Free legal fees – fact or myth

An erroneous understanding of the matter exists in the housing development industry, much to the dismay of purchasers having disputes with developers.

FREEBIES have been advertised and offered to woo purchasers to buy developers' property because choices are now in abundance though pricing is on the exorbitant side.

Some of the freebies include air-conditioners, kitchen cabinet, automatic gate, club membership and legal fees. The list is not exhaustive as property development is a competitive game.

However, among the freebies offered to purchasers, legal fees require objective analysis. The freebie on legal fees normally appears in sale brochures and advertisements as “free legal fees” or “legal fees borne by developer” or words to that effect.

Now, what is “free legal fees”? Is it a freebie in the truest sense of the word?

Meaning of free legal fees

Generally, “free legal fees” would mean that the developer will pay for the legal fees on the S&P (sale and purchase) agreement. However, the offer of free legal fees may not cover disbursements such as stamp duties, searches fees, registration fees, printing charges, purchase of documents costs, etc. The purchaser will have to pay for them.

In other words, the offer of “free legal fees” would in its plain and obvious meaning suggests that the legal fees the purchaser would have to pay to the solicitor would instead be paid by the developer. It would, therefore, be understood that if the purchaser had appointed a solicitor, the developer would pay for the solicitor's fees.

However, is this what happens actually when a purchaser buys property from a developer who offers “free legal fees”?

What happens actually is quite different. An erroneous understanding of “free legal fees” exists in the housing development industry, much to the dismay of purchasers having disputes with developers.

Developer's solicitor

In offering “free legal fees”, the developer would recommend to the purchaser a law firm on the developer's panel to attend to the S&P agreement and its related transaction. Correspondingly, the same law firm will be tasked with the loan documentation as a packaged deal. If the purchaser chooses that law firm, the developer will supposedly absorb the legal fees. Quite obviously, the developer takes the view that such arrangements represent a cost-saving to the purchaser as well as facilitate and expedite dealings.

Now the irony is the solicitor of the law firm attending to the sale and purchase agreement would not normally scrutinise the agreement for the purchaser to understand in layman language, but would say that it is a standard agreement'. Instead, the solicitor would ensure that the developer's rights and interests in the agreement are intact and the purchaser duly signs the agreement and thus, is bound by it.

From a legal point, the solicitor acting in such a manner would actually be acting for the developer. The solicitor is therefore the developer's solicitor, and this being the case, the developer would have to pay the solicitor's fees. Therefore, there is nothing free about it as far as the purchaser is concerned. It can only be considered free if the buyer receives independent legal representation and does not have to pay for it.

Hence, there is no solicitor acting for the purchaser to scrutinise and protect the purchaser's rights and interests in the agreement. The purchaser is without legal representation. Since the purchaser has no solicitor acting for the purchaser in the agreement, there is no legal fees for the purchaser to pay.

Unfortunately, many purchasers realise this rather late in the day.

The purchaser normally realises this fact when a dispute arises and the purchaser asks the solicitor for help and is informed that the solicitor who attended to the sale and purchase agreement is actually the developer's solicitor. Purchaser's solicitor

What would happen if the purchaser appoints another solicitor who is not on the developer's panel of solicitors to attend to the sale and purchase agreement? How would the offer of “free legal fees” be affected?

In principle, the solicitor so appointed will scrutinise the sale and purchase agreement for the purchaser. The solicitor will act for the purchaser and consequently there are legal fees for the purchaser to pay the solicitor.

In this situation, the developer and purchaser will each have their respective solicitors. Each party will have solicitor's fees to pay.

If the developer's offer of “free legal fees” were taken seriously, the developer would have to pay for the purchaser's solicitor's fees. It is arguable that the developer's offer of “free legal fees” is broad enough to cover such a situation. The purchaser would therefore be entitled to claim on the offer and have the developer pay for the purchaser's solicitor's fees.

However, most developers would refuse to pay for the purchaser's solicitor's fees. The reason given normally for the refusal is that the offer of “free legal fees” is subject to the condition that the purchaser chooses the solicitor on the developer's panel of law firm to attend to the S&P agreement.

When this happens, the developer's offer of free legal fees would seem hollow and the developer may possibly be exposed to being sued for misrepresentation and damages. Legal Profession Act

Section 84 of the Legal Profession Act 1976, stated that a solicitor who acts for the developer in the sale of property under a housing development must not act for the purchaser in the same transaction.

Furthermore, under the sale and purchase agreement, namely Schedule G and Schedule H, the developer and purchaser must pay its own solicitor's costs.

The above laws clearly suggest that the developer's solicitor must not act, or purport to act, for the purchaser. The purchaser has a right to appoint his/her solicitor. Each party bears its own solicitor's costs.

Thus, is the developer's offer of “free legal fees” legal? Readers should ponder on the arguments.

The reality

Meantime, two situations would possibly arise from the developer's offer of “free legal fees”.

First, where the purchaser is unrepresented by a solicitor in the S&P agreement, the offer of “free legal fees” is not really “free” because the purchaser has no solicitor acting on his behalf. There is thus no legal fees to pay.

Second, where the purchaser is represented by a solicitor in the S&P agreement, he has a solicitor acting on his behalf and thus has legal fees to pay. The developer would be bound to honour the offer of “free legal fees” and pay the solicitor's fees or possibly risk being sued for mispresentation and damages.

In reality, most developers fail to honour the offer of “free legal fees” in the second situation. Instead, the purchaser is asked to pay the solicitor's fees and is informed that the offer only applies if the purchaser chooses the solicitor on the developer's panel to attend to the S&P agreement.

In summary, is “free legal fees” fact or myth? I leave that for your pondering and own conclusion.

Hopefully, the next time you buy a property from a developer and read about “free legal fees” or words to that effect, you would remember reading this article and exercise your rights accordingly.

What are the prevalent legal fees in property transaction when you buy from a housing developer? Are legal fees discounted for standardised S&P or housing loans)

In a case where the purchase transaction is governed by the Housing Development (Control and Licensing) Act, 1966 (HDA transaction), or where a loan is obtained to finance a HDA transaction, the following lower scale of fees will apply:

● RM250 if purchase price or the loan sum (as the case may be) is RM45,000 or below;

● 75% of the applicable scale fee specified above, if the purchase price or the loan sum (as the case may be) is above RM45,000 but not more than RM100,000;

● 70% of the applicable scale fee specified above, if the purchase price or the loan sum (as the case may be) is above RM100,000 but not more than RM500,000; and

● 65% of the applicable scale fee specified above, if the purchase price or the loan sum (as the case may be) is in excess of RM500,000.

(See table for a simplified version of formula for the fees scale.)

Why must you use your own lawyer?

The first rule of conveyancing is “buyer and seller must engage own lawyer”. Consult a lawyer right from the start and not after you have paid the deposit. The reason being, under the law you are deemed to have read and understood every document you have signed.

Furthermore, promises made by the seller or someone else about the deal may not be enforceable if the promises are not in writing unless you are able to provide proof of the same.

A lawyer cannot represent both the vendor and purchaser. If you are using the vendor's panel lawyer, often, when disputes happen, the lawyer is unlikely to represent you against their bigger client.

A lawyer in a general practice will be able to complete your purchase; however, lawyers with a focused real estate/conveyancing practice may prove a better choice if you are unsure of what to do, or have complications in your purchase agreement or mortgage. While you may think that you cannot afford the services of your own lawyer, consider whether you can afford not to.

● Chang Kim Loong is the honorary secretary-general of the National House Buyers Association (HBA) www.hba.org.my, a non-profit, non-governmental organisation (NGO) manned by volunteers. He is also a NGO councillor at the Subang Jaya Municipal Council. - The Star