5 Things to Note in a Collective Sale
Written by Lee Ee Yang
Since the start of 2021, there have been at least 10 projects launched for collective sale, with more than 20 other developments (including Golden Mile Complex and Thomson View) having started the en bloc process, as reported in the Straits Times on 14 March 2021.
Many of us recall the last en bloc fever in 2016 before the 2018 cooling measures doused the fire, which saw projects such as Tampines Court, Tulip Gardens, and Shunfu Ville successfully sold en bloc. Other projects which did not find similar success would be looking forward to hop on the bandwagon this round, riding on renewed interest of developers due to the land bank crunch. In fact, this year saw Maxwell House sold en bloc to a consortium consisting of Chip Eng Seng and SingHaiyi for S$276.8 million, above the reserve price of S$268 million.
1. Collective Sale Committee
Prior to 2008, the formation of a collective sale committee (“CSC”) was not regulated and a group of pro-sale owners can start a collective sale attempt anytime by forming an ad hoc sale committee.
Pursuant to the amendments to the Land Titles (Strata) Act (“LTSA”) in 2008, an en bloc sale attempt can only commence if the owners have discussed the matter at a general meeting, and have agreed to explore possibilities of a collective sale with the formation of a CSC by way of an ordinary resolution (i.e. by simple majority of owners present at the meeting). The owners will also elect the members of the sale committee, usually at the same general meeting.
It should be noted that the number of CSC members cannot be less than 3 and not more than 14. The election of the CSC is an important process because, arguably, the identity of the CSC members would be one of the most important factors, if not the single most important factor, in the success of the collective sale. For a large development, especially where there is a larger talent pool, it is important to elect members with the requisite experience, e.g. familiarity with the real estate industry and experience in previous collective sale attempts.
The size of the CSC is usually pegged to the size of the development and it is important to ensure adequate representation of different blocks in the development. Quite apart from the fact that it is easier to influence neighbours staying in the same block whom you already know due to pre-established relationships, it is important for the different unit types to be adequately represented in the CSC as it will be relevant to the issue of the method of apportionment of the sales proceeds, as will be covered later. It is important for the CSC members to be like minded and united in their approach to the collective sale and not end up having disagreements amongst themselves which might derail the sale process.
Most CSCs will also have members of the Management Council (“MC”) being represented in the Committee. Sometimes, the Chairman of the MC is also the Chairman of the CSC. There is wisdom in this because the members of the MC would be knowledgeable about the history of the estate and would also have built up goodwill with the owners themselves.
But perhaps the most important process in the election of the CSC members is that a person standing for election to the sale committee must declare any potential and/or actual conflict of interest with his duties or interests as a member of the CSC arising from, amongst others, his interest or relationship (if any) with a property developer, property consultant, or law firm. The LTSA specifically states that the election of any person who fails to abide by the declaration shall be void. Any failure to adhere the procedure could result in the failure to obtain a sale order (whether at the Strata Titles Board or the High Court).
2. Professional consultants
It is imperative that competent and experienced professional consultants are appointed by the CSC to guide them through the whole collective sale process. This would usually be the first task of the CSC after being elected to the committee.
There are 2 groups of consultants involved: marketing consultants and lawyers. The appointments of the marketing consultant and the lawyers must be considered at a general meeting. Unless otherwise decided at the general meeting, a CSC can decide on the appointment of the property consultant and the lawyers.
Marketing consultants
The role of the marketing consultants include:
Making their rounds in the development to talk to owners and clarify queries with a view to secure their signature to the collective sale agreement
Advise on the reserve price and the method of apportionment
Marketing the property for sale to developers whether through the tender process or private treaty
The selection of the marketing consultants is usually based on the following factors:
Experience in handling en bloc sales and track record
Size of the team dedicated to the process
Knowledge of the market trends and specific marketing proposal for the development
Their fee structure
Marketing consultants usually charge based on a success fee, being pegged to the sale price. It is common for their fee structure to include an incentive fee (i.e. a higher percentage) for the portion of the sale price that is over and above the reserve price. Such a fee proposal could be attractive for the CSC given that this would incentivise the marketing consultants to do their best to achieve a sale price over and above the reserve price.
Lawyers
The role of the lawyers include:
Drafting the collective sale agreement and explaining the terms to the owners at the general meeting
Witnessing the signing of the collective sale agreement
Drafting the tender documents and conditions of sale for private treaty
Making the application to the Strata Titles Board to obtain the collective sale order
Being responsible for the completion of the title of the development to the purchaser developer
In selecting the legal team, it is important to bear in mind that the collective sale process presents both real estate/conveyancing as well as litigation elements. It is important to choose a team that has experience in not only the conveyancing aspects but also in applying to the Strata Titles Board or High Court for approval and dealing with objections from minority owners.
3. Collective Sale Agreement
The Collective Sale Agreement (“CSA”) sets out the terms that govern the relationship between the owners that have agreed to the collective sale. The CSC is required to discuss the terms of the CSA at a general meeting.
The 2 most important terms in the CSA would be the reserve price as well as the method of apportionment. The reserve price is the minimum price the property is to be sold at and the method of apportionment sets out how the sale proceeds are to be distributed to the respective owners of the development.
Reserve price
In setting the reserve price, the CSC would have to be mindful of owners’ expectations as well as market demand. A reserve price that is too low would be difficult to find acceptance from owners and might prove to be a stumbling block in obtaining signatures to the CSA. However, a reserve price that is too high may not attract attention from potential purchasers. The reserve price will have to be carefully crafted with reference to successful collective sale prices within the vicinity as well as the development potential of the site.
The collective sale agreement would usually provide that should an offer be received from a potential purchaser that is lower than the reserve price, the CSC can receive a fresh mandate from the owners to accept such offer by signing a supplemental agreement to the CSA.
Method of apportionment
The method of apportionment (“MOA”) is another important aspect of the CSA that has to be carefully thought through in balancing the interests between different unit types. The MOA is usually derived by giving weightage to at least 2 of these 3 factors:
Unit size
Share value
Valuation
Owners of bigger units would expect to receive a higher proportion of the sale proceeds. However, in developments whereby the owners of smaller units pay the same amount of maintenance fees for the estate due to them having equal share value with the bigger unit types would argue that they should be receiving the same amount of sale proceeds. Valuation is also used as an objective “leveller”.
One thing to take note is that the signing of the CSA by any owner will have to be witnessed by the lawyers if signed in Singapore and the lawyer will also have to explain the legal terms and liabilities and address any doubts that the owner may have. An owner is also allowed to change his mind at any time during a 5-day cooling off period after signing the CSA. However, he will only be allowed to make use of the cooling off period once for the same CSA.
4. Sale process
Once the requisite number of signatures have been obtained from the owners (either 80% or 90% of both share value and strata area, whatever the case may be), the collective sale can be launched.
Every launch for sale must be by public tender/auction to enhance transparency to the sale process. However, the sale committee can engage in follow-up negotiations with any bidder, especially if the public tender/auction fails to achieve the price acceptable to the sale committee, to obtain the best deal for the owners. A sale by private treaty must be concluded within 10 weeks of the close of the tender/auction.
There should be a valuation from an independent valuer, on the worth of the collective sale site as at the date of the close of tender. The report should be submitted on the date the tender closes. The report will assist the sale committee in the evaluation of the bids and to give assurance to the owners that the sale committee will not sell the development at a price that is below the market value.
In cases of sale by private treaty, it is common for the potential purchaser to initiate negotiations and finalise the terms of sale at short notice. It is also common for potential purchasers to introduce fresh clauses into the sale and purchase agreement at the negotiations itself, such as conditions precedent. For example, the conditions precedent could provide that the sale and purchase can be rescinded should the potential purchaser fail to obtain certain approvals from the regulatory authority. As such, it is important for the CSC guided by their professional consultants to be certain that such approvals can be achieved before agreeing to the clause in question.
5. Strata Titles Board approval
An application for a collective sale to the Strata Titles Board (“STB”) can only be made if there is consent from the owners holding at least 80% of both share value and strata area if the development is more than 10 years old and 90% if the development is less than 10 years.
The STB was established to mediate and hear en bloc applications when it is made to the Board pursuant to the LTSA. Applications will be heard by a three- or five-member STB, presided by the President or one of his Deputies.
A minority owner (i.e. unit owner who has not agreed to the sale in writing) may file an objection to the STB using the prescribed form within 21 days after the notice of proposed application has been served on all owners. Where no objection is filed against the en bloc application, the STB will fix a date for a hearing.
Where objections are filed against the application, the Board would mediate and assist parties to resolve the dispute. Should mediation fail, the matter will be referred to the General Division of the High Court for the dispute to be resolved.
It is important to bear in mind that the General Division of the High Court or the STB will not approve the sale should it be found that the transaction is not in good faith after taking into account only the following factors:
the sale price for the lots and the common property in the strata title plan;
the method of distributing the proceeds of sale; and
the relationship of the purchaser to any of the subsidiary proprietors.
In the case of Ngui Gek Lian Philomene and others v Chan Kiat and others (HSR International Realtors Pte Ltd, intervener) [2013] 4 SGHC 166 which involved the collective sale of Thomson View development, it was discovered that the marketing agent had offered payments of varying amounts to four subsidiary proprietors (“SPs”) in return for their undertaking to sign the CSA so that the 80% consent threshold would be reached (“the Incentive Payments”). The High Court held that the marketing agent’s conduct amounted to bad faith in the transaction involving the method of distribution of the sale proceeds within the meaning of s 84A(9)(a)(i)(B) of the LTSA.
The reasoning was that since the marketing agent would only receive its commission if the requisite 80% consent threshold was achieved, the Incentive Payments did not come from commission that the marketing agent had already earned but from its future commission payable by all the SPs. Effectively, the marketing agent was reducing its commission by promising the Incentive Payments. This reduction of commission would ordinarily result in a corresponding increase in the net sale proceeds which would benefit all SPs but, in this case, such a reduction only benefitted the four SPs who were promised the Incentive Payments.
After the approval for sale has been obtained, the sale can proceed to completion. This would entail the owners handing over vacant possession of the respective units in exchange for their share of the sale proceeds. The monies in the sinking fund and management fund shall also be returned as soon as practicable after completion to the owners of the development in shares proportional to the contributions levied on the owners by the management corporation.
Conclusion
Given that the process of the collective sale from the election of the CSC to the completion of sale can stretch up to 2 to 3 years, it is important to select a good legal team with the requisite experience to provide sound, practical, and workable legal advice.
Disclaimer: The information provided does not constitute legal advice and does not purport to give rise to a lawyer-client relationship. You are fully responsible for seeking specific legal advice from a lawyer before taking any legal action. Should you require legal advice, you may contact us at info@covenantchambers.com.