When incentive payments are made to minority owners to secure their consent to a collective sale, is the ‘good faith’ of the transaction impugned such that an application for collective sale will not go through?

The answer, as the cases illustrate, would depend on who is making the incentive payments and the duties (if any) it owes to the proprietors.

Incentive payments to minority owners

Minority owners who object to a collective sale may scuttle a potential lucrative deal with a developer, especially where their consent is required to reach the requisite threshold for an application for a collective sale to be made. Thus, some parties offer incentive payments to the minority owners in a bid to secure the minority owners’ consent to achieve the requisite threshold.

The making of incentive payments per se does not run foul of the provisions of the Land Titles (Strata) Act (the “Act”). The Act only requires the sale committee’s consent for the making of additional payments in the particular instance of an order to increase the sale proceeds of an objecting minority owner: s 84A(7A) of the Act. There is also no general implied term prohibiting the making of inducement payments to minority owners: see Choon Cheng and others v Allgreen Properties Ltd and another appeal [2009] 3 SLR(R) 724 (“Allgreen”) (Regent Garden). In Allgreen, the Court of Appeal rejected the argument that there should be a blanket prohibition on the making of incentive payments, remarking as follows:

… such a term would mean that even if some of the majority owners, who might for personal, or even noble, reasons be keen to ensure that the sale is carried through, they would be unable to incentivise any or all of the minority owners to alter their stances for the wider common good.

Where incentive payments are permissible

Thus, the Courts have held that the making of incentive payments directly to minority owners in the following scenarios is permissible:

• by majority owners: In N K Rajarh and others v Tan Eng Chuan and others [2013] 3 SLR 103, the High Court remarked that majority owners (who are not members of the CSC) may make inducement payments privately and directly to minority owners.
• by developer: In Mohamed Amin bin Mohamed Tadib v Lim Choon Thye [2009] 3 SLR 193 (“Mohamed Amin”) (Regent Court), the developer offered additional payments to minority owners, who would have otherwise suffered financial loss from the collective sale, to make up for the shortfall so that the sale could proceed. The High Court found there was nothing objectionable about the purchaser providing the additional payments to the minority owners.

Where incentive payments are not permissible

However, where the incentive payments are made by parties who are subject to duties of good faith and fidelity in relation to the minority owners, incentive payments made in breach of such duties would be objectionable and infect the entire transaction:

• CSC members making incentive payments to some minority owners: In N K Rajarh and others v Tan Eng Chuan and others [2014] 1 SLR 694 (“N K Rajarh (CA)”) (Harbour View), majority owners who were also members of the Collective Sale Committee (“CSC”) made an incentive payment of $200,000 to only one of three minority owners to secure the requisite consent under the Act. The Court of Appeal dismissed the application for collective sale, finding that the transaction was not in good faith as the CSC had breached its duty to act even-handedly as between the consenting proprietors and the dissenting proprietors.
• marketing agents making incentive payments to some minority owners: In Ngui Gek Lian Philomene and others v Chan Kiat and others (HSR International Realtors Pte Ltd, intervener) [2013] 4 SLR 694 (Thomson View), the marketing agents made incentive payments to a select group of dissenting owners to secure their consent so that the 80% threshold would be reached. The High Court dismissed the application for collective sale on the basis that the sale was not in good faith. By making the incentive payments to the select owners, the marketing agents had placed themselves in a position of conflict, preferring the group’s interests of the other objecting owners.

Concluding remarks

The Court of Appeal’s rejection in Allgreen of a blanket ban on the making of incentive payments to minority owners stems from the acknowledgement that such inducement payments may be beneficial in certain circumstances (e.g. as Mohamed Amin illustrates), and consistent with Parliament’s intent of achieving urban renewal.

However, incentive payments made to achieve the requisite consent level would not be legitimate where they involve a breach of duty owed by the CSC and/or the marketing agents to the minority owners. As the Court in N K Rajarh (CA) emphasised, procedural fairness in arriving at the requisite consent level was crucial since the minority owners would be obliged to sell their properties without having consented to the collective sale if that threshold is met.