Check if the bank has lost the “original copy” of your title document.

By Dr Ernest Cheong

In my earlier article, When the bank forecloses how do you survive?, I suggested that Malaysian borrowers have five defences against foreclosure proceedings launched against them by Malaysian banks. One of them is checking if the bank has lost the “original copy” of your title document.

Defective title returned by bank - a chargor’s nightmare

After the chargor (borrower) has settled and paid in full his loan, the bank will return to the chargor a “replacement title” that the bank has applied for and obtained from the land office if it lost the “original title”. If the bank did not inform the chargor, he or she as the registered proprietor would not have been involved in the application for the “replacement title”. According to the Supreme Court judgment in M&J Frozen Food Sdn Bhd v Siland Sdn Bhd, the “replacement title” obtained by the bank without involvement of the registered proprietor is likely a “defective title”.

This is a real nightmare scenario that is waiting to happen to many chargors (registered proprietors and borrowers) in Malaysia. They are living in blissful ignorance. Wake up from your slumber and act immediately before it is too late!

Borrower’s right as chargor

When a borrower (chargor) charges his property/house to the lending bank (chargee), the chargor deposits the “original copy” of his title with the chargee to keep as “trustee and custodian” for the chargor. This means that the bank must be responsible to the chargor for the safety of the title document.

What happens if Malaysian banks lose chargors’ title documents

I am told by officers of many Malaysian banks that they often lose the “original copies” of the chargors’ title documents kept with them. I have personal knowledge of more than one such incident.

Malaysian Banks sometimes ignore the National Land Code 1965

I am informed that when banks lose the “original copy” of the chargors’ title documents, they would instruct their lawyers to apply to the Land Office for “Replacement Titles”. I am also informed that these banks do not inform and do not get the chargors (registered proprietor and borrower) to be involved in the application process. The banks consider that as chargees, they have the right to apply for “replacement titles”.

Statutory procedures for the application of replacement titles

Section 166 (1) (d) of the National Land Code 1965 provides for the “circumstances in which title in continuation may be issued to land as a whole” and for the application of replacement titles when the original issue document of title “has been lost or wholly or partially destroyed, or is being improperly or wrongfully withheld”.

Section 166 (2) of the National Land Code 1965 stipulated that the person or body to apply for replacement titles are as listed below:-

a)         The proprietor of the land in question

b)         Any person or body claiming through the proprietor

Section 166 (2) of the National Land Code 1965 did not provide for the “bank” or “chargee” to be included in the list of persons or bodies permitted to apply for the replacement title.

Section 168 of the National Land Code 1965 stipulated that: “Before issuing title in continuation in the circumstances described in paragraph (c) or (d) of subsection (1) of section 166, the Registrar or [Land Administration] shall:-

(a)         cause notice of his intention to do so to be published in the Gazette in Form 10D; and

(b)        cause copies of the notice to be served on every person or body having a registered interest in the land, and to be published in accordance with the provisions of Section 433

Judicial Interpretation

M&J Frozen Food Sdn Bhd vs Siland Sdn Bhd

This is an appeal to the Supreme Court of Malaysia by M&J Frozen Food Sdn Bhd against an order of the Johore Bahru High Court that had annulled an Order for Sale made by the Senior Assistant Registrar in respect of a property known as Lot No PTD 18279 in the Mukim of Plentong, District of Johore Bahru, State of Johore held under HS(D) 40269.

We will not delve into the details of the judgement of the Supreme Court. We will only examine the rulings and decisions made by the Supreme Court in this case where it applies to the right of the bank as chargee vis-à-vis the right of the chargor.

Legal position between the chargor and the chargee

When ruling on the legal position between the chargor and the chargee, the Supreme Court cited the Federal Court case of Mahadevan Mahalingam v Manilal & Sons (M) Sdn Bhd [1984] 1 MLJ 266 at p 289 as follows:

“Our land law does not recognize a mortgage if it means a mortgage in the sense of English land law whereby the legal estate, i.e. ownership of the land is transferred to the mortgagee and what is left with the mortgagor is only an equitable right to redeem, known as equity of redemption. But our land law certainly recognizes a mortgagor in the sense of Torrens system, referred to by text written as Torrens Mortgage in which the mortgagor retains the legal ownership whilst the mortgagee acquires a statutory right to enforce his security”

From reading the judgment of the Federal Court in Mahadevan Mahalingam v Manilal & Sons (M) Sdn Bhd and adopted by the Supreme Court, it is abundantly clear than the bank as chargee does not have the same rights over the property as the chargor who retains the legal ownership. The Bank only has the statutory right to enforce his security.

Respective interests of the chargor and the chargee

When ruling on the respective interests of the chargor and the chargee, the Supreme Court in the M&J Frozen Food Sdn Bhd v Siland Sdn Bhd case cited another Supreme Court case, Malayan United Finance Bhd v Tan Lay Soon [1991] 1 MLJ 504, quoting from Justice Jemuri Serjan SCJ:

From reading this judgment, it is abundantly clear than the bank as chargee is entitled to the custody of the issue document of title so long the liability stays under the charge. It also ruled that “the right or interests in the charged land remains with the registered owner”.

Failure of purchaser to obtain good title

The Supreme Court in the M&J Frozen Food Sdn Bhd v Siland Sdn Bhd further ruled on the circumstances when the purchaser of the land might fail to obtain good title in two distinct ways:-

i)            If the title of the vendor is bad

ii)           Even if the vendor has a good title, there might be some invalidating defects in the conveyance or transaction in which the purchaser attempted to obtain the title.

The Supreme Court further ruled that:

“These transactions might be void or voidable for a variety of reasons. In the case of a defect in the vendor’s title, the common law rule is that no person can give a better title than he had –nemo dat quod non habet”.

Conclusion

In the light of the above listed Federal Court and Supreme Court Judgments and the provisions in the National Land Code 1965, it is clear that the Bank’s rights over the title of the charged property are as follows:-

1.     The Banks do not have the right to apply for replacement titles when the original titles deposited with them are lost;

2.     The Banks as custodians of title documents deposited with them only have the statutory right to enforce their security;

3.     The Banks as chargees are only entitled to the custody of the title documents so long as the liability stays under the charge;

4.     The right or interests in the charged land remains with the chargor.

Request for copy of title document from lending bank

In the light of the Supreme Court’s judgment in M&J Frozen Food Sdn Bhd v Siland Sdn Bhd, the chargor (borrower) might fail to get good title if it is bad because the bank did not comply with the provisions in Sections 166 (1)(d) and Section 166 (2) of the National Land Code 1965. The chargor  may have difficulties in the future trying to sell his or her property after he has paid the bank and the bank has discharged the property and returned him a “defective title”.

I advise chargors (borrowers) to immediately request from their lending banks photocopies of their title documents. After receipt from the banks, make sure the copies of title documents are copies of the original title and not copies of replacement titles. If the title documents provided by the banks are copies of replacement titles and if you are sure you were not involved in the replacement titles’ application, then the replacement titles are probably defective. Immediately get a lawyer and tell him the whole story. Your lawyer will know what to do next and he will take care of you. Show your lawyer this article if you like.

Dr Ernest Cheong is a veteran chartered surveyor, registered valuer, auctioneer and arbitrator and also principal of Ernest Cheong PTL Chartered Surveyors. He holds a Doctorate in Business Administration (DBA) as well as an MBA from Reading University, England. If you have any query about property and property related issues, e-mail Dr Cheong at enquiries@ecptl.com or visit www.ecptl.com. He also blogs at www.propertygandhi.blogspot.com.

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