Tuesday, October 4, 2011

What is Due Diligence

In the context of a real estate sale or purchase, exercising due diligence simply means taking care by checking out all the facts, paying attention to the details and implementing risk controls before you go ahead and buy or sell. When we say checking we mean checking the person, the property and the money/price involved in the transaction. So important questions must be asked concerning ownership, location and so on.

One reason why purchasing registered land is highly recommended is that a registered title which is an official record of who owns the land, its description and location is guaranteed by the state. The original is maintained at the National Land Agency Office of Titles in the Register Book of Titles. When you purchase land,  you get the duplicate certificate of title with your name duly endorsed on completion of the transaction.

Unlike sellers of unregistered land who often have to produce several documents to prove ownership, the vendor of registered land must only show his registered title.

* Person(s)

When you are buying land you want to ensure that you are purchasing same from the rightful owner. It is imperative therefore that you conduct a title search. If there are multiple owners registered and only one of the owners is selling and purporting to sell the entire property then you may have a problem,. If the explanation is that the other owner(s) is/are deceased then your lawyer will make the necessary inquiries to ensure the legalities are complied with so that the sole vendor can proceed or in certain cases the deceased's personal representatives can join in the sale. If the person selling is not the owner nor his legal representative then you WILL have a problem but it is better to know before you part with your money that unscrupulous persons are misrepresenting themselves in the hope of making you the victim of their scam.

As I mentioned in my post on Pre-contract Matters you will have to conduct further searches at the Companies Office if the registered proprietor is a company. Be aware the foreign companies can own real estate so you will have to make searches in the foreign jurisdiction to ensure that such a company is in good standing and in a position to sell.

Of course you also want to ensure that the vendor is not selling the same property to several persons at the same time that he is selling to you.  In this regard and for your general protection buyers should ask your lawyer about the importance of lodging a caveat.

* Property

The registered title for land will have a deposited plan unless the property was registered by metes and bounds. You must examine this plan to see if the property your Realtor showed you accords with that on the plan. It is critical that prospective buyers see the property they are buying but if they are away in foreign lands they should take the next best step. Get a Commissioned Land surveyor. He will confirm whether:

  • the property on the ground is the same as that in the title,
  • the boundaries are fine and
  • the restrictive covenants are being complied with or not.

* Money

Is it really worth what they are asking? It is important to get a valuation report which a mortgagee will require if a purchaser is financing the purchase via mortgage loan.However a cash purchaser may not want this added expense. At the very least one should seek to get an idea of comparable values of homes in the neighbourhood.

Sometimes the parties may seek to engage in "passing money under the table" to allow the vendor to avoid paying taxes. BEWARE! Some of these transactions are downright illegal and in any event the Transfer Tax Act gives the Commissioner the power to assess the tax on a higher value than declared.

Another area that is becoming of increasing concern is that of money laundering. The ordinary man may think that this issue is one that is of interest only to financial institutions but it is important to note that property may be forfeited if it is derived from criminal acts. So a potential party to a real estate action who has reasonable suspicion to believe that the vendor or purchaser is disposing of or transferring criminal property should not proceed or he runs the risk of forfeiture and/or being charged with a criminal offence.

It is better to be safe than sorry.

Friday, July 29, 2011

Delays in Property Transfers

Not too long ago the manager of Jamaica National Building called upon the government of Jamaica to reform the land transfer system. Judging from the comments left by The Gleaner readers, the view is that such reform is long overdue. There were many complaints of land transfers or land sales taking abnormally long periods - in one case 7 years.

Let me be quite clear. If the following conditions exist there is no reason for a property transfer to take more than  90-120 days.

  • The land is registered
  • The owner/vendor is alive
  • There are no competing equitable interests as would be revealed by caveats
  • The property being purchased is the whole of the land comprised in the title
  • There is compliance with the restrictive covenants
  • The purchaser has the full purchase price and costs or has secured funding for same
Usually delays arise where one or more of the following occur: the land is unregistered, the owner is deceased, there are person(s) other than the registered owner who have an interest/claim against the property, the property being sold is a part of the property in the title or otherwise conflicts with the deposited plan, there are breaches of restrictive covenants or the purchaser cannot secure funding to close in time. 

It is critical therefore that the parties secure good legal representation to make the necessary inquiries to ensure that the ideal conditions exist for the transfer to proceed smoothly or to effectively address the conditions that can cause delays. If the property owner is dead for example, his estate will have to be administered and that process could very well cause a sale to be delayed for up to one year or more. Similarly if the property is not registered an application for registration of land can cause long delays.

In the event that certain conditions exist that will impede the sale process it is important that the parties are informed so that expectations for completion are not unreasonable.

Thursday, May 5, 2011

Shaw Makes Another Attempt

Our finance minister Audley Shaw is at it again lowering duties and taxes payable in relation to real estate transactions. Will the market respond this time?  For to be sure, despite repeated reductions in stamp duties and transfer tax the real estate and construction markets remain sluggish.


Mr. Shaw has focused on reducing duties payable on the re-financing and transfer of mortgages to a nominal fee of J$100 effective 16 May, 2011. This however will apply only if the loans are NOT being increased in which case the regular duties will apply.

Will this really stimulate the market? Hopefully the banks will be stirred by this incentive into lowering interest rates and so borrowing will increase but where are the buyers going to find the  income and/or savings from which to pay a deposit or make monthly mortgage payments? 

In order to stimulate growth the government is obliged to find ways to encourage spending yes, but the potential buyers cannot spend what they don't earn. The focus must be on job-creation.

Transfer Tax on Death

Section 5(1) of the Transfer Tax Act states that:
on the death of any individual after 31st May 1974, all property of which he was at his death competent to dispose shall, for the purpose of taxation in conformity with Subsections (2) & Section (3) of Section 12, be deemed to be, for a consideration equal to the market value at the date of his death to the persons to whom such property passes on 

Despite the fact that there are exempt categories, such exemption from payment of transfer tax on death only relates to the principal place of residence. Where there are other properties involved, transfer tax is calculated on an ad valorem basis.  Such tax on death is very often a disincentive to executors/beneficiaries to winding up estates, many of which comprise real estate.

This if further compounded by the interest charges. Interest is calculated as per Paragraph 17(3) First Schedule of the Transfer Tax Act:
“6% per annum shall be paid upon any of the tax outstanding from and after the expiration of twelve (12) months of the date of death of the deceased, to the date of payment”.

Very often the beneficiary of property is deprived of the real estate as the executor is forced to sell  in order to settle the taxes and other duties. In some cases due to the high stamp duties the application for probate or letters of administration is not even filed to allow for the estate's representative to collect and distribute the assets. The effect of this is that there are many properties in Jamaica which remain registered in the names of deceased owners. Some consequences of this are:

  1. the property cannot be held as security for loans,
  2. the property cannot be sold or leased. 
  3. the asset therefore fails to contribute to significant economic activity.

As of May 16, 201, Per Shaw's initiative, transfer tax on death will now be  1.5%.coming down from 4% on estates where death occurred after August 2009. Note the interest rate is now higher than the tax rate. Something ought to be done about that. 

In respect of probate and letters of administration filed after April 27, 2011 stamp duties will be charged on a graduating scale beginning at $5000 for estates valued at less than $10 million and going up by increments of $5000 for every 9.99 million thereafter culminating at $25,000 for estates valued at $40 million and more. Now while these will no doubt lighten the tax burden of estates upon death, the time is early yet to forecast great gains or a significant boost in the economy.

Indeed there are detractors who claim that this incentive is only of benefit to the wealthy as a member of a middle class family who might be the beneficiary of  a two bedroom apartment valued at J$12 million  will still be hard pressed to find the funds necessary to pay the $180,000.00 to the tax authorities and that only covers transfer tax. The stamp duty, executor's commission and attorney's fees are not included. In such a case, it is my opinion that the government ought to embark on a serious education drive to encourage the public to understand the need to make their assets work for them and also to encourage their loved ones to engage in shrewd estate planning to ensure that their estates are not overburdened or swallowed up by taxes.

Thursday, January 27, 2011

Update on Real Estate Costs

Having had occasion to direct one of my clients to my blog I noticed that I needed to give an update as to the current costs usually incurred on real estate transactions. This applies to transactions dating from January 1, 2010.

Transfer Tax - This was discussed in summary form earlier. Vendors will be happy to know that they will now only have to fork out four percent (4 %) of the market value of the property transferred.

Stamp Duty -   This is payable on the stated value or price of the property on the face of the document eg. Agreement for Sale. This has been reduced to three percent (3%). We remind you that this duty is shared equally between Vendor and Purchaser.

Unfortunately this has not had the desired effect of boosting the real estate market and may account for the fact that Attorneys are seeking to find ways to increase their income as the transactions remain flat. It is common therefore to now pay upwards of J$50,000.00 for the simple preparation of an Agreement for Sale. While this fee is usually shared equally, there will be occasions when the Purchaser will bear the full brunt of this charge, such as when the agreement is cancelled due to no fault of the Vendor.