HOW to avoid the risk of abandoned projects — conducting due diligence for purchasers?
To many purchasers, an investment in a property is a once-in-a-lifetime event. For a start, it involves a huge sum of money.
It is only natural that one of the issues that will come to mind would be the possibility of the project becoming abandoned.
It is not uncommon to hear real stories of abandoned projects and some people being caught in this unfortunate situation.
WHY DO PROJECTS GET ABANDONED?
There are a multitude of reasons to why a project becomes abandoned such as;
• Inexperienced developers;
• Poor marketing and sales strategies;
• Financial problems;
• Challenging economic conditions;
• Disputes between shareholders;
• Mismanagement of the company and business affairs; and
• Lack of enforcement and monitoring by the authorities.
It was reported not too long ago that the government had registered 253 abandoned private housing projects in Peninsular Malaysia since 2009 involving 64,290 residential units.
From the total of uncompleted houses, 43,537 units had been sold.
It is interesting to note that Selangor has the highest number of abandoned projects.
For developments that are subject to the Housing Development (Control & Licensing) Act (HDA) 1966 (Act 118), there were vast amendments made which came into effect on June 1 2015. Act 118 governs the licensing and control of housing developers in Peninsular Malaysia and protection of the purchasers. It is important to note that the amendments to the Act are not retrospective. Some of these amendments; 1) Amendment to section 6 on ‘Conditions or restrictions for the grant of a licence’. The developer’s deposit has now been increased to three per cent of the estimated cost of construction as certified by an architect in charge of the housing development in cash or in such other form as the minister may determine, if the application is made by the company/a person/body of persons’.
This means that only developers with a strong financial backing are able to be granted a licence for development.
Under Regulation 11A of the Housing Development (Housing Development Account) Regulations 1991 on ‘Controller may use the money in the Housing Development Account’, the Controller† of† Housing (appointed under section 4 of the said Act) may use the monies in the Housing Development Account of the development to ensure the completion of the development. The controller may also use the monies in the Housing Development Account to comply with an award made by the Tribunal for Homebuyer Claims.
2) Under the amendment to section 8A of the said Act on “Statutory termination of sale and purchase agreements (SPAs)”, the purchaser now has the right to terminate the SPA.
The purchaser can terminate the SPA if:
a) The licensed housing developer refuses to carry out or delays or suspends or ceases work for a continuous period of six months or more after the execution of the SPA;
b) The purchaser has obtained the written consent from the end-financier; and
c) The controller of housing 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 SPA.
Under section 8A(3), in the event of a termination, the developer shall within 30 days of such termination refund or cause to be refunded to such purchaser all monies received by the licensed housing developer from the purchaser free of interest.
3) Under section 18A of the said Act on “Offences relating to abandonment of housing development by a licensed housing developer”, the word “abandon” has been defined as ‘refuses to carry out or delays or suspends or ceases work continuously for a period of six months or more or beyond the stipulated period of completion as agreed under the SPA.
The punishment for this offence is a fine which shall not be less than RM250,000 but not exceed RM500,000 or imprisonment for a term not exceeding three years or both.
4) On the amendments to the Housing Development (Control and Licensing) Regulations 1989 (which came into effect on July 1 2015), one of the important amendments is with respect to the delivery of vacant possession of the property. The developer shall give the purchaser the Certificate of Completion and Compliance (CCC) and the separate strata title relating to the said parcel.
FOR DEVELOPMENTS NOT UNDER THE HDA
For developments not under the HDA such as commercial and industrial properties, purchasers are unfortunately not accorded the protection of the law
like the HDA. The purchaser is therefore advised to conduct due diligence as follows:
1) To check with the relevant authorities such as the Urban Wellbeing, Housing and Local Governmen Ministry to see if there have been any complaints lodged against the developer;
2) Is the developer experienced in this type of development or they are a novice venturing into this business from another business? Is the developer familiar with the local environment? The maxim of “location, location, location” may not necessarily hold true here as I have witnessed quite a few projects through the years where they had failed or were abandoned despite being located in very strategic areas.
3) To check the past developments undertaken by the developer. It is best to go and see these yourself. Check on the quality of workmanship and speak to past purchasers. Are the past purchasers happy with the developer? Are the past projects successful? Has there been an appreciation in the value of the properties since?
4) Check with the Companies Commission of Malaysia and Bursa Malaysia for public-listed companies to see the financial standing of the developer. You obviously would want a developer with a strong financial background to see through the completion of the project.
5) Go through the terms and conditions of the sale and purchase agreement to see if they are fair and reasonable to you as the purchaser. If in doubt, please consult your lawyer.
6) One of the important things, if not the most important, is to check on the developer’s character. Is the developer concerned with their brand? How did they carry out the repair work during the defect liability period? Do they abide by the laws and regulations imposed by the authorities? Do they say what they promised to do, such as, have they completed past projects within the agreed timeline?
Christopher Chan is a registered estate agent and the associate director of Hartamas Real Estate Group. He was elected as a director of the Malaysian Institute of Estate Agents (MIEA) for the term 2017 to 2019. He is the chairman of† Membership Benefits of MIEA. He writes and speaks regularly on real estate in the media. He can be contacted at [email protected] or at +6012 2323837.