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Financing an illegal purchase

18/05/2001 NST-PROP By Salleh Buang

On January 5, 2001 the Kuala Lumpur High Court handed down a decision which I think should be read by everyone involved in the housing industry and more so by senior management in financial institutions.

It is the decision of Kamalanathan Ratnam J. in Arab Malaysian Finance Berhad v Chan Sai Mee 2001 1 AMR 1743, which has just been published in my favourite law report. If the name of the case does not ring a bell with you, how about the Venice Hill Condominium and Golf Resort project? Right, you have heard of it.

After analysing the judicial approach adopted, I found that there are a couple of things  which need to be highlighted. My hope is that financiers and purchasers will both be able to learn something valuable from the judgement.

Let me recap the salient facts of the Case, as outlined by the court. The defendant in this case, Chan Sai Mee, had purchased a condo unit (the parcel) from the developer, Venice Hill Resort Living Sedn. Bhd. (VHRL). To finance the purchase, CSM had obtained a loan from the plaintiff, Arab Malaysian Finance. (AMF).

Under the terms of the loan agreement, Chan was required to pay a monthly sum of RM1,459 for 39 months, with a final payment of RM1,284. Chan defaulted in the loan repayments and AMF applied to the High Court to foreclose the parcel. The question before the court was whether the plaintiff's application should be allowed.

The answer to that question hinges on two things- one, whether the sale and purchase agreement (SPA) entered into by Chan and VHRL on December 7, 1994 was illegal and thus void ab initio or merely voidable; and two, whether the defendant had shown the court a valid "cause to the contrary" against the plaintiff's application.

In the course of the hearing, Chan argued that the SPA is illegal because the developer had not, on that date, obtained the advertising and sale permit from the Ministry of Housing and Local Government. In support of his argument Chan had produced a letter dated November 21, 2000, from the relevant local authority (Majlis Perbandaran Kajang) stating that building plans for the project had not yet been approved.

Chan said that statement clearly contradicts the representation made in the preamble to the SPA which said that the developer had obtained "the approval of building plans from the appropriate authority". If the developer had not obtained the advertising and Sale permits, the SPA must therefore be illegal. That is the essence of the arguments put forward by Chan to the court.

After reviewing a couple of past decisions (the facts of which are anyway nto exactly similar to the instant case), the learned Judge side-stepped this crucial issue (whether the SPA is illegal and therefore void or merely voidable) and instead posed the question to itself "whether the defendant in this case did anything to avoid the contract?"

I may be wrong about this, but to my mind, the question so posed by the court to itself raised the inference that the SPA signed by Chan and the developer is not illegal or void ab initio, but merely voidable at the option of the purchaser.

The learned Judge then answered his own question. He said that Chan "ought to have taken out a summons to avoid the contract" - something which Chan had failed to do. But that ought not to be held against him, said the Judge. Nor should Chan be penalised for not avoiding the contract earlier, instead of doing it now, at a very late stage, when the financier had commenced foreclosure proceedings. It would "not be fair" to hold that against the purchaser, concluded the Judge. Consequently, the court said that Chan "is entitled to raise the issue of avoidance at this stage of the proceedings."

Another interesting (you might say "disturbing") feature of this case, which has hitherto not been disclosed in media reports, is the existence of a letter from the Ministry of Housing and Local Government dated November 10, 2000.

In that letter, the Ministry said that "Untuk makluman tuan seterusnya, penjualan rumah-rumah yang telah meperolehi Sijil Layak Menduduki, tiada Lesen Pemaju dan Permit Iklan dan Jualan diperlukan" (For your information, for sales of houses for which Certificates of Fitness have been issued, no advertising and sale permit is required).

Understandably the learned Judge was perturbed by this statement, and he queried whether the Ministry has the authority to make that dispensation or exemption. Be that as it may, the court said that in this case CF has not yet been issued. The learned Judge also noted that Chan, in his police report maintained that he had not been issued with a CF. In the light of these circumstances, he concluded "that the defendant has successfully raised the defence of avoidance."

Up to this point in his judgement, the learned Judge was addressing his mind on the issue of illegality or enforceability of the SPA between the developer and Chan. Bearing in mind that the present judicial dispute before him is between the financier (AMF) and Chan, the second issue referred to above must also be resolved- and that is whether Chan has been able to raised anything to defeat AMF's application to foreclose the parcel?

In a surprising brief paragraph, the learned Judge concluded that the Chan "has shown a valid cause to the contrary pursuant to section 256(3) of the National Land Code to warrant a dismissal of this action with costs".

Lawyers and bankers familiar with the National Land Code to warrant a dismissal of this action with costs".

Lawyers and bankers familiar with the National Land Code will not find it difficult to understand (and presumably agree with) this final paragraph of the learned Judge's decision. Others will probably continue to scratch their heads.

Before ending this short commentary, there is one parting gift I would like to leave behind for our local financiers who are still keen in giving out loans-especially to developers. That "gift" is the decision of Anuar Zainal Abidin J in Keng Soon Finance Berhad v MK Retnam Holdings Sdn Bhd (Bhagat Singh & 11 Ors as Intervenors) [1996] 3 AMR3021. Find the time to read it. It will give you a better understanding of this complex subject and the pitfalls you should avoid.

 

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