Amending developers’ deposit and cancelling standard S & P

NOTABLE CHANGES: In Part 2, we reproduce Proposals No: 3 and 4 of the HBA’s Memorandum to Parliament on amendments to the Housing Development (Control & Licensing) Act, 1966

3: Proposed imposition of 3 per cent refundable deposit – The Way Forward

We are pleased that the government heeded our call to have Section 6(1)(b) of the Housing Development (Control & Licensing) Act, 1966 (Act 118) in respect of conditions or restrictions for the grant of a developer’s license amended.

The Minister recently announced that laws will be ‘enhanced’ to change the requisite refundable deposit from the current RM200,000 to three per cent of the Construction Costs.

Firstly, we will not even use the word “increase”. This is because in the case of small developers who build small number of houses in the smaller towns and where total construction cost is RM2 million or less, the RM200,000 that they are currently forking out actually represents over 10 per cent. Thus for them the new three per cent is actually a vast reduction!

Compare this to a big project developer whose construction cost is, say, RM20 million. The present RM200,000 represents a miserable one per cent!! Thus, any contention that the three per cent will weigh down on the smaller developers is not correct. The present RM200,000 is flawed because it assumes a “one-size-fits-all” formula where small developers are compelled to wear the “big size” that clearly does not fit them. The proposed introduction of three per cent formula (HBA’s proposal was for five per cent imposition on gross development value) is (to an extent a compromised figure) a realistic and fair figure because the actual deposit sum is dependent on the size of the project.

As to whether the new three per cent deposit will curb abandonment, our contention is that it will indirectly reduce such incidences. Those developer-
aspirants who are financially so weak that they are not able to raise the three per cent deposit (it is refundable anyway) should stay out of the industry because the probability of their running into trouble is higher. The increased finance cost in order to fork out the three per cent deposit is negligible when measured against the potential gross development value (GDV).

Further, any additional cost (interests) is only incurred during the construction phase because upon project completion, the three per cent is fully refunded by the Controller of Housing. In a small way, it also serves as insurance for the Ministry of Housing & Local Government to have a source of funding in the event of unforeseen eventualities caused by developers where immediate expenses need to be incurred.

The havoc created by abandoned projects and the amount of funds made dormant (and in many cases, written off) is far more devastating and adverse than the amount of funds held in refundable security deposits. Project abandonment cannot be totally prevented but the three per cent deposit only acts as proof of commitment, seriousness, financial standing and safety net. The proposed three per cent deposit can, to a larger degree, assist in revival efforts by the Government compared to the present insignificant RM200,000.

The tightening of the Housing Development (Control & Licensing) Act, 1966 and revised in the years 2002 and 2007 has somehow failed to arrest the problem of abandoned housing projects.

The statistics speak for themselves. Enforcement needs to be tightened up regardless of the amount of security deposit(s) demanded.

The three per cent deposit represents only a minute factor in the whole risk equation. We would like to state that the proposed three per cent is the minimum norm and that the Controller of Housing should be empowered to increase this percentage to our proposed five per cent if deemed necessary due to high risk or whatever other reasons.

4: Sec 8A: Statutory Termination of Sale & Purchase Agreement

The clause reflects the severity of house buyers‘ problems such that it entitles them to terminate the contract of sale after a delay of ‘6 months after their execution of the sale & purchase agreement’. By this amendment, any house buyer would have the equitable right to get out of the agreement which the present legislation fails to allow.

However, instead of ‘6 months after execution of the S & P’; it is proposed that it should read as ‘at any continued period of six (6) months during the subsistence of the Sale & Purchase Agreement’. This is because there have been numerous situations where the developer resumes work and then stops for a period of time and then restarts again to frustrate the buyers.

However, to ensure public confidence in the termination mechanism where among others, the Controller’s certification is required before the homebuyer may terminate the contract, it is proposed that express provisions on the issuance of the Controller certificate are important. This is to ensure that the certification is issued in a prompt and transparent manner. Another glaring weakness not addressed by the amendment is the question of where can buyers claim back whatever they have paid when a project is abandoned and the developer becomes insolvent?

The proposed amendment to Section 8A (1) (c) may read as follows:
c) the controller has certified that the licensed housing developer has refused to carry out or delayed or suspended or ceased work for a continuous period of six months or more after the execution of the sale and purchase agreement in reliance upon any act omission failure or neglect of the developer or documents available to the Controller at the material time.

Section 8A (6) – The word ‘lawfully’ in line one creates unnecessary confusion and arguments. It should not matter whether the Sale & Purchase agreement was ‘lawfully’ entered or not because we do not wish parties to take advantage of their own wrong-doing.

Note: HBA is part of the drafting team that made amendments to the current legislation. Most of its recommendations have been accepted, according to Chang Kim Loong, Secretary-General of the 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
Fax: 03-22601803
Email: info@hba.org.my
Web Site: www.hba.org.my

 

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