03 May 2012
| last updated at 08:06PM
The case for converting leasehold to freehold status
WIN-WIN: Huge revenue can be derived by making it easy and equitable to convert leasehold to freehold status for residential land
Asking my friend to buy leasehold property is really a tough call. He says that he will not touch leasehold property because the value decreases over time. Well, he’s not totally right or wrong. Prices of leasehold properties are still subject to market forces but market value indeed starts decreasing when the outstanding leases are nearing its expiry date.
That’s when banks begin to restrict their lending based on the length of lease left. House owners of Section 1 township, Petaling Jaya, should know as most of their leases have about 20 years left and they are concerned that the State will take back the land when the lease expires.
Fortunately, the state government has recently given them a new lease of life. It implemented a new land policy designed to provide a more equitable renewal of leases for individual property owners. Prior to this, there were worries that if they were unable to pay the high renewal premium, their homes would be taken back. Many of the affected are retired senior citizens, they have difficulty getting loans to pay the premium.
The new scheme allows an individual owner of leasehold land to renew their lease up to 99 years with a nominal payment of RM1,000 provided that when he sells the property to a third party, the relevant premium assessed at the time of sale is paid. A condition to this effect will be endorsed on the title.
Transfers to children, parents and property under probate or letter of administration are not affected and can be done without further payment of premium. This means the individual owners can be confident of continuing to live in their homes and passing on their properties to their children without fear of the lease expiring on account of their inability to pay.
Alternatively, owners of individual leasehold property can elect to pay the full amount and extend his/her lease. The extended lease tenure has the benefit of allowing the property to be sold to a third party or charged to the bank for a loan.
Easy conversion will generate revenue: Since the State adopted a change in policy, and the market also wants a change, I would like to echo calls for converting leasehold to freehold status for residential land only and I will cite my reasons for this (for the time being, we exclude industrial/mining/reserve/commercial land).
First of all, what is the purpose of leasehold tenure? To my knowledge, it is for the purpose of ‘control’ and for generating state revenue. The question is, has the leasehold tenure achieved its objective?
Theoretically, when the lease expired, all land and building will revert back to the State. Let’s look at a hypothetical case, say a large number of owners default payment or are unable to pay the premium, would the state take back its land and building?
I don’t think so, doing so would be ‘political suicide’ for any state government as this matter would become a ‘moral and social’ issue.
What the Selangor state did was to allow the landowners to defer renewal premium payments by paying a nominal consideration upfront under its new land policy.
So you see, the objective of state revenue collection has been compromised. The primary priority of collection of revenue has been relegated to become a secondary issue. Secondly, if we want to argue about ‘control’, the state government can still invoke the ‘Acquisition Act’ to acquire freehold/leasehold properties for national interests. (Actually, the state authority can alienate freehold or leasehold property but after the 1985 amendment to the National Land Code, the State rarely alienates freehold tenure).
If the State is considering a policy to alienate land to freehold tenure, it can come up with a one-time equitable formula for the conversion premium. And to safeguard long-term revenue in order to compensate for the ‘loss of short-term revenue’, why not consider a proposal to increase the quit rent and assessment for those who elect to convert to freehold status?
In my opinion, if the state goes for such a policy, I think there will be a high probability of owners converting to freehold property. Not only will it generate huge state revenue in the short term, but money in hand is always better than future value of money.
Furthermore, future revenue collection is also fraught with uncertainty and is random at best. What say you?
Chris Yong can be reached at Rochester_properties@yahoo.com