EN BLOC BATTLES

Aug 20, 2008
EN BLOC BATTLES
Fix bank-or-CPF charge problem
By Jessica Cheam, PROPERTY REPORTER

THE Strata Titles Board's (STB's) recent decision to throw out the
sale of Tampines Court has put an end to a three-year en bloc saga.
But the issues raised during the objectors' hearings will no doubt
resurface again in future en bloc sales. They deserve a closer look.

Essentially, STB killed the application because it was not done 'in
good faith, taking into account the sale price and the method of
distributing the proceeds of the sale'.

Although there was no mention of financial loss, this was at the
heart of the minority owners' objections.

A financial loss is deemed if an owner's sale proceeds, after
deductions allowed by STB, are less than the price he paid for his
property.

But the law does not specify what deductions are allowed. Based on
precedents set by STB decisions, stamp duty and legal fees are
allowed but interest and renovation costs are not.

In the Tampines Court case, a fair number of owners faced the
prospect of financial loss. They might have ended up with no cash in
hand and a big hole in their CPF accounts if the sale had gone ahead.
No wonder they fought it with such determination, scrutinising the
deal for every possible flaw.

This problem is not likely to go away, for estates can be sold en
bloc once they are 10 years old. Many would have bought their
apartments at, or near, the previous 1996 peak. Those facing
financial losses will contest en bloc sales to the bitter end and STB
may well be hearing many appeals.

Which begs the question: Is there a win-win situation for all? I
believe there is, but this would require a tweaking of the rules. Let
me explain.

The current procedures on how to deal with financial loss have been
created by a combination of rules and rulings.

Under the law, the STB can reject an en bloc sale application if an
objecting owner can show that he will suffer financial loss.

The sales committee and their lawyers usually make a provision for
this by running a financial check on all owners to determine who
might suffer losses and calculating the sums that would be needed to
pay them. Usually this sum is deducted from the total sales proceeds,
before they are distributed equally among owners.

Some other brokers, however, set aside a specific sum obtained from
developers, as in the case of Tampines Court. In most cases, the
industry way of doing things works out fine. But the problem arises
for individual owners when there is a financial loss and it is the
bank, and not the CPF, that has first charge upon the sale of the
property.

If it is the CPF that has first charge of the property, then it is a
straightforward case. Sellers will always have their CPF accounts
fully reimbursed first and then the bank loan will be paid off with
whatever money is left. If there are insufficient funds, the sales
committee will compensate them from the total proceeds. Everyone is
happy.

But if the bank has first charge, then it is possible for an owner to
lose from the sale. The proceeds of the sale go first to repaying the
bank loan. After that, the money goes to top up the owner's CPF
account - but in some cases, the remaining sum is not enough.

You would think that the law would require this CPF shortfall to be
made good. But this is not the case, as shown in the Waterfront View
ruling last year.

In that case, a couple tried to stop the en bloc sale by claiming
financial losses. They said the $660,000 payout for their home was
not enough to pay off their bank loan and top up their CPF accounts.
The CPF Board had said the couple did not have to top up this
shortfall.

As a result, the STB made a landmark ruling - upheld by the High
Court - that since the CPF Board had not required them to top up
their accounts they could not claim financial losses. This decision
sparked an outcry. Deputy Prime Minister S. Jayakumar later explained
in Parliament the principle behind the decision.

In a property purchase, CPF funds can be used to pay for three
components: the initial downpayment, the monthly repayment of the
bank loan principal, and the monthly repayment of the interest on the
bank loan.

Professor Jayakumar explained that CPF funds that go into repaying
bank loan interest are not taken into account. This is to distinguish
between owners who take no loans at all or who take a small loan with
little interest, and owners who take long-term mortgages with a high
component of interest payments.

This seems to make sense, but not for owners who have been forced to
sell their home and take a hit in their CPF accounts - which affects
their ability to buy a new home, as well as their retirement savings.

If it is a forced sale, no owner should have to suffer financial
losses just because he made a decision to take a big loan some years
ago.

There are many who might be caught in this situation. The CPF Board
used to have the first charge on private properties, but in 2002,
banks were given first charge. For former HUDC developments such as
Waterfront View and Tampines Court, the change was made as early as
1996 to give banks first charge.

There are two possible solutions to this problem. One is to reverse
the policy and require all owners facing financial losses to top up
their CPF accounts fully, regardless of whether CPF funds were used
to pay loan principal or interest.

A second less drastic solution would be to mandate that the CPF Board
should have the first charge for all en bloc sale cases. The CPF
Board would not object and neither would banks, since it would not
affect them: The current custom of compensating owners who suffer
financial losses would continue, ensuring bank loans would be repaid.

To owners facing financial losses, however, this change would make a
world of a difference. If they can be assured that they will not be
worse off after a sale, they might drop their opposition.

The other en bloc sellers will, of course, need to share the cost of
compensating financial losses. But this is a relatively small price
to pay, considering that most will reap a windfall.

In the case of Tampines Court, there was a couple who claimed CPF
losses of $69,000. Divided among the 560 units in the estate, this
works out $123 per seller. Even in the unlikely situation of all 100
dissenting owners claiming this amount, it would have worked out to
$12,300 per seller - still small compared with the overall profit,
which might have amounted to $300,000 for some owners if the sale had
gone through.

It will serve the interests of all parties involved to address the
bank-or-CPF charge problem. When a home owner is assured that he will
not suffer a financial loss, a forced sale in the name of urban
renewal might begin to make sense.