Legal and Beneficial Ownership
1.0 Introduction
All things in this world belong to Allah (swt); we are merely the trustees of His belongings, and shall be accountable for all of our conducts. Qur’an and Hadith explained the kind of properties (mal) that we are allowed and not allowed to possess and use for our necessity, and what kind of person who can and cannot own properties. It is the human nature that never be satisfied for what they have, although it is sufficient. Sometimes humans are blinded with material pursuit (greed) and will do anything regardless of whether it is permissible or not to achieve and fulfill their desire. Among others, it is important to recognize that the pursuit for material wealth and power resulted in people fighting one another for scarce resources; those who own resources or properties are considered superior than others in the society. Therefore, it is important to analyze the issues concerning legal and beneficial ownership as these issues are ubiquitous in today’s lives.
For the sake of the paper, we have identified three main issues in legal and beneficial ownership namely legal and beneficial ownership in trust cases related to waqf, legal and beneficial ownership in lease cases and legal and beneficial ownership in mortgage or charge cases.
2.0 Legal and Beneficial Ownership
Ownership is defined as “a right over a property, which excludes others and enables the owner to make use of the property itself or its usufruct (manfa’h) in the absence of any legal hindrance or to take compensation for its loss”. It means the owners can exploit the properties without legal obstacles with the condition that the owners are not minor, lunatic, prodigal (sufha) and bankrupt. In case that the owners belong to one of the category mentioned above, a guardian or an agent can be appointed to manage and protect the ownership of the properties on behalf of a minor, insane or a prodigal person. Ownership can be acquired through contract, inheritance and the rule of first possession of natural resources. It can be further divided into three categories which are ownership of assets (Milk ul’Ain), ownership of debt (Milk ud Dayn) and ownership of usufruct (Milk ul Manf’at). Milk ul’ Ain is when the owner acquired both the rights and manfa’h from the possession of a property. The ownership is definite and not related to time while Milk ul Manf’at is related to time, meaning that usufruct of any asset against rental can be taken or given for a specific period of time. This could also be referred to as beneficial ownership.
It is important to recognize the differences between legal and beneficial ownership as the type of ownership determines the liability, right, risk, and reward for possessing the properties. Legal ownership can be categorized as a complete or incomplete ownership whereas beneficial ownership can be classified as incomplete ownership. In practice, there are two terms of incomplete ownership such as follows:
● Legal control is an ownership of legal title only. A person with legal control can buy and sell an asset but will never own or enjoy the benefits of ownership (such as income or usage).
● Beneficial ownership on the other hand, allows a person to enjoy the benefits of ownership (including usage, income, profits etc.) even though the legal title is in another person’s name. Beneficial ownership arises when an asset is owned by one person (the "legal owner") who has a duty to use it on behalf of another; one person holds assets as trustee for another.
For example, when Gerry buys a new car and he has the choice of either to use his name or uses another person’s name as the legal owner. In addition, he can lease that car or use it for himself. He has the choice of either complete ownership (to own the property and its usufruct) or incomplete ownership (to own the property). However, sometimes they do not use their name as a legal owner in order to avoid tax and other negative purposes or other negative thing will happen when the beneficial owner misuses his or her right.
2.1 Legal and beneficial ownership in trust cases related to waqf
To illustrate, legal and beneficial ownerships can best be comprehended in trust cases. Trust is a fiduciary relationship in which one person, known as a "trustee", holds the title to property or assets for the benefit of another person, the beneficiary. Anglo-American law recognizes the division of ownership between the power to manage property and the privilege of receiving the benefits from it, known as the trust. One of the most important issues in trust is also related to Waqf. The concept of Waqf is rooted to the Quranic injunctions, which deal with charity. The spirit of charity in the Quran suggests:
"And in their wealth the beggar and outcaste had due share"(26:19)
"Ye shall never attain to goodness till ye give alms of that which ye love, and whatever ye give, of a truth God Knoweth" (3:86).
Waqf means freezing the capital or property, and not disposing it by selling, giving or inheriting, or in any other way, so that any income or earnings are to be disposed of in the manner dictated by the person who initiated the waqf, for charitable purposes and the like. Although the foundation of waqf is laid down in the Islamic teaching, there are still some gray areas especially when it comes to the implementation and enforcement of the waqf itself.
The Concept of trust can be used in waqf, for example, Camelia and Fairus Corporation give a land as a waqf to IIUM, and in this case the trustee is IIUM (beneficial ownership). IIUM is given the trust to exploit this waqf land and Shariah court can appoint a manager (mutawalli or nazir) to manage and administer that waqf land in this case is can be one of the IIUM’’s officer. The issue in here is IIUM does not has right to sell, mortgage, or change the ownership of waqf property without the permission of the shariah court. In addition, IIUM cannot borrow money for spending on this land except with court permission. It is because IIUM is not the legal owner of that land. The main basic of the waqf is shifting from private property to public property, therefore, IIUM can develop the waqf land lawfully (in line with shariah) such as to construct a building IIUM makes a contract of Istisna’ with bank and bank make a second Istisna’ with developer. The issue is IIUM cannot lease in long term to other private institution to develop the waqf land (such as Hukr which already abolished in several countries) which will convert to private property since it will use for commercial purpose not for public interest anymore.
Nowadays, all waqf land must be registered even though the ownership of waqf property is versted in Allah S.W.T. Currently, in August, 2009, there was a current legal issues on waqf in Selangor, Malaysia, a waqf land was claimed by Mr.B as his land. The story was Mr.X (original legal owner) a few years ago gave his land as a waqf to Majlis Agama Islam Selangor (MAIS) that to be used for Muslim burial ground. However, the land has not been gazetted as waqf by the Land Office pursuant to section 62 of the NLC (National Land Code) (civil law) which is higher than shariah law (MAIS). In addition, the cause of this problem is that there is no similar provision of section 13(e) of the Wakaf (State of Selangor Enactment) 1999 in other states, except Malacca there is ‘A wakaf is invalid if…(e) it is inconsistent with Hukum Syarak or any written. The issue arises when the son of Mr.X (original legal ownership) sold the land to Mr.B and it has been notarized according to civil law without informing MAIS, as a result, MAIS dispute with Mr.B in the Shah Alam High Court. Legally, the civil law is higher compared to shariah law (MAIS) and the case happened due to negligence of the MAIS’s officer not to proceed the process quickly. Eventually, Mr.B won the case since civil law is higher than shariah law in Malaysia. Therefore, there is a need for an efficient administration and clear law governing waqf and its validity. Without such legislation, it is unlikely that waqf will achieve its mission of alleviating poverty and protecting the general interest of the society as it was intended to be.
2.2 Legal and beneficial ownership in lease cases
Another issue concerning the legal and beneficial ownership can best be examined in lease cases. Lease is a written agreement in which a property owner allows a tenant to use the property for a specified period of time, in return of a monthly payment (rent). Ijarah (lease) derived from Al-’Ajr which means compensation, substitute, consideration, return or counter value (Al’Iwad). As a contract, it refers to hiring or renting of any asset/commodity to benefit from its usufruct. It also encompasses the hiring of labour and any contract of work against a return (wage). In addition, the definition of Al-Ijarah is an agreement (aqad) of transferring usufruct (intangible manfaah) of goods and services through compensation without being followed by the transfer of legal ownership (milkiyyah) of the goods itself.
The issue in Ijarah (lease) rises in the case of sublease where the lessee leases the leased asset to another person without the lessor’s permission. This transaction is not permissible since legal ownership is not transferred through leasing, but only the beneficial ownership (transfer of usufruct). Another concept in the modern leasing is “head leasing”, in which a lessee sub-leases the property to a number of sub-lessees, and then invites others to participate in scheme by sharing the rental revenue received from the sub-lessees. In order to receive the rental revenues, the lessee will charge a specific amount of fee from his “partners”. At a first glance, the arrangement looks genuine as if there is nothing wrong with the transaction. However, if we scrutinized it further, we still found that this transaction is actually unlawful. He has passed on the usufruct to his sub-lessees by sub-leasing the property to them. Now, he does not own anything, neither the corpus of the property nor its usufruct. What he has is the right to receive rent only. Therefore, he assigns a part of this right to other persons. It is already explained in detail that the right cannot be traded in, because it amounts to selling a receivable debt at a discount is one form of riba, thus prohibited by the Holy Qur’an and Sunnah. Therefore, this concept is not acceptable. Another issue is that according to the Hanafis, usufruct is non-heritable, but in today’s urbanized society where land is scarce, scholars say that tenancy right can be inherited otherwise it will create hardship.
The last issue in ijarah is employment specifically in employees’ contracts where they prohibit employees from working for other companies while having their tenure in the company. However, the economic crisis and high inflation might force people to find additional income in the form of part-time job to fulfill their basic needs. Thus, there will be issues arising regarding the legal and beneficial ownership because employees are by default legally binding to the company that they are hired but these employees enjoy the benefits offered by both companies that they are working which are against the agreements that they have signed with one of the company earlier.
2.3 Legal and beneficial ownership in mortgage or charge (Al-Rahn)
Finally, the legal and beneficial ownership can also be looked from the perspective of mortgage cases. Mortgage (Al-rahn) literally means to pledge, pawn or retain whereas in terminology, it refers to a contract of pledging or depositing a property as a security for a debt so that the debt may be taken from the property should the debtor failed to settle the debt. The Quran states: “If you are on journey, and cannot find a scribe, a pledge with possession (may serve the purpose). And if one of you deposits a thing on trust with another, let the trustee (faithfully) discharges his trust, and let him fear his Lord” (2.283). In Addition, the Quran also states that Rasulullah (SAW) bought some food from a Jew and mortgage (give collateral) a hauberk (HR Bukari no.1926, kitab al-bayu, and Muslim).
It is clear that the main issue in sale for deferred payment (bay’ bi-thaman al-aajil) when the customer is default, and the bank cannot increase the price. The question is whether the bank is entitled to take back the house from the customer or not. The problem here is that the legal ownership of the house has already been transferred to the borrower or customer, even in practice, the customer does not need to be the registered owner of the property to be able to sell it to the bank under BBA. However, the bank will do legal action to possess the house since the bank requires a customer to execute registerable charge that acts similar to a pledge registered under the virtue of section 241 of the National Land Code, and in case the customer defaulted, bank has the right to sell it to another customer regardless of whether the mortgagor is alive or dead, and bank is entitled to receive the outstanding amount and should return the balance to the customer. The main issue in here is there is no clear cut there is no specification of the value of the pledged property stated under the principles of al-rahn.
Another issue is whether the mortgagee entitled to benefit from the pledge. For example, if the pledge is a house, can the mortgagee reside in it? This question needs to be delineated in detail. If the mortgagee (lender) seeks permission from the mortgagor (borrower) to dwell in the house, and even if the mortgagor gives this permission (in the case of a pledge against a debt), then the mortgagee is not entitled to dwell in the house. This is because using the house in this case would be a benefit resulting from a loan. The Prophet (PbAbuh) stated, "Every loan resulting in a benefit is usury;" thus it is illegal. If the pledge is a house, and the mortgagee hires it from the mortgagor for an adequate rent without favouritism, the rent is correct and legal. It would be different from the mortgage contract and would be considered a rent contract. This is the opinion of Imam Ahmad. On the expiry of the rent the mortgage goes back to its origin, and the mortgagor is not entitled to dispose of the house by way of selling, renting or by another mortgage except with the permission of the mortgagee.
3.0 Conclusions
The conclusions are, as follow:
1. In waqf case, the trustee (mutawalli) is the manager and not, an owner- either legal or beneficial owner, cannot act as a legal owner; thus, everything should get permission from shariah court law, can develop the waqf property in line of public interest and principle of shariah. Moreover, waqf land must be registered in shariah law and civil law as soon as possible after the waqf property is given.
2. In lease case, it is only transfer the beneficial ownership from lessor to lessee. Therefore, lessee does not has right to sublease to other parties without lessor permission.
3. In mortgage or charge cases, in BBA such as for financing house the legal of ownership belongs to customer or borrower not the bank even developer. However, the bank requires a customer to execute registrable charge that acts similar as a pledge and if customer is default bank has right to sell it to another customer regardless whether the mortgagor was alive or dead and bank is entitled to receive the outstanding amount and should return the balance to the customer. Mortgagee (lender) cannot get benefit from the mortgage property if the borrower is not default even get permission from mortgagor (borrower).
4.0 Recommendations
There are four recommendations, as follow:
1. Government should make the clear laws (Shariah laws and civil laws) in waqf rules and similar in all its states to avoid uncertainty and to protect the waqf land for public interest. Government should train its officers to work fast and reduce the hierarchy in government to make the process fast and to avoid the current case in Selangor, Malaysia repeat.
2. There should be strict rules (shariah law and civil law) in leasing to avoid the lessee abuse his or her right to sublease the leased asset to other party without lessor’s permission to protect the lessor’s right.
3. There should be specification of the value of the pledged property stated under the principles of al-rahn to create justice and certainty.
4. Muslim jurists and Muslim Government Entity such as MAIS (Majlis Agama Islam Selangor) should give the knowledge to people about muamalat not just about ibadah since many people do not know about what they should do in business according to principle of Shariah and Government should support and facilitate them.
Nuarrual Hilal Dahlan. Current Legal Issues on Waqf in Malaysia, http://nuarrualhilal.wordpress.com/2009/08/18/current-legal-issues-on-waqf-in-malaysia/.August 2009.
