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The mystical CFO

18/05/2002 Published in NST-PROP A Buyer Watch Article by National House Buyers Association

The House Buyers Association examines why the elusive Certificate of Fitness for Occupation are so important for house buyers

The subject of delays in the issuance of the Certificate of Fitness for Occupation (CFO) has been highlighted in the media for as long as we can remember, although the matter has heated up in recent times.

The hue and cry is not surprising really, as the problems related to the delays in the issuance of this mystical document are far-reaching. Why do we refer to it as mystical? It's far more than the desire to be acerbic that prompts us, and we'll explain why later. First, let's discuss the effects of the delay in CFO issuance.

As the name implies, the CFO is a document that declares that a house is fit for occupation. Hence, without it, a buyer is not allowed to occupy his newest (and possibly most expensive) possession. It would not be unfair to say that most house buyers in Malaysia have been faced with the problem where they obtained the keys to their brand new homes but were unable to move in because there was no CFO.

The present rules in the Housing Development Act allows developers to hand over "vacant possession" of houses even though the CFOs have not been issued. This tenet of the Act is well exploited by errant housing developers, which, as soon as the architects have declared "practical completion", rush to hand over the "completed" houses to buyers.

They do for three key reasons. First, they can demand the full and final 20 per cent of the progress payments (although five per cent is held in trust by their solicitors until the end of the defect liability period) once they've delivered vacant possession.

Second, from the date of delivery of "vacant possession", the developer is deemed to have handed over the house and will avoid the late delivery penalty (if it has not already incurred it). Third, the defect liability period of 18 months starts to run from hand over date.

The sad fact is that house buyers are left with no choice but to accept the keys to their new homes, lack of CFO notwithstanding. The Housing Development Act stipulates that in the event of buyers failing to take over vacant possession 14 days after being notified by the developer, they are deemed to have taken over vacant possession of the houses.

The irony is that they are forbidden from moving into their new homes because the CFOs have not been issued! And yet, from the date they take over or are deemed to have taken over their houses, they assume full responsibility for the property.

This means that any theft or vandalism is their sole responsibility. They also assume liability for the various rates, taxes and other ownership risks. Is it fair to make house buyers responsible for all these when they are not even allowed to occupy their houses?

Equally important is the aspect of defect liability. The defect liability period starts from the date of vacant possession and runs for 18 months. Now, how on earth can buyers be aware of any defects when no one can stay in the houses? Thus the later the buyers move into their new houses, the shorter will be the period during which they can discover defects and report them to the developer for rectification. To see this nonsensical situation in a better perspective, let's say the delay in the issuance of CFOs stretches to 18 months. The defect liability period would have run out before the buyers can move into their houses!

The issuance of the CFO relies largely on developers. They are solely responsible for the compliance of whatever that the relevant authorities require. The reluctance of the councils to issue the CFOs only implies that the developers have not complied with certain aspects. Thus the paradox of this whole issue is that, under the present situation, this self-generated delay greatly benefits the developers at the expense of the house buyers.

The House Buyers Association hopes that it is not too late for the appropriate authority to look into this aspect of the Act, the amendments to which were recently passed by Parliament. We have a very simple proposal - to allow handing over of vacant possession only after the issuance of CFOs.

Let's go back to why we've dubbed the CFO a "mystical" document. If you have followed the various media reports on the subject, you would have noticed that the process of issuing this document is indeed mystifying. That must be why all the parties involved point fingers at one another and nobody seems to be responsible. The whole issue has become so mystical that nobody has been able to resolve the problems. In fact, the delays have become something of an act of God!

We shall attempt to shed some light on what the process entails so that if you should fall victim to such delays, you'll have a better idea as to where to zero in to ask questions and to demand answers.

CFOs are issued by local councils (such as Majlis Bandaraya Shah Alam, Majlis Perbandaran Petaling Jaya, Majlis Daerah Kajang, and so on) to ensure that every house built conforms with the various prerequisites., by-laws and the approved layout and building plans. This is done with the good intention of making sure that owners do not move into houses that are sub-standard, dangerous or in any other aspect deemed unfit for human occupation.

At the beginning of the development process, even before the local council approves the building plans, the latter have to be channelled to the following technical departments for scrutiny:

  1. Jabatan Kerja Raya (Public Works Department)

  2. Jabatan Bomba dan Penyelamat (Fire and Rescue)

  3. Indah Water Konsortium

  4. Jabatan Perairan & Saliran (Drainage & Irrigation)

  5. Tenaga Nasional Bhd

  6. Jabatan Kesihatan (Health Department)

  7. Jabatan Bekalan Air (Water Supply Department)

After the other requirements and formalities have been fulfilled, the developer/contractor then proceeds to build the houses. A registered architect supervises the building process. He also certifies the various stages of construction to the buyer' financier(s) so that the appropriate amount of progressive payments may be released to the developer. This is what is called progressive billing.

When the construction is completed, meaning that the houses, infrastructure and facilities for providing utilities (such as water reticulation and electricity sub-stations) are all in place and commissioned by the relevant authorities, the architect then certifies the "Practical Completion" of the construction work. It is then incumbent upon the developer to obtain the letters of support (surat sokongan) from the seven technical departments, certifying their fulfillment of the respective department's conditions/requirements.

Before the departments issue such letters they will make physical inspections of the houses and the surroundings to convince themselves that all the prerequisites have been conformed with and that no rule has been breached. If there is any infringement, then it is again incumbent upon the developer/contractor to make good the observation. The architect will then submit a form known as the Form E, together with all the letters of support, to the local council to apply for the issuance of the CFOs.

The Housing Developers Act stipulates that vacant possession can only be delivered to buyers after the Form Es have been submitted and received by the local councils. We have heard claims from various councils that if everything is in order, they can actually issue the CFOs within two weeks. Thus if they are not able to issue the CFOs, there is something wrong somewhere and buyers should ask questions and demand immediate remedies.

We sympathise with house buyers who have fully paid for their houses but are prevented from moving in due to the CFOs not being issued.

Unfortunately, until such time as the Act is amended for the better, such a problem will continue to plaque the housing industry.

Another situation to look forward to is when the industry is ready to adopt the "build then sell" principle. In the meantime, being conversant with the process and knowing where to ask questions and to demand answers will be of some help. 

 

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