The end of private lease scheme in Medini?

It is understood that existing registered developers in Medini, for example, have the option to acquire from IIB a freehold interest in their land bank, specifically undeveloped land. Those offered are said to be required to sign a non-disclosure agreement before any further details are released.

The Edge understands that the option to convert to freehold comes with a premium of about RM8 ($2.43) per gross floor area for undeveloped land and RM10,000 per unit for completed units, which some say is a reasonable sum.

When asked why buyers of the properties under the PLS are being offered this option to convert to freehold now, IIB says it is unable to comment due to the ongoing court proceedings (see side story).

“However, we would like to emphasise that the PLS is legitimate and has received support and approval from relevant authorities. As litigations concerning the PLS are currently pending before the courts, we wish to respect the legal process and would like to seek cooperation from members of the public to avoid making comments that may prejudice judicial proceedings and impede the fair trial of the matters.

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“IIB is committed to addressing this matter and is actively working with the relevant developers to find a resolution. We assure all stakeholders that efforts are being made to resolve the situation promptly and effectively, ensuring the best possible outcome for all parties,” IIB says in an email reply to The Edge.

IIB, owned by the federal and Johor governments, was incorporated in 2006 to oversee investments into Iskandar Malaysia, specifically the Iskandar Puteri region. According to several news reports, some buyers in Medini claimed that they believed they bought a 99-year leasehold unit, but instead, the unit was under a PLS. A buyer does not own the property under PLS, and are instead buying a lease like a rental agreement, for a certain period of time.

“It is quite amazing for them to claim that they are not aware if they are represented by solicitors who bear the responsibility to explain the implications of PLS to them. Perhaps, it is a case where they do not fully understand or the PLS was not fully narrated to them. It is wiser to use solicitors who are not representing the developers to avoid possible conflict of interest. The concept of free legal fees by the panel solicitors given by developers to buyers must be reviewed. Both parties bear responsibility to bring clarity to such a new concept to avoid misrepresentation and misunderstanding,” Olive Tree Property Consultants CEO Samuel Tan tells The Edge.

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What is PLS?
The main difference between a PLS and the typical leasehold ownership is that with the former, buyers are not the owners. In the case of Medini, IIB is the owner/proprietor (the lessor), who in turned leased the land to a developer. The term could be between 30 and 99 years with an option to extend a further 30 years. The developer (the first lessee) then builds a high-rise condominium, for example, and homebuyers (second lessee) will then purchase the units on a lease basis.

“Lease schemes are common for industrial properties such as those developed by Johor Corporation. It was used for private development for the first time in Medini by IIB in 2012. The original intention of the PLS in Medini was to prevent foreigners from owning properties in perpetuity. However, it was later discovered that there were many drawbacks to the said scheme,” Tan tells The Edge.

He adds that PLS is a private sector creation that is essentially a contract between a seller (lessor) and a buyer (lessee) with no guarantee of lease renewal or extension at the end of the lease period. A traditional leasehold property is governed under the National Land Code, with an option to either renew or extend the lease. Essentially, PLS offers significantly less security and rights to the buyer compared with a standard leasehold property, he says.

“Unlike widely believed, Singaporeans and other foreigners are allowed to own freehold properties in Malaysia. Malaysia has some of the friendliest land laws. However, when Medini was first developed, a lot of incentives were given, including no bumiputera quota, no provisions for affordable housing or restriction to price threshold for foreigners and exemption from the real property gains tax. As a trade-off, a PLS scheme was given instead of a freehold or leasehold tenure. However, it is also worth noting that certain parts of Medini has land with freehold interest,” Tan explains.

“Technically, there is only one proprietor in the development. At best, the buyers can form a Residents’ Association. When a Joint Management Corporation or Management Corporation is formed, there is only one qualified member. This will cause a lot of management problems as it is inconsistent with the Strata Management Act,” Tan says.

“A PLS is merely a long tenancy [lease] but with the entire ‘rent’ paid upfront. There are no propriety rights on such leases. Buyers of PLS [properties] must be made aware that they are not buying the said properties but merely renting or leasing from the seller for a specific number of years,” National House Buyers Association of Malaysia honorary secretary-general Datuk Chang Kim Loong explains.

Previn Singhe, founder and Group CEO of Zerin Properties says, “The PLS model in Medini is not unprecedented. Farlim’s scheme under the Khoo Kongsi also adopted a private lease structure. It would be interesting to compare the operational and legal challenges between both models. Lessons from Farlim Group may shed light on why the PLS in Medini is facing hurdles today.”

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Farlim Group (Malaysia) Bhd (KL:FARLIM) is the developer of the 356-acre Bandar Baru Ayer Itam in Penang. The land titles were registered to the Trustees of Leong San Tong Khoo Kongsi (Penang) Registered, or Khoo Kongsi. In 1983, a joint-venture agreement was signed between Khoo Kongsi and Farlim Group to develop Thean Teik Estate (now Bandar Baru Ayer Itam). A case study by N H Zainal et al, IOP Conference Series: Earth and Environmental Science 1274 012037 on Strata Lease Schemes for Township focused on Bandar Baru Ayer Itam, found that while a strata scheme has multiple owners, each with its own proprietor to a strata title, the Khoo Kongsi Strata Title Scheme is a unique single-proprietorship scheme (24 schemes in total) with one owner registered for all strata titles.

Bandar Baru Ayer Itam was developed by a single private developer Farlim Group, building about 13,018 residential and commercial units there. All the units were sold through leasing agreements.  The land registrar in the Penang Land and Mines Department regulates the strata titles with registered leases.

PLS no more?
It is understood that IIB plans to extend the option of converting the properties under the PLS to freehold to all buyers in the future. Meanwhile, two questions arise from this: (i) Why is IIB giving options now to buyers to convert the properties under PLS to freehold; and (ii) What happens if not every buyer decides to take up the option?

“PLS conversion [to freehold] subject to payment of premium has been on the table for discussion since about 2020 ... due to the fact that not just strata, but individual titles and the register and Land Office would have been an administrative nightmare. This move might address challenges with the PLS model, particularly its misalignment with the Strata Management Act 2013, which governs strata property and management.

“The PLS inherently creates complications in strata management as it does not confer ownership rights. If this is the main reason, it signals the potential phasing out of the PLS to align with legal frameworks,” Previn says.

With this option to convert given to buyers, Olive Tree’s Tan says this is a much needed and positive move for several reasons. “Banks are reluctant to finance PLS due to the uncertainties surrounding it. The values of PLS properties will decline over time. Converting to freehold status will also enhance the property value. Ultimately, the clarity in having freehold interest rather than a lease brings confidence to the market. It will attract more investors, making Medini a more vibrant destination. The benefits outweigh the premium to be paid.

“We foresee more developers buying and developing in Medini. With the JS-SEZ in place, there is increased confidence when investors are able to invest into a freehold property. Given the freehold status, the proximity to Johor Bahru and Singapore, the ingredients are there to make Medini a success, with the ability to create more jobs within the region,” Tan says, adding that IIB has started many initiatives to enhance the attractiveness of Medini.

 

In the courts

Last year, a group of 63 individuals took legal action against Iskandar Investment Bhd (IIB) and Distinctive Resources Sdn Bhd, the developer of Iskandar Residences, for alleged misrepresentation over the title of the property units they purchased in Medini Iskandar Malaysia some 10 years ago. Representing all 63 of them (owners and co-owners) of the development are three individuals in the case. Apparently, the property stated in the sales and purchase agreement (SPA) was referred to as a “lease” at the time. One of the plaintiffs noticed in December 2023 that they have yet to receive the strata title and only then discovered that they have been given a private lease scheme instead of a leasehold title. The misunderstanding about the terms of the “lease” in the SPA led to the filing of the case against IIB and Distinctive Resources.

According to a report by The Edge Singapore, the plaintiffs claim that the SPA they signed originally does not follow the standard terms of Schedule H of Housing Development (Control and Licensing) Regulations (HDR) 1989, which concerns leasehold and freehold properties. They say the SPA was modified for the introduction of a private lease scheme (PLS).

They argue that the modification violates the Housing (Control and Licensing) Development Act (HDA) 1969 and HDR 1989, key legislation governing Malaysia’s housing developments.
They further allege that IIB and Distinctive Resources had acted in a way that constitutes misrepresentation by conduct. IIB and Distinctive Resources, through their agents, had allegedly represented to the plaintiffs and induced them to believe that they were acquiring outright ownership of the land, rather than a lease. This was done through words and other marketing materials such as brochures, emails, websites and online videos.

The plaintiffs request that the court grant a declaration that the SPA will conform with Schedule H of HDR 1989, issuing a separate strata title and registering the plaintiffs as owners of the strata title and Distinctive Resources should also be removed as a lease in the strata titles.

IIB claims that the plaintiffs had full knowledge of the facts at all times with no objections to the terms and conditions prior to this. IIB further claims that there were no illegal modifications made to the SPA, and that the lease scheme is legitimate and valid as approved by the Ministry of Housing and Local Government in September 2011. Approvals were also received from various authorities, including the Economic Planning Unit in Johor and Iskandar Regional Development Authority.

IIB denies any allegations of misrepresentation, contending that the plaintiffs have failed to adequately prove that their conduct led to plaintiffs to believe they were acquiring outright ownership rather than a lease. IIB further reiterates that the plaintiffs should have or ought to have knowledge based on the SPA terms.

The case is currently ongoing.

However, this is not the first time property developers are facing legal action in Medini. In 2018, some 107 buyers of The Meridin@Medini took developer Tropika Istimewa Development Sdn Bhd to court with allegations of misrepresentation and breach of the HDA 1966, HDR 1989, and Strata Titles Act 1985, particularly concerning the failure to issue separate strata titles and delays in delivery. In October 2020, the Kuala Lumpur High Court ruled in favour of the buyers, declaring the SPAs invalid for contravening laws and awarding damages to the plaintiffs.

Rosalynn Poh is an associate editor with The Edge Malaysia