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What is all this fuss over Stratas?

August 30, 2012

FMT LETTER, From Zakay Rehman, via e-mail

The National Land Council meeting recently announced the going ahead in tabling of a Strata Management Bill in this coming Parliamentary session. This bill will supersede the existing Buildings & Common Properties Act (Act 663) and come together with amendments to the Strata Title Act.

A lot of thought and effort seemed to be put into this bill which seeks to achieve the common good for the public, and for the thoughtfulness of the stakeholders involved in pushing for these changes, kudos to them whom will mostly go without a pat-on-their shoulder. Never the less, good intentions may produce undesirable results and we have to be keen aware of such potentialities that lie in this new bill.

First of all, the question that needs to answered is what is all this fuss over Stratas?

Strata living or living in vertical multi-level structure’s like apartments, flat and condominium, and to a lesser but increasingly popular degree horizontal stratas as in gated landed communities are the fastest growing real estate development in Malaysia, and since the introduction of the Strata Titles Act in 1985, a guesstimate would put it around 25-30% of Residential Holdings are in strata form, with an unverified estimates by 2020 this number will reach anywhere between 35-50%.

However, with the rapid growth of strata development comes a crisis in strata administration rights, where in a report by the Housing Ministry that 500,000 strata holdings have yet to get strata titles and this number is not reducing with ever increasing new application of strata development. For those whom are interested in statistics, the 500,000 strata holdings represents 30-50% of strata residential holdings.

Returning back to the proposed tabling of the Strata Management Bill, this session of amendments put before the Parliamentarians is amongst other issues meant to address the administrative challenges in issuance of strata titles, made apparently so in the announcement by the Deputy PM chairing the National Land Council meeting…”that the amendments to the Strata Title Act will be tabled in the next parliamentary sitting which will amongst other make it compulsory on Real Estate Developers to procure Strata Title upon Issuance of Vacant Possession (VP).”

Even the best of intentions might fall short in delivery or cause the opposite to happen, and this current proposal has potential to go that way.

For the benefit of the lay reader, the objective of making it compulsory on Real Estate Developers to procure Strata Titles upon Issuance of Vacant Possession (VP) means that in the future, when you buy a newly constructed apartment, the developer has a duty to deliver you the completed apartment ONLY with strata title already issued or else the developer faces tough penalties including jail time.

The onus of making it the developers responsibility come from the thinking that its in the developers best interest to ensure that all administrative documentation and process to procure strata title be made as equal priority as the super structure construction should the developer wish to sell the unit as strata. However, the assumption ignores the axiom that the authority and power to issue strata titles fall in the hands of the State Offices of Directors of land & Mines (PTG), and its the PTG and no other authority that determines when strata titles are issued.

If the amendments are pass in this form, technically it shifts the burden of procuring strata tiles on to the Real Estate Developer, however it increases the “risk” of failures to the purchaser or home buyer. The logic which seems to be missed by those drafting the bill is that should the Developer be unable to deliver the real estate due to strata title issuance, then the Strata buyer or Purchaser also suffers due to the fact that:

  1. The Purchaser has already entered into a Sale & Purchase agreement and would have incurred cost and
  2. Most Purchaser buy on loans. Regardless of the fact that the Developers may be subjected with Liquidated Ascertainable Damages (LAD) for late deliveries, the burden still fall on the Purchaser should the Developer falls insolvent, and directly or indirectly this amendments may promote project abandonment.

The other implication that may occur which is more speculative, will be the practice of Developer chasing for issuance titles from the PTG may promote a culture of corruption in the civil service, or in the least creating rent seeking services avenue.

So the question that begs answering is should the amendments be shelved? The answer is NO, the focus of delivering title rights i.e. Strata Title to Purchaser should remain as priority, its just that the methodology or approach should be tweaked!

For those familiar with the draft Strata Management Bill, its is known that there will be provisions that Real Estate Developers are required to notify and submit plans to the Commissioner of Buildings at their Local Governments (that oversees the management of strata development after completion) prior to initiating Any Sale of Strata Units.

Now herein lie the best instance to put the onus on Real Estate Developers to initiate procurement of Strata Title, i.e. before any sale of Strata Units are made!

Since the proposed Act recognises that there be a point where Real Estate Developer should identify their intention for Stratified Development, the proposed Bill together with proposed amendments of Strata Title Act, may then create an approval inprincipal for “Stratified Titled Development”, wherein the relevant PTG together with the relevant Local Government provide approval services for administrative issuance of Strata Title even prior to final as built Strata Plan, which may then be submitted to the PTG at a fixed minimum time, e.g 6 months before VP.

In effect, the Real Estate Developer then are made to ensure that all administrative issues especially those in relations to the National Land Code are cleared prior to the embarking in any Development toward Sale of Strata Parcels.

Would this not make a far LESS riskier proposition?


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