Housing Developer's Act: Who does it protect?

“HOUSING DEVELOPMENT ACT: WHO DOES IT PROTECT?”

By Haji Salleh Buang

Working Paper presented at the National Housing Conference II: The Road Ahead in Nation Building 6^th November 2001, Sunway Pyramid Convention Centre

PART ONE – LOOKING BACK AT THE “OLD LAW”

THE PRINCIPAL ACT

1.1 The Housing Developers (Control and Licensing) Act 1966 (Act 118), which has been renamed the Housing Development Act (once the recent Amendment Bill becomes law) is not (as it is generally believed) a comprehensive law governing the housing industry. It was passed by Parliament with three objectives – one, to check abuses of the then infant housing industry; two, to regulate the activities of housing developers; and three, up to a limited point to protect house buyers (not necessarily in that order).

1.2 The Act applies only to Peninsular Malaysia. It had not, since its inception, been made applicable to Sabah and Sarawak, and the status quo regrettably remains until today. The Act, too, does not apply to housing activities undertaken by statutory bodies and co-operatives societies. Fortunately, this oversight has been corrected by the recent Amendment Bill.

SUBSIDIARY LEGISLATION

2.1 Apart from the principal Act, the housing legislation in Peninsular Malaysia is contained in two other important regulations, namely the Housing Developers (Control and Licensing) Regulations 1989, and the Housing Developers (Housing Development Account) Regulations 1991. The 1989 Regulations were a marked improvement on the earlier 1982 Regulations, which itself had earlier repealed the Housing Developers (Control and Licensing) Rules 1970.

2.2 The 1970 Rules, together with the 1966 Act, could be regarded as laying the first “ground rules” affecting the local housing industry. Prior to that, the industry was completely unregulated. Any RM2 company can start a housing project (at times even without owning any piece of property), put up its signboard on an empty piece of land, and immediately start collecting booking fees from eager house buyers.

MAIN OBJECTIVE OF THE LAW

3.1 The main objective of the law, as had been judicially recognized and enunciated in several cases (some of them are mentioned below), is “to protect the interest of purchasers”. However, an amendment to the 1989 Regulations passed in 1994 (in force since August 1, 1994) has made house buyers wonder whether the law has changed direction – from one primarily protecting the purchaser’s interest to one of also “giving aid and comfort” to the developers.

3.2 The 1994 amendment was passed to put to rest a judicial conflict regarding the actual meaning of the developer’s duty to provide the “connection of water and electricity supply to completed houses”. This legislative answer to resolve a judicial conflict (which turned out to be in favour of developers) has been regarded by some quarters as a step backward in protecting housing purchasers.

3.3 A dark spot in the history of the industry was the huge unprecedented number of abandoned housing projects towards the close of 1980s – some say it was principally due to mismanagement by the developers, whilst others pointed out to the inadequacy of the law. This unhappy series of events finally led to the passing of the 1991 Regulations (requiring the developers to maintain a special account), which came into force on August 26, 1991.

SCOPE OF THE 1966 ACT

4.1 The long title of the Act states that it is to provide “for the control and licensing of the business of housing development” in the West Malaysia and for matters connected therewith. The Act does not have a Preamble – which is indeed a pity.

4.2 The term “housing development” is defined in section 3 of the Act to mean the construction and sale of “more than four units of housing accommodation”. In addition, it also includes the sale of “more than four units of housing lots by the landowner or his nominee with the view of constructing more than four units of housing accommodation by the said landowner or his nominee” [Definition substituted by Act A703, with effect from December 1, 1988].

4.3 Note the underlined words in the preceding paragraph, the effect of which is quite obvious. If there is an agreement to sell a plot of land and subsequently there is a separate construction agreement to build a house on the said land, and both these agreements are executed by the same entity with the purchaser (and house owner), the Act still applies. If the vendor (under the sale and purchase agreement of the land) and the construction company) engaged to build the house on the land) are different entities, the Act does not apply. You do not have to be genius to get around the law, as far as this definition is concerned.

Housing Accommodation

4.4 The expression “housing accommodation” has been specifically defined in the Act to include “any building tenement or messuage which is wholly or principally constructed, adapted or intended for human habitation or partly for human habitation and partly for business premises….” In essence, therefore, the Act only applies to cases where a housing developer is undertaking the development of at least five units of “housing accommodation” – that is to say, complete housing units (houses, flats, apartments) or partly houses and partly shop or offices.

4.5 Thus, if a developer were to build a three-storey building where the ground floor is a flatted factory, the first floor is a shop premise and the second (top) floor is an office, the project will not be governed by the Act. Consequently, the purchaser of such properties will not be protected. His position vis-à-vis the developer is governed purely on contract law – to which “caveat emptor” applies. Here lies, as always, the potential for abuse of the weaker party by the stronger party; the recent report of the commercial project in Semabok, Malacca, is a case in point.

PROTECTING THE PURCHASERS

5.1 In the leading case of SEA Housing Sdn Bhd v Lee Poh Choo (1982) 2 MLJ 31 the purchaser sued the developer for breach of contract and for delivery of the issue document of title (LDT) to a house he had purchased from the developer, The house in question was completed after 23 months, instead of 18 months as stated in Sale and Purchase Agreement. The issue before the court was whether the developer could be excused for the delay, due to acute shortage of building materials, a state of affairs which was then public knowledge. The developer had relied on Clause 32 of the agreement which purported to exempt him if non-fulfillment of any terms of the agreement was caused by circumstances beyond his control.

5.2 At the High Court, the trial judge held that the 1966 Act and the 1970 Rules were passed by the authorities to protect the interests of the public and the developer could not contract out of the Rules. Upon appeal to the Federal Court, the appeal was dismissed.

5.3 In Khaw Daw Yau v Kin Nam Realty Development Sdn Bhd [1983] 1 MLJ 35, where the developer had jumped the gun and sold some Bumi lots to non-Bumi purchasers, V. C. George J. expressed similar sentiments when he said “The scheme of the Housing Developers (Control and Licensing) Act 1966 and the Rules of 1970 is to provide a measure of protection to purchasers of housing accommodation to a housing development against unscrupulous developers.”

6 MINISTERIAL DIRECTIONS

6.1 Section 11 of the Act is a good example of the principal legislative intent of the 1966 Act – to protect the interests of the purchasers. Under this section, whenever it becomes apparent to the Controller of Housing (either through investigations or information) that the developer has become unable to meet his obligations to his purchasers, is about to suspend his building operations or is carrying on his business in a manner detrimental to the interests of his purchasers, the Minister is empowered by law to give several directions to the housing developer or take such other measures as he may deem necessary. These directions, when given, must be complied with.

6.2 The directions which the Minister can issue under this provision include:

· Directing the developer to rectify or resolve any matter or circumstances;

· Appointing a person to advise the developer in the conduct of his business;

· Appointing a company to assume control and carry on the business of the developer upon such terms and conditions as the Minister may determine (with the concurrence of the Minister of Finance);

· Directing the developer to present a petition to the High Court for the winding up of his business; or

· Taking such other actions as the Minister may consider necessary.

The question which has been repeatedly raised is whether the Minister has fully invoked section 11 of the Act in the past when there were definite signs that developers were facing difficulty in continuing or completing their projects. In many cases, regrettably, actions taken were either too little or too late. If section 11 of the Act had fully enforced or invoked by the Ministry of Housing and Local Government, probably the scale of abandoned housing projects in the 1980s would not have reached such catastrophic proportions.

6.3 Section 12 of the Act states that the Minister may give a housing developer such directions as he considers fit and proper for purpose of ensuring compliance with the Act. Such directions (which shall be given in writing) are binding on the licensed developer – in other words, they must be complied with by the developer to whom such directions had been given. Unfortunately, despite the apparently wide scope of the provisions, the courts have places a narrow interpretation on it.

6.4 In Public Prosecutor v Anamaly all Narayanan [1989] 1 MLJ 45, the issue before the Seremban High Court was whether the Minister is empowered under Section 12 of the Act to issue a ‘direction’ to the developer to make refunds to 16 purchasers. The developer in this case had failed to start his housing project and the distressed purchasers had demanded the refund of their payments. When the developer refused or failed to do so, the purchasers had sought the assistance of the Minister. The Minister had directed the developer, pursuant to his powers under Section 12 of the Act, to refund the purchasers’ payments. When the developer still failed to do so, he was brought to court to face criminal charges. Mustapha Hussain J. held that the Minister had no such power to order the developer to refund the purchasers’ money. The Public Prosecutor did not appeal.

6.5 In April 1997, an unlicensed developer in Kulim, Kedah had been collecting “booking fees’ from several would-be purchasers. While such actions are clearly illegal under the law and the fraudulent developer could be hauled to court to face criminal charges and, upon conviction, be punished accordingly; this would not be of much help to the purchasers who wish to get their money back. If the purchasers were to seek the Minister’s help (as in Seremban case) to get their refund from the developer, the end result would probably be the same. The Minister would be powerless to act under section 12 to assist them.

6.6 Since the decision of the Seremban High Court has never been overruled in any subsequent cases, it must be regarded as good law. Regrettably, to my knowledge, no action had been taken by the Ministry since then to amend the section. If a similar situation were to arise in the future, the Minister would continue to be powerless to assist housing purchasers. [Further comment – Annamaly is only High Court decision. A similar case filed before another High Court Judge will not necessarily end the same way, as one High Court Judge does not bind another].

7 LICENSING OF DEVELOPERS

7.1 A housing developer must be in possession of a valid licence issued under the Act before he undertakes any housing development; section 5 (1). A licence is required for each housing development. Where a housing development is to be undertaken in phases, a licence is required for each and every phase of such housing development: see Regulation 3 (5) of the 1989 Regulations. Any misrepresentation of the information furnished by the developer in its application for the licence or for a renewal of the licence is an offence under the Regulations: see Regulations 3(2) and 4(4) respectively.

7.2 There are stringent conditions imposed under the 1966 Act which must be complied with before an applicant can be granted a licence. No licence will be granted unless the company has an issued and paid-up capital in cash of not less than RM250-000 (if applicant is a company) or has made a deposit with the Controller of not less than RM100, 000 in cash or in the form of a bank guarantee if the applicant is a “person or a body of persons” (in other words, a sole proprietorship or a partnership): section 6(1) (a) and (b).

7.3 While the figure of RM250, 000 might be sufficient in late 1960s, is it still realistic today? Will an incorporated company having that much (that little) paid-up capital be able to undertake a medium-size housing development – say, a project consisting of over 100 unit of terrace houses covering a land area of 10 acres? Even worse, will a sole proprietorship or a partnership having a minimum capital of RM100,000 be able financially to undertake a medium size development as stated above? It would seem to be only logical to raise the figure in section 6(1) (a) further – say to RM1 million, and to repeal / expunge section 6(1) (b) from the statute book. More discussion on this later. [More of this later, when we discuss the recent Amendment Act].

7.4 The Act also requires that no member of the company or firm should have been convicted of an offence involving fraud or dishonesty. However, Section 6(2) empowers the Minister, in his absolute discretion, to waive any or all of the conditions mentioned above. [More of this later, when we discuss the recent Amendment Act].

7.5 In 1997, Palmex Industries Sdn Bhd was fined RM15,000, in default 6 months jail, by the Penang Sessions Court for undertaking a housing project (“Pearl View”) without a licence in Tanjung Bungah, Penang. The company was charged under section 5(1), punishable under section 18 of the Act. In mitigation, the company said that it applied for a licence in January 1995 but was only granted a licence in December. Pending the issue of the licence, the company had cleared the area and put up fencing. (The Star, 29 April 1997).

7.6 Unlicensed developers (and their bankers / financiers) should heed the warning of Anuar Zainal Abidin J. in the case of Keng Soon Finance Berhad v M.K. Retnam Holdings Sdn Bhd; Bhagat Singh & 11 Ors. As Intervenors [1996] 3 AMR 3021. The effect of this case is that if a bank grants a loan to an unlicensed developer, the loan is bad and the security offered is also bad. If the housing developer defaults, the bank cannot recover the loan by instituting foreclosure proceedings on the land.

7.7 For the latest decision on the same point (unlicensed developers), see Arab Malaysia Finance Berhad v Chan Sai Mee [2001] 2 AMR 1743 (the Venice Hill Condominium case).

8 DUTIES OF DEVELOPERS

8.1 The duties of a licensed developer under section 7 of the Act are as follows –

(a) Within four weeks of making any alterations in any of the documents submitted to the Controller under section 5(3), he must furnish to the Controller written particulars of such alterations.

(b) He must exhibit, at all times, in a conspicuous position in any office or branch office, a copy of his last audited balance sheet and the names and particulars of each person who has the control and management of the business of the company; [Under the new law, this paragraph has been amended to include a copy of his developers’ licence, the advertisement and the sale permit];

(c) He must keep such accounting and other records as will sufficiently explain the transactions and financial position of the company;

(d) He must appoint auditors each year to carry out the annual audit;

(e) Within three months of the close of the company’s financial year, he must send to the Controller a copy of the auditor’s report prepared under section 9 of the Act; [Under the new law, the period has been enlarged to “six months];

(f) He must submit a statement in the prescribed form to the Controller twice a year not later than January 21 and July 21 of each year: [Under the new law, the prescribed form includes a report of the progress of the housing development]; and

(g) He must forthwith inform the Controller where he considers that he is likely to become unable to meet his obligations to the purchasers. [Under the new law. this has been amended by the addition of the words “at any stage of the housing development before the issuance of the certificate of fitness for occupation].

[Note: the new law has also added new paragraphs (h) to (k). More of this later, at paragraph 22.4 below]

8.2 These are onerous obligations indeed. The question is how thorough and consistent had the Ministry been in enforcing these provision of the law? The present Housing Minister had (soon after his appointment) openly admitted that enforcement had been disappointing, if not altogether non-existent. A news report quoted the Minister as saying that ‘developers have taken the Ministry for granted”. The Minister made that surprising remark after hinting that heavier penalties will be imposed to developers who fail to submit their progress reports every 6 months (New Straits Times, February 18, 2000).

9 OPEN / MAINTAIN HOUSING DEVELOPMENT ACCOUNT

9.1 Section 7A of the Act (a new provision inserted by Act 703 with effect from December 1, 1988) requires the developer to open and maintain a Housing Development Account. Under this provision, unless the developer is implementing a “Build & Sell System”, he is required to open and maintain a Housing Development Account with a bank or a financing company for each housing development undertaken by him. The deadline for opening the account was August 31, 1991.

9.2 If a housing project is developed in several phases, the developer is required to open and keep an account for each phase of the project. The developer is required to put into the account all payments received by him from the sale of the housing accommodation in the project. The developer is not allowed to withdraw from the account except as authorized by the Housing Developers (Housing Development Account) Regulations 1991.

9.3 Section 7A was enacted specially to solve the problems of the 80s - developers who siphoned off funds from projects (currently in progress) to other “ventures” including for personal use and gratification. The Ministry stated that the Regulations had been largely successful in putting a stop to this unhealthy practice.

9.4 Section 7A does not apply if a housing developer implements a “Build and Sell System”. While such a system clearly benefits the house buyers (who can actually see and inspect the property before parting with a single sen of the purchase price), not many developers, including public sector agencies, are willing to implement this because not many financiers are prepared to provide the necessary financing.

9.5 Under the new law, the penalties for contravening this section have been increased – from a fine of RM10,000 to RM50,000 (lower limit) and a fine of RM100,000 to RM500,000 (higher limit).

10 THE STANDARD SALE AND PURCHASE AGREEMENT (SPA)

10.1 Regulation 11 of the Housing Developers (Control and Licensing) Regulations 1989 states:

(1) Every contract of sale and purchase of a housing accommodation together with the subdivided portion of land appurtenant thereto shall be in the form prescribed in Schedule G and where the contract of sale is for the sale and purchase of a housing accommodation in a subdivided building, it shall be in the form prescribed in Schedule H.

(2) No housing developer shall collect any payment by whatever name called except as prescribed by the contract of sale.

10.2 The intention behind Regulation 11 is obvious. No housing developer is allowed to “contract out” of his obligations under the law. No money can be collected by the developer until the parties have signed the SPA and thereafter further payments can only be collected in accordance with the terms of the SPA. Regrettably, some people are still ignorant of the law. As a result, there had been cases of housing developers collecting “booking fees” from unsuspecting purchasers. Some of these developers had not even obtained the necessary approvals from the relevant authorities and the developer’s licence and advertising permit from the Ministry of Housing and Local Government.

11 DEVELOPER’S DUTIES UNDER THE SPA

11.1 The duties of the developer under the standard SPA can be briefly described as follows:-

(a) To sell the property free from any restrictions and encumbrances other than those conditions expressed or implied affecting the title;

(b) Upon execution of the agreement, not to encumber the property save with the prior approval of the purchaser; and to undertake that the property shall be rendered free from any encumbrance immediately prior to the handing over of vacant possession of the building to the purchaser;

(c) To complete the construction of the house on time, as para 7 of the standard SPA (see Schedule G and H) states that “Time shall be the essence of the contract, in relation to all provisions of this Agreement”. For standard housing units, the period of completion and handing over vacant possession is 24 months (para 20 of Schedule G) while for sub-divided buildings, the period is 36 months (para 24 of Schedule H);

(d) To obtain the issuance of a separate document of title (para 10 of Schedule G), and in the case of a sub-divided building, to obtain a separate strata title (para 10 of Schedule H);

(e) To execute a valid and registrable memorandum of transfer of the property to the purchaser (subject to the payment of the purchase price by the purchaser);

(f) To construct the building in “good and workmanlike manner” in accordance with the description set out in the Fourth Schedule to the agreement and in accordance with the plans approved by the relevant authorities;

(g) To construct the infrastructure, including roads, driveways, drains, culverts, water mains and sewerage plants serving the housing project as a whole in accordance with the requirements and standards of the relevant authorities, and to maintain and upkeep the same (with the purchaser having to contribute to the costs of such upkeep) until they are taken over by the relevant authorities;

(h) To provide services, including refuse collection, cleaning of public drains and grass cutting on the road reserves, from the time of handing over of vacant possession until the same is taken over by the relevant authorities (with the purchaser having to contribute a fair proportion of the cost);

(i) To lay all necessary water, electricity and sewerage mains to serve the housing project, and to apply for the connection of internal water, electricity, sanitary and gas installation (if any) of the building to the mains – but not obliged to ensure that there is water and electricity flowing into the building upon its completion (the effect of an amendment in the Regulations in [1994].

(j) To comply with “any written law for the time being in force” (a number of developers have been taken to court for contravening several provisions of the Environmental Quality Act 1974 and the Occupational Safety and Health Act 1994);

(k) To apply for certificate of fitness (CF) of occupation and, to ensure that there shall be no delay in the issuance of such certificates, the developer is required to “duly comply with the requirements” of the relevant authorities;

(l) To remedy defects, shrinkage and other faults during the defects liability period (18 months after handing over vacant possession of the building to the purchaser).

11.2 Whilst the good intentions of the legal draftsman (to provide safeguards for the purchasers) cannot be denied, it is a pity that the SPA is full of legal jargon. Much of the benefit is lost due to lack of comprehension – resulting in purchasers not really being aware of the full extent of their rights under the law. Shouldn’t’ the Housing Ministry come out with a “simpler version” under the SPA, or at the very least, a Handbook for Purchasers in layman’s terms?

12 DEVELOPER’S PRIVILEGE TO APPLY FOR EXTENSION

12.1 Regulation 11(3) gives a “dark side” of the above picture which some purchasers are not aware of. This provision enables the developer to apply to the Controller for extension of time to complete the project beyond the period stipulated in the SPA or to “waive or modify” any provision of the SPA. If the Controller is satisfied that “owing to special circumstances or hardship or necessity” compliance with any provision of the SPA “is impracticable or unnecessary”, he MAY, by a certificate in writing, grant the extension requested or “waive or modify” any such provision.

12.2 The proviso to this Regulation, however, stipulates that no such application for “waiver or modification” shall be entertained if it is made “after the expiry of the time stipulated for the handing over of vacant possession” of the property to the purchaser.

12.3 What is particularly objectionable about this provision is that the application for extension can be made by the developer to the Controller without purchasers being notified and be informed of their right to make representations against the developer’s application. However, the Controller can, acting on his own initiative, inform the purchasers of the developer’s application and hear their representations before making his decision.

13 WATER AND ELECTRICITY SUPPLY

13.1 This is one area where uncertainty in the law had led to a lot of pain and suffering on the part of house purchasers. Until the 1989 Regulations were amended in 1994 (effective from August 1, 1994), there was some doubt to whether or not ‘completion” means that water and electricity supply has been connected to the building – in other words, whether water and electricity supply is actually available on the premises. Judicial decisions on the matter have been evenly divided.

A. Decisions in favour of purchasers

13.2 In Syarikat Lean Hup (Liew Brothers) Sdn Bhd v Cheow Chong Thai [1988] 3 MLJ 21, Mustapha Hussin J. held that vacant possession must include “the connection of water and electricity”. The trial Judge’s decision was later upheld by the Supreme Court on April 19, 1989

13.3 In Kandasamy all Sreenivsagam v Syarikat Muzwina Development Sdn Bhd [1990] 1 MLJ 15, Abdul Malek J. held that vacant possession must include electricity and water. In Charles Muriel (f) v Newacres Sdn Bhd [1994] 2 AMR 23:1145, the same issue came before the Shah Alam High Court, upon hearing an appeal from the decision of a Sessions Judge. Abu Mansor J. held that vacant possession must include electricity and water.

13.4 In Hoya Holding Sdn Bhd v Chin Ting Hing & Anor [1994] 3 AMR 48:2532 Abdul Malik Ishak J. said “there must be water and electricity supplies actually running through the internal waterpipes, electric lines and powerlines in the dwelling house before the question whether or not vacant possession has been delivered could be considered.” The learned Judge added that “Malaysian house buyers must surely insist and expect that the handing over of vacant possession of completed houses can only be effected if and only if he water and electricity meters have been installed and energized within the completed houses. This seems to be the trend and thinking of the Malaysian Courts”.

B. Decision in favour of developers

13.5 However, in Tay Ket @ Chan Kong Seong v Bumibaku Development Sdn Bhd [1994] 2 AMR 35:1833, Wan Adnan J. expressed a different opinion. The judge held that under the 1982 Regulations (the applicable law to the case), the developer (defendant) had duly fulfilled its obligations as soon as the defendants had energized the sub-station to enable electricity to be connected to all the houses in the project. The trial Judge refused to follow Lean Hup because the issue which he deliberated on (the energizing of the sub-station) was “not canvassed” in that earlier case.

13.6 In Salmah binti Sulalman & Anor. V Metroplex Development Sdn Bhd [1994] 3 AMR 47:2514, Siti Norma J. held that under the applicable law to the case – Rule 12(1) (1) of the 1970 Rules – the developer’s obligations “is only to connect the outside electricity and water mains to the internal electricity and water mains and not to the flow of water and electricity for which deposits had to be made to the appropriate authorities and there may well be a delay in the tendering of such deposits, not to mention the delay that may be caused by the authorities concerned in the actual supply of such amenities.” On appeal to the Court of Appeal (see [1997] AMR 592), the trial Judge’s decision was upheld. Dismissing the purchaser’s appeal, Zakaria Yatim JCA said that “We agree with Siti Norma Yaakob J that the Rule speaks of connection of the electrical and water mains and that the respondent’s obligation was only to connect electricity and water mains to the internal electricity and water mains and not the flow water and electricity.”

C. Stand taken by Local Authorities

13.7 While the legal uncertainty (and contradictory case-law) continues unresolved, the purchasers’ problem was further aggravated by the stand taken by local authorities that as long as the completed houses have not been issued with certificates of fitness for occupation, connection of water and electricity to the premises will not be permitted. In 1993, Selangor Waterworks Department director Liew Wai Kiat was reported as saying that water supply will not be connected to phase two of Taman Pandan Mewah houses in Ampang until the certificates of fitness have been issued by the local authorities. He was quoted as saying “The only way for them to get their water supply is to produce the certificate of fitness” [New Straits Times, December 28, 1993]

13.8 This unhappy state of affairs has made victims of innocent people. Consider, for example, the plight of purchasers of low-cost flats in Taman Muliajaya, Ampang Tasik, who had reportedly been left “high and dry” for 18 months after the developer had given them “vacant possession” of their properties.” [Malay Mail, April 5, 1993].

D. Resolved in favour of developers

13.9 This judicial uncertainty was finally resolved (for better or for worse – depending upon where you stand) in the 1994 amendment. For housing projects launched after the amendment came into force (August 1, 1994), the developer is only required to ensure that water and electricity supply is “ready for connection”. The phrase “ready for connection” has been expressly defined in the amended regulations to mean as follows –

(a) water and electrical fittings have been installed by the developer;

(b) the fittings have been tested and commissioned by the appropriate authority; and

13.10 While the amendment is welcomed in having finally resolved the uncertainty, the effect of the amendment can hardly be said to bring cheer or joy to the purchasers.

14 CERTIFICATE OF FITNESS OF OCCUPATION (CF)

14.1 This is another matter which has caused immeasurable anxiety and distress to

house purchasers. The applicable law is found in By-Law 25 of the Uniform Building By-Laws 1984, a subsidiary legislation made under section 133 of the Street, Drainage and Building Act 1974.

14.2 The local judiciary is generally in agreement that “The certificate of fitness for occupation is … distinct and separate from the issue of vacant possession …” (see Syarikat Lean Hup (Liew Brothers) Sdn Bhd v Cheow Chang Thal [1988] 3 MLJ 221).

14.3 In the old case of South East Asia Brickworks. Sdn Bhd v Maria Antonette [1974] 2 MLJ 46, Abdul Hamid J. (as he then was) had said that “completion” does not mean that the developer must have obtained a certificate of fitness for occupation of the building. In the judge’s opinion, to do so would be to import “a term which was not within contemplation of the parties and would have the effect of frustrating the contract”.

14.4 In the light of the above, as far as the purchaser is concerned, the legal position with regard to the completion of the house, vacant possession and the issuance of certificates may be summed up as follows:

(a) Within 24 months (or 36 months in the case of subdivided buildings), the property bought by the purchaser must be completed by the developer and handed over to the buyer. Keys must be given to the purchaser. It does not follow that the purchaser can immediately occupy the house, that is, not until and unless the CF has been issued by the relevant local authority.

(b) It was originally thought that water and electricity supply must actually be connected to, and flowing in, the building when vacant possession is handed over to the purchaser. Effective from August 1, 1994, the legal uncertainty has been put to rest by a legislative amendment – in favour of developers.

(c) Everything that needs to be done by the developer must have been done to comply with the requirements of the appropriate authority for the issuance of a certificate of fitness. However, the developer is not legally obliged to guarantee when the certificate of fitness will be issued.

14.5 The problem for the purchaser is that, as long as the certificate of fitness has not been issued by the relevant local authority, he cannot legally occupy the house, even though in law he “is deemed” to have taken delivery of the house.” This is where a serious mismatch occurs between law and reality.

14.6 In one case at the end of 1993, some 100 house buyers of Bandar Puchong Jaya still could not get their certificates of fitness because the developer had not built an access road as outlined in the development plan. What the developer did in this case was to upgrade an existing temporary access road. [New Straits Times, December 9, 1993.]

14.7 Media reports in late 1993 highlighted the fact that some 200 buildings in Kuala Lumpur were issued with temporary certificates of fitness. The question is – how temporary is temporary? Apparently, in some cases the temporary certificates were renewed as many as six times. Under By-Law 26(1), a temporary CF can last only for 6 months – and even then, it can be issued “where only minor deviations from the approved building plans had been made and pending full compliance with the requirements” of the local authority.

14.8 Although local authorities had in the past been urged by the Ministry of Housing and Local Government to issue temporary certificates of fitness in certain cases which merit such an issuance, the Ministry announced in 1997 that such a practice was to be discontinued. Developers and purchasers believe that irrelevant conditions imposed by many local authorities “have resulted in delayed issuance of certificates of fitness for buildings throughout the country, preventing thousands of owners from moving into their premises”.[New Straits Times, August 5, 1995].

Reasons for delay in issuance of CF

14.9 Delay in the issuance of CF had been attributed to several things – e.g. non-completion of drainage and sewerage works and landscaping, non-payment of development charges, unauthorized alterations and failure to clear the site. In one case, the Hulu Langat District Council said it would not issue a certificate of fitness to a condominium project until the developer has satisfied the authorities that it has taken appropriate “Safety measures” for the project. [Utusan Malaysia, August 28, 1995].

14.10 There are also other reasons, which some developers had termed as “irrelevant conditions” being imposed by the local authorities –

(a) requirement of a Bumiputra quota;

(b) developer to maintain sewerage system even after the issuance of certificate of fitness;

(d) developer to carry out landscaping works.

Cabinet directive

14.11 On January 10, 1996, the Cabinet directed all local authorities to issue CF within 14 day of a building having met all structural and legal requirements. This directive followed a joint study by the Ministry of Housing and Local Government and the Malaysian Modernisation and Management Planning Unit (Mampu), which found that many house owners were compelled to wait for indefinite periods for certificates of fitness even though they had been given their keys by the developers.

14.12 Local authorities were encouraged to emulate the Kuantan Municipal Council. In March 1997, the Housing Ministry confirmed that the Kuantan local authority was able to issue CF within two days of the application – provided all documents were in order.

15 PROPERTY FREE FROM ENCUMBRANCES

15.1 Under the earlier 1970 Rules, the developer was not allowed to subject the land to encumbrances without the approval of the purchaser after the SPA had been signed: rule 12(1) (a) and (b). If the purchaser had given his approval, the developer had to ensure that the land would be free from any encumbrances on the date when vacant possession of the property was to be given to the purchaser. These provisions are now contained in the schedule to the 1989 Regulations, in the form of a developer’s covenant to the purchaser.

Developer’s covenant

15.2 The covenant is divided into two parts. First, the developer undertakes that after the execution of the SPA he will not charge the land without any prior consent of the purchaser. Second, assuming that he had obtained the purchaser’s consent and had then charged the property, he must discharge it immediately before he is required to deliver vacant possession of the property to the buyer.

15.3 The rule of prudence to be observed by a purchaser when buying properties without titles (whether they are sited on terra firma or are ‘bungalows in the air’) is to ensure that the developer has a solid reputation. The law reports are littered with many cases of purchasers being left in the lurch by developers – their dream homes in shambles, their precious investments down the drain. This happens when the developer fails to proceed with the project as a result of which the bridging financier then has no choice but to commence foreclosure proceedings.

When bridging financier forecloses

15.4 In mid 90s, however, there have been cases where the courts have extended their protection to purchasers when the properties which they had purchased became the subject matter of foreclosure proceedings commenced by bridging financiers against the developers: see in particular the decision of the Supreme Court in Kuching Plaza Sdn Bhd v Bank Bumiputra Malaysia Bhd [1991] 3 MLJ 163, and following that the decision (which went the other way) in James Edward Buxton & Anor v Supreme Finance Bhd [1992] 1 AMR 81. These cases, however, must be seen in their proper light. They represent the exception, rather than the norm.

16 DEVELOPER’S CONSENT TO DEED OF ASSIGNMENT

16.1 Not infrequently purchasers of parcels in sub-divided buildings (as well as purchasers of conventional housing units) will need to get the developer’s endorsement on their deeds of assignment when these purchaser sell off their properties to others. The need to get the developer’s endorsement arises because at that point in time, the strata title (or the qualified title as the case may be) has yet to be issued.

16.2 In Lim Seang Mee v Keepahead Holdings Sdn Bhd [1993] 2 AMR 51:3553, the issue before Mohamed Zaiddin J. was whether the developer’s practice of charging an exorbitant sum of RM2,000 as “administrative fee” should be allowed. It was submitted by counsel for the purchasers that the 1966 Act as well as the 1989 Regulations “do not provide for the payment of any administrative fee”. Counsel for the developer submitted that the developer is under no legal obligation to endorse the deed of assignment nor to give a letter of undertaking to the new purchaser. Consequently, he argued that it was lawful and reasonable for the developer to demand the sum from the purchaser. The court held that “a fair and reasonable amount should be a sum of RM500.”

On November 1, 1993, the Supreme Court, in an oral judgement, upheld the decision of the trial Judge. It remains to be seen, even as of today, when (if ever) the Ministry of Housing will act to update the Regulations in line with the judicial recommendation.

16.3 In Singapore, its Housing Developers Rules 1976 (amended in 1981) stipulated that the maximum amount which the developers may charge as administrative costs is S$200.

17 DELAY IN COMPLETION

17.1 The standard SPA provides that if the developer fails to complete the house within the stipulated time, the purchaser is entitled to claim “liquidated damages to be calculated from day to day at the rate of ten per centum (10%) per annum of the purchase price” (see Clause 20(2) of Schedule G and 22(2) of Schedule H). The inevitable question for the purchaser is: “What happens if I lose more than that amount? Can I claim my actual loss?”

17.2 Case law does not seem to side with the purchaser on this point. In Limmewah Development Sdn Bhd v Dr Jasbir Singh [1993] 2 AMR 1263, the house which should have been handed over to the purchaser on 25 August 1981 was only completed in January 1985. When the purchaser sued the developer the actual loss and expense which he incurred as a result of the long delay, the trial Judge (Richard Talalla J.) held that in view of the remedy provided under the Act, he cannot recover anything further or beyond it.

18 DEFECTIVE HOUSING

18.1 Examples of defective houses arising from poor construction work are legion. An example often cited is a major housing project, consisting of 1,800 low-cost flats and terrace houses at Bandar Indera Mahkota, Pahang, undertaken by the Pahang State Economic Development Corporation. The contractor for the project was a joint-venture company set up by the Pahang SEDC and a South Korean company. Soon after the housing project was completed, complaints started surfacing – cracked walls and floors, collapsing door frames, generally shoddy workmanship, sub-standard building materials, cement bags and styrofoam stuffed into walls instead of bricks, and shoddy wiring which short-circuited when rain water seeped in. The project was ultimately condemned as unsafe and the residents were resettled by the SEDC.

18.2 Several quarters (including this writer) have suggested to the authorities to consider enacting a legislation similar to the United Kingdom Defective Premises Act 1972 (see previous page). The Housing and Local Government Ministry has (so far) not indicated whether it is prepared to introduce such a legislation in the near (or distant) future.

Complaints

18.3 Usual complaints include –

(a) shoddy workmanship;

(b) late delivery;

(d) no water and electricity connection;

(e) poor infrastructure works at site;

(f) houses not built according to specifications or in contravention of current regulations.

18.3 Attempts have been made to resolve these complaints – with varying degrees of success. Remedial steps taken include requiring developers to submit statements and progress reports every six months, and ad hoc site inspections by Ministry officials. FOMCA receives 40,000 complaints from house buyers every year [NST 2/2/2000], and the number is still increasing. In related moves, the Institute of Construction Quality Control (ICQC) had been established, likewise the new House Buyers Association (HBA). The Housing Developers Association had also established their Housing Complaints Tribunal.

18.4 A promising sign surfaced in February 1997 when the Housing Minister announced the federal government’s offer to provide incentives to developers to build “zero defect” houses. It was announced that a technical committee had been set up to draw up guidelines for the scheme and that the types of incentives offered would be made known later.

PART TWO – FUTURE OUTLOOK: IS IT GOING TO BE ANY BETTER?

18 EARLIER PROPOSALS

18.1 Various proposals have been put forward by several quarters in an attempt to address the problem of housing defects as well as developer’s delay. Some of the proposals are –

(a) a colour-coded demerit system (NST 2/2/2000); [apparently, now shelved]

(b) black-listing developers; [In fact, this has long been implemented. As of July 1999, 27 developers had been black-listed by the Housing Ministry – NST 18/2/2000]

(d) setting up a data bank of such individuals based on their track record.

18.2 There are also other proposals mentioned (as 31^st December 1999) –

(a) Uniform Building By-Laws 1984 to be amended – under which CF will be deemed issued in 2 weeks from the date the developer submits his application to the local authorities; mandatory for developers to get CF before handing over vacant possession of house to purchasers. [Note that as far back as 1997, the Cabinet had directed that all local authorities must issue the CF within 14 days once the developer has met all structural and legal requirements].

(b) Housing Minister urged all states to gazette early amendments of the 1984 By-Laws so that CF can be issued within 2 weeks.

(c) The Cabinet urged developers to play their “social role” by e.g. providing amenities for the handicapped, and building low-cost houses with 3 rooms (UM 16/8/99).

(d) Housing Minister announced that the existing penalties will be increased for offences committed by developers “against unsuspecting purchasers.” [More of this later].

(e) Housing Minister announced that the 1966 Act will be extended to cover statutory bodies and co-operative societies. [Proposal now contained in the Amendment Act]

19 ENSURING OPEN SPACES

19.1 When purchasers buy properties in a housing estate, they expect that open spaces and recreational areas (as designated in the housing estate’s layout plan at the time of purchase) will remain as they are over time. However, in several housing projects, this was not the case. The open areas were subsequently alienated, sometimes to the same developer and at other times to some enterprising applicants. What was a green lung yesterday can turn into a multi-storey apartment today (see New Straits Times, July 25,1994). Reports from several states, including Selangor, show that “continuity of open spaces” in housing estates cannot be taken for granted.

19.2 In the face of increasing complaints by distressed house owners, the Housing Minister finally took action in March 1997 to request all state governments to discontinue the practice of degazetting such open spaces and turning them into development sites. Commenting on this, the Chief Minister of Penang was quoted as saying that he would “heed the Ministry’s advice” but he wanted concrete and clearer guidelines.

19.3 In Selangor, the (previous) Menteri Besar acknowledged that land officers sometimes “overlooked” the nature of these open spaces and approved applications for development projects without realizing that the open areas had been gazetted for other purposes, such as recreation. He agreed that open spaces must be left in their present state and that land officers “must automatically reject applications to develop them”. Asked to comment about a particular case in Subang Jaya, where approval had been given to build a condominium project at a playground, the Menteri Besar admitted that it was a mistake and said the matter had been duly rectified. (New Straits Times, February 19, 1997).

20 PRESERVING THE ENVIRONMENT

20.1 Housing development undertaken on hill-slopes and mountain-slopes (referred to as ‘hillside developments’) have in the past been permitted by local authorities. The effect, at times, had been catastrophic. This state of affairs actually made a mockery of the Land Conservation Act 1960 – see in particular section 6 (restriction against clearing and development) and section 11 (control of silt and erosion).

20.2 Despite the tragic incident involving the Highland Towers in Ampang (the decision of the Kuala Lumpur High Court is still pending appeal) and the collapse of newly-constructed buildings in Cameron Highlands some time ago, it seems that some people never learn. The urge to tamper with nature and disturb the eco-system appears to continue unabated. A case in point a little while ago was the proposal to develop Bukit Larut in Taiping (since abandoned).

20.3 As a result of intervention by the Prime Minister, the days of hillside developments are probably now over. In March 1997, while on a return flight from Kuantan to Kuala Lumpur, the Prime Minister saw massive hillside development being carried out in an area in Selangor. That incident led to the Prime Minister issuing a directive to curb such development. Local authorities have been told not to grant any approvals for housing projects where trees had to be cut, and hills and mountains leveled / flattened. In cases where approvals had already been given, local authorities were instructed to liaise with the developers to make the necessary changes to the development orders or approvals.

20.4 In a related move, the Ministry of Housing and Local Government had also directed local authorities to assign officials to conduct checks and physically inspect proposed development sites to ascertain for themselves the topography of the land in question before granting any approval to the developer. Following a Cabinet decision on the matter, the Ministry had also prepared and issued guidelines for developers on the preservation of topography and vegetation.

21 SUBSEQUENT PROPOSALS

21.1 Before we take a look at the Amendment Act you might want to reflect on a handful of other “interesting suggestions” put forward by several quarters.

(a) Developers will be required to part-finance the construction of access roads to the main road – Works Ministry idea [NST 9/2/2000];

(b) Housing Ministry will post details of housing developers and their approved projects in the Ministry website [NST 25/1/2000];

(d) A new law (Building Common Properties Act) will be tabled in Parliament, to draw the “lines of responsibility” for managers of condos and apartments [NST 29/1/2000];

(e) A new body known as MAHSURI (Malaysian Human Settlements and Urbanisation Research Institute) will be set up.

22 THE 2001 AMENDMENT ACT

Overview

22.1 The Amendment Act contains 26 sections. The name of principal Act is now changed to The Housing Development (Control and Licensing) Act 1966. The Act is also given a new format. It is now divided into 7 distinct parts as follows-

Part I Preliminary (covering sections 1 to 4)

Part II Licensing Housing Developers (covering sections 5 to 6)

Part III Duties of a licensed Housing Developer (covering sections 7 to 9)

Part IV Investigation and Enforcement (covering section 10)

Part V Powers of the Minister (covering section 11 to 16)

Part VI Tribunal for Homebuyer Claims (covering new sections 16A to 16AI)

Part VII Miscellaneous (covering sections 17 to 19)

22.1 The existing section 2(1) of the principal Act has been deleted. Consequently, the new law applies to statutory bodies and co-operative societies. Section 4 has been amended to empower the Minister to appoint Deputy Controllers of Housing and other officers. It also enables the Controller to delegate his functions.

22.2 Section 5 is amended to require the payment of fees to the Controller when an application for a developer’s licence is made. Section 6 is amended to require the payment of a minimum deposit of RM250,000 by a company applying for a licence. The deposit payable by “a person or a body of persons” (currently at RM100,000) has been increased to RM200,000. The deposit is to be kept until the expiry of the defects liability period (new section 6A).

22.3 The new law also enables the Controller to forfeit the deposit in certain cases – e.g. when the developer is behaving in a manner “detrimental to the interest of the purchasers or to any member of the public”, has insufficient assets to cover his liabilities, has contravened any provisions of the Act or has ceased business operations (new section 6B). Before doing so, however, the Controller must give the developer an opportunity to state his case.

22.4 Section 7 of the principal Act (which deals with the duties of a housing developer) has been amended by the addition of paragraphs (h) to (k), resulting in enlarging the scope of such duties. The net effect of this amendment is to ensure that the purchasers can get their CF early, the issuance of separate or strata titles and the transfer of such titles to them.

22.5 Section 7A (which deals with Housing Development Account) has been amended to enhance the penalties five-fold for developers contravening this section.

22.6 A new section 7B has been added, which states that a licensed developer (for purposes of being given directions by the Minister) shall include “any housing developer whose licence has expired.”

22.7 The existing section 8 has been amended to require a housing developer to notify the Controller when he enters into any arrangement or agreement which affects its management or business.

22.8 A new section 8A has been added, which provides for the statutory termination of the sale and purchase agreement (SPA). It sets out the conditions and procedures for making applications under this new section. Essentially what is contemplated under this new section is that if after 6 months of the SPA the project has not commenced and if at least 75% of all the purchasers who had signed the SPA wish to terminate the SPA, the developer can apply to the Minister to have the SPA terminated. The Minister has the discretion whether to approve or refuse the application. If approved, he can impose such conditions as he may deem fit and proper. The decision is final and cannot be questioned in a court of law, and is binding on all the purchasers and the developer. All monies received must be refunded free of interest within the period as stipulated by the Minister. Upon receipt of the refund, all encumbrances must be removed, and all costs and expenses incurred shall be borne by the developer (recoverable as a civil debt). Failure to comply with this section is an offence, punishable with fine not exceeding RM50,000, and a daily fine of not exceeding RM5000.

22.9 Under a new Part IV (dealing with investigation and enforcement), new sections 10A to 10J have been added. These confer powers of entry, search and seizure (section 10A), search of person (section 10B), and examination of persons (section 10E).

22.10 Section 11 (which enables the Minister to give special directions) has been amended to enable the Minister to certify that a licensed housing developer has abandoned his project.

22.11 A new section 13A is added to the principal Act, under which the Controller is now empowered to lodge a report on the conduct of an architect or engineer to this respective professional body in the event that such conduct “has prejudiced the interest of the purchaser”.

22.12 Under a new section 13B, a housing developer’s licence cannot be transferred or assigned. All such transfers and assignments “shall be void”.

22.13 The Tribunal for Homebuyers Claims

(a) Under a new Part VI, the new law established the Tribunal For Homebuyer Claims. The Tribunal consists of a Chairman and a Deputy Chairman (to be appointed by the Housing Minister from the members of the Judicial and Legal Service, in other words, someone from the courts or from the Attorney-General’s Chambers) and not less than 5 other members. For the latter posts, the Minister can choose whether to appoint someone from the Judicial and Legal Service or from the roll of advocates and solicitors in the country having 7 years standing in the profession. Tenure of office shall not exceed 3 years but everyone is eligible for reappointment up to three consecutive terms.

(b) Like always, the Minister has the power to hire and fire. Section 16F empowers him to revoke the appointment of any member of the Tribunal on various grounds – e.g. misconduct, incapable of discharging his duties, conviction of offences involving fraud, dishonesty or moral turpitude. A member can also resign at any time by giving 3 months notice in writing to the Minister.

(c) Section 16E states that the “The Tribunal may sit” (in other words it can be convened) “in one or more sittings” at any time and at such place as the Chairman may determine.

(d) Under section 16L, proceedings are said to commence when a homebuyer lodges a claim “in the prescribed form together with the prescribed fee” in which he claims “any loss suffered or any matter concerning his interests as a homebuyer under this Act”. Under section 16M(4), a homebuyer’s claim “may include loss or damage of a consequential nature”. The actual meaning of this subsection is a matter of some doubt and conjecture. We will have to wait for an actual case coming up before the Tribunal before we can say with some certainty what kind of “consequential loss” can be claimed against a developer.

(e) Whilst the establishment of the Tribunal is warmly welcomed, some quarters feel unhappy about the low limit imposed on the claim. Under section 16M(1), no claim can be made in excess of RM25,000. When queried on this point in the Dewan Rakyat recently, the Housing Minister replied that claims exceeding the limit can still be filed in court. He pointed that homebuyers are therefore not deprived of their remedies against the developer. [There is a way to get around the RM25,000 limit. If both parties (the developer and the homebuyer) mutually agree to allow the Tribunal to hear a claim involving a sum exceeding that amount, the Tribunal can still do so – see section 16O(1). Such an agreement, however, must be in writing and preferable should be made before a claim is lodged with the Tribunal – see section 16O(2)(a).]

(f) If a homebuyer has filed a claim exceeding RM25,000 and the developer cannot be persuaded to agree to allow the Tribunal to hear the claim, the Tribunal still has jurisdiction to hear the claim if the homebuyer then decides to abandon (forego) that portion of the claim in excess of the RM25,000.

(g) There are also procedural matters which homebuyers must keep in mind. Under section 16N(s), the claim must be filed with the Tribunal not later than 12 months of the issuance of the CF or the expiry date of the defects liability period (DLP). The draft Amendment Bill at this point, however, makes no mention whether it is “whichever is earlier” or “whichever is later”.

(h) When a homebuyer has already filed his claim against the developer with the Tribunal, he is no longer permitted to file the same claim against the developer in the courts – section 16R. Once the claim has been filed, the Secretary to the Tribunal will then notify the parties (the homebuyer and the developer) the day, time and place of the hearing – section 16S.

(i) Under section 16T(1), the Tribunal has the power to make an assessment of the case with a view of deciding whether it is appropriate for it to “assist the parties” to work out an amicable settlement. If an agreed settlement can be reached by the homebuyer and the developer, the Tribunal will record the settlement, whereupon it will “take effect as if it were an award of the Tribunal” – section 16T(3)

(j) </