The distinction between residential and commercial titled properties was once unambiguous, with the title clearly denoting its use.

Residential title properties consist of landed and stratified developments, such as terrace and semi-detached houses, townhouses, apartments, flats, condominiums, cluster homes, and bungalows.

Office units, shoplots, retail lots, hotels, and other components from mixed developments, meanwhile, fall under a commercial title.

However, evolving consumer needs and marketing terms employed by developers have made things more confusing. New products such as small office, home office (SoHo), small office, flexible office (SoFo), and small office, versatile office (SoVo) have penetrated the market over the years.

These properties, alongside serviced apartments, are open for residential use but remain under a commercial title.

The differences between a residential and commercial title matter for the following reasons.

1. Statutory protection

Home buyers enjoy some statutory protection under the Housing Developers (Control and Licensing) Act 1966 (HDA).

Amendments in recent decades have been made to cover residential properties with commercial titles, such as SoHos and serviced apartments. But SoFos and SoVos remain excluded and are subjected to the control of local authorities.

The HDA requires inclusion of standard terms in the sale and purchase agreement, unlike the terms in the purchase of commercial properties drafted by developers’ lawyers.

The rules for vacant possession are also more stringent for properties covered under the HDA. Vacant possession begins upon the receipt of the certificate of completion and compliance (CCC), and handover of keys of the unit to the buyer for occupation.

Properties under the HDA must receive running water and electricity supply to constitute vacant possession.

The same can’t be said for commercial properties, where vacant possession may be handed over despite the unit still being unfit for occupation and pending the CCC.

Buyers covered under the HDA also enjoy a more comprehensive warranty for the purchase of new properties. This defect liability period runs for 24 months from the date of vacant possession for residential properties, and encompasses the parcel, building, and common areas as well.

On the contrary, the defect liability period for commercial properties is not regulated. It typically runs for 12 months and only covers the parcel, making it more challenging for buyers to claim against any defects in common facilities, and is subject to dealings with the developer.

The HDA also entitles buyers to a set amount of compensation for the delayed completion of a property. This is known as liquidated ascertained damages and is calculated at 10% per annum of the purchase price from the scheduled completion date.

2. Legal recourse

Those who purchase properties covered under the HDA are able to seek redress for buyer-related disputes at the Homebuyer’s Tribunal.

Legal representation is not needed at a tribunal hearing, and a filing fee is capped at RM10, making the process speedy, affordable, and more accessible for aggrieved home buyers.

On the contrary, buyers of commercial properties can only seek remedy in a court of law, where lawyers’ fees can be expensive and the process time consuming.

3. Utility rates and taxes

Commercial utility rates are higher than residential, with buyers of commercial-titled properties including SoHos and serviced apartments potentially having to pay 30% to 50% more in electricity tariffs.

According to Tenaga Nasional Berhad (TNB), residential properties are charged an electricity tariff of only RM0.218 per kWh, while low-voltage commercial properties pay RM0.435 per kWh for the first 200kWh – nearly double the rate.

However, home owners or management bodies may apply to TNB to convert the electricity tariff from a commercial rate to a residential one.

Taxes are another factor, as quit rent and assessment rates for properties with commercial titles are approximately 2.5 times higher.

4. Loan margins and financing

SoFo and SoVo properties are subject to similar commercial-loan terms as offices and shoplots. Prospective buyers would have to settle for a loan of up to 80% of the property’s price and possibly shorter tenures.

With the increased margin of financing, buyers would be required to pay a minimum 20% down payment.

The higher upfront costs compared with purchasing residential properties could deter future buyers in the subsale market when the original owners seek to sell off the property.

Financing options may also be more limited. For example, the purchase of a property via EPF Account 2 is only allowed for residential properties and certain types of residences with commercial titles, such as studio apartments, service residences, SoHos, and shoplots with an attached residential unit.

Additionally, Malaysians might find various incentives such as full financing and stamp-duty exemptions for first home buyers restricted to residential properties, or only available upon appeal.

This article was written by Vigneswar Rajasurian of PropertyAdvisor.my, Malaysia’s most comprehensive source of property data, property analytics and insights.