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When enforcement is lacking

18/09/2004 Published in NST-PROP A Buyer Watch Article by National House Buyers Association

The continuing saga of why the build-then-sell method should be embraced

IT is not uncommon to come across cases where buyers are given vacant possession to their newly built houses, only to find that their developers have not yet even applied for the Certificate of Fitness for Occupation (CF). At the National House Buyers Association, this is just one of the many situations unfortunate buyers have faced. And it doesn't end there.

After receiving their keys, buyers then have to spend the next 18 months chasing developers to comply with any breaches they may have caused and rectify defects. Until CFs are available, they are not able to move into their houses, even though the full purchase price has been disbursed and they have started servicing their bank loans.

Remedies, when available, are also slow in coming. While both the Housing Development (Control and Licensing) Act and the Housing Developers' Regulations are aimed at safeguarding the interests of house buyers, they lack the bite and this is largely because of poor enforcement.

The Housing and Local Government Ministry's Monitoring and Enforcement Division has been given the task of overseeing the activities of developers and enforcing the law.

However, this division's workload is extremely heavy, and it cannot keep constant vigil on developers and their compliance with the law. But this is vital as laws can only do so much.

Predetermined terms and conditions in the statutory contract of sale, which is the Sale and Purchase Agreement (SPA), bind those who buy houses from a developer.

However, there is no provisions in the SPA for purchasers to get out of the contract and get a refund of the money paid should a developer commit any breach or fails to perform or observe any material term of the agreement, goes bankrupt or goes into liquidation.

Over and above this buyers face many other risks under the existing practice of housing supply, which is the 'buying-off-the-plan' or the sell-then-build method.

To mitigate the risks, buyers are often advised to "check the financial strength and capability of the developer", meaning they should check its reputation, honesty, goodwill, track record and most importantly, its financial resources. But this task is beyond the capability of the average house buyer.

For one, there is nothing to inspect. Potential buyers rely on advertisements, write-ups, architects' plans and specifications, artists' drawings and projected returns. Bridging financiers and end financiers also do nothing to protect the interests of buyers.

When the sale is completed, that is when purchasers have made full payment on the house, they would still not be able to occupy the house until the CF are issued.

All this while construction remains a 'no-risk' venture for the developer. If a project fails, it is the buyers who suffer. A developer typically cites financial problems when they fail to complete and deliver a project on time.

They also find other excuses, such as bad weather, Government policies, building material shortage, stop work order imposed by the authorities and even disputes with land owners, consultants or contractors.

In any other business, a company involved in a contract that fails to deliver the specific product required on time would shoulder the risks and not pass them on to its customers.

However, in the case of housing, if a project is abandoned and then revived, buyers would end paying more - and the Government would lose revenue. Such was the case in the Majestic Heights saga that played out in Penang.

In the case, the first phase of the development comprising RM75,000 medium-cost apartments were launched in 1995 and were due to be completed in 1998. However, the project was abandoned in the early part of 1998.

On Oct 16, 2001, the High Court in Penang ordered the developer to be wound up: This eventually led to the formation of an action pane, in which the buyers were also involved that resumed construction.

Each buyer had to pay RM7,500 more and the units were finally completed, with the CFs issued early this year.

If these buyers could claim late delivery compensation, each of them would have been paid RM45,000 - a welcome sum, for all the bank payments that they had been making all these years. The statutory charges waived by the Penang Island Municipal Council, Tenaga Nasional Bhd and Indah Water Konsortium alone came up to RM3.62 million.

So, in reality, it is an expensive affair to revive an abandoned project not only for the buyers but also for the Government and other authorities that will lose revenue.

We, at the HBA maintain that despite the amendments to the housing law in 2002, weaknesses remain. And one way to tackle these problems is to have another comprehensive review of the Housing Development Act - and to push for the building of housing units before selling them.


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