When Chinese developer Qingjian Realty signed a conditional contract to buy the 358-unit Shunfu Ville for $638 million in May, some believed this could herald the dawn of a new wave of collective sales in Singapore.
Under Section 84A of the Land Titles (Strata) Act (LTSA), if the sale en bloc is supported by 80 per cent of the development’s owners (in terms of both share value and strata area) and the development is at least 10 years old, owners can receive an order of sale from the Strata Titles Board or the High Court. But owners should be mindful of the salient issues before launching such a sale.
STARTING A COLLECTIVE SALE
The election of responsible collective sale committee (CSC) members is a good starting point.
Owners of developments which had failed to secure a collective sale in an earlier round should note a higher threshold requirement of 50 per cent (by way of the 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 sale attempt.
Otherwise, the usual requirement for such a requisition is to get the signatures of owners holding 20 per cent of total share value or of owners comprising 25 per cent of the total number of owners.
Owners should aim to appoint CSC members from owners across all types of units in the development so as to ensure better cross-representation of different interests. Candidates for the CSC should, at the time of election and at other relevant times, make full disclosure of any actual or potential conflicts of interest.
APPOINTMENT OF LAWYERS AND PROPERTY CONSULTANTS
The CSC could be empowered at the EOGM to appoint lawyers and property consultants to act for the owners in the sale process. Otherwise, the appointment of lawyers and property consultants should be made at an EOGM.
The experience, track record and commitment level of the lawyers and the property consultants should be fully considered before they are appointed.
RESERVE PRICE IN THE COLLECTIVE SALE AGREEMENT (CSA)
The sale committee should propose a reserve price in the CSA, taking into consideration factors such as development gross plot ratio, development baseline, special height controls (if any), lease top-up premium (if any) and general market conditions.
The committee should be mindful that, while a high reserve price will facilitate the collection of signatures to the CSA from owners, it may turn away potential buyers.
The committee should understand the importance of enticing developers to invest time and money to do feasibility studies on the development’s land and of allowing the spirit of competition to take the eventual winning offer above the reserve price.
METHOD OF APPORTIONMENT OF SALE PROCEEDS
The CSC should propose a method 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” method or distribution of sale proceeds for a collective sale.
The Singapore Institute of Surveyor and Valuers recommends that one or a combination of two or more of the following methods or factors for apportionment – namely, valuation, strata area and share value.
Valuation could be made of a typical unit of each type, ignoring the unit’s renovation cost, facing or floor level. However, the siting or location of a unit should be taken into consideration during the valuation of retail units.
While valuation is an important factor for commercial or mixed-use developments, it is rarely used for purely residential developments. Strata area is understandably a commonly adopted factor.
Owners of smaller units may argue for weightage to be given to their share value in the management corporation strata title (MCST) since a collective sale relates to unlocking the potential of the land. But they should also appreciate that share value is approved by the Commissioner of Buildings at the onset of the development for the purpose of determining maintenance contributions and the voting rights of owners in the MCST, and not for purpose of apportionment of sale proceeds.
The method of apportionment is often an emotional topic as everyone thinks his unit or unit type is worth more than others.
Practically speaking, the method of apportionment to be adopted must also be able to garner the support of 80 per cent of owners. Otherwise, the 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 the sale price, the method of apportionment 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 Court of Appeal in the landmark case of Horizon Towers. The court decided that CSC members are fiduciaries of all the owners, including those who do not consent to the sale. The duties of CSC members include loyalty, even-handedness, avoiding any conflict of interest, making full disclosure of relevant information and acting with conscientiousness to exercise its powers in the best interest of all owners. The duty to act with consciousness in relation to the sale price requires the CSC to to use all possible diligence to secure the best reasonable price.
Non-consenting owners can raise a valid objection on the grounds 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, will be 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 for the purchase, costs related to privatisation and costs incurred in the process of 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.
SALE BY PUBLIC TENDER OR AUCTION
The need to ensure that the highest market price is achieved is safeguarded by a sale by public tender or auction. This will allow maximum exposure of the development to potential buyers so that there is competition to get the highest offer.
The CSC must obtain a valuation report prepared by an independent property valuer on the date of the close of the tender or auction.
The CSC may, within 10 weeks from the close of the tender or auction, enter into a private treaty contract with a buyer.
•Lee Liat Yeang is a senior partner with real estate practice group Dentons Rodyk & Davidson.
•This article is for general information only and should not be relied upon as legal advice for any specific matter or case.