Jan 21, 2010, seemed to be a very significant day for the development of Malaysian land law, with headlines nationwide lauding another landmark decision that corrected a “blatant error” which had stood as good law for the better part of the last decade. As much as we celebrate this long awaited “justice”, does that mean that land investment in Malaysia has just resumed its aura and is now foolproof against any form of forgery or fraud?
The recent decision by the Federal Court in Tan Ying Hong v Tan Sian San & 2 Ors (2010), for all intents and purposes, only restored a legal position consistent with the wording and intents of Section 340 of the National Land Code — nothing more, nothing less.
So the next question is whether the said section of the National Land Code is good enough to protect property investors. The Federal Court’s decision has merely put to rest a very technical argument in the interpretation of Section 340 and confirmed that the indefeasibility accorded under the Land Code is one that is deferred and not immediate. In fact, there were many cases after Adorna Properties Sdn Bhd v Boonsom Buoyant (2001) which dealt with similar issues, yet were confined to the common law doctrine of judicial precedent, which upholds only the decision of the highest court of the land.
The decision in Tan Ying Hong v Tan Sian San & 2 Ors was seen by many as a mere formality following notable decisions by the Court of Appeal in its attempt to interpret Section 340 without affecting the judgment in Adorna Properties Sdn Bhd v Boonsom Buoyant by imposing higher (perhaps unreasonable) burden on the purchaser acting in good faith like in Au Meng Nam & Another v Ung Yak Chew & Others (2007). Therefore, if the decision in Adorna Properties Sdn Bhd v Boonsom Buoyant was wrong and is now overruled by favouring the innocent original owner, it now imposes a very high burden on the purchaser.
In what circumstances would a genuine purchaser be protected against good considerations paid to a potential fraudster? If the ownership information recorded in the land registry cannot be immediately relied upon, what kind of due diligence is available to the purchaser? What are the other avenues in verifying the title and how to best investigate the authenticity of the owner? This a real test for even the most seasoned of purchasers and the most experienced of lawyers that attend to real estate transactions in this country. Surely, good deals and fire sales can happen in a free market motivated by supply and demand; such occasional purchasers should not be adversely implicated as a result of acting in good faith.
In many ways, the Federal Court in Adorna Properties Sdn Bhd v Boonsom Buoyant highlighted a very real threat to Article 13 of the Federal Constitution, which confers the right to property ownership. It highlights that perhaps the owner of the property is in a better position to protect his or her interest, compared with an intended purchaser. Therefore, the Federal Court decided almost a decade ago that the law should favour a bona fide purchaser, thus the immediate indefeasibility. Yet, there are parties involved who are in better control than the owner or purchaser. Surely, the keeper of the land register has a role to play. That is, of course, within the realm of the respective states as provided under the constitutional framework of our federated nation.
With the Federal Court’s pronouncement in Tan Ying Hong v Tan Sian San & 2 Ors, the question remains: what happens to those aggrieved owners over the past decade? One thing is for sure — the good law in Tan Ying Hong v Tan Sian San & 2 Ors does not apply retrospectively. Furthermore, it would be impossible to return land ownership to the aggrieved owners as subsequent development and transfers would have prevented it in most cases.
The law makers, in preparing the legal framework for land ownership in Malaysia, has chosen Torrens as a basis and has adopted the doctrine of deferred indefeasibility based on Section 340 of the National Land Code. In this regard, whether rightly or wrongly, there remains an aggrieved innocent party as a result of foul play or a fraudulent scheme, in which a bona fide purchaser paid good money for the real estate. Until and unless there is a full adoption of the Torrens system like that adopted in Australia, British Columbia and New Zealand in establishing a state compensation fund, confidence in the land registry system will remain questionable.
If this status quo is not rectified, the banking system will also be affected as the most secure form of security in real estate as perceived by most is now not so secure after all. RHB Bank, in the case of Tan Ying Hong v Tan Sian San & 2 Ors, is an obvious testament to this.
Establishing a compensation fund is a natural challenge for our nation as land is administered within the sovereign power of each state, while revenues are mostly concentrated at the federal level for onward distribution. Strong and concerted political will is required to ensure contribution to the compensation fund, perhaps from a portion of the transactional stamp duties imposed on real estate. Yet, good governance practices must be in place to protect the fund from abuse.
Presuming that the challenge of setting up and administering a compensation scheme can be overcome, the question remains as to whether we should practise the current deferred indefeasibility that seems to protect the innocent owner or make a radical change to adopt the immediate indefeasibility that favours a bona fide purchaser.
From a practical point of view, the records at the land registry will be of paramount importance as they will probably be highly relied upon by its users. This will reduce an unreasonable amount of due diligence on the part of the purchaser. If it is proven that the purchaser has been prudent and acted in good faith, he or she ought to be protected too, with the compensation fund acting as a safety net for any aggrieved party.
Our judiciary had spoken its mind by sending signals in the right direction, perhaps as early as Adorna Properties Sdn Bhd v Boonsom Buoyant, while Tan Yin Hoong v Tan Sian San & 2 Ors is merely a correction in the interpretation of a law that may not be suitable today as crime has become increasingly sophisticated.
Much effort and resources have been invested to promote Malaysia as an international real estate investment destination. For the legislative and executive bodies, the time to act is now. Defer no more — immediate rectification is required.
Chris Tan is managing partner at law firm Chur Associates. He also responds to real estate-related legal questions posed on The Edge’s online property portal, www.theedgeproperty.com.
This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 791, Feb 1-7, 2010.