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Paying for your ignorance

10/05/2003 Published in NST-PROP A Buyer Watch Article by National House Buyers Association

Read the unfortunate experience of a buyer who paid cash for a "sell-then-build" property

There are many ways a house buyer can get into a dilemma. The one we want to highlight today must be most deserving of sympathy and quick remedy from our lawmakers.

This is the complainant's story, which involves paying cash for a property:

"I am now staying in a single storey terrace house with my mother in Negeri Sembilan. The house was purchased by my aunt in 1986 for RM52,000 without any end financing. Payments were made directly to the developer upon issuance of architect’s certificate on the stage of completion.

However, before the house was fully completed the developer abandoned the project. My aunt had made almost all the payments (except for the final five per cent). Other buyers who were similarly affected decided to form a committee and appoint their own contractor to finish up the job. Subsequently, Certificate of Fitness (CFO) were issued, and the buyers were able to occupy their homes.

However, my aunt's case was different from the others who bought their homes by obtaining loans from either the government or a bank. When the housing project began, the entire land was pledged to a local financial institute as security for bridging financing. The other purchasers who bought their properties via mortgages were "safe" as the titles will be redeemed in due course.

However the cash my aunt paid was not used by the developer to redeem the title from the financial institute. As a result, the land (plus house now) is still encumbered to the bridging financier. We tried to locate the developer but it was futile. The house later became the subject of foreclosure proceedings, and during the auction, there was a successful bidder.

We consulted many solicitors even before the financial institute took foreclosure action but most of them said that we have to pay. We asked whether lodging a private caveat was adequate to stop a foreclosure and sadly the answer was "No".

Some lawyers suggested that we have to pay back the financial institute to get the title. That means buying the same property twice due to the actions of an irresponsible developer!

Now even doing this is a bit too late as the house has already been auctioned off. We asked the successful bidder (also a developer) to sell the house back to us at a reasonable price, but we haven't received a reply yet.

The current market value of the house now (plus renovations) is definitely more than the meager RM52,000 paid 17 years ago.

My questions are:

a) What other options can we take now?

b) What could have prevented the house from being foreclosed in the first place (besides paying the financial institution?

c) When can we expect and eviction order?

d) What are the steps involved? Do they come straight without notice and lock up the front gates and doors
Now, my mom and I are afraid to go anywhere for holiday and to leave the house unattended. Please advise.”

We at the HBA subsequently had a meeting with the complainant and his aunt, but can only highlight part of our recommendations (the rest was given in confidence) .


First, we have to say that the "build-then-sell," system of development would have avoided all these problems and much more.


Second, when a buyer takes a loan for a house (called end-financing), his financier would require the developer's financial institute to issue a Disclaimer Letter. Basically this would state that if the developer should default on its bridging loan and his financier institutes foreclosure actions, the buyer's unit would be excluded in the foreclosure actions.

In this particular case, we feel that although the aunt did not use an end-financier, should nevertheless have got the developer's bridging financier  to issue the critical Disclaimer Letter.


This letter is even important if end-financing is also taken from the developer's bridging financier, as it could end up being a situation where conflict of interests arise.


In such a scenario, it is also important that house buyers engage their own solicitors who are well versed in conveyancing to handle their interests.


Since the complainant's aunt was a cash buyer, the solicitor handling the transactions should have procured the Disclaimer Letter and identified whether the developer had any redemption sum payable to the bridging financier. If so, the very first payment, apart from the deposit, should have been remitted to the bridging financier so that the letter could have been issued and the title redeemed.


Whether a development's master title is charged to a bridging financier or not is stated in the recital to a standard Sale & Purchase Agreement. One should exercise caution in redeeming first, prior to paying  the developer.

Third, the victim could institute a civil suit against the developer for refund of the excess sum paid and for consequential losses incidental to the sufferings in the incident. But even if the suit is successful, what can the complainant's auntie squeeze out from developer who has gone belly-up?


Fourth, the complainant's aunt is also at liberty to lodge police report against the directors and officers of the company for criminal breach of trust and cheating. She could also try to obtain a court order to restrain the public auction, on the grounds that the sale may have been tainted  by fraud.

The question of why the bridging financier took nearly six years to commence foreclosure proceedings to commence foreclosure proceedings also captured our interest.


Shouldn't the bridging financier kept records of the properties sold off periodically by the developer? After all, the developer is obliged to provide the information, as spelt out in the bridging loan agreement. So, was there a fiduciary duty of care by the bridging financier to the innocent buyer?

The preparation of the SPA entails the task of perfecting the Memorandum of Transfer. The solicitors appointed should have been alerted when the developer failed to produce the relevant discharge from the bridging financier because without the discharge instrument the transfer cannot be effected at the Land Office.

From the documents forwarded to HBA during the discussion, we discovered that the registered office of the errant developer was the same as that of the successful bidder in the auction. We asked the complainant to make further checks at the Companies Commission of Malaysia and alert his present lawyer of the finding.


We sympathize with the complainant and his aunt and hope that they will be able to see through this problem which could happen to any uninformed cash buyer.


The lesson here is that buyers should appoint their own solicitors instead of using the firms on the developer's appointed panel. Don't be penny wise, pound foolish, just to enjoy the bait of 'free' legal fees.


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