SMALL CHANGES: Some minor tinkering with the law can easily solve the abandonment predicament within the framework of the sell-then-build (STB) system, argues a local law lecturer
The misery caused to the house purchaser where the developer abandons the project is incalculable: he is not likely to be able to buy another house because as far as his bank (end-financier) is concerned, he is a defaulter and therefore blacklisted (through no fault of his). He still has to repay the loan and continue paying interest whether or not the construction is ever going to be completed; and, as often happens, the developer may have taken more than he should from the instalments of the purchase price causing an even greater loss to the purchaser.
The developer is safe because the property is still his; the developer’s bank still has its charge over the property; and the purchaser’s bank too, both with interests running!
We have had this problem for too long, and cases of abandonment are on the increase. Notwithstanding that, it is possible to make abandonment more difficult, and if it still happens, to revive the abandoned housing projects easily within the framework of the sell-then-build (STB) system.
In my opinion, the principal cause of abandonment lies in the concept of sell-then-build as well as the fact that the Sale and Purchase agreement allows the developer to borrow beyond the needs of the project. There is no disclosure of the amount borrowed by the developer before the sale and soon after. The developer is allowed to borrow more. Why is this so? Isn’t the developer expected to make use of the first loan for initial expenses and thereafter use the deposit and instalments of the purchase price paid by the purchaser for all subsequent expenses?
The developer’s bank which should be most concerned about recoverability of the loans seems more interested to maximise business both for itself and the developer. The bank’s position is secure because it has a Charge on the property with interest running on it and the developer has enough money for investing elsewhere.
The developer’s bank is unconcerned enough not to deduct for itself the amount owed by the developer from the instalments made by the purchaser into the Housing Development Account (HDA) as required under the law. Only the developer has access to this account.
If the purchaser allows the developer to borrow to the hilt, he might have the comfort of being able to pay off the developer’s debt to the bank but in exchange for what? Nothing. Even at this stage, the developer’s bank does not assure the purchaser that the house is free from the encumbrances created on it by the developer. Why not? Is it because the amount owed by the developer is in truth still not settled because it is more than the so-called redemption sum disclosed by the developer’s bank? They (the bank and developer) allow the purchaser to think that the amount of the redemption sum is not more than the purchase price, of course!
And here is the crux of the problem: If the developer is not able to settle his (bridging) loan even though the purchaser has paid in full, the result is abandonment in various forms:
I) Developers have not settled the Charges that they created as the loans that they took were invested elsewhere and these investments have gone sour; or
II) Developers do not want to see matters coming to a head by letting banks foreclose on such properties, so to avert such a situation, they pay only the interests on the loans; or
III) Developers drag their feet when it comes to applying for separate, sub-divided titles because they have not settled their (bridging) loans; and the purchaser will not accept transfer of the property to himself with the developer’s ‘sub-divided’ charge still encumbered on the separate, sub-divided titles; or
IV) The developer, collusively with creditors, goes into liquidation, as liquidators seem to think that the purchasers have NO claim to the amount realised, resulting in the developer and the liquidator sharing the proceeds of liquidation at the expense of the purchasers; and
V) Having borrowed on the security of the purchaser’s property and invested the money elsewhere and lost, on top of taking the purchaser’s money placed in the HDA, the developer has no way now to complete the construction of the house, hence simply disappears into the sunset.
Consequently, it is about time the Ministry of Housing & Local Government as the public entity responsible for our housing laws amends the laws to better protect the house-buying public:
i) A developer should not be allowed to take out more than one loan on the security of the housing estate land;
ii) The amount of the loan taken by the developer should be apportioned amongst all the housing lots and the redemption sum payable by the developer in respect of each housing lot should be disclosed to the purchaser;
Baharuddeen Abu Bakar is a law lecturer at the Ahmad Ibrahim Kulliyyah of Laws, Int’l Islamic University, and is one of the voluntary legal advisers of HBA.
NATIONAL HOUSE BUYERS ASSOCIATION [HBA]
No. 31, Level 3, Jalan Barat, Off Jalan Imbi, 55100, Kuala Lumpur
Tel: 03-2142 2225 | 012- 334 5676
Web Site: www.hba.org.my