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Understand the Sale and Purchase Agreement (SPA)

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When it comes to buying real estate in Malaysia, making sure you fully grasp the property sales contract is essential.

Indeed, not fully understanding the document you will sign can lead to financial losses, including the forfeiture of deposits, payment of penalties, unexpected costs, legal expenses, and potential poor investment decisions.

We've heard countless stories of people making costly mistakes when signing their property agreement in Malaysia. We want to help you avoid the same experience.

We'll give here a very brief overview regarding the property sales contract in Malaysia ; if you want a full checklist, please check our property pack for Malaysia.

What is the Sale and Purchase Agreement (SPA) in Malaysia?

In Malaysia, the property purchase agreement you're referring to is commonly known as the Sale and Purchase Agreement (SPA).

It's a crucial document in real estate transactions, outlining the terms and conditions of the sale between the buyer and the seller. This agreement is legally binding once both parties sign it, ensuring that both the buyer and seller adhere to their respective responsibilities.

The SPA works as a guarantee for both parties. For the buyer, it assures that the property will be delivered as agreed, while for the seller, it guarantees payment according to the agreed terms.

The agreement typically details the property's description, the sale price, payment schedule, obligations of both parties, and any other conditions of the sale.

International buyers or non-residents have some specific considerations to be aware of.

Malaysia has regulations in place regarding foreign ownership of property, which may include minimum purchase values and approved property types. It's essential for international buyers to be aware of these regulations to ensure a smooth transaction.

The signing of the SPA usually comes after the initial booking phase.

First, you would pay a booking fee or earnest deposit to reserve the property. This deposit is usually about 2-3% of the purchase price.

After this, within a stipulated period (often 14 days), the SPA is signed, and a further payment is made, bringing the total deposit to around 10% of the purchase price.

Comparatively, the process in Malaysia might differ from other countries, particularly regarding the regulations for international buyers and the specifics of the deposit amounts.

In some countries, the deposit percentage or the structure of the agreement might vary. The legal requirements and the specific terms of the SPA can also differ based on local real estate laws and practices.

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What should be included in the property purchase agreement in Malaysia?

In Malaysia, the key law governing property transactions, including the Sale and Purchase Agreement (SPA), is the Housing Development (Control and Licensing) Act 1966 for properties developed by a developer and the National Land Code 1965 for individual or sub-sale properties.

The SPA is a critical document in real estate transactions, and it must adhere to the stipulations outlined in these laws.

The SPA should contain several mandatory clauses. These include a detailed description of the property, the total purchase price, payment terms (including the deposit and the payment schedule), and completion date of the transaction.

It should also clearly state the obligations and responsibilities of both the buyer and the seller. This includes matters such as the condition of the property at the time of handover and any penalties for late payments or failure to complete the transaction.

Additional clauses might cover aspects like the terms of access to the property for valuation and inspection, arrangements for rectifying defects, and the conditions under which either party can terminate the agreement.

It's important for these clauses to be clear to prevent any future disputes.

Conditions or contingencies can be included in the SPA. These might involve the buyer securing a mortgage or the sale being subject to a satisfactory property inspection.

Such contingencies protect the interests of the parties involved, particularly the buyer, ensuring they're not legally bound to purchase until certain conditions are met.

In Malaysia, the SPA does not necessarily have to be authenticated by a notary.

However, it must be stamped to be legally valid, which involves paying a stamp duty. This process can be handled by a lawyer who specializes in property transactions.

Real estate agents in Malaysia play a role in facilitating the transaction, helping in finding the property, negotiating the deal, and guiding through the initial stages of the agreement.

However, they are not typically involved in the legal aspects of drafting the SPA. This task is usually undertaken by a lawyer to ensure that all legal requirements are met and the interests of both parties are adequately protected.

What's the signing process like?

In Malaysia, the signing process of the property purchase agreement, or Sale and Purchase Agreement (SPA), is a structured and formal procedure.

Here's a detailed breakdown.

The SPA is a bilateral agreement, meaning it must be signed by both the buyer and the seller. In cases where there are multiple buyers or sellers (like joint owners), each party must sign the agreement. For instance, if a married couple is buying a property, both must sign.

Both parties need to provide personal identification, usually in the form of a National Registration Identity Card (NRIC) for locals or a passport for foreigners.

Additionally, the seller needs to provide proof of property ownership, such as the title deed. Other relevant documents may include proof of financing for the buyer and the property’s original purchase agreement for the seller.

Here is the signing process and timeline:

Signing Process Description

Preparation of SPA

After agreeing on the sale terms, the SPA is prepared, typically by the buyer's lawyer.

Review and Amendments

Both parties review the SPA, and any amendments are made prior to signing. This review period can vary but generally takes a few days to a week.

Signing Appointment

Once the SPA is finalized, a signing appointment is scheduled. The time frame for this depends on the readiness and availability of both parties, but it usually happens within a week or two after the SPA is prepared.

Physical Presence

Traditionally, both parties are physically present at the signing, often at the lawyer’s office. However, with advancements in digital technology, remote signings may be possible, especially for international buyers, but this should be confirmed with the involved legal professionals.

The SPA typically has a deadline for signing, often within a certain period after the booking fee is paid (usually within 14 to 30 days). The contract remains valid until all obligations are fulfilled, typically marked by the transfer of property and completion of payment.

After signing, the SPA must be stamped at the Stamp Office to be legally effective. The lawyer usually handles this process.

Registration of the property transfer with the Land Office occurs after full payment and fulfillment of all conditions in the SPA. This process can take several weeks to a few months, depending on the complexity of the transaction and local office workloads.

Once the SPA is signed and stamped, making amendments is not straightforward. Any changes would require agreement from both parties and potentially entail additional legal processes.

If significant issues arise after signing, it's usually handled through addendums or separate agreements, depending on the nature of the change.

The entire process, from signing the SPA to completing all necessary paperwork and approvals, can vary.

Generally, it takes a few months. The exact time frame depends on various factors like loan approval for the buyer, the efficiency of the legal and property agents involved, and the responsiveness of local authorities.

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How is the payment handled when signing a property purchase contract in Malaysia?

In a real estate transaction in Malaysia, understanding the financial aspects related to the property purchase agreement is crucial.

Here’s a breakdown of what you need to know.

When you sign the Sales and Purchase Agreement (SPA), you are typically required to pay a down payment. This is often part of the initial booking fee or earnest deposit you would have already paid when reserving the property.

The total down payment is usually 10% of the property's purchase price. This includes the booking fee, which is around 2-3% of the purchase price.

In addition to the down payment, you may need to cover legal fees, stamp duty for the SPA, and disbursements. These fees are separate from the down payment and are often paid to the legal firm handling your property transaction.

The down payment is usually paid to the seller's account or to an escrow account managed by the legal firm handling the transaction. This ensures that the funds are securely held until the transaction progresses.

The down payment is typically due upon signing the SPA. The remaining balance of the purchase price is then usually paid according to the payment schedule agreed upon in the SPA, often linked to the construction progress for new developments or a timeline for transfer of ownership for existing properties.

In Malaysia, you are required to pay stamp duty on the transfer of property ownership. The rates vary based on the property value.

Additionally, there may be Real Property Gains Tax (RPGT) applicable for the seller if the property is sold within a certain period after purchase.

The down payment amount is generally standard (usually 10%); however, there may be room for negotiation depending on the seller's circumstances and the market conditions.

If the sale falls through due to conditions such as failed financing or a negative property inspection, the down payment may be refundable. This depends on the terms of the SPA and any contingencies included therein.

Typically, the down payment should come from your personal funds. Mortgage loans are generally for the balance of the purchase price after the down payment.

Your attorney ensures the legal aspects of the payment are in order, including holding funds in escrow if required. The real estate agent may assist in negotiations but is not usually involved in the financial transactions.

You can and should request a receipt or confirmation of payment for your down payment. This is a critical record of your transaction.

Apart from RPGT for the seller, as a buyer, you should be aware of the stamp duty charges.

Both parties may also have other tax considerations based on their individual financial circumstances.

What are the potentials risks and pitfalls?

You might be interested in reading our article about the common risks and pitfalls surrounding a property transaction in Malaysia.

In Malaysia, the property purchase agreement, or Sale and Purchase Agreement (SPA), has its set of risks and pitfalls that both buyers and sellers should be aware of.

Generally, once the SPA is signed, neither the buyer nor the seller can simply withdraw from the agreement without facing consequences.

There are specific circumstances under which withdrawal is permissible, such as breach of contract or failure to meet certain conditions.

Unlike some other countries, Malaysia does not typically have a cooling-off period for private property sales once the SPA is signed. This means that after signing the SPA, the commitment is legally binding, and backing out can have legal implications.

If either party wishes to withdraw due to valid reasons, like the inability of the buyer to secure financing, or the seller's failure to meet certain obligations, it must be stipulated in the SPA as a contingency.

Without such clauses, withdrawing can lead to legal and financial penalties.

If one party fails to meet their obligations outlined in the SPA, the aggrieved party can seek legal recourse.

Penalties may include forfeiture of the deposit (in the case of the buyer defaulting) or compensation claims (in the case of the seller defaulting).

The exact penalties depend on the terms of the SPA. For buyers, the deposit may be forfeited if they fail to complete the purchase. For sellers, they may have to return the deposit along with additional compensation.

Real estate transactions vary globally. For example, in some countries, there's a legally mandated cooling-off period, allowing buyers to back out of a sale with minimal consequences within a certain period.

In Malaysia, the SPA is more binding once signed, with fewer options to withdraw without penalty.

The main risks include misrepresentation of property details, unforeseen legal issues with the property, delays in construction (for new builds), or financial issues such as inability to secure financing. Buyers should conduct thorough due diligence before signing the SPA.

Disputes can arise over property defects, delays in property handover, or financial disagreements. These are often resolved through negotiation, arbitration, or, as a last resort, legal action.

In Malaysia, disputes related to property transactions can be resolved through negotiation, mediation, or arbitration.

If unresolved, the matter may be taken to court. Engaging a lawyer experienced in property law is advisable to navigate such disputes.

If defects are discovered after signing, recourse depends on the terms of the SPA and Malaysian law.

For new properties, developers usually provide a defect liability period during which they are responsible for rectifying certain defects.

This article is for informational purposes only and should not be considered financial advice. Readers are advised to consult with a qualified professional before making any investment decisions. We do not assume any liability for actions taken based on the information provided.