Downpayment pitfalls

20/07/2002 Published in NST-PROP A Buyer Watch Article by National House Buyers Association

The House Buyers Association stresses the need to scrutinise all documents pertaining to the sale of a property before putting down any money.

In our dealings with aggrieved house buyers, we learned that many paid up their initial payments or “deposits” in the form of booking fees, confirmation fees, earnest money, or whatever other name they go by. This was the first step required of them before they went on to sign the Sale and Purchase Agreement (SPA) and the Deed of Mutual Covenant (DMC), in the process paying up the balance of the 10 per cent of the cost of the property.

To most of these buyers, this would have been the first time they ever caught sight of both the SPA and DMC and being prudent investors, they would have begun to scrutinise the contents of both the SPA and the DMC.

That’s when they would have found that there were clauses within both the documents that were detrimental to their interests. What choice would they have had then? To call it quits would have meant facing the prospect of losing their initial payments of whatever-you-may-call-it. To carry on and sign the documents would clearly have meant putting their interests in jeopardy. The ball would have been in their court but they would have been holding the shorter end of the stick!

Based on this scenario, the House Buyers Association’s (HBA) message is for property seekers to be fully aware of what they are getting into before committing to any payment. Yes, any payment!

In the case of properties that come within the ambit of the Housing Development Act, there is at least some measure of protection because the SPA has a statutorily governed content and there is not much that developers can vary. (Of course there are still loopholes, but we’ll not discuss them right now.) However, the DMC is a totally different kettle of fish altogether and is not governed or regulated by any statute.

The HBA has been urging the authorities to also govern the DMC just like the SPA but to date the Ministry of Housing has not given any proactive signal. The same applies to SPAs for properties categorised under commercial/industrial, bungalow lots and some other categories that are exempted from the Housing Development Act. In these cases the SPAs is not governed by any Act and buyers have to be extra cautious before committing to any payment. Buyers are advised to peruse the contract of sale diligently rather than depend on others to do so and later suffer the consequences of ignorance.

We have seen cases where the progress payments for bungalow plots were worded in such a way that payments were to be made upon commencement of each type of infrastructure promised, such as earthworks, roads, water reticulation, drainage, electricity cabling and so on. The key words used (that may spell disaster to some buyers) were “upon commencement”. In other words, payment of progress billing is not dependent on the completion of the infrastructure works but upon commencement.

Thus the certifying consultant engineer would not be committing any breach when he duly certifies that a particular infrastructure, say earthworks, had commenced, thus signifying that buyers or their financiers are obliged to make progress payments. Yet nowhere is it stated that the said infrastructure had been completed.

Worse still, the likely clause that would follow would probably state that the commencement of the various infrastructure need not necessarily follow the stated sequence. This implies that they may be carried out in any sequence or more vital, that they may even be commenced simultaneously. This means that the buyers would have to pay out a large proportion of the purchasing price (sometimes up to 95 per cent) when the consultants have certified and the developers had claimed the simultaneous commencement of the whole list of infrastructure works.

We wish to point out that having commenced is one thing, but having completed all infrastructure satisfactorily is a totally different matter altogether. The remaining five per cent (or whatever meagre sum left unpaid) is usually to be paid upon the issuance of the titles. Defaulting developers can easily and painlessly sacrifice this amount.

Thus the end result is that those buyers of dream resort bungalow plots would have coughed out a lot of money and all that they would have received would have been half-completed abandoned wastelands. The land would most probably still be under the master titles and worse still, quite likely to be under the defaulted loan actions taken by the developers’ bridging financiers. This is yet another such example of signing without fully realising the real and serious implications.

We found out that many property buyers were overwhelmed by the visions of their dream homes. They were also taken in by the marketing gimmicks put up by developers to the extent that they did not really bother to find out the various terms and conditions of their purchases. They were lulled into a state of mind where they would not allow anything to come in the way of signing the SPA and whatever documents thrust at them in their eagerness to “secure” their dream homes.

By the time they realised that they had made a mistake, a lot of money would have been paid up and it would have been too late to withdraw from the purchases without financial losses. All they could do was to hope for the best. The best did not come their way and that was when they got into serious trouble.

Do not leave it to chance and do “hope for the best”. Hopes have a nasty habit of playing people out!

Hence our message is, “Understand what you are getting into first before making any payment.” It will be a good idea for any property buyer to ask the for a copy of the SPA and DMC (where applicable) first before even paying any money up front. Don’t pay based on the sales brochures or word of mouth promises because they don’t hold water! And make sure that the copy of the SPA or DMC is properly read and explained to you in detail by your own lawyer. If it is a sincere developer that you are dealing with, we do not see any reason for it to refuse such requests. If the developer does refuse, well, forget buying!