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Expectations not met
13/11/2007 The Star ARTICLES OF LAW by BHAG SINGH
When a housing project is delayed, is the house buyer spared the demands of
the financial institution for loan repayments?
RECENTLY I wrote about the rights of a buyer to withdraw from the
transaction for the purchase of a property when the developer fails to
complete the building by the agreed date.
Of course, many would rather wait for the building to be completed and
handed over despite the additional cost and inconvenience. This is because
it is better to have the building later than not at all. That is the general
view of most buyers, given the complexities involved in the purchase of a
property.
However, there will be situations whereby the buyer may withdraw from the
Sale and Purchase Agreement on grounds permitted by law, and seek a refund
for payments already made.
When this happens, two possibilities exist. Where the development is ongoing
and the developer can meet its obligations, it is likely that the buyer may
get his money back, with interest and damages if he diligently pursues his
claim to the end.
The situation could be different, however, where the developer is having
difficulties.
One reader wrote in to say that he entered into an agreement with a
developer and paid the 10% deposit of the purchase price. However, apart
from some groundwork, work on the site seems to have stopped and the time
for completing the building is almost up.
The developer has indicated that he is about to restart work. If he
completes the next stage, he will be entitled to claim the next progress
payment. For this purpose, a loan has been granted by a lending institution,
and the loan agreement and other documents have been signed.
Even though the developer has intimated that he intends to resume work, the
buyer is apprehensive about the developer’s ability to complete the project.
He wants to know the risks involved if he continues with the Sale and
Purchase Agreement, and the lender releases the loan. What if work stops
again and the project is abandoned?
If there is a delay in completing the building or work is suspended, the
reader wants to know if the lender is obliged to wait for the construction
of the building to be completed before asking the buyer to repay the loan.
The buyer posed the question because when he purchased the property, the
entire transaction was packaged together; the loan facilities had been
arranged and other services agreed to. All the necessary documents
pertaining to the purchase and the loan for the property as well as related
services were signed at the same time with the same solicitors, giving the
impression that it was all one transaction.
On the basis of arrangements ordinarily entered into for obtaining a loan,
it is most unlikely that the lender would have agreed to wait indefinitely
for the loan to be repaid if there was an indefinite delay in completion or,
worse, the project was abandoned.
If there was such an arrangement, it would mean that if the work was never
completed, the lender would never get paid. Of course, there is nothing to
stop a lender from agreeing to such an arrangement but, in reality, such an
arrangement is non-existent.
This is because in all such transactions, the financial institution
considers itself a provider of finance to purchase the property and nothing
else. The lender does not associate itself with any construction work to be
carried out.
From the lender’s point of view, any grievance as to delay in the completion
of the building is a matter between the buyer and the developer.
Of course, at the time the transaction was entered into, it may appear that
all the parties involved – including the developer and the lender – were
acting as a group to help the buyer acquire the property. However, this is
only a matter of outward appearance and does not create any joint liability.
In real terms, the rights and obligations of each party depend on the actual
contractual documents executed in each transaction. It is on the basis of
such contractual documents that any party will be able to assert its rights
and be obliged to fulfil its obligations.
There have been cases in which lending institutions have advanced payments
to developers when the work for such payment has not been done. But then the
lending institution is likely to rely on the fact that the progress of work
has been certified by a pre-agreed designated person.
In such a situation, it may be that the person who certified the work done
has been negligent or fraudulent in issuing the certificate that results in
such payments being made. As far as the lender is concerned, it would not be
a ground for the buyer to refuse payment to the lender.
It is apparent that the buyer, in such a situation, is quite helpless in
denying the demands of the lender. He may risk losing the initial deposit
paid and still have to pay back the lender. On top of that, he may not even
get the property he bought.
Faced with such a situation, what should a buyer do? It can be difficult for
the ordinary individual to make a decision. This is because of the need to
cut one’s losses if necessary. If the buyer is convinced that eventually the
project will fail, it would be better to terminate the contract and the
agreement with the lender as well as stop the release of the loan. In this
way the loss will be limited to the deposit that he has paid, in the event
that this cannot be recovered.
Of course, many buyers would want to think positively and hope that
everything will be well in the end rather than call off the transaction.
This is for the individual to decide. Knowing the consequences if
expectations are not met will, hopefully, help the buyer to make an informed
decision.
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