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The Role And Duties Of En Bloc Sale Committees
June 2009 | Collective Sales | Real Estate | Property Notes

LEE Liat Yeang
LING Tien Wah
KOH Jiaying

Introduction

The role and duties of a Sale Committee ("SC") in an en bloc sale came under the close scrutiny of the Judges of Appeal of the Supreme Court of Singapore recently in Ng Eng Ghee and Others [2009] SGCA 14 (the "Horizon Towers case").

Interestingly, the SC had its origins in contract. When en bloc sales first started in the early nineties, owners who signed an agreement to sell a development collectively appointed an SC, for practical reasons, to represent the owners. When the Land Titles (Strata) Act ("LTSA") was amended in 1999 to facilitate collective sales by development owners holding at least 80% of the development's share value, the Act did not mention the SC. Then, the big wave of en bloc sales swept across the country in 2006 and 2007 when almost every other development had owners who thought of going "the en bloc route" to take advantage of booming real estate prices. In the most recent big wave of en bloc cases, many SCs came under heavy fire allegedly for being overly pro-sale at the expense of the legitimate interests of owners who were reluctant or unwilling to sell.

Although the amendments to the LTSA in 2007 covered the SC's composition, constitution and proceedings, the precise duties of the SC remained largely a grey area. Then, industry experts could only agree that the duty of honesty is essential for the SC. Finally, in April 2009, the Singapore Court of Appeal clarified the law applicable to SCs in the Horizon Towers case.

The role of the SC during the en bloc sale process

Prior to the 2007 LTSA amendments, it was sometimes suggested that the SC is the representative of consenting owners who support the en bloc sale. This view was decisively rejected in the Horizon Towers decision. Instead, the Court of Appeal pointed out that the SC should be, and is, the agent of all owners in the collective sale of their units. This was supported by section 84A(1A)(a) of the LTSA which states, among other things, that the SC acts "jointly on behalf of the subsidiary proprietors of the lots". As such, the SC represents both consenting and objecting owners, even for an en bloc sale made before the 2007 LTSA amendments.

It seems paradoxical that the SC should be an agent of objecting owners who fail or refuse to sign the collective sale agreement. The court apparently sensed this difficulty but nevertheless unequivocally stated that the SC's initial paramount responsibility was to obtain the requisite consent (under the LTSA) for the collective sale and to appoint competent professional advisers. The SC's members and professional advisers have a statutory duty, respectively, to avoid any possible conflict of interest. However, once the requisite consent is obtained, the SC becomes an impartial agent acting for both consenting and objecting owners alike. At this stage, the SC must apply an even hand between the interests of these two groups of owners.

A fiduciary and a trustee of the power of sale

In the appeal judges' opinion, arising from the agency relationship between the SC and the owners, the SC should be regarded as a fiduciary of all owners independent of its contractual obligations. The court was not prepared to lower the standard of duty expected of the SC even though the SC was "not paid to do the job", which has often been cited as a reason to absolve the SC of liability in cases where the SC has not been guilty of fraud or dishonesty. In fact, the court pointed out that since most members of the SC would be consenting owners and would be inclined towards the sale, there is a need for higher standards of accountability and conduct from the SC.

Turning to the SC's power of sale, the judges opined that the SC's duty to owners in the exercise of its power of sale should be higher than that of a mortgagee exercising its power of sale. In their view, the SC has obligations akin to those of a trustee with a power of sale.

Duties in law apart from contractual obligations

The court emphasised that the primary statutory duty imposed on the SC is that of good faith. In our respectful view, "good faith" as stated in section 84A(9) of the LTSA is the necessary ingredient of any en bloc sale transaction to be approved by the Strata Titles Board. In the LTSA, "good faith" in a transaction is assessed only in the light of the stated factors, namely sale price, method of distribution of sale proceeds and the relationship of the purchaser to any of the owners. The Court of Appeal pointed out that the word "transaction" in section 84A(9) of the LTSA embraces the whole sale process (including marketing the property, and negotiating and finalising the sale price with the buyer), culminating in the eventual sale.

According to the court, the definition of "good faith" in general law should be considered. As such, the Strata Titles Board should look at the requirement of the SC to discharge its duties faithfully and conscientiously, and to hold an even hand between the consenting owners and the objectors. In particular, the SC must act as a prudent owner to obtain the best price reasonably obtainable for the entire development.

Here, the Court of Appeal linked the duties of the SC to the necessary ingredient of good faith in an en bloc sale transaction. The term "good faith" must be read in the light of the SC's role as fiduciary agent and whose power of sale is similar to that of a trustee of a power of sale.

From the Horizon Towers judgment, the SC's duties, flowing from its role as a fiduciary agent and trustee of a power of sale, include the following:

(1) The duty of loyalty or fidelity.
(2) The duty of even handedness, which is essentially a duty of impartiality.
(3) The duty to avoid any potential (and not merely actual) conflict of interest.

As members of the SC are owners themselves and come from all walks of lives, the possibility of a conflict of interest is very real. This makes the next duty even more important.
(4) The duty to make full disclosure of relevant information (to both consenting and objecting owners).

The SC member must disclose fully his or her personal interest as soon as a possible conflict of interest arises, or as soon as practicable after. This duty continues even after the statutory requirement of disclosure, at the time of election as an SC member, of that person's direct or indirect interest in any property developer, property consultant, marketing agent or legal firm, which could conflict with his or her proper performance of the functions of an SC member. The Court of Appeal opined that any non-disclosure of a conflict of interest may affect the requirement of good faith in the transaction, especially when that member has played a decisive or influential role in the SC's decision to enter into the transaction to sell. An SC member who acquires additional units in the development (especially if they are financed by bank loans) before or after he becomes a member of the SC must disclose such interest (including the terms of sale and any existing loan arrangements) to all the owners.
(5) The duty to act with conscientiousness, that is, to exercise its powers in the best interests of all owners.

The duty to act with conscientiousness in relation to the sale price requires the SC to discharge its duty to use all possible diligence to secure the best price reasonably obtainable. In the Horizon Towers case, the Court of Appeal set out the steps that the SC must take to fulfil this duty. Some of these steps include the following:
  • Exercise due diligence in appointing a competent property agent to market the property and negotiate with potential purchasers. In our view, this is important since an en bloc sale transaction is usually more complicated than a single property deal and involves more rules.
  • Market the property for a reasonable period of time to the largest number of potential purchasers. In our view, the first sale attempt should be by public tender or auction, as stated in paragraph 11 of the Third Schedule to the LTSA, so as to give the property its greatest exposure to the market.
  • Follow up on all expressions of interests and offers that result from its marketing efforts.
  • Where reasonable, try and create competition between interested purchasers so as to obtain the best sale price. In our view, this is most relevant when an earlier offer price from one potential buyer is intercepted by a higher offer from a second potential buyer before acceptance of the first. In such a case, it is not enough for the first buyer to just match the second buyer's price. The best way would be to conduct either a closed tender for the two buyers or an open tender again.
  • Inform itself of matters relevant to the decision to sell the property and take advice from appropriate experts on when and at what price to sell the property.
  • Obtain an independent valuation prior to agreeing on the final sale price in order to be able to gauge whether it is obtaining a fair (not to mention the best) price for the property. In our view, the SC should look carefully at a valuation report obtained to discern the basis for assessment and the comparables used at the time of valuation, especially in a rising market of active sales transactions.
  • Choose the most propitious timing for the sale of the property. The SC should not decide to sell at the reserve price point or market value of the property if there is a reasonable basis to believe, with the benefit of independent expert advice, that a better price may be obtained within a reasonable time frame in the future. In our view, this very high standard will cause difficulty for many SCs in the future when they have to make a decision to sell in a property market of fast rising values. The Court of Appeal noted the "challenging duty" facing the SC but highlighted that it is "a necessary judgment call for an SC to make in each instance". The Court of Appeal correctly recognised situations where the adage "a bird in hand is worth two in the bush" holds true. After all, in our view, one can never tell when we will see the "red flag" in a property market "bull run".

The Court of Appeal also opined that the SC has the duty to seek fresh instructions or guidance from the consenting owners from whom it draws its mandate whenever there is reasonable doubt as to the proper course to adopt. This duty arises out of the SC's fiduciary obligations to the owners. In our view, this should be most relevant when the prices in the property market have risen so quickly within a short time period so as to vitiate the earlier mandate of reserve or sale price. In practice, we note that the SC, in many cases, are empowered under the collective sale agreement to increase the reserve price upon the advice of the property consultants and lawyers. Even in such cases, it may still be relevant to seek the views of the other owners before making any decision to sell at any given price.

Conclusion

The comprehensive grounds of decision of the Court of Appeal will form the legal literature of lawyers advising future en bloc sale transactions, which are set to increase again when the economy recovers in land scarce Singapore. Putting an end to the Horizon Towers saga, the Court of Appeal took great pains to explain that the SC has an onerous duty to act in good faith, not just for the benefit of consenting owners but objecting owners as well. Ultimately, the duty is to act faithfully and conscientiously to obtain the best price possible in the circumstances.

It might appear that the stringent duties laid down by the Court of Appeal will scare away future potential SC members from taking up the position for fear of being sued by fellow owners if they fall below the requisite standard. This is especially so if the SC cannot legally exclude liability for duties arising out of principles of fiduciary agency that is statutorily confirmed in the 2007 amendments to the relevant provisions of the LTSA. After reading the long list of expected duties, we suspect that few owners will want to take on the gratuitous (and thankless) job of an SC member with the prospect of being held responsible legally should they fail to meet the requisite standards. At the same time, one hopes that objecting owners should take note of and respect the personal sacrifices and the effort made by members of the SC in discharging their numerous duties.

In our view, the job of the SC can be made easier with the proper and competent guidance of experienced legal and real estate professionals. Quite possibly, the satisfaction of a job well done becomes even greater if the SC leads a successful collective sale by duly observing the guidelines set out by the Court of Appeal in the Horizon Towers case and treating all owners fairly.