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Charging Land
15/12/1998 The
Star Articles of Law with Bhag Singh
Land is a valuable asset, besides its various obvious uses,
it can also be charged to obtain a loan or other financial facilities.
A person may, of course, charge a property for his own
benefit. But what about situations when one person's property is charged and
another gets the loan? In this situation, the land owner allows his land to
be charged for a loan or facility that is granted to another person. Even
though the loan is granted to someone else, the property is at risk until
the debt is repaid.
A similar situation arises when a developer charges the
property to get a loan. Can the developer continue to do so after having sold
some units? Or can the developer sell units with land that is already charged?
Such a charge is of concern to a house buyers because if
the developer is unable to settle the amount owed, the house buyer would be
at the losing end. This is neither impossible nor unknown. And when it happens,
it is indeed tragic.
Ideally speaking, a developer should not be allowed to
charge a property for his own benefit once it has been sold. This is because
the Housing Developers Act 1996 enables house buyers to substantially finance
the construction of the building.
Often, even before a brick is laid, the house buyers on
signing the Sale and Purchase Agreement has to pay 10% of the purchase price
of land and building.
In cases where the project is undertaken on a joint-venture
basis with a land owner who will receive built units upon completion of the
work, the developer's situation is even more comfortable.
But the law does not prohibit a developer from charging
the land on which he intends to construct houses for sale.
However, the position is altered once the property is sold.
The relevant provision in this connection is Clause 2 of the Standard Form
Contract which states: "The proprietor and the vendor shall not immediately
after the date of execution of this Agreement subject the said land to any
encumbrances without the prior approval of the purchaser and the proprietor
and the vendor hereby undertakes that the said property shall be free from
encumbrances immediately prior to the handing over of vacant possession of
the said building to the purchaser."
The effect is that subsequently, a developer can charge
the property with the purchaser's approval. If the purchaser refuse to give
his consent, the developer cannot charge the property.
Some developers ask house buyers to sign a consent to charge
along with other documents when the Sale and Purchase Agreement is signed.
At that time, , many excited house buyers do not realise
what they are letting themselves in for or, for that matter, even read what
they are signing. Others do not understand the implications.
But whatever it is, once consent is given and property
is charged to a lender, the house buyers has to shoulder the burden in the
event, the developer defaults on payment. When that happens, the lender will
proceed to auction off the property and it will be difficult for the house
owner to stop him from doing so.
A reader, who has purchased a property which is almost
half completed, says that he has received a letter from the developer asking
for his consent to create a fourth legal charge. The developer has given him
14 days to respond.
The reader wants to know whether he, as a house buyer,
must give his consent to the developer? What if he does not respond within
14 days? Can that be taken to mean that he has agreed?
The answer: It is entirely up to the house buyer to decide
whether to give his consent or not and any comment must be expressly given.
The house buyer is also not obliged to give any reason for his decision.
Leaving aside the legal issues and principles. many people
would find it disturbing and ominous to get such a request. As the development
is progressing and progress payments are being made by purchasers, the developer's
debt should be decreasing and not increasing!
But then, there may be reasons for such a request. The
reader should enquire further and then decide whether to consent or not, bearing
in mind the consequences of such a decision.
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