Property Sales, Agency Fees and Penalties: Key Moments to Know

Navigating a property sale can be daunting, and it helps to understand the details related to agency appointments, fees and penalties. This article explains when and under what conditions agency fees and penalties are applicable, as well as key parts of the sale and purchase agreement (SPA) that will influence them. By clarifying the process, you’ll understand why it’s vital to know this information before selling your property. Prepare to handle your property transactions effectively and avoid any unexpected surprises.

Agency appointment letter

If you are appointing an agent, ask the agency firm for the appointment letter. Ensure that the firm is registered with the Board of Valuers, Appraisers and Estate Agents (BOVAEA) and has the licence to practice. You can call the BOVAEA to confirm. Key terms and conditions of the letter include the following:

(1) The type of agency engagement

Exclusive Agency: This means only one firm has the authority to sell the property. The owner may make introductions but the actual closing of the transaction is handled solely by the agency.

Sole Agency: If you wish to retain the right to market and conclude the deal yourself, you can choose sole agency.

Joint Agency: In this arrangement, more than one agency firm is engaged, and the agency that closes the deal gets paid. The number of firms appointed is limited, and each is aware of the others that are engaged.

Ad Hoc: On an ad hoc basis, you may engage an unlimited number of estate agency firms.

(2) Payment of agency fees

Typically, an agency firm converts the earnest deposit, which it holds as a stakeholder, into its commission when the SPA is signed and stamped, provided that the sale is unconditional and the owner has given prior written consent.

In cases where the sale is conditional, the commission is paid when the conditions precedent stated in the SPA are fulfilled. Common conditions may include obtaining approval from State Authorities, Foreign Investment Committee (FIC), developer and other relevant bodies. An unconditional sale has no conditions. It is clearly worded in the Malaysia Estate Agency Standards (MEAS Section 4.2.4) that where the Sale and Purchase agreement or Tenancy/Lease agreement is conditional, the estate agency fees (excluding disbursement) are due when the last of the conditions are met, i.e. when the agreement becomes unconditional.

Note that for a conditional sale, the SPA would specify that if the conditions are not met, the sale will be cancelled and the owner must return the full 10% deposit to the purchaser. If you agree to pay commission to the agency firm before the conditions are met, you risk incurring additional costs if the sale is ultimately cancelled.

Suppose the agency firm intends to convert the earnest deposit into their commission at the SPA stage for a conditional sale; the appointment letter must clearly state this. They must also explain the legal implications to you and obtain your written consent first. This is specified in MEAS Section 4.2.5. The clarification is important so you understand the consequences if the conditions are not fulfilled. If they are willing to refund their commission, be sure to ask if this refund is guaranteed and how the guarantee operates if they have paid the commission and in cases involving co-broke arrangements. You can disagree if you are uncomfortable with the arrangement.

In most cases, the purchaser will lodge a caveat on the property. Some sellers prefer that the agency release the earnest deposit to their lawyer if the sale is conditional. In this arrangement, you must ask your lawyer to provide a letter assuring the agency of the commission payment. You may specify in the agency appointment letter that the agency must return any funds it holds if the sale is cancelled due to unfulfilled conditions.

(3) Commission amount

The maximum commission for a sale is 3% of the property sale price. Most agencies would charge a service sales tax (SST) on the commission. There should be an SST registration number on the invoice.

If you are paying a 2% commission, the agency may collect a 3% earnest deposit to cover the SST and must remit the balance to you. Inform the agency if you want the agency to collect an earnest deposit equal to the commission amount. You must top up the SST separately.

If the agency collects a lower earnest deposit, the buyer will need to pay more when the SPA is signed so that the total reaches the standard 10% deposit payable at SPA stage.

Letter of offer

Once the agency has found a buyer, it will send you an offer letter and payment evidence for the earnest deposit. You can also check with the agency to see if the earnest deposit has cleared.

The offer letter should specify if the sale is subject to any conditions. If the offer letter does not mention any conditions but they appear later in the SPA, you may reject them if you disagree. You also have the right to reject any additional conditions added to the SPA that were not specified in the offer letter.

Once both parties have signed the letter, the agency is entitled to collect 50% of either the commission or the earnest deposit collected (whichever amount is lower) if the owner or the purchaser cancels the deal. If the purchaser is the party who cancels, they must forfeit the earnest deposit. If it is the owner who cancels, the agency will return the deposit, and the owner will be required to pay an equal amount as a penalty. The appointment letter must clearly state the penalties and the amount due to the agency.

Penalties after signing SPA

Once the SPA is signed, there are penalties if the sale is aborted due to the fault of either the owner or purchaser or if either party opts to back out. The SPA should clearly define the terms and conditions under which penalties apply. This is different from cancelling a conditional sale if certain conditions are not met, as there are no penalties in that case.

If the cancellation of the sale is due to the purchaser, then he will forfeit the 10% deposit made upon signing the SPA. However, if the cancellation is at the owner’s instigation, he must refund the entire 10% to the purchaser and pay an equivalent penalty amount. In such a scenario, the agency firm will still be entitled to receive its full commission.

Finally, ensure that you have a good title because if the title cannot be transferred or registered in the buyer’s name at the land office, you will need to refund the buyer. This is a rare but possible outcome if there are problems with the title.

Remember to keep track of when and how much to pay agency commission and any penalties while selling a property. This includes the time frame from the agency appointment letter and the letter of offer through signing the SPA and fulfilling conditions. Pay attention to the key moments in this process to avoid costly mistakes.