If you are a property investor in Malaysia, or have been keeping track of the development of property investment in the country over the last few years, you would most probably have heard of Property Investors Buying in Group.
WHAT IS ‘GROUP BUY’ ?
Some ‘group buy’ refers to bulk purchase of properties. This is typically a scenarios where a group of individuals purchase en bloc or bulk of a development project from a developer at a bulk discounted price. Though negotiated in group, the buyers often purchase the individual units of property in his / her individual names, but each enjoy the ‘bulk discount’ offered by developer.
Other ‘group buy’ may refer to a few individuals putting together their resources to jointly purchase a property. I call this ‘joint venture purchase’. The first type of group purchase is based on the principle of ‘bulk purchase bulk discount’ while the second type of group purchase work on the basis of ‘business joint venture’. This article aims to address some relevant issues concerning ‘joint venture purchase’.
WHY JOINT VENTURE PURCHASE ?
The most common reason for any individual to participate in ‘joint venture purchase’ is leveraging on each other’s financial resources, skills, network, knowledge and time. Another reason may be diversifying one’s risk.
LEGAL STRUCTURE ?
There are numerous legal structures or vehicles that you can utilize for the purpose of joint venture purchase of properties.
(i) Incorporated partnership (perkongsian).
The partnership is registered with the Companies Commission of Malaysia. Unless specify otherwise, all partners will own EQUAL shares, benefits, interest, obligations and liabilities in the partnership. One major characteristic of a partnership that you ought to be aware of is that all partners are personally, jointly and severally liable for all liabilities (on an unlimited basis) incurred by the partnership. You are not shielded from the partnership (as oppose to a Sdn. Bhd.).
(ii) Unincorporated partnership.
A loose form of ‘partnership’ between the joint investors. The parties merely get together in their personal capacity and jointly invest in the purchase of properties. The parties will enter into sale and purchase agreement on joint named basis. The percentage of equity may be spelled out in the agreement. For example, Mr A (2/10 share), Mr B (4/10 share) and Mr C (4/10 share).
(iii) Limited liability partnership (LLP).
This is an alternative business vehicle available in Malaysia regulated under Limited Liability Partnership Act 2012. You can now register with Companies Commission of Malaysia (CCM) a limited liability partnership. LLP provides its partners with limited liability, where all liability of the partnership will borne by the assets of the partnership, instead of the partners personally. An LLP has a legal status of a body corporate, like a Sdn.
Bhd. It may sue or be sued in its name. It may own properties in its own name and borrow from financial institution to finance purchase of its properties. The management and operation of the LLP business is flexible and similar to conventional partnership.
This is a company registered with CCM and governed under the Companies Act 1965. A Sdn. Bhd. is a separate legal entity in itself. It can sue and be sued in its own name. It can purchase properties in its name and borrower from financial institutions in its name. The liability of the shareholders is limited to their shareholding in the company. The concern in using a Sdn. Bhd. as a vehicle to purchase and own properties is the cost of maintenance of the Sdn. Bhd. Besides the cost of incorporation, the company is required to maintain its Company Secretary, conduct annual general meeting, audit and submission of annual accounts. A Sdn. Bhd. also lacks flexibility in terms of termination.
In many cases, the joint venture parties initially enter into their first purchase via unincorporated partnership ie. In the form of a loose arrangement where a few of them joint together and purchase a property. After a while, they may decide to invest into buying more properties and decide to form an official partnership or company and transfer the property to the legal entity.
HOW TO PROTECT YOUR INTEREST?
As a lawyer, I believe when you walk into any legal firm to seek advice on joint venture purchase, you will be advised to get your joint venture done in ‘black and white’ !
Incorporated Partnership and Limited Liability Partnership.
The partners may enter into a partnership agreement. Some key elements in a partnership agreement will be :-
(i) number of partners;
(ii) initial financial contribution by each partner;
(iii) subsequent financial contribution;
(iv) time frame to put up contribution at each cash call
(v) failure to respond to cash call
(vi) profit and loss distribution;
(vii) contribution other than cash, for example contributing skills or network or time;
(viii) admitting future partners;
(ix) holding period of the properties – medium or long term;
(x) renting policy of the properties (minimum rental rate);
(xi) exit strategy of the partnership;
(xii) consequence of default by partners;
(xiii) management of partnership – duties and responsibilities of each partner;
(xiv) dispute amongst partners – any right to buy out the other partner.
The shareholders may enter into shareholders agreement to spell out the role and obligations of each shareholder as well as the role and obligations of their appointed Directors at the board of the company. Some key elements in a shareholders agreement will be :-
(i) authorised shares capital;
(ii) paid up shares capital;
(iii) par value per share;
(iv) future increase in paid up capital;
(v) initial shareholders;
(vi) admission of new shareholders in the future;
(vii) directors nominated by the shareholder;
(viii) authority and power of director;
(ix) initial start-up capital;
(x) subsequent capital injection;
(xi) maximum capital injection;
(xii) shareholders advances;
(xiii) repayment of shareholders advances;
(xiv) any particulars assets / properties / intellectual properties own by the Company;
(xv) business objective of the company;
(xvi) single purpose vehicle for 1 transaction or multiple purpose for the future;
(xvii) conduct of shareholders meeting, quorum, voting rights;
(xviii) conduct of directors meeting, frequency, quorum, voting rights;
(xix) matters that require unanimous approval of all shareholders;
(xx) issue of new capital;
(xxi) right of first refusal of new issued shares;
(xxii) determine Company Secretary, Auditor;
(xxiii) accounting matters;
(xxiv) bank account operation;
For the joint venture investment which is not based on a registered entity, it is advisable that the ‘partners’ still enter into an unincorporated partnership agreement or mutual covenants. The key elements in this agreement or covenants would include :-
(i) objective of joint investment;
(ii) period of holding the property - short term –vs- medium term –vs- long term;
(iii) setting minimum price of disposal and minimum price of rental;
(iv) duty and responsibilities of each ‘partner’ during point of entry, holding period and exit;
(v) financial responsibility of each ‘partner’;
(vi) time frame to put up contribution at each cash call
(vii) failure to respond to cash call
(viii) profit and loss distribution – formula of calculating profit / loss
(viv) failure to contribute or delay in putting up contribution (may result in late interest or penalty being imposed)
(vv) can other partner advance first ? Any interest chargeable ?
(vvi) meetings amongst partners - when and how frequent;
(vvii) role of each partner;
(vviii) share of liabilities;
(vix) bank account operation;
(vx) restriction against assignment, transfer to third party;
(vxi) breach of terms – consequence. Eg. force sale for other partners.
Having said that, despite the best agreement having been signed, you cannot stop anyone from dishonouring and disputing the terms of that agreement. The parties may still resort to resolving their disputes in court.
To conclude, I would say getting your mutual understanding documented is an effort and attempt to foresee the unforeseen, and attempting to provide for the unforeseen circumstances. But ultimately it is about choosing your partners wisely!
The writer can be contacted [email protected]
She will be giving a talk in Property Outlook 2015 on 7th February 2015 in Cititel Hotel, KL from 9.30am - 6.00pm, come to meet her personally and talk to her
POTENTIAL ISSUES IN JOINT INVESTMENT OF PROPERTIES?
Over the years of advising clients and investors in joint venture purchase, I realize most investors are very enthusiastic about this business venture….AT THE ENTRY POINT. Unfortunately during the holding period or end period, many unforeseen issues and disagreement may arise, leading to unhappy ending to their venture and at times, financial losses.
Some of the potential issues that may arise are :-
(a) Demise of a partner. The estate or next of kin come into the group has no understanding or connection with the rest of the group, hence friction arises, leading to break up of the group;
(b) Disagreement between partner;
(c) Dishonesty of any member or member engaging in activities that is in conflict of interest with the group;
(d) Refusal to honor the group’s mutual understanding;
(e) Member goes into financial problem e.g. Bankruptcy;
(f) No clear direction and objective was set from the onset, leading to confused state of event during the holding period;
(g) No black and white agreement was entered into. Parties merely rely on verbal agreement;
(h) No in depth discussion and thought during the initial set up, leaving many void areas in the partnership;
(i) A ‘dead lock’ situation among group members – members cannot see eye to eye with each other or simply cannot reach a mutual consensus on matters relating to the joint venture investment despite numerous meetings.
Legal Considerations for Joint Venture Purchases of Properties, 19 Jan 2015, Property Outlook Asia, available at