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Leasehold renewal demystified

19/10/2002 NST-PROP By Eileen Ng

Molly Tan has been living comfortably in a bungalow in Section 14, Petaling Jaya in Selangor for over 40 years and the house holds many happy memories for her and her family. For it was here that Molly grew up, got married and returned to raise her children after she inherited the house from her parents.

However, of late, Molly and her children have become increasingly concerned about the status of the house because they only have 50 years left on the lease. Their worries have been exacerbated by newspaper reports beginning in April this year of the PJ draft local plan unveiled by Majlis Perbandaran Petaling Jaya (MPPJ), which herald changes for the township.

The plan has received a lot of flak from affected residents who have not only questioned the re-zoning of certain areas in PJ for commercial use, but also the high premiums imposed on those who want to renew their leases.

The issue of lease renewal is a pertinent one for many residents of PJ, who live on leasehold land alienated by the state government beginning in the 1950s, and as such, have only 50 to 60 years left on their leases. Several of them are now preoccupied with how to renew their leases and the premium they will have to pay to continue staying in their homes. Those who want to sell their properties are worried if they can find buyers, considering the limited time left on the lease.

It’s not just individual homeowners who are concerned.

Developers who see the potential of redeveloping parts of “old” PJ are deterred by the short life span left on leasehold parcels that would otherwise be deemed prime by virtue of their location and profit potential.

The limited time left on the lease is also a factor to consider when seeking bridging- and end-financing for new projects. Will banks extend loans for those who want to buy properties with less than 50 years left?

The best solution, it appears, would be to apply for an extension of the lease, or renewal if it has expired.

Extension and renewal

Petaling District and Land Office land administrator Zoal Azha Yusof said the procedures for extending or renewing leases both by developers or individual owners are the same.

He said the extension of leases is governed by Section 197 of the National Land Code 1965, which stipulates that before applying for an extension, the lease must first be surrendered to the state government.

Both developers and leasehold property owners have to fill in a form called Permohonan Serahbalik dan Mohon Semula Tanah Untuk Tujuan Melanjutkan Tempoh Pajakan (application to surrender and re-alienate land to extend lease duration). Those who want their lease extended can opt for either 60 or 99 years.

Zoal said together with the form, the owner also has to submit to the land office a certified copy of the land title, which can be obtained from the office’s registration department, a copy of the current year’s quit rent receipt, personal and land particulars, a copy of the latest assessment receipt, two copies of site plans and a copy of the applicant’s identity card.

Once the office has received the forms, a settlement officer (SO) will be sent to the area to check on the land status to ensure that it is used only for the approved purpose.

“The SO and the planner will then prepare a report to be incorporated in a draft paper for approval, which will be forwarded to the state exco through the district officer,” explained Zoal.

He said the whole process is estimated to take three months, depending on the number of applications received by the land office. However, the exco might take a longer time to approve the applications as it needs to meet first to look into them.

Once the land office has received approval from the exco, it will notify the owner, who will then be required to submit another form, Form 12A, which entails giving back the property to the land administrator for re-alienation.

The re-alienation process is subjected to procedures stipulated under the National Land Code. When the department has receive the Form 12A, it will check to ensure that all the necessary details are in place, for example, whether the latest quit rent had been paid.

If there are any discrepancies, the application will be rejected and property owners will be informed of the decision.

If the application is approved, the land office will issue the “Notice that Land Revenue is Due “ (Form 5A) to the property owner, who will have to pay the premium within three months of the date of the notice.

Upon payment of the premium, the land office will get the land title ready and inform the property owner that it is ready for collection. If the owner is unable to pay the premium, the approval for re-alienation is revoked and the application is deemed withdrawn.

Zoal said the entire surrendering and re-alienating process takes at least one year due. Hence, he advised property owners to start reapplying for an extension at least two to three years before the lease expires.

If the lease has expired, property owners will have no choice but to apply for lease renewal using the Permohonan Pemberimilikan Tanah form (Application for Land Re-alienation). The subsequent procedures are the same as applying for an extension.

However, Zoal warned that once the lease has expired, the property automatically reverts back to the state government and this allows anyone to apply for the land.

“Thus, it is very dangerous to let the lease expire,” he said.

High premiums

Zoal conceded that the trouble with the RTPJ1 draft local plan is due to the fact that residents are upset over the high premium rate imposed. But, he said, the public has to understand that the rate is calculated based on the current market value of properties in the area.

He said the premium charged is based on a formula stipulated in the Selangor Land Rules 1966. For residential areas, the formula is 1/2 x 1/100 x land size x market value of property x tenure of lease. For commercial and industrial properties, the formula is 3/4 x 1/100 x market value of property x tenure of lease (see sidebar).

He said the deciding factor in the formula is the property’s market value. The valuation is done by the Finance Ministry’s Valuation and Property Services Department and is based on the latest transaction values in the area.

Zoal said some owners who are unable to pay the premium, especially those with still some years left on their leases, have withdrawn their applications and opted to wait for land values to drop.

“Some have decided to reapply for extension later but they fail to realise that the rate may rise in tandem with higher property values,” he said.

He added that owners could appeal to the state government to reduce the premium, but they would have to pay up the revised amount within three months. The revision will be considered on a case-to-case basis and will be at the discretion of the state government.

Other variations

However, Raine & Horne International Zaki + Partners associate director James Tan said if the lease is surrendered for re-alienation before the term expires, the years remaining on the lease will have to be forsaken.

He gave the example of the owner of a 99-year leasehold property who decides to surrender his lease and apply for re-alienation in 2002 although its term only expires on Sept 1, 2022.

“When the application is approved, the clock on the new 99-year lease - if it is approved for 99 years - will start. Thus, the remaining 20 years on the lease will be forfeited,” he said.

Tan advised those wanting to renew their leases to do so only when they have 10 years left.

He said he has also come across other variations of leases. Some people had been given 30, 42, and 66 years by various state governments, while others in Sabah and Sarawak had even obtained 999 years!

At the Selangor Science Park, the developer, the Selangor State Development Corp (PKNS) is selling a variety of leases for industrial land, such as 30 years at RM17psf, 60 years lease at RM22.50psf and 99 years at RM36.50psf.

“The are some who prefer to pay more for short leases. For example, those in Sg. Buloh new village with 30 years lease are willing to pay between RM20 to RM30psf, almost close to freehold value,” Tan said.

He said if a developer wants to develop a parcel with 50 years or less left on the lease, it would be more viable to apply to renew the lease to 99 years in order to attract more buyers.

Financing options

Tan said the best time to sell leasehold properties is when there is at least 50 years left, as anything less than that will affect the property value and its saleability.

But can a person obtain financing to buy such a property? According to sources from financial institutions, the answer is yes. Although the requirements may differ from bank to bank, overall, these institutions do not see any problems.

A source with a major bank in Malaysia said banks are still willing to extend loans as long as the lease tenure is longer than the loan tenure.

“For example, if a customer is seeking a 20-year loan against a 50-year lease, we will approve it. Certain areas in PJ and Jinjang in Kuala Lumpur have less than 60 years but the owners can still obtain loans without difficulty,” said the source.

The source said even when a property has 25 years left, if a customer is only seeking 50 per cent loan against current market value, and the pay-back tenure is only five years, the loan may still be extended provided the bank is comfortable with the customer’s repayment capacity, the property has some resale value; and the customer has a good repayment track record.

An Affin Bank Bhd spokesman said his bank will still accommodate financing requests on leasehold properties with 50 years lease and above, as such properties still command either considerable demand or market value on the property market.

“The housing loan application will be processed and evaluated like any other housing loan applications. No special requirements are needed,” he said in a faxed reply to PropertyTimes.

He said for the bank, the unexpired lease should not be less than 40 years as the market demand for such properties will decline. He said if, upon expiry of the lease, the state government takes back the land the bank’s right as the chargee would be extinguished.

“Affinbank will then become an unsecured creditor where our available legal recourse for remedy is against the borrower(s) or the guarantor(s),” he said.


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