years to 5 years?

I truly and sincerely hope that Malaysian Banks would voluntarily impose upon themselves a Malaysia-wide housing loan repayment moratorium for durations of between three years to five years that will spare thousands of Malaysian families the agony and trauma of facing foreclosures and public auctions of their homes.The Worst Case Scenario

I truly and sincerely hope that Datuk Seri Najib Tun Razak, Malaysia’s Prime Minister and Finance Minister will intervene and instruct Bank Negara Malaysia to impose a Malaysia-wide Housing Loan Repayment Moratorium to be implemented by Malaysian Banks for durations of between 3 years to 5 years.

What if?

What if none of the above happens? What if the Prime Minister does not intervene? What if Malaysian banks instruct their lawyers to commence with wholesale foreclosure proceedings against their defaulting borrowers? Faced with these onslaughts from Malaysian banks, can the thousands of distressed and hapless borrowers defend themselves and survive?

The playfield is not level

Until now, with a few exceptions, when Malaysian banks commence with foreclosure proceedings against their borrowers, “the field is not level”. It is a sloping and slippery field for borrowers. Even when they have a weak case, by the sheer weight and power of their money and their battery of high powered litigation lawyers, Malaysian banks will invariably prevail and win against their hapless borrowers.

Justice requires that the playfield is level, I believe. The objective of this article is to educate and inform the thousands of distressed borrowers who cannot afford to pay the expensive lawyers’ fees to get the appropriate advice they need so that they know their rights as provided for in the National Land Code of 1965 and how they can stand up for themselves and know what to do when they are faced with foreclosure proceedings so that they will not be “steamrolled” by Malaysian banks’ lawyers, even when the banks have weak cases.

Malaysian banks’ lawyers always claim that their clients have solid and water-tight cases against the borrowers. Are the banks’ lawyers correct? To find out let me now take us on a journey through Malaysia’s National Land Code of 1965 to understand the respective rights and obligations of Malaysian Banks and their borrowers vis-à-vis the properties of borrowers charged (pledged as collateral/security).

Technical Nature of Foreclosure Proceedings

For many average Malaysians, to have an encounter with the Law can prove to be an unpleasant and sometimes traumatic experience. Much though we want to avoid an encounter with the Law, living in this modern society, such a wish can prove to be difficult to achieve. We are confronted with issues of law all the time.

I will present the issues involved in non-technical every day language that ALL Malaysians can understand.

When a person borrows money from a bank, normally the bank will require that the borrower provides the bank with security (collateral) for the loan. The security required by the bank is usually in the form of a property and the value of the property should be higher than the amount of the loan granted by the Bank. The property offered by the borrower to the bank as security for the loan will then be “charged to the Bank”. The borrower is known as “chargor” and the lending bank is known as “chargee”.

When the borrower fails to repay to the bank the loan granted to him, in order to recover the loan amount, the bank will apply to the High Court or Land Office for an “Order for Sale” to sell the property that is charged to the Bank by public auction.

Right of Malaysian Banks to foreclose

The National Land Code of 1965 gives Malaysian banks the right to foreclose on the properties of their defaulting borrowers and to sell these foreclosed properties through public auctions to recover the loans.

There are also very strict statutory rules that Malaysian banks are required to comply with before they can foreclose and sell their borrowers’ properties. If they fail to comply with these statutory rules, they will fail in their attempts to foreclose and sell their borrowers’ properties. The requirement for strict compliance of these rules (with penalties for their failure to comply) provides distressed borrowers with plausible defences when faced with foreclosure proceedings by Malaysian banks.

Borrowers’ 1st line of Defence (or Attack)

When a borrower fails to pay the lending bank the monthly housing loan instalment for four consecutive months and the lending bank commences with foreclosure proceedings against him, before the lending Bank can apply to the High Court for an “Order for Sale”, Section 254 of the National Land Code of 1965 requires that the lending Bank issues to the borrower a “Default Notice” in Form 16D, a form prescribed in the National Land Code of 1965. This Form 16D must be served on the borrower in person.

It is mandatory for the lending bank to comply with these requirements. If the lending bank fails to comply and did not personally serve on the borrower the “Default Notice” in Form 16D, all subsequent foreclosure proceedings commenced by the lending Bank, all the way to the issuance of the “Order for Sale” by the High Court is considered irregular and cannot be enforced on the borrower.

There have been many previous Malaysian Court judgements upholding the doctrine of “strict compliance” with Section 254 of the National Land Code of 1965.

What do you do when served with a Court Summons?

When you are served by your lending bank with a court summons to foreclose your property, first and foremost, you should check your memory and your records to make sure “if you have personally been served by the lending Bank through their lawyers with the “Default Notice” in Form 16D”. I emphasize the word “personally”. If you did not personally receive this notice, even though it may have been given to your wife or left at your house or sent to you by post, the lending Bank did not comply with Section 254 of the National Land Code of 1965 and the consequences for the lending Bank will follow.

When you are sure you did not personally receive from the lending bank’s lawyer the “Default Notice” in Form 16D, immediately get yourself a lawyer and tell him the whole story. Your lawyer will know what to do next and he will take care of you from then on.

Borrowers’ 2nd line of Defence (or Attack)

After you have ascertained that you did personally receive from the lending bank’s lawyer the “Default Notice”, you now have to study the form carefully. Is it Form 16D or Form 16E? Why the splitting of hairs? Does it matter whether it is Form 16D (issued under Section 254) or Form 16E (issued under Section 255)? Yes it does matter if you want to stop the lending Bank’s foreclosure proceedings against you.

The difference between Form 16D and Form 16E is: Form 16D is a default notice issued when the loan granted by the lending bank to the defaulting borrower is repayable by intalments over a period of time, like a housing loan repayable in monthly instalments over a period of 30 years.

Form 16E is a default notice issued when the loan granted by the lending Bank to the defaulting borrower is repayable on demand in one payment like an overdraft granted to businesses. If you have been granted by your bank a housing loan to be repaid in monthly instalments over a period of 30 years, and you personally received the “default notice” from the lending Bank’s lawyer but it was Form 16E that you received, the lending Bank did not comply with Section 254 of the National Land Code of 1965 and the consequences for the lending Bank will follow.

Immediately get yourself a lawyer and tell him the whole story. Your lawyer will know what to do next and he will take care of you from then on.

Borrowers’ 3rd line of Defence (or Attack)

After you are sure that you personally did receive from the lending bank’s lawyer the “Default Notice” in Form 16D, you will now instruct your lawyer to request from the lending bank’s lawyer a copy of the valuation report on your property prepared by the lending Bank’s valuer.

When the lending bank’s lawyer applies to the High Court for an “Order for Sale”, the lending Bank’s lawyer will have to submit to the High Court a copy of the valuation report on your property prepared by the lending Bank’s valuer. The valuation report will state the “Market Value” of your property as at the date of the Valuation Report.

Reserve Price of foreclosed property

Section 257 (1) (d) of the National Land Code of 1965 states that: “Every order for sale made by the Court under section 256 shall require the Registrar of the Court to fix a reserve price for the purpose of the sale, being a price equal to the estimated market value of the land or lease in question.”

The definition of “Market Value” as adopted by the Board of Valuers, Appraisers and Estate Agents, Malaysia is as follows: “Market value is the estimated amount for which an asset should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.”

Right to challenge Valuation Report

As the owner of the property that is being foreclosed, the borrower has the right to challenge the accuracy and correctness of the valuation report prepared by the lending bank’s valuer and to challenge the valuer’s opinion on the “market value” of the borrower’s property that is the subject of the foreclosure proceedings.

It is not unusual that when two valuers are instructed at the same time to value a residential property like an apartment, terrace house or detached
However when these two valuers are instructed at the same time to value a 50 acres plot of vacant land in Kajang, Selangor, they will likely produce valuation reports that are vastly different in their opinions of value with the difference between the lowest value and the highest value ranging from 50% (at the lower range) to 400% (at the higher range). In absolute figures, Valuer A may value the 50 acres vacant land at RM10mil whilst Valuer B may value it at RM15mil (50% higher) or even RM40mil (400% higher).house located in Kuala Lumpur, the valuation of the property by the two valuers will not differ much one from the other. They will likely have adopted the same method, namely the direct comparison method for their valuations. Similarly the valuation of a valuer appointed by the borrower to value his house, a straightforward residential property in Kuala Lumpur is not likely to differ much from the valuation of the same property by the lending bank’s valuer.

Can either of the valuers be wrong or can they both be wrong? Who will decide which valuer is right and which valuer is wrong?

Kuala Lumpur High Court case on fair market value and reserve price

This is a foreclosure dispute between the lending bank and the borrower that was heard and decided by the Kuala Lumpur High Court in December 1995. A copy of the Kuala Lumpur High Court judgment may be obtained from the writer at enquiries@ecptl.com.

In the Kuala Lumpur High Court originating summons between the lending bank and the borrower, the lending bank had in November 1988 appointed Valuer S of Valuation Firm J to value five contiguous plots of residential zoned land located next to the Kuala Lumpur City Centre (KLCC) off Jalan Ampang, Kuala Lumpur. In November 1988, Valuer S of Valuation Firm J valued the 206,531 sq ft (4.74 acres) land at RM19,000 (RM0.09 per sq ft).

I
In his valuation report dated 27th July 1993, this writer valued the land at RM134,245,150 (RM650 per sq ft). After hearing the evidence of both Valuer S and this writer, the judge of the Kuala Lumpur High Court held that: “I am of the opinion that this Court can still follow the general guideline as laid down in that case (Supreme Court case of NKM Properties Sdn Bhd v Rakyat First Merchant Bankers Berhad [1992] 2 MLJ 349) that is the reserve price is a price equal to the estimated market value of the land in question”n April 1993, Valuer S of Valuation Firm J prepared an updated valuation report valuing the land at RM42,000 (RM0.20 per sq ft). In July 1993, the borrower, appointed this writer to value the land for the purposes of the coming hearing of a Kuala Lumpur High Court originating summons.

“In his valuation report dated 27 July 1993, Mr. E gave the basis of his valuation whereas in Encik S’s update of his 1988 report, dated 5 April 1993, it was stated that the update was undertaken without re-inspection of the subject property and conducting title check but was based on information received in the earlier report.”

“As such, I am more inclined to accept Mr. E’s report. Furthermore, Encik S has totally disregarded potential advantages of the said land. Mr. E however has given the fair market value at RM650 per sq ft. I am of the opinion that this is rather on the high side and that if I follow the value as suggested, the reserve price will be too high and there will be no bidders and the auction will be aborted. As such to my mind a reserve price at RM525 per sq ft is more reasonable in the circumstances”

The Court ordered that the reserve price be fixed at RM525 per sq ft totaling RM108,428,775 for the 206,531 sq ft (4.74 acres) land.

As you can see, the RM134,245,150 (RM650 per sq ft) valuation of this writer was around 3,200 times the valuation of Valuer S at RM42,000 (RM0.20 per sq ft), while the RM108,428,775 (RM525 per sq ft) reserve price ordered by the Kuala Lumpur High Court on 17 December 1995 was about 2,600 times that of Valuer S' estimate!

Borrowers’ 4th line of Defence (or Attack)

After you have been granted the housing loan and before the loan amount was released to you, you signed all the legal documents to “charge” your property/house to the lending bank. After the “legal charge” was registered by the Land Office in the name of the lending bank, the “original copy” of the title document was returned to the lending bank for the bank to keep as your “trustee and custodian” for the safety of your title document.

What if the Bank lost and/or misplaced your title document

Did you ever wonder if the “original copy” of the title document to your house is safe in the bank’s custody? Did you ever consider it possible the bank would lose the “original copy” of your title document?

It is a fact that Malaysian banks have actually lost the “original copies” of their borrowers’ title documents. What happens when the banks lose the title documents? I am informed by officers of Malaysian banks that when the bank has realised that they lost a title document, they would instruct their lawyers to apply to the Land Office concerned for a “replacement title”.

I am also informed by these officers that the bank did not inform and did not get the borrower concerned to be involved as they consider that as the chargee, the bank has the right to apply for the “replacement title” without the involvement of the property owner.

Do Malaysian Banks have the right to apply for Replacement Titles on their own?

To find out if Malaysian Banks “have the right to apply for Replacement Titles on their own’ let me now take us on a journey through Malaysia’s National Land Code of 1965 to understand the respective rights and obligations of Malaysian banks and their borrowers vis-à-vis the application of replacement titles when these title are "reported lost".

Section 166 (1) (d) of the National Land Code 1965 provides for the “Circumstances in which title in continuation may be issued to land as a whole” and for the application of replacement titles when the original issue document of title “has been lost or wholly or partially destroyed, or is being improperly or wrongfully withheld”.

Section 166 (2) of the National Land Code 1965 stipulates that the person or body to apply for replacement titles are as listed below:- a) The proprietor of the land in question

b) Any person or body claiming through the proprietor

As you can see, Section 166 (2) of the National Land Code 1965 as quoted above did not provide for the “bank” or “chargee” to be included in the list of person or body permitted to apply for the replacement title.

Section 168 of the National Land Code 1965 stipulates that “Before issuing title in continuation in the circumstances described in paragraph (c) or (d) of subsection (1) of section 166, the Registrar or [Land Administration] shall:-

(a) cause notice of his intention to do so to be published in the Gazette in Form 10D; and

(b) cause copies of the notice to be served on every person or body having a registered interest in the land, and to be published in accordance with the provisions of Section 433

Request for copy of Title Document from lending Bank

When you are served by your lending bank with a court summons to foreclose your property, immediately request from your lending bank a photocopy of your title document that you had deposited with them. Your lending bank has to give you what you requested as it is your right to ask them to give you a copy of your title document.

If your lending bank gives you a copy of your title document and you find that it is not a copy of your original title but a copy of a replacement title, and you are sure that you were not involved in the application for the replacement title, immediately get yourself a lawyer and tell him the whole stoy. Your lawyer will know what to do next and he will take care of you from then on. Show him this Article if you like.

Borrowers’ 5th line of Defence (or Attack)

If you fail to stop the lending Bank and they succeed in obtaining an “Order for Sale” against your property and even sell your property at a public auction, is this the end of the road for you? You still have one last line of defence available.

Extension of time to settle balance purchase price

The usual requirement under the Proclamation of Sale is that the purchaser at the public auction is normally required to settle the balance of the purchase price within 90 days after paying the required 10% of the purchase price. The chargor (borrower) must be consulted and his consent obtained if there is any application by the purchaser for any extension of time to settle the balance of the purchase price.

The bank cannot on their own, unilaterally grant the purchaser the extension of time they applied for. Failure on the part of the lending bank to obtain the chargor’s (borrower’s) consent will render the sale of the borrower’s property at the public auction void (has no legal effect and unenforceable) (refer to M&J Frozen Food Sdn Bhd v Siland Sdn Bhd & Anor [1994] 1 MLJ 294 SC).
Even after your property has been sold by the lending bank at the public auction, you will need to monitor the progress of the sale. You will know when the balance 90% of the purchase price has to be paid by the purchaser (90 days from the date of the public auction).

On the 91st day after the public auction, go to the bank to ask if the purchaser has paid the 90% of the purchase price. If the lending Bank refuses to answer your query or give you a vague answer, immediately get yourself a lawyer and tell him the whole story. Your lawyer will know what to do next and he will take care of you from then on. Show him this article if you like.

Dr Cheong, 68 is a veteran chartered surveyor, registered valuer, auctioneer and arbitrator. He is the principal of Ernest Cheong PTL Chartered Surveyors and holds a Doctorate in Business Administration (DBA) as well as an MBA from Reading University, England. You can contact Dr Ernest Cheong at enqueries@ecptl.com or visit www.ernestcheong.com. He also blogs at www.propertygandhi.blogspot.com. 

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