Review on Topic 4

Land Location

QT/FT
?

Land Office
or Land
Registry

Freehold
or Lease
Hold?

HS(M) 1234
Pajakan 99 tahun

Kuala Ketil, Kedah

Grant No. 8899

HS(D) 7899
Grant No. 55, pajakan 33
tahun

Lenggong, Perak

State Lease
Grant No 5678

Kota Baharu,
kelantan

Pajakan

Ipoh

Grant No. 77 pegangan

bebas.

Sg. Semeling,
Pahang

Topic 5
Legal Charge

Objectives
At the end of this topic you should be able to
Define what legal charge is?
Describe the process of creating a legal charge?
Explain the precautions to take?
Discuss the different types of legal charge?
Explain how to discharge a legal charge?
Describe chargees rights to Foreclosure &
Possession
Analyze and discuss a legal case on legal charge.
3

Prelude: Security on land or landed

property

Four ways of creating security on land or

landed property.

What is..

Legal charge?
Encumbered?
Title?
Interest?

Definition of Legal
Charge

Definition - Legal expression signifying that the land

or landed property is encumbered.

Encumbered means lender has legal claim in the

land/property. By charging the land/landed property
to the bank in accordance to the provisions of NLC,
the law grants the bank a legal right of claim to the
land/landed property.
Legal claim can be a claim
under a common law (for written contracts), when a legal
charge is created in accordance to the provisions of NLC.
Under a law of equity for unwritten contract, but
Must convert from equitable claim to legal claim.

Definition (continue)
Charge does not TRANSFER ownership; it merely
creates LEGAL INTEREST in the property it
confers chargee the power to sell or foreclose the
property in case of default or breach of contract.
Chargor, the land owner can continue to occupy
or use the land. However, he cant do dealing on
the land, such as sell (transfer ownership), lease,
tenant, crease easement or create lien, unless
with written permission from the chargee (the
bank).
Legal charge is created to secure
loan/debts, in which case
loan/debt becomes a secured loan/debts.
bank/lender becomes a secured creditor.

General Category of
Legal Charge

You can create 1st party legal charge or 3rd party legal charge as security to various parties.
1st party is when you are the owner of the land/landed property and you charge it to secure your
own loan.
3rd party LC is when you charge your own land to the bank to secure the loan given to someone else
(your mother, father, friend, etc.)

General Category of Legal

Charge

General Category of Legal

Charge
First-party legal charge where chargor, the owner of
the land/landed property, is the borrower

Third-party legal charge where chargor, the owner of

the land/landed property, is not the borrower.

For Third-party legal charge: In addition to tendering

his property as security, the chargor also has to stand
as guarantor. Hence, chargor is secondarily liable for
the loans. In case of default and the borrower
disappears, the land/landed property will be
auctioned/sold and the proceeds will be used to settle
the loan. If the proceed of the auction is insufficient to
settle the loan, the chargor will have to pay for the
shortfall amount.

10

Creating a Legal charge

11

Creating a Legal charge

12

How to create a legal

charge

A. Use Form 16A (see sample in next slides)

It is called a statutory form. The form is available at
the land office or land registry office.
Banks do not handle this work. They assign to
lawyers to do the preparation and registration of
legal charge.
Lawyer fills up the form with the required particulars
and pass to the chargor (borrower) and then to the
banker for checking and signing.
After signing banker returns the form to the lawyer
to do the rest.
13

Form 16A, Front Page

14

Form 16A, p.4

15

Form 16A, p.5

Note that all land dealing done

under common law (such as
legal charge, lease, tenancy,
easement and transfer) are
shown in the grant (or Hakmilik
Sementara)

16

How to create a legal

charge (cont)

B. Bankers usually include ANNEXURE 16A (see

sample in next slides).
Annexure is a few page, written agreement. It is called annexure because it
is annexed (attach) to the form 16A.
Annexure spells out the terms and conditions regulating the relationship
between chargor and chargee. Example chargors obligation on the loans
(such as repay the loan regularly) and on the landed property (such as pay
the quit rent, maintain and do the necessary repair).
Annexure is not a part of the Form 16A. It is also not necessary in order to
create a legal charge. However, bankers are always prudent and would want
to put any agreement in written form. Written agreement provides a strong
and clear evidence in litigation.
Generally, oral agreement generates an equitable interest, as it is covered
under a Law of Equity. Thus, oral agreement is an equitable agreement. A
written agreement too, when created not in accordance to any statute (any
act), is an equitable agreement (i.e., covered under a law of equity).
Likeiwise, a written loan agreement is an equitable agreement (covered
under a law of equity). However, when it is attached to the Form 16A, it
becomes a legal agreement (covered under common law), since Form 16A is
under a statute (i.e., Nat. Land Code) established under a common law..

17

Sample of Annexure

18

How To Create Legal

Charge?
(cont.)
C.
Can create
legal charge on freehold,
leasehold and term of lease.
Never use correcting liquid or pencil eraser
to rectify mistakes on form 16A/B and on
ANNEXTURE. It will make the charge instruments
VOID.

19

Steps in creating a legal

charge

1.Conduct Search on the

Register Documents of Title (done by lawyer).

To identify registered proprietor of land, ascertain

registered interest in the land, determine restriction in
interest, ensure the land/landed property is free from
encumbrances (caveat, prohibitory order, or other
restrains) & it is not subject to government acquisition).

2.Check to make sure that all particulars in form 16A/B

& annexure are correct.

3.All parties sign in black or blue-black ink.

4. some land/landed property requires consent or
approval from state authority. In that case the banker
must ensure that the Letter of consent from state
authority is included in the documentation. State
authority refers to state government/Menteri Besar.

20

Steps in creating a legal

charge
(con)

5. Obtain a letter of undertaking to refund if, for

any reason, a legal charge cannot be registered.

Do this whenever you release the loan before the charge
is
properly registered.
6. Do second search just before presentation, to
ensure no new encumbrances entered on the
property. Search is done at the land office or land
registry.
Search means checking the Register Document of Title to
confirm the title, the registered owner, if any charge is
created or any prohibition (like caveat, prohibitory order or
lis pendens is entered, etc.
7. Present the charge document to Land Registry (for Town
Land) or Land Office (for Mukim Land) soonest. Do not de

21

Principle of Stare Decisis

It is trite law that based on the doctrine of stare
decisis, a decision of a superior court is binding on
all courts below it.

22

BANK ISLAM MALAYSIA BHD v. LIM KOK HOE & ANOR AND OTHER APPEALS
COURT OF APPEAL, PUTRAJAYA
RAUS SHARIF JCA, ABDULL HAMID EMBONG JCA, AHMAD MAAROP JCA
[CIVIL APPEALS NOS: W-02-918-2008, W-02-954-2008, W-02-955-2008, W-02957-2008, W-02-958-2008, W-02-959-2008, W-02-960-2008, W-

02-961-2008 & W-02-962-2008]

26 AUGUST 2009
[2009] CLJ JT(4)
JUDGMENT

Once it was established that there had been a

default, then unless there was cause to the
contrary, the order for sale must be given since a
charge is an ad rem right to dispose of the
security to recover a secured debt.

23

cont
The charge is a charge under the National Land Code. The remedy available
and sought is a remedy under the National Land Code. The procedure is
provided by the Code and Rules of the High Court 1980.
38] From the above cases, it is clear that the validity and enforceability of the
BBA contract had been ruled upon by the superior courts. It is trite law that
based on the doctrine of stare decisis, a decision of a superior court is binding
on all courts below it. The importance of this principle must not be taken
lightly. In this regard, we can do no better than be guided by the wise words of
Steve Shim CJ (Sabah & Sarawak) in
Dato' Tan Heng Chew v. Tan Kim Hor & Another Appeal [2006] 1 CLJ 577:
It is axiomatic to state that the doctrine of stare decisis has become the
cornerstone of the common law system practised in this country. It is
fundamental to its existence and to the rule of law. It has attained to status of
immutability

24

Priority of claim under legal

charge

Case
1

Case
2

Case
3

Date of
signing LC

Date of
registering
LC

7.4.2013

unregistered

12.5.2013

unregistered

3.1.2013

8.1.2013

3.1.2013

9.1.2013

6.2.2103

25.8.2013

20.8.2013

24.8.2013

Interest:
Legal or
Equitable
?

Which has
1st
priority?

25

Priority of claim under

legal charge
NLC registered interest takes priority over unregistered interest.
Priority is ranked by date of registration. Hence, the one registered earlier takes
precedence over the one registered later.
You can create several legal charge on the same land. However, must obtain
consent from the earlier chargee. Example, a borrower charges his land to secure
a loan given by Maybank in 2014. In 2015 he offers to create a second legal
charge on the same land to secure a loan taken from CIMB Bank. CIMB Bank
must obtain a written consent from Maybank in order to create a second legal
charge in that land. After all, Maybank is keeping the grant on the said land.
Maybank may agree or disagree at its own discretion. Should Maybank decides
not to agree, the second legal charge on the said land to CIMB Bank cannot be
created, which means CIMB Bank will not give the loan to the borrower.
Assuming that Maybank allows the creation of second legal charge to CIMB Bank,
Maybank may insist either one of the following conditions:
1. That Maybank has a priority claim on the land over CIMB Bank.
2. Maybanks legal charge ranks in parri passu with CIMB Banks legal charge.
3, Maybanks LC has inferior claim to that of the CINB Bank.

26

Priority of claim under legal

charge (con)
With consent from the earlier chargee, you can
make the subsequent legal charge (LC) to
rank in pari passu with the earlier (LC).
You are also allowed to postpone the earlier LC
to subsequent LC, if you can obtain consent
from the earlier chargee.
27

Types of Legal Charge

1. Substituted charge when the chargor
withdraws existing title, and replaces it with a
new title. A new charge is created on the new
title.
2. Supplementary charge/additional charge
when one or more new titles are added to the
existing security.
3. Charge created under Principal and
Subsidiary Instruments when different
titles at different locations are involved. Refer
to table on page 29, Banking Securities in
Malaysia by Ong Kok Bin.

28

Discharge of Charge

When loans/debts fully settled.

Use Form 16N.

Instruct your lawyer to discharge.

Discharge at (land) office that creates

the charge.

29

Rights of Chargee

Right to Power of sale.

Right to sue chargor personally.
Right to possession.
Right to transfer the charge.
Right to tack.

30

Legal Right
Once it was established that there had been a
default, then, unless there was cause to the
contrary, the order for sale must be given, since a
charge is an ad rem right to dispose of the
security to recover a secured debt.

31

Foreclosure &
Enforcement
In case of default on loan repayment or
breach of covenants, banker has 2
options:1. to foreclose the property
(Foreclosure proceeding
2. to enforce bankers rights(i.e., right
to possess the land).
32

Chargees Right

33

Option 1: Foreclosure
Foreclosure at High Court
Apply for order of sale by way of originating
summon.
To dispose by public auction. Distribution of
proceeds from auction:

1. Pay government first quit rent, assessment, etc.

2. Pay valuer, lawyer, auctioneer.
3. Pay chargee/lender/banker
4. Pay holder of subsequent charge, in order of
priority
5. Balance, if any, return to chargor/land owner.

34

Option 1: Foreclosure
(con)
Foreclosure at land office
Apply for order for sale (16G)
Holds enquiry by calling chargor to show cause,
and chargee to convince why chargee must sell the
land.
If auction is allowed, Land Administrator then
appoints auctioneer.
Auction conducted on the specific date.
Distribute the proceeds of the auction in order of
priority (refer to previous slide).
Buyer of the auctioned land obtains clean title.

35

Option 2: Right to
Possession

Sec 271(1), NLC chargee (bank) has

right to take possession of the
land/property, but only for land
Under Registry title.
For Mukim (under Land Office), the Land
must not be occupied by the chargor.

36

Option 2: Right to
Possession (con)

Banker as Chargee has Two Rights of Possession:

To take rents from existing lease or tenancy agreement on the
land/landed property. Must first serve notice on leasee, tenant, and/or
chargor.
To take occupation of the land/property. Serve notice on the chargor. If
chargor refused, apply to court for an order to take occupation of the
land/property. Then lease, rent out, etc. the property to get monthly
rental/income.

Use the rental/income or profits derived from the property to pay quit
rent, then insurance premium, then costs of managing the building,
and finally, if anything left, to pay off or reduce the oustanding loan
amount.
Precaution: chargee must manage the land properly as:
Chargee is liable to chargor for loss of and damages to the property,
Chargee is accountable to chargor for loss of incomes/rental.
37

Option 2: Right to
Possession (con)

Distribution of rents or profits collected from the

land/property is in the following order of priority:
1. Government quit rent, assessment fee,
other charges.
2. Insurance premium.
3. Maintenance expenses on the
land/properety.
4. Chargee/banker.
5. Chargor (if here is any surplus).

38

summary
You should now be able to
Define what legal charge is?
Describe the process of creating a legal charge?
Explain the precautions to take?
Discuss the different types of legal charge?
Explain when to discharge a legal charge?
Describe chargees rights to Foreclosure &
Possession
Analyze and discuss a legal case on legal charge.
39