By COMMENT
By RAYMOND ROY TIRUCHELVAM | Jun 12, 2010

Mortgage or loan term insurance

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IN times of old, when we buy a property, it was meant for stay, as the term owner-occupied. Slowly, this was extended, when people bought properties for investment purposes. Realising this venture as a business, financial institutions, which usually finance these investments, started assessing the risks associated with it. Hence the birth of the loan or mortgage related insurance coverage.

Today, in Malaysian there are two main types of housing loan related insurance coverage, called MRTA (mortgage reducing term assurance) and MLTA (mortgage level term assurance). The former was the first to be offered, but both protect the loan borrower against death or total permanent disability (TPD). Basically, in the event of loss of life or TPD (or in some instances also covering critical illness, depending on the terms) the policy will cover the remaining payment obligation due under the housing loan to the bank.

The main differentiation factor lies in the offerings and coverage categories, whereby MRTA acts like a life insurance, the premium is lost in the end, but for MLTA it acts as a term policy, whereby there is cash-back in the event of no claim. Furthermore, the MRTA is a reducing balance coverage, that pays back in accordance with a reducing balance schedule, and at the end of the tenor the payable sum is zero. This is not the same for MLTA whereby the coverage is fixed from start, meaning the person gets cash-back mounting to the sum insured.

While it is easy to see, which options stands out the better, we need to further analyse two more factors. Firstly, it involves the fact that the premium for the MLTA is much higher. This can go to 10 times higher in totality compared to a MRTA premium. Which brings us to the second factor, which is the purpose. The purpose of the home mortgage insurance, if we can remember, is to cover us against TPD and death, whereby our family is not burdened with the financing. If we seek to find a reasonable cost approach and in the MRTA instance, to be financed by the bank via lump sum payment capitalised into the loan, then the choice is obvious.

Let us take an example in order to show the details. Thirty-year old Vaniza Carlos is buying a RM125,000 property, and is taking up a 30-year term 80% loan financing package. She is faced with the option of choosing a loan insurance package, and her friendly insurance agent Cryced sets out the terms as per Table 1.

Which will be your pick?

Just for analysis purposes, in order to equate the total cost of the MLTA to current value (to bring it to MRTA equivalent), using the NPV approach at 10% discount rate (method of derivation which was featured in my previous article), the NPV value works out to about RM9,950, which is effectively only about 3 times higher than the cost for MLTA. Year 2020 is 10 years into the loan agreement, where the outstanding loan sum would have reduced to about 75% of original sum.

Nevertheless, under the bancassurance umbrella, there are many types of term life policies which are not directly linked to the property but offers similar risk coverage. Bancassurance is defined as insurance business being provided by banks of financial institutions. This term was coined after banks started merging with insurance companies, and in combination started offering products with dual, loan and risk coverage facilities, among others. But do be careful, as MRTA and MLTA usually covers main critical illnesses (albeit limited from the full list of known 36 critical illnesses), whereas term life policies differs.

It is interesting to note that banks are now insuring this “business venture” or property investment, and if this can be extended to say a business of setting up a restaurant with an initial cost of RM100,000, with the same terms being applied. Food for thought, isn’t it?

Raymond Roy Tiruchelvam … “I forget what I was taught, I only remember what I learnt” is a business planner with SABIC group of companies

Tuesday April 27, 2010

Helpless landlords

ARTICLES OF LAW
By BHAG SINGH

Although there are provisions to allow landlords to recover overdue rental, there are limitations, too.

NOT everybody can afford to purchase a property to live in or to operate a business. Hence renting becomes a viable option for many. Renting involves the creation of a relationship between the landlord and the tenant. This may be created formally or informally, whether or not in writing.

The essence of the relationship is that for the agreed term, the tenant is entitled to enjoy the said possession. The landlord in return gets the rent.

If the tenant fails in his primary obligation, there will be cause for concern. If the tenant moves out, at least the landlord can mitigate his loss by renting it out to someone else. But the tenant may choose to stay, yet not pay rent.

Many a landlord in such a situation will feel frustrated. Going to the courts can be time-consuming and costly. Would it not be easier to just go in and chase the tenant out? Or could one not just disconnect the electricity and water supply?

Remedies

A landlord has three distinct remedies against a tenant in arrears with his rent. He may levy distress upon the tenant’s goods, which ultimately he may sell to pay off such arrears as remain unpaid.

Apart from that, he may sue the tenant on the covenant to pay rent, or he may seek to terminate the tenancy through forfeiture.

In addition, for any period for which he cannot claim rent, the landlord can get the liquidated damages, which would include claims for compensation for use and occupation, or an action for mesne profits.

Once the relationship of landlord and tenant has been created, the rights and obligations of the parties inter se will be governed by its terms subject to the general law. As the arrangement is a contract, its terms are enforceable between the parties in much the same way as any contract.

One of the rights conferred on the tenant is the landlord’s covenant that “the tenant paying the rent hereby reserved and performing and observing the several covenants on his part herein contained shall peaceably hold and enjoy the demised premises during the said term without any interruption by the landlord or any person rightfully claiming under or in trust for him.”

Distress

The right to distrain is an ancient remedy which may be described as the right to take another’s goods without legal process as a pledge for the satisfaction of a debt or claim. It is a remedy not confined to the law of landlord and tenant.

The Distress Act 1951 provides for this. It involves the application for a Warrant of Distress addressed to the bailiff directing the latter to forthwith distrain any removable property found by him on the premises named in the distress warrant.

The plus side of a warrant of distress is that it is obtained ex parte, meaning that the application to the court does not have to be served on the tenant before an order is made. The tenant will only know when the bailiff turns up at the premises to seize the property.

However, it must be noted that the purpose is primarily for the landlord to recover rent and not to get back possession of the premises. Once the goods have been seized and disposed of, the tenancy, unless terminated, continues.

Distress is not for recovery of possession. However, possession may be obtained where the premises are abandoned and there is no sufficient property seized with which the arrears can be paid. If so, an application can be made to authorise the bailiff to enter the premises and take possession.

Even then, the bailiff must in such cases affix in a conspicuous place or on the premises, a notice that possession thereof will be delivered to the landlord, unless within 10 days a judge, on the application of any person interested, otherwise orders.

Forfeiture and re-entry

There are instances where the landlord may seek to terminate the tenancy by forfeiture in exercise of a right to re-enter reserved expressly under the tenancy in the case of non-payment of rent. This could read as follows:

“If the rents hereby reserved ... shall be unpaid for (twenty-one) days after becoming payable it ... shall be lawful for the landlord at any time thereafter to re-enter upon the demised premises or any part thereof in the name of the whole.”

Of course, such a covenant may be enlarged in its scope to allow similar action to be taken in case of other breaches. Whilst this is an option on paper, the landlord’s right could be frustrated by other matters.

Where an effort to re-enter the premises is physically resisted, this could have a potential to cause a breach of the peace. In such a case, Section 99 of the Civil Procedure Code comes into play. A magistrate can act, if satisfied from a police report that a dispute is likely to cause a breach of the peace.

He can order the parties concerned to attend before him and put in written statements their respective claims with regard to possession of the premises in dispute.

He can thus make an assessment on which party should remain in possession. If the magistrate decides that one of the parties is in actual possession, an order declaring such party to be entitled to retain possession until evicted in due course of law, can be made.

Conclusion

Even where the tenant does not resist the re-entry because he is not present or otherwise, it would be prudent to make an inventory on what is found. Being accompanied by an independent party could be helpful against future claims by the tenant that some valuable property has gone missing.

There is, of course, the other aspect of cutting off electricity and water supply to the premises. Whether one is entitled to do so will depend not only on practical considerations but also on how the tenancy agreement is worded as well as the stage and point of time at which such action is taken.

Apart from the contract terms, one may also need to consider whether incorporation of such provisions permitting discontinuation of a utility is enforceable as it is contrary to public policy. This aspect could be the subject of a separate discussion.

Monday April 26, 2010

More foreign investors targeted for Nusajaya

By ZAZALI MUSA
zaza@thestar.com.my

UEM Land MD says good progress being made there

GELANG PATAH: UEM Land Holdings Bhd is targeting more international investors to participate in the development of Nusajaya this year.

Its managing director Datuk Wan Abdullah Wan Ibrahim said the company was eyeing investors from China, India, Europe, Singapore, South Korea and the United States.

“Nusajaya is progressing well and moving on the right track and we are confident of keeping the momentum going as planned,’’ Abdullah told StarBiz.

He was speaking at the launch of “Green Programme”, a collaboration between UEM Land and Universiti Kebangsaan Malaysia at SK Taman Nusa Perintis 1, near here on Saturday.

The Green Programme is outlined under the Nusajaya Green Plan launched in December last year to ensure a sustainable development of the country’s first economic growth corridor.

»Nusajaya will have enough content to attract investors and residents« DATUK WAN ABDULLAH WAN IBRAHIM

Abdullah said the company was unfazed by the Dubai World saga and now the Greece debt crisis as the two were unlikely to affect the global economy.

“Even during the global economic slowdown in the last two years, Nusajaya attracted interest from both local and foreign investors,’’ he added.

Abdullah said the company believed there were always opportunitie,s even during times of economic uncertainty, as there were investors and individuals with funds.

He said the company’s high-end residential projects, East Ledang and Horizon Hills, a joint venture between UEM Land and Gamuda Bhd, had attracted a large number of foreign buyers.

Abdullah said foreigners made up 65% and 56% of the buyers at East Ledang and Horizon Hills respectively and that the projects had recorded good take-up rates.

UEM Land is the master developer of the 9,308ha Nusajaya, the key driver of Iskandar Malaysia which was launched on Nov 4, 2006.

Nusajaya comprises eight catalyst developments – Kota Iskandar (Johor State New Administrative Centre), Southern Industrial and Logistic Clusters, Puteri Harbour Waterfront Development, EduCity, Medical City, International Destination Resort and Nusajaya Residences.

Nusajaya is one of five flagship development zones in Iskandar. The other four are the JB City Centre, Western Gate Development, Eastern Gate Development and Senai-Kulai.

Abdullah said works on infrastructure and several development projects in Nusajaya were on schedule and were expected to be completed in the next three to five years.

These include the RM1.4bil Coastal Highway linking Johor Baru city centre to Nusajaya, Asia’s first Legoland Theme Park, Indoor Theme Park @ Puteri Harbour, Marlborough College, Newcastle University Medical Faculty and Pinewood Studios.

“On completion of these projects, Nusajaya will have enough content to attract investors and residents,’’ he said.

Abdullah said it would be much easier to convince and attract investors to Nusajaya as they could witness the developments taking place.

He said another contributing factor was that Iskandar received continuous support and commitment from the Federal and Johor governments.

“The support from the Federal and Johor governments is important to ensure the success of Iskandar, which in turn will ensure that Nusajaya succeeds too,’’ Abdullah said.

He said other stakeholders, namely Iskandar Regional Development Authority and Khazanah Nasional Bhd-backed Iskandar Investment Bhd, also played crucial role in determining Nusajaya’s success.

Abdullah said its close proximity to Singapore was another added advantage for Nusajaya as it would not only able to attract Singaporean investors but also expatriates and multinational corporations there.

“As the master developer, UEM Land has an enormous task to ensure that Nusajaya succeeds and looking at its progress, we are well on our way to achieving it,’’ he said.