What is meant by 'Service Charge' in a strata development?

Service charge is the main point of contention between the owner and the management in a strata development as it does not exist in landed property when one owns a property. It is an additional burden to strata development property owner as it has to be paid monthly. Under clause 18 of Schedule H of the Housing Development (Control and Licensing) Regulations 1989, the payment for maintaining the common facilities or common property provided by the housing developer is known as  ‘service charge’. Payment of service charge is paid to the housing developer before the joint management body for the property is established. The portion of the service charge to be paid by the purchaser is determined by a licensed land surveyor, appointed by the housing developer, who assigns the amount payable each month by the owner according to the allocated share units within the strata development. It means that the purchaser of a strata development pays according to the space that the purchaser owns within the strata development. The more space that the purchaser owns, the more service charge that the purchaser has to pay. An owner of a penthouse or a duplex pays more than a standard unit. In order for the purchaser to take vacant possession of the property that was bought, a four-month service charge has to be paid in advance and then the purchaser pays the service charge monthly in advance.

A Building Maintenance Account is established and maintained by the housing developer where all the collected service charge are deposited. The housing developer will then hand over the account to the Joint Management Body when it is formed and the account will finally be managed by the management corporation upon issuance of individual strata titles. Under the Fifth Schedule of the Sale & Purchase Agreement of Schedule H of the Housing Development (Control and Licensing) Regulations 1989, a sample of service charge statement is set out outlining the itemised billing and payment that the purchaser has to make every month. The Fifth Schedule is known as ‘Form of Service Charge Statement’ and has the descriptions, estimated monthly expenses and estimated annual expenses for the service charges. The listed descriptions for the service charge include the electricity supply, electrical system maintenance, firefighting system maintenance, lift or escalator system maintenance, security maintenance system, water supply, swimming pool maintenance and a few other common properties which need maintenance and upkeep. The list also includes management fee, management office expenses, staff expenses and bank charges for the management of the strata property. The list is not exhaustive as other services can be added on.

Under Section 16 and 17 of the Building and Common Property (Maintenance and Management) Act 2007, when the housing developer transfers the management of the strata property to the joint management body, the housing developer also has to transfer the Building Maintenance Account to the joint management body. The Building Management Account is to be opened before vacant possession is delivered. The housing developer has to deposit all the service charges received from the purchasers and to pay the service charges for the unsold parcels too. The housing developer will need to make sure that the Building Maintenance Account is maintained, audited by professional auditor, file a certified statement of accounts with the Commissioner of Buildings and  permit the Commissioner of Buildings' office to have access to the Building Maintenance Account. A housing developer who fails to do as such can be liable to pay between RM10,000-00 and RM100,000-00 with fine not exceeding RM1,000-00 for each day the offence continues if convicted. When the Building Maintenance Account is transferred by the housing developer within one month of the establishment of the joint management body, the account will be under control of the joint management body called ‘the Building Maintenance Fund’. Even if the housing developer is unfortunate enough to go into composition or arrangement with its creditors or goes into liquidation, the money in the Building Maintenance Account will not form part of the property of the housing developer and be under receivership. The money in the Building Maintenance Account will still have to be transferred to the joint management body by the administrator of the liquidation process. The Building Maintenance Fund will always be under the control of the joint management body. The monies in the Building Maintenance Fund shall include maintenance charges for the building, any money from the sale, disposal, lease or hire of any property, mortgages, charges or debentures which is done by the joint management body, moneys and property payable to the joint management body due to the joint management body’s functions and powers; and any money lawfully received by the joint management body be it interest, donation and trust. 

When the strata development is issued with individual titles, accessory parcels and common property, according to the Strata Tiles Act 1985,  the management of the strata development will pass to the the management corporation. Management corporation is born through the first annual meeting called by the housing developer. Part of the duties and powers of the management corporation are to take over from the joint management body, and then manage, maintain, audit and send report to the Commissioner of Buildings, the management fund. Under Section 45 of the Strata Titles Act 1985, the management fund is where all service charges are paid into when strata titles are issued to a strata development and management corporation manages the common property.  Service charges in the management fund are allowed to be used for nearly the same usage whether it is under the housing developer, joint management body or the management corporation. Management corporation is given additional usage of service charges under Section 45(2) of the Strata Titles Act 1985 in which management corporation is allowed to invest the money in the management fund with approval at general meetings. Service charges can also be raised through the annual general meetings accordingly through votes. 

In my next post, I'll try to tackle the issue of liability to pay the service charge, how far the management can do to collect it and what's the liability of the management to give good service.

Can accessory parcel or common property in strata development be sold?

One of the question to be found in the sequel to 40 Questions You Should Ask Your Lawyer Before Buying A Residential Property in Malaysia. This new book will concentrate more on strata development. 40 more questions and now finishing up the final 10 questions. This is also the reason why I have not post up an entry here for quite some time. 

Here is a rough draft of the answer to the question 'Can accessory parcel or common property in strata development be sold?'. Most developers in Malaysia have done it one time or another but is it legal? 

Accessory parcel and common property are two different subject matters in a strata development although both can be seen to overlap each other. Accessory parcel is an extension of a parcel owned by the purchaser in a strata development which can be a building attached to the parcel or just a space labeled to show its connection with the parcel. In short, an accessory parcel is privately owned and comes together with a parcel when it was bought by the purchaser of a parcel within a strata development. As for common property or facility, it is shared by everyone with a strata development although some of these common properties are within the sphere of a parcel. Common properties are managed by the management of a strata development and they can be immovable or movable objects. Certain accessory parcels may look like the part of common properties and vice versa. The best example for this is none other than the parking lot. When a property is bought and sold in a strata development which has many parcels attaching themselves to each other with overlapping functions such as a floor to a parcel which can be a roof to another parcel, a parking lot which can be an accessory parcel to one particular parcel can exist next to another parking lot which is a common property. That is why it is important in the initial development plan of a strata development for the housing developer to survey, label and get approval for every inch of the strata development. That is why the plan for accessory parcel, especially if it is not attached to the sold parcel and the plan for common facilities are given the option to be attached in the First Schedule of the Sale & Purchase Agreement of a strata development. In order to answer to question whether the accessory parcel or common property can be sold or not, we need to differentiate the beneficiaries of each subject matter.

Accessory parcel is built within a strata development to be sold to a particular purchaser. In the preamble of the Schedule H of the Housing Development (Control and Licensing) Regulations 1989, it is stated that ‘….the Vendor (the housing developer) and the Purchaser has agreed to purchase the parcel with vacant possession….with accessory parcel with vacant possession distinguished as accessory parcel No: ………….. of Building Land Parcel No:……………… (which is delineated and shaded BLUE in the Accessory Parcel Plan annexed in the First Schedule)’. The additional wording which appears in a bracket ‘(hereinafter referred to as “the said Parcel”)’ means that an accessory parcel is part of a parcel within a strata development. As it owes its existence to a particular parcel, in a nutshell, an accessory parcel can be transacted as long as it belongs to that particular parcel.

In Section 34(2) of the Strata Title Act 1985, under the ‘Rights of proprietor in his parcel…’, it is also specifically stated that ‘No rights in an accessory parcel shall be dealt with or disposed of independently of the parcel to which such accessory parcel has been made appurtenant’. It means that each accessory parcel must co-exist with the parcel that it is attached to. As such, the only transaction which is available to the owner of the accessory parcel who is also the owner of the parcel is to rent out any particular accessory parcel under his control. If the accessory parcel is a parking lot, that parking lot can only be rented out on a monthly basis and not sold individually as it cannot be separated from the parcel. As all accessory parcels must be labeled to indicate which parcel it is attached to, it is impossible to be sold.

Common property or common facility is built by a housing developer for a strata development to be shared among the purchasers. Common property is generally whatever not within a parcel. If the accessory parcel is privately owned once it is sold to the purchaser, common property is publicly shared among the purchasers and is actually owned collectively by all the purchasers within the strata development. If the decision about any accessory parcel is to be made by the owner of the parcel, any decision about any common property is made by the collective effort of the purchasers through the management of the strata development. Management of strata development differs depending on the time the strata development is at. From the time of vacant possession to within one year of the date of vacant possession, the management will be under the control of housing developer. After that one year the common property will be managed by the joint management body until strata title is out which will then pass the management to the management corporation.

At each interval, the powers given to the management are properly spelt out. When in relation to common property, the housing developer has the decision to decide what initially can be built and labeled as common property or common facilities. Under Clause 17 of Schedule H of Housing Development (Control and Licensing) Regulations 1989, the housing developer ‘…shall, at its own cost and expense, construct or cause to be constructed the common facilities serving the housing development…’. Common facilities plan can also be attached in the First Schedule of the same agreement. Among the duties and powers given to the Joint Management Body under Section 8 of the Building and Common Property (Maintenance and Management) Act 2007 are to ‘…maintain the common property and keep it in a good state of good and serviceable repair;’ -Section 8(1)(a) and ‘to purchase, hire or otherwise acquire movable or immovable property for use by the purchasers in connection with the enjoyment of the common property;’ – Section 8(2)(d). The same provisions as replicated in Section 43 of the Strata Titles Act 1985 as duties and powers of the Management Corporation. 

In all the clauses and sections of the agreement, regulations and acts, common property can only be managed, maintained, controlled, enjoyed and added with movable property. There is nowhere in any of these provisions that a common property can be sold. However, if a shop or a retail space is labeled, marked and reserved as a common property, it can be rented out or even leased as it can be enjoyed by every of the owner(s) of the parcels within the strata development. In the Third Schedule, Strata Titles Act 1985, as By-Laws for the Regulations of Subdivided Buildings, under clause 3, the Management Corporation is allowed to ‘…by agreement with a particular proprietor grant him exclusive use and enjoyment of part of the common property or special privileges in respect of the common property or part of it’ That will also mean that a common property such as a car park, under the control of the management of the strata development, can be rented out or leased out to the owner of parcels within the housing development. For any shop(s) or additional parking lot(s) or any other space(s) to be sold by the housing developer which are other than the residential property within the housing development, such spaces have to be parcels and declared as such. As long as these spaces are labeled as common property, it cannot be transacted as such.  

Updates : Book and Work

The last post for this blog is in early March. 

It has been a very busy two months leading up to this moment. We were appointed to two of the biggest property companies in Malaysia which sell high-end freehold properties. We offered our service and when they appoint us into a select group of solicitors to handle documentations for the sale of their properties, our infrastructure took a beating that even the partners (especially me) who always had time for other endeavors find it hard to go out.

Then, one of our long-time valuable staff who we thought will one day be the heiress to this medium-sized legal firm decided to concentrate on her study and tendered her resignation. I personally was heartbroken as I had suggested and we, as a collective, decided nearly two years ago to send her to a local university's law school. We paid for her law school's fee and ask her to stay on board after she finished her study. She had worked with us nearly 5 years then. We had watched her grow and learned various trade secrets which she then shared around. We found her to be the best candidate.

We gave her the space and time to take leaves without question. During her exam weeks, she did not have to come to the office at all. We were willing to sacrifice the time and in some way, some money too, in order to ensure the legal firm's next generation is well in place. As it was a project I had suggested, I consider it a failure on us to retain her. Her excuses of being under pressure due to her study and the feeling that she was more of a burden to her colleagues due to her absence, did nothing to lessen the pain of a failed succession plan project. I guess we need to go back to the drawing board.

However, nothing can stop me from making this lifelong project of building a successful business. To a certain extent, the business is already successful though the growing pain is still very much evidence. Reading a New Yorker's article about Uniqlo about Uniqlo having more staff than enough to man each of its store in order to ensure every customer's need is tended to at any given moment , we decided to fill up the void with more staff. We anticipated our good work may just bring us more business. It would also be good for us to ensure our clients are treated the instance the need anything too.

As for my book, I have abandoned writing it for some time until something gave me a second wind to go back writing it. In April, I was invited by Penang Regional Development Authority (PERDA) to give a one-day talk. I recruited my partner and senior associate to accompany me and we had a great time disseminating knowledge and answering questions, some which I never thought of hearing, which made me decided there is still a need for a sequel to my book. I am now halfway in writing the book and is giving myself the whole of 2012 to finish it.

I am also is reading the book 1Q84, by Haruki Murakami, one of my favorite Japanese author, which has a character who is a writer and Murakami's idea of why one writes can be seen to be manifested in that particular character. 

As long as I am motivated to write, I will...

Office : Do we still need one?

One of our main grouse every day is the commuting that we have to make to reach our office. As we have now reached the year 2012, I am wondering about the need for the existence of office. If we dissect the television series The Office, in a situation where people comes to their office which sells paper, the series never look like that the office ever need to exist. The people keep on coming and going. The people is always out to sell the paper. The account department can exist anywhere as long as the record of transactions are kept.

What do we use office for? We use it to type out our work. We need computers for that. We have mobile devices for that. Laptops and tablets. Computers can be linked securely virtually with each other, right? Google and IBM have tools for that if I am not mistaken? Storage space? Isn't cloud computing the thing everyone should jump on at the moment? How about meeting? Can't work be distributed among the staff with use of emails and meetings be about "Where are we now?" than the need to sit down and ask everyone how their work is going. Even my own legal firm rarely got visitors as we always meet client at wherever is convenient for them.

I think we are too traditional whenever we think of the existence of office as a need. We have the biggest businesses in the world like Google and Apple which use office as playgrounds. We have people feeding businesses in the world like Starbucks and McDonald's as they congregate there to hold meetings. When I was writing my books, I tend to go out and write them at whatever cafes I can find. My house has an office which my wife uses more than me as I use sofas and lounge chair to do any work done.

The only institution which I consider really needs an office or buildings are banks. Offices or buildings for banks or financial institutions are more than just offices. They are assets as they can't actually holds money as assets as the thing they trade in money. Then, there is still the issue whether we need real fiat money to transact which is another issue altogether. Maybe storage is an issue like my legal firm which has to deal with such matters. The only thing that makes me wonder is if everyone is not going to office anymore and have offices in their houses, why do property developers still keep on building offices?

All this issue about the need for an office is boils down to the fact of a new social media start-up of mine. Which has an office but does not really being used. So, I am going to add a few items to make into a playground or more of a hangout place. As it is a penthouse which has a nice view,  I want it to be a barbeque place with pool table inside and beanie bags all around.

Isn't work is for you to make money and survive the world? Then, why has it become a thing we live for? I long for the day we make a living out just so that we can feed ourselves and not die of starvation.

Dawn (Pakistan) article on Property Investment in Malaysia

Was commissioned by our Counsel General in Karachi, Pakistan, En. Abu Bakar Mamat to write an article about investing in the property market in Malaysia. It was to come out in Dawn, a Pakistani newspaper. It came out last Sunday. Here is a snapshot of the article in Dawn (sent over through Twitter by En. Abu Bakar Mamat).

Although Dawn have an online portal : Dawn.com, I couldn't find a link to show the full article. For the sake of posterity and in case you are curious, I reproduced the article below :

Malaysia is a great property investment destination. As a well-known Islamic country with great infrastructure, accessible through various points of entry and with a predictable climate, all the cost and returns from any investment you make can be easily calculated from the offset.

Anyone above the age of 21 can invest in property in Malaysia including foreigners. The only restrictions for foreigners are the price of property that they buy must be above RM500,000-00 (USD$166,000-00). Another form of restriction is the type of property that they can buy must not be the native or bumiputra properties and areas in certain areas due to the restrictions found on the tittles of the land as imposed by state governments. A property tax of 10% is levied on the profit you make if you sell a property within 2 years of purchase but it will be lowered to 5% for profit made between 2 to 5 years. After the 5th year, no tax is levied for residential property.

The usual popular properties easily bought by foreigners are freehold properties in the middle of towns like Malaysia's capital, Kuala Lumpur or the beautiful island state of Penang. Apartments or condominiums there can easily reach the price of RM1 Million (USD$330,000-00) with a possible returns of 8% per year. The lands there are easily bought and transacted by foreigners as the land offices in these towns have vast experience in deals involving foreigners.

Property loans for foreigners can be obtained up to 80% of the property price but it depends on the collateral that you can offer such as fixed deposit cash emplaced at the banks. It will be easier if you join the Malaysia My Second Home (MM2H) program so that you can enjoy multiple entries visa and various other convenience.

It will take between 6 months to one year for a property transaction involving for foreigners depending on the type of property that you buy. The usual transaction involves the booking by paying a 2% deposit, another 8% upon the signing of the sale agreement and then the balance of 90% will depend on how much property loan you have obtained. Any purchase of property by a foreigner in Malaysia will require consent from the land office and this usually takes up to 3 months. 

Upon arrival in Malaysia if you are on a property hunt either for investment or holiday homes, consult your local real estate agent or lawyer.