What gives the bank the right to auction my property?
Land is usually taken by the bank as security for housing loan before the loan is disbursed. Security may be taken in the form of a legal charge or assignment.
For property with an individual title, the charge in favour of the bank (“Chargee”) is executed by the borrower (“Chargor”) registered on the title as security for the loan. The original title with the bank’s charge endorsed on it is is kept by the bank as security.
For property where the title has yet to be issued, security is taken by the bank by way of a deed of assignment in favour of the bank. The borrower (“Assignor”) assigns all his rights in the property deriving from the Sale and Purchase Agreement to the bank (“Assignor”) as security for the loan. When the title is issued, the borrower will be required to execute the charge in favour of the bank.
Whether by way of charge or by assignment, the effect of default is that the bank is entitle to recall the facility and recover monies due by way of sale of the subject property.
Before the subject property can be auctioned, the bank will have to first apply for an Order for Sale. Depending on the type of land title, the application may be made to the High Court or the Land Office.
Pursuant to the National Land Code, where the subject property is held under a Land Registry title, the application for Order for Sale may be made to the High Court whereas for properties held under a Land Office title, the application shall be made to the Land Office.
For properties without individual or strata title, the process stipulated under the Loan Agreement cum Assignment (LACA) will be followed.
This remainder of this article deals with the foreclosure procedure in the High Court.
What is Foreclosure?
It is the legal process then the lender uses to sell off a charged property where the borrower has defaulted in loan payments for the purpose of recovering the outstanding debt owing to the lender. The process is regulated by the National Land Code and Rules of Court.
Overview Of The Foreclosure Process In Malaysia
1. Letter of Demand (LOD)
Before initiating foreclosure proceedings, banks may issue a letter of demand (usually through their solicitors) notifying the borrower of the breach and giving the borrower a specified time to remedy said breach.
However, it should be noted that banks are not legally obligated to issue a letter of demand before commencement of foreclosure proceedings.
2. Notice of Default (Form 16D)
A notice of default (Form 16D) is issued where the breach is continuing for at least one month or such other period that may be specified in the charge. (note: where the principal sum is payable on demand, notice may be in Form 16E)
The notice must specify the breach, provide a specified timeframe for it to be remedied, and notify the chargor that foreclosure proceedings will be commenced should the chargor fail to comply.
Should the chargor fail to remedy the breach within the timeframe specified, the bank shall be entitled to recall the facility and the entire sum secured by the charge shall become immediately due and payable by the chargor.
3. Commencement of Foreclosure Proceedings in the High Court
I. Filing
Foreclosure proceedings are initiated in the High Court by the bank (“Plaintiff”) through its panel solicitors by way of originating summons supported by affidavit exhibiting a copy of the charge.
A copy of the same will be served on the chargor (“Defendant”) by the Plaintiff’s solicitors.
II. Hearing
The court will fix a hearing date for the Plaintiff’s application and the Defendant shall be notified of the same by the Plaintiff’s solicitors.
At the hearing the Defendant may object to the Plaintiff’s application by providing evidence of cause to the contrary (i.e. defects in the Plaintiff’s Notice of Default or procedural non-compliance with the NLC or Rules of Court etc.).
III. Issuance of Order for Sale
If the Defendant is absence or fails to provide any evidence of cause to the contrary and if the court is satisfied that the Plaintiff has proved its case, the court will proceed to issue an order for sale.
The order for sale empowers the Plaintiff to proceed to sell the subject property by way of a public auction.
IV. Enforcement of the Order for Sale
At this juncture, the Plaintiff will apply to court for a consequential order that an auction date is fixed at a reserved price based on a valuation report provided by the Plaintiff.
The application will be served on the Defendant who is once again required to appear in court for the hearing of the Plaintiff’s application.
Should the Defendant fail to appear in court or fail to raise any objections, the court may grant an order fixing the auction date and reserve price for the sale of the subject property.
V. Public auction
The property is sold to the highest bidder at a public auction and the proceeds are applied to settle the debt owing to the bank in the order of priority stipulated in the charge annexure.
Should the proceeds be insufficient, the bank has a right to commence further legal action against the borrower to recover the shortfall.
Conclusion
In conclusion, while bank foreclosure can seem daunting, understanding the process and the rights of both borrowers and banks under Malaysian law can help homeowners make informed decisions, take timely action, and better protect their interests before a property is put up for auction.
