In Malaysia, stakeholder solicitors play a crucial role in property transactions, particularly under the statutory sale and purchase agreement of Schedule G and Schedule H of the Housing Development (Control & Licensing) Regulations 1989 (“Statutory SPA“). Although the stakeholder solicitors are often the solicitors representing either the developers or the purchasers as opposed to an independent third party, they should remain neutral in their duties as stakeholder solicitors in holding the stakeholding funds on behalf of both parties. They should only release the funds only when specific conditions outlined in the SPA have been met to ensure legal compliance and impartiality. This principle was clarified by Lord Edmund-Davies in Sorrell v Finch [1976] 2 All ER 371 and Lord Denning MR in Burt v Claude Cousins & Co Ltd [1971] 2 Q.B. 426, both of whom emphasised that a solicitor holding stakeholding monies does not act as an agent for either party but as a trustee, holding the funds impartially for both parties.
However, questions often arise regarding the circumstances under which stakeholder solicitors may withhold or release such funds, particularly in disputes concerning defect repairs. Such issues underline the solicitor’s duty to navigate the delicate balance between contractual obligations, legal precedents, and professional ethics.
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The Essence of Stakeholding and Fiduciary Duties
s.22E of the Housing Development (Control And Licensing) Act 1966 (“HDA”) imposes specific duties on stakeholder solicitors, particularly regarding the handling of such funds, which typically constitute 5% of the purchase price in SPA. Under Section 22E, any solicitor who knowingly releases stakeholding monies to a housing developer or another party in violation of the SPA is committing an offence, punishable by a fine, imprisonment, or both.
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Circumstances for Withholding Stakeholder Funds
Solicitors holding stakeholding monies may withhold such funds under the following circumstances:
- 1. Adherence to the Stakeholding Terms
- Under Rule 14.10(3) of the Bar Council’s Rules and Rulings, stakeholder solicitors must strictly adhere to the terms of the stakeholding arrangement. Stakeholder funds may not be released utilised, applied or otherwise dealt with by such Solicitor unless the conditions specified in the SPA are met, or express written consent is obtained from all relevant parties.
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- 2. Specific Provisions in the SPA
- Under the Statutory SPA, stakeholder solicitors are required to withhold 5% of the purchase price—2.5% to be paid at the expiry of the period of eight (8) months after the purchaser takes vacant possession, and balance 2.5% at the expiry of the period of twenty-four (24) months after taking vacant possession, aimed to address potential defects during the defect liability period (“DLP”). If the purchaser serves written notice to the developer within these periods requesting defect rectification, the solicitor must withhold the sum until the stakeholder solicitors received a developer’s architect certificate certifying that the defects have been repaired. If no notice is served during the respective periods, the relevant sums shall amounts may be released after the respective periods.
The cases of Toh Theam Hock v Kemajuan Perwira Management Corporation Sdn Bhd [1988] 1 MLJ 116 (SC) and Tay Hup Lian v Histyle Sdn Bhd & Anor [2010] 9 MLJ 569 (HC) underscore the solicitor’s duty to hold stakeholding monies in trust and release them only when conditions are met. Specifically, in Toh Theam Hock, the manner in which stakeholder solicitors are to dispose of them was defined as contingent upon the terms under which the funds are held, affirming that a solicitor holding stakeholding monies may withhold or release the funds based on the SPA terms. Tay Hup Lian further emphasised that a solicitor holding stakeholding monies is duty-bound to hold retention sums impartially, pending fulfilment of conditions under the relevant SPA clause. Once these conditions are satisfied, as in Tay Hup Lian, the solicitor is authorised to release the retention sum.
Similarly in Datuk M Kayveas, the Federal Court stressed that stakeholder solicitors do so in a trustee capacity, not as part of a contract. These cases establish that stakeholder solicitors must follow the SPA terms and release the funds only when the conditions for release are fulfilled, with any breach of these terms constituting a breach of trust.
In Embassy Court Sdn Bhd v Yip Kum Fook & Ors [2014] 10 CLJ 295, the High Court emphasised that stakeholder solicitors cannot release them without the consensus of all parties and confirmation that SPA conditions are met. The High Court, following Datuk M Kayveas, reiterated that under clause 29 or 30 of the SPA, since the required notices have been given and acknowledged, the solicitor holding stakeholding monies cannot release them without the consent of both the plaintiff and the purchaser. Thus, the unauthorised release of stakeholding monies constitutes a violation of Section 22E, subjecting the solicitor to penalties.
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Disputes Over Defect Repair Works
Disputes frequently arise concerning defect rectifications during the DLP. Under Clause 30(2) of Schedule H and Clause 27(2) of Schedule G, purchasers are entitled to recover repair costs from the retention sum if the developer fails to address defects within the timeline specified in the statutory sale and purchase agreement, provided that the purchasers have complied with the requirements under the respective clauses. It is also worth highlighting that the purchasers must have carried out the repair works and paid for the repair costs. In Ang Ban Giap v Worldwide Holdings Bhd & Anor [2019] 8 MLJ 669, the High Court held that purchasers must substantiate their claims with completed rectification works, not merely provide quotations, as quotations alone are insufficient to make a valid claim under Clause 25(2) of the SPA. The words “recover” and “deduct” in Clause 25(2) clearly indicate that the purchaser must complete the rectification works before being entitled to recover and deduct the cost of repairing and making good the defects from the sum held by the solicitor. The court, in giving effect to the plain and ordinary meaning of Clause 25(2), found that the purchaser could only claim the stakeholder sum upon providing proof of the actual costs incurred for the remedial works.
The solicitor holding stakeholding monies may file an affidavit with the court to seek relief by interpleader in cases where there is a dispute over the stakeholder sum between the developer and the purchaser. If the court deems it appropriate, interpleader proceedings will be initiated, relieving the solicitor of liability while the court exercises its discretion to determine whether the stakeholder sum should be withheld or released to the purchaser.
However, in Tetuan Fong Yap & Gan v HSB Development Sdn Bhd & Anor [2016] MLJU 1478, the dispute between the developer and purchaser over the stakeholder sum led the purchaser to appeal the court’s decision. The High Court ruled that the matter should be resolved through a separate civil suit, as the dispute was not suitable for interpleader proceedings. In such disputes, the court may direct that competing claims to the stakeholder sum be resolved through a civil suit.
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Conclusion
The role of stakeholder solicitors under the HDA is crucial in maintaining trust and safeguarding the interests of developers and purchasers. By adhering to statutory provisions, judicial precedents, and fiduciary obligations, solicitors ensure compliance and mitigate disputes. Their position as custodians of stakeholding monies reinforces the importance of impartiality and strict adherence to the law.
About the authors
Lim Jus Tine
Partner
Real Estate
Halim Hong & Quek
justine.lim@hhq.com.my
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Lim Ting Mei
Associate
Real Estate
Halim Hong & Quek
tm.lim@hhq.com.my
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