Introduction

The role and duties of a collective sale committee and a marketing agent came under the High Court’s scrutiny in N K Rajarh & Ors v Tan Eng Chuan & Ors [2013] SGHC 76. This time, the issues considered were in relation to payments to incentivise a subsidiary proprietor to form part of the requisite 80% majority to enable the collective sale to proceed.

Brief facts

The majority owners (Majority Owners) in the 14-unit residential development Harbour View Gardens (the Development) appointed the Collective Sale Committee (CSC) to put up the Development for collective sale by public tender. The reserve price was set at $34 million. No bids were received at the close of tender and one week before the expiry of the ten-week period to proceed by private treaty as permitted under paragraph 11(3) of the Third Schedule of the Land Titles Strata Act (LTSA), an offer of S$33 million was received from the purchaser. As this was below the reserve price in the Collective Sale Agreement (CSA), there was a scramble to execute a Supplemental Agreement (SA) to obtain the requisite 80% consensus to lower the reserve price to $33 million. The subsidiary proprietors of unit 217, Han Min Juan and Jee Meng Tu (the Hans) signed the CSA and the SA after they were promised an incentive payment of $200,000. Mr Han was a member of the CSC.

The Majority Owners submitted an application to the Strata Titles Board. As mediation was unsuccessful, the case came before the High Court.

The incentive payment

The incentive payment of $200,000 was offered to the Hans and not to all the dissenting minority owners. The parties accepted that the incentive payment had the sole objective of achieving the requisite 80% consensus prescribed by section 84A(1) of the LTSA. With the additional $200,000, the Hans would have received more than what they would have received even if the Development had been sold at the reserve price of S$34 million. The dissenting minority owners (the Minority Owners) contended that this would upset the method of distribution and result in a breach of good faith required in the LTSA. It was also the Minority Owners’ contention that the CSC, in breach of the good faith requirement, did not act in a transparent manner in the sale process and that the offer of the additional payment of $200,000 was made to the Hans to the prejudice of the Minority Owners.

The process

Rejecting the Majority Owners’ argument that the scheme was a private arrangement, the Court held that the CSC and agent owed the Minority Owners a duty of disclosure. It is interesting to note that the Judge emphasised that the law does not prohibit incentive or inducement payments to minority owners per se. But the Judge drew a distinction between owners being incentivised after the 80% consensus is achieved and before it is achieved: where an incentive payment is made to achieve the 80% consensus, the Court will scrutinise the process. Thus, the Judge made considerable efforts to examine how the requisite 80% consensus for the collective sale at S$33 million was obtained. In evidence were two agreements:-

  1. an agreement between the contributing owners and the marketing agent (the Contribution Agreement); and
  2. an agreement between the marketing agent and the Hans (the Agent’s Agreement) in which the agent agreed to pay the Hans $200,000 on the condition that the Hans sign the CSA and the SA.

The circumstances faced by parties in the case are not unusual in collective sales.

The Han’s signatures were critical in facilitating the sale to the purchaser at $33 million, $1 million below the reserve price of $34 million. The last day for the CSC to execute the sale and purchase agreement with the purchaser was 25 July 2012. An exchange of emails with one of the subsidiary proprietors, who was overseas, Miao Miao, established that on the afternoon of 24 July 2012, Miao Miao was agreeable to contributing towards the $200,000 to the Hans. However, Miao Miao could only execute the Contribution Agreement and the SA on 25 July 2012. The Agent’s Agreement was entered into on 24 July 2012. As at 23 July 2012, before Miao Miao’s signature, the total amount pledged, based on contributions agreed upon in the Contribution Agreement by various majority owners, was S$184,594 which fell short of the sum of $200,000. The Judge concluded that the Agent’s Agreement effectively “underwrote” the shortfall of about $15,000. More significantly, the Judge ruled that the agent was a sub-agent of all subsidiary proprietors including the dissenting minority. As the agent’s commission was only payable if the collective sale was successful, the Judge concluded that by executing the Agent’s Agreement in favour of the Hans, the agent had put itself in a position where its duties to the CSC and the Minority Owners conflicted with its own interest and had acted directly against the Minority Owners’ interest not to sell below the reserve price.

Are incentive payouts permissible?

The Court made it clear that it should not be objectionable if subsidiary proprietors who are not CSC members make incentive payments to a minority owner for noble or other reasons. While the Court was of the view that the CSC and agent in Harbour View Gardens had not acted in good faith and in breach of their duty to the Minority Owners on the facts of the case, the Court made an interesting observation that a blanket prohibition against CSC members making incentive payments would not be practical and “arguably contrary to legislative intent of the collective sale regime which is to facilitate rather than impede collective sales”. However, the conduct of CSC members and the CSC’s advisors, the agents as in this case, would be subject to the test of good faith as such parties are subject to duties of good faith and fidelity to the dissenting minority. It is established law since the case of Horizon Towers (Ng Eng Ghee v Mamata Kapildev Dave [2009] 3 SLR(R) 109) that CSC members owe fiduciary duties to all subsidiary proprietors and as such are held to a higher level of accountability. While there is nothing objectionable for one subsidiary proprietor who is not a CSC member to make an inducement payment to a dissenting minority owner, where such payment is made by a CSC member, the process and the CSC members’ conduct will be subject to scrutiny and the test of good faith. Simply put, the CSC “cannot be allowed to enter into engagements which their personal interests conflict with or possibly conflict with the interests of those whom they are bound to protect”.

Those familiar with collective sales would be able to relate with the difficulties faced by the parties involved in Harbour View Gardens. The Judge found on the evidence of the case that the incentive payment of $200,000 was not offered to all Minority Owners. The first and second Minority Owners jointly owned two units. Any incentive payments to them would have to be for both units as they were not likely to agree to sell one unit and not the other. The unit of the third Minority Owner was too small for her consent to make up the shortfall in the requisite 80% consensus. Faced with such predicament, the parties involved made a “logical” choice in offering the additional payment to the Hans to make up the 80% consensus. The Court stated categorically that the statutory requirement of 80% consensus was supposed to be reached voluntarily. The sale process must be carried out in good faith and the Judge was of the view that the participation of the agent “in cash inducement with the knowledge and acquiescence of the CSC is conduct that is commercially unacceptable by reasonable and honest people”. The inducement was an act of bad faith and therefore in breach of the fiduciary duties owed to the Minority Owners. The fact that Mr Han was also a CSC member was probably a persuasive factor for the Court to arrive at its decision.

Conclusion

The Harbour View Gardens case further clarifies the obligations of the CSC and the agents in a collective sale and the legitimacy of incentive payouts. The practice of such payments if left unchecked could encourage parties to hold out for such “extras” and this would certainly frustrate the legislative intent of the collective sale regime which is to facilitate collective sales in the interest of urban renewal.

Moving forward, the Harbour View Gardens case serves as a timely reminder to all involved in collective sales to be mindful that while it may be an appealing and practical solution to take certain positions detrimental to the dissenting minority, their interests cannot be disregarded as the CSC and its advisors are duty bound to be even handed and to act in good faith. Notwithstanding massive time pressure at times, parties involved should be mindful that the processes in achieving certain ends would come under close scrutiny of the courts and what may appear to be an attractive and even logical solution may not be able to withstand the test of good faith and fidelity.

It is understood that the Majority Owners in Harbour View Gardens are appealing against the High Court’s decision. The outcome will be closely watched by parties interested in collective sales.