What is a Sale and Purchase Agreement?
The Sale and Purchase Agreement (“SPA”) is a legal document that details the terms agreed upon by the Vendor and the Purchaser and is one of the most essential documents in the property transfer process.
Why is it so important to fully comprehend the terms of a Sale and Purchase Agreement before signing it?
The SPA safeguards the Purchaser by preventing the Vendor from amending the terms and conditions for their own benefit. Furthermore, by signing to the SPA, the terms are finalised, and both the Vendor and the Purchaser are required to abide by the terms of the Agreement.
What are the essential clauses in a Sale and Purchase Agreement?
Here are the essential clauses of a SPA that both the Vendor and the Purchaser should be aware of:
The recitals in the SPA serve as an overview of the subject matter of the agreement (i.e., the parties' intentions in entering into the agreement) and to identify the relevance of each Vendor and Purchaser and background context leading to the execution of the SPA.
2. Land title and tenure
The clause in the SPA will also state whether a property is freehold or leasehold. Depending on whether the property is freehold or leasehold, the procedure to transfer the property may take 3 to 4 months or longer. The transfer of a leasehold property requires the approval of the State Authority, which is expected to take another 2 to 3 months.
3. Purchase price and manner of payment
This clause clarifies the manner of payment for the agreed-upon purchase price of the property for both Vendor and Purchaser. To avoid penalties if the conditions are unintentionally violated, it is also imperative for the Purchaser to strictly abide by this clause. The purchase price is usually paid in the following manner: -
a) Deposit of 10% from the purchase price.
i) Earnest Deposit (usually will be paid by the Purchaser upon signing letter offer to purchase); and
ii) Balance Deposit (usually will be paid by the Purchaser upon signing the SPA unless otherwise agreed by the Vendor).
b) Balance purchase price (if the Purchaser intends to apply for loan to part-finance the purchase of the property, shall consists of:- i) the differential sum (if the loan amount is less than the balance of purchase price); and
ii) the loan sum (that is the amount the Purchaser applying from any financial institution to finance the purchase of the property)
4. Delivery of Vacant possession & Legal Possession
The Vendor has the responsibility to ensure that the property is fit for occupancy upon delivering vacant possession of the property. The Vendor usually must deliver vacant possession to the Purchaser within three (3) working days or five (5) working days after receipt of the balance of the purchase price and subject to late delivery interest (if any).
On the other hand, legal possession means that the Purchaser lawfully owns the property even though he or she doesn’t yet hold the physical keys to the property. There are, however, different situations in which the Purchaser is unable to enjoy or access the property after obtaining the keys from the Vendor. Some instances are as follows:
There is an existing tenant on the property, and they are currently the residents; or
There are squatters residing in the property; or
An immense quantity of trash or junk remains on the property.
Hence, it is important for the Purchaser to specify in the SPA how he or she should receive vacant possession of the property.
5. Vendor’s Warranties and Representations
This section of the SPA refers to undertaking by the Vendor to the Purchaser as part of a sale and purchase transaction. The Purchaser may have the right to terminate the sale or refuse to execute it if a representation or guarantee is breached by the Vendor.
The termination clause highlights the non-defaulting party's capacity to terminate the agreement in the event of a default by the Vendor or Purchaser. For instance, if the purchaser fails to pay the purchase price after both Completion Date and Extended Completion Date have expired, the Vendor has the right to forfeit the 10% deposit paid by the Purchaser at an earlier stage of the SPA. The Vendor does not have to prove any damage before forfeiting the deposit since the Purchaser's refusal to pay the purchase price constitutes an essential violation.
The breach by the Vendor, on the other hand, will usually be failure to transfer good title or provide vacant possession/ legal possession to the Purchaser. In the event of a Vendor’s default, the Purchaser may either ask for liquidated damages from the Vendor or seek specific performance against the Vendor, i.e., obtain a court order compelling the Vendor to perform its obligations under the SPA.
7. Real Property Gains Tax (RPGT)
A Real Property Gains Tax (RPGT) is a tax charged by the government on the profit that you make from selling the real property. Therefore, if the Vendor makes a gain or profit from it, then he is liable to pay this tax.
The Purchaser Solicitors are required to withhold 3% of the purchase price (applicable for Malaysian and Permanent Resident) and withhold 7% of the purchase price (foreigner) or withhold 5% of the purchase price (applicable for corporate Vendor) as retention sum and remit to the Inland Revenue Board within 60 days from the date of disposal of the real property, in the event the RPGT is payable by the Vendor.
If there is a delay in submitting the RPGT forms or the 3% retention sum, a penalty is imposed under subsection 29(3) of the RPGT Act 1976 (RPGT Act). For each disposal, both the Vendor and the Purchaser are required to submit RPGT return respectively within the prescribed forms as may be required by the Director General of Inland Revenue in respect of the disposal and acquisition of the Property within Sixty (60) days from the date signed SPA in accordance with Section 13(1) of the RPGT Act.
Nonetheless, the RPGT Act offers a 100% RPGT exemption when property is transferred between family members out of love and affection, including between spouses, and between parents, and children only. Further, 100% RPGT exemption between parent and children and between grandparent and grandchildren is also exempted, but limited to the first RM1 million of the property’s value effective on 1st April, 2023 (Stamp Duty (Exemption) (No.3) Order 2023). The transferor is said to have received "no gain and suffered no loss" and is therefore exempted from RPGT.
Time shall be the essence in relation to all clauses of the agreement. It means the parties must fulfil their obligations within the time range specified in the agreement that they signed. Failure to act within the specified time limit is a violation of the agreement, allowing the other party the right to pursue legal remedies immediately.
The waiver clause may be easily missed but it illustrates an important point. It means that if a party fails to enforce part of a term in the SPA, it doesn’t exclude that party’s right to enforce it later, and they can still do so in the future.
10. Force Majeure Event
A force majeure event can be described as the occurrence of an incident or condition that is beyond a party's reasonable control and/or could not have been predicted at the time the contract was entered into and precludes that party from completing its contractual duties.
The case of RHB Capital Bhd v Carta Bintang  10 MLJ 469 states:
“Force majeure clauses are clauses generally intended to include risks beyond the reasonable contract of a party. In essence, it frees both parties from liability or obligation when an event such as war, riot or act of God such as an earthquake takes place.”
An effective force majeure clause usually contains two main components:
A description of what amounts to a force majeure event; and
The consequences of a force majeure event.
What is the cost to draw up the SPA?
The legal fees payable for preparing the SPA, including interacting with the other party, the financial institutions, the property regulators, and everything in between, is subject to Section 3 of the Solicitors' Remuneration Order (SRO 2023).
According to the latest SRO 2023, the legal fees for conveyancing transactions in Peninsular Malaysia for non-contentious activities such as the sale and purchase of movable and immovable property and financing been increased effective on July 15, 2023, as follow;
Sale and Transfer
First RM500,000 (Legal Fees = 1.25% (subject to a minimum of RM500) of the Consideration/ Adjudicated Value)
Next RM7,000,000 (Legal Fees = 1%)
Exceeding RM7,500,000 (Fees = Subject to negotiation (not exceeding 1%) of the Consideration/ Adjudicated Value)
Meanwhile, Purchasers also need to take note of the Stamp Duty payable to the Inland Revenue Board for any transfer of the Real Estate.
In conclusion, the SPA can serve as a safe and enforceable contract to smoothen the property sale, provided that the terms are clear, and the deal has no force against either party to the agreement. Therefore, the parties involved in drafting the SPA must pay close attention to every details of the SPA.
Written by Syafiqah Shahabuddin, Legal Executive
Date: 11th September 2023
Disclaimer: This article does not establish any solicitor-client relationship, thus do not rely on the contents herein in making any decision pertaining to the subject matter. You are advised to seek independent and professional engagement with a solicitor of your choice to ensure that your interests are best protected. The contents herein are meant for general dissemination and for educational purposes.