Caveat 101

Recently, I went through a debt management process with a client and have learnt something new about “caveat”. My client's property was purchased by a developer under a en-bloc sale. As part of the legal process, the entire condominium's owners and their mortgage details have to be published in the newspapers. He was shocked to find out that other than the charge on the property by the mortgagee bank, there is another caveat by another bank. He asked me what's the meaning of “caveat”.

My lawyer friend and working partner gave us a “caveat 101” briefing. A caveat means “a warning”, for example “caveat emptor” means “let the buyer beware”. A caveat can be lodged onto one's assets as a result of unpaid debt, for example credit card, o/d line, car loan, or in above case, a business loan.

The implication to one's assets can be problematic. In above case, the sale of the property cannot be completed until the notifier's(the bank who placed the caveat) case is heard. This will result that the seller being unable to transfer the property to the buyer at the agreed time, and thus incur further financial losses.

Each caveat lasts for 5 years, and it is the responsibility of the notifier to renew the caveat for another 5 years if the outstanding debt still remain unpaid. The fee is, of course, bear by the debtor. This is usually done by adding on to the outstanding principal owed by the debtor to the creditor(bank).

The are 3 lessons to be learnt here. First, it is important not to avoid the creditor bank when one is in financial difficulties. Be pro-active with the creditor bank to work out a viable installment payment on one's loan. Otherwise, the bank would have little choice but to lodge a caveat (and then bankruptcy proceedings) on one's assets to recover the money.

Second, if a caveat is already lodged, one should try to complete the debt within the 5 year period, this will prevent unnecessary charges like caveat renewal fee.

Finally, one has to be very prudent in one's financial planning matter. In Singapore, in our quest to accumulate assets, we can (unknowingly) get into debt situation quite easily. And when these debts become unmanageable, life can be very miserable.

My Experience in Brunei

I was at Brunei over the weekend to conduct a wealth management training session for the local financial planners. My previous trip to this beautiful and quiet country was 20 years ago, where I learn how to topo out of the thick Tembrulong Jungle as a young soldier.

This time round, I was to experience the business and social sides of Brunei. Its land area is 4 times that of Singapore, but its population is only 300,000+, of which 50,000 are Chinese. With such a small population and tremendous income from its oil resources, it is one of the most livable countries in the region (if not the world). For example, a landed house costs about $350K (with no property tax); a mid- size Japanese car costs about $30,000 (with no road tax, and petrol is about $0.51 per liter); education and medical benefits are footed by the state.

As there is no income tax payable, a $200K income in Brunei is equivalent to $250K pre-tax income in Singapore (assume tax rate at 20%). With $200K annual income, the ratio of a landed house to income is 1.75 times; whilst a $200K annual after tax income in Singapore, the ratio of a landed house(say $1M) to income is 5 times. This means that a Singaporean has to make more income to sustain a similar lifestyle as his Bruneian counterpart.

There is no stock market in Brunei, therefore the working capital of running a business comes from traditional bank loans or own money. This make the cost of capital of running a business higher and more rigid, but the simplicity of capital can be a plus point. The shortage of equity and debt markets do mean that the businesses in the country are relatively small and simple ones. Huge companies, unless in partnership with the government, can have difficulty accessing to capital.

Another interesting fact is that the unit trusts sold by the local banks are actually unit trusts from Singapore.

I was told by my host that because there is no big stress in making big money to live a reasonably good life, the Bruneians are generally very relax and friendly. This is thought provoking.