Improving accountability
16/02/2004 By David Lee Lai Huat Published in The Edge Magazine

It is not uncommon to hear the grouses of those who have purchased a property from a project that has since been abandoned. We have also read of the plight of home buyers in Malaysia who have been short-changed by housing developers. As at 2002, a total of 544 projects, with sales value totaling some RM9.4 billion, had been abandoned, affecting some 80,070 home buyers.

To arrest the problems faced by home buyers, The Housing Developers (Control and Licensing) Act 1966 ("the Act") was amended by the Housing Developers (Control and Licensing) (Amendment) Act 2002. The amendments, effective Dec 1, 2002, confer a wider scope of protection to home buyers that many felt were lacking in the provisions of the old Act.

This article will attempt to identify the impact and significance of certain changes made to the Act and whether these changes generally favour house buyers. Other changes to the Act, such as the powers and functions of the newly introduced and appointed controller, deputy controllers and inspectors, the administrative and procedural requirements on an application for a housing developer's licence under the Act and other miscellaneous changes, will not be discussed.

Societies and government agencies

The Act now binds societies registered and unincorporated under any written law in Malaysia and government agencies, previously exempted and excluded from the purview of the Act. This means that purchasers of housing projects carried out by societies and government agencies can now institute actions against such societies or government agencies for breach or non-compliance of the Act.

It is not unusual for a housing developer to run and operate a development through a project management company. To do so, the housing developer would usually, among others, grant a power of attorney in favour of such a management company. Previously, it was open for the management company to argue that it does not fall within the purview of the Act. Hence, it was not required to observe and comply with the provisions contained in the Act. However, amendments were made to extend the meaning of a "licensed housing developer" to include the "holder of any power of attorney of such housing developer". As a result, the basis of the old argument is, somehow, emasculated.

The purchaser

The meaning of a "purchaser" under the Act has been amplified. The expression now means "any person who purchases housing accommodation or who has any dealing with a licensed housing developer in respect of the acquisition of housing accommodation". This appears to mean that any person who purchases housing accommodation is a purchaser, irrespective of whether the housing accommodation was acquired from a housing developer or another purchaser of the housing accommodation.

Claims may be filed at the newly established Tribunal for Home Buyer Claims by a "home buyer", defined as "a purchaser and includes a person who has subsequently purchased a housing accommodation from the first purchaser of the housing accommodation".

Housing accommodation

It is germane at this juncture to point out that the Act has been expressly amended to define "housing accommodation" for purposes of the Act to exclude accommodation erected on a piece of land that has been designated or approved for commercial development. The type of accommodation that immediately comes to mind would be the shop houses and serviced apartments that are located on top of or connected to shopping complexes. By adopting a strict interpretation, it appears that purchasers of units of serviced apartments fall outside the purview of the Act.

Housing Development Account

The manner in which the housing developer deals with monies paid towards the purchase price of the housing development has always been regulated by the Act. A housing developer is required to open and maintain a Housing Development Account and all monies received from home buyers as payment towards the purchase price of the property must be deposited into the Housing Development Account.

The housing developer is only allowed to deal with the monies in accordance with the Act. The Act was recently amended to regulate the handling of the money by the housing developer in the event the housing developer, being a company, enters into a scheme of arrangement with its creditors under the infamous Section 176 of the Companies Act 1965; or goes into voluntary or compulsory winding up.

Upon the occurrence of any one of such events, the monies paid to the housing developer and any stakeholders pursuant to the Act would be vested in the official receiver or liquidator who shall utilise it in accordance with the Act. This includes paying the government and other authorities all lawful charges and taxes levied. Any remainder would then be distributed among the other creditors of the housing developer.

It appears that the housing developer must first settle in full its debts arising from the housing development before it can use the monies to settle its debts to other parties not involved in the project. This may be open to abuse as currently, a housing developer is not prohibited from employing or engaging its related company or any company or person connected to a director as a consultant or supplier of building materials for the housing development. By so doing, it would still be legally proper for the housing developer to pay its "consultant" or "supplier" out of the monies placed in the Housing Development Account.

Furthermore, at present, the Act does not prescribe the refund of monies to home buyers under the sale and purchase agreements (S&Ps) as an authorised purpose under the Act. There is nothing expressed in the Act to place the home buyers in priority over suppliers or consultants engaged by the housing developer when it comes to utilisation of monies in such event.

Right to terminate

The Act introduced a right of the housing developer to terminate, with prior approval of the minister, all S&Ps made with the purchasers in respect of a housing development or a phase thereof provided the construction works of the housing development have not commenced after six months from the execution of the S&P; and 75% of all purchasers who have entered into the S&P have agreed to the proposed termination.

For purposes of this limb, the Act further provides that where there is more than one purchaser in an S&P, these joint purchasers will constitute one purchaser. To obtain the approval of the minister, the housing developer merely has to submit an application supported by written consent from the housing developer and from every purchaser who has agreed to the termination together with documentary evidence to satisfy the minister that the housing developer is in a financial position to refund to all monies paid to the purchasers.

If the minister grants such approval, all the S&Ps, including those of the 25% of purchasers who disagreed, will be terminated. Thereafter, the housing developer must, within a period specified by the minister, refund free of interest all monies paid by the purchasers pursuant to the S&P. Upon receipt of the refund, the purchasers will be required to remove or cause to be removed, at the cost of the housing developer, all encumbrances entered by the purchaser against the land.

It is not clear from the Act, however, when the six-month period commences. S&Ps are made at different times. In the absence of clear provisions, the period could arguably run from the date of the first S&P or, alternatively, from the date of the latest S&P entered into by the housing developer. It appears that a housing developer is entitled to terminate all S&P that were made in respect of a particular phase of the housing development, if, for example, the housing developer forms a subsequent view that a particular phase is not viable or profitable, by reason of unfavourable market sentiments.

From one perspective, it may be seen to favour housing developers, for it provides them with a way to wriggle out of a bad or miscalculated business decision practically unscathed. A housing developer only has to fail to commence construction for six months, culminating in a situation where concerned and frustrated purchasers would feel compelled to agree to the termination of the S&P. Thereafter, the housing developer simply has to refund monies paid by these purchasers plus some nominal expenses that may be incurred by these purchasers in removing their encumbrances or private caveats.
 

On the other hand, the amendment appears to provide home buyers with a similar reprieve from a bad investment. Purchasing a unit in a slow or abandoned development project is definitely a bad investment. However, the likelihood of home buyers recouping their money is beyond their control. Their chances of recovery depend largely on the housing developer since the right to apply for and obtain the sanction of the minister to summarily terminate S&Ps vests solely on the housing developers. Thus, if the developer chooses not to exercise its statutory right, home buyers are left without the benefit of the redress described above. They would have to seek other forms of legal remedies.
 

The situation would be complex if 75% of the home buyers have agreed to the termination of the S&P by reason of the housing developer having failed to commence the construction works, but at the same time, a winding up petition has been presented against the housing developer. There is no clear provision in the Act on whether the right of the home buyers to the refund would rank in priority over the other indebtedness of the housing developer in respect of the funds available and kept in the Housing Development Account.

Tribunal for Home Buyer Claims

The Act sets up a Tribunal for Home Buyer Claims to hear claims from home buyers for any loss suffered or matter concerning their rights and interests as a home buyer under the Act. Any home buyer who purchased a property from the first purchaser is also entitled to make a claim in the tribunal. However, any purchaser of a unit of accommodation located in a building erected on a land designated for commercial purposes is precluded from filing a complaint at the tribunal.
 

A claim must be made no later than 12 months from the date of the issuance of the certificate of fitness for occupation or the expiry date of the defects liability period set out in the S&P. The tribunal has the jurisdiction to make awards not exceeding RM25,000. Despite the monetary limitation to its jurisdiction, claims exceeding that sum may still be heard if parties involved had entered into a prior agreement in writing to the tribunal hearing the claim. This agreement in writing must be essentially made before the lodgement of the claim or, if the claim has already been lodged, at any time before a decision or settlement of the claim has been made.

The tribunal is not conferred with the jurisdiction to hear death or personal injury claims or the recovery of land or disputes on rights and entitlements arising from any will, settlement, goodwill, chose in action or personal rights, such as intellectual property rights. Unless the tribunal is of the view that the claim involves complex issues of law and a party would be gravely aggrieved if no legal representation is allowed, an advocate and solicitor has no right of audience at the tribunal.

The tribunal must decide on the claims made without delay, preferably within 60 days from the date of the first hearing. All decisions of the tribunal are final and binding. The Act is silent on the right of a party aggrieved by a decision of the tribunal to appeal from that decision. The Act, however, provides penal consequences for non-observance of an
award of the tribunal. Any person failing to comply with the award made by the tribunal will be deemed to have committed an offence that is punishable on conviction by a fine of not exceeding RM5,000 or imprisonment for a term not exceeding two years or both.

Where an offence has been committed by a housing developer, any person who was at that time of commission a director, manager or secretary or holds any similar office or position or was an agent, clerk or servant of that housing developer shall be guilty of that offence unless it is proven that the offence was committed without his consent or connivance and that he has exercised all such diligence to prevent the commission of the offence.

With the provision of the tribunal, home buyers seem to be accorded with another avenue to air their grievances and obtain a solution thereof expeditiously. Be that as it may, in a recent development, a High Court judge presiding in an application for judicial review by two housing developers pronounced that the tribunal has no jurisdiction to hear cases in which the S&P were entered into before the changes to the Act were effective. This means that, where disputes arose from S&Ps made before Dec 1, 2002, the aggrieved party would not be entitled to pursue its claim in the tribunal. It would have to seek redress in the normal courts of law. On appeal, the Court of Appeal set aside the High Court's decision and reinstated all awards made by the tribunal prior to that controversial decision. The dust has not settled. According to press reports, an appeal to the Federal Court will be filed.

Presumably for inculcating a higher degree of professionalism and accountability from the professional consultants, the Act empowers the controller, if he is satisfied that the conduct of an architect or engineer engaged by a housing developer prejudices the interest of home buyers, to report such conduct to the governing professional body. This
may be seen as an attempt to prevent architects from falsely issuing completion certificates.

Administration fee and other charges

The Housing Developers (Control and Licensing) Regulations 1991 (the Regulations), made by the minister pursuant to the Act, were also amended. Among others, effective Dec 1, 2002, the copies of the S&P and the annexures will be made available free of charge to the home buyer or his solicitors. Currently, the housing developers or their solicitors charge sums of varying amounts for the production of the annexures. There are some that even charge for the agreement itself. With this amendment, a home buyer, already burdened with the payment of initial deposit and other forms of costs and expenses, such as stamp duty, would not be further burdened financially.

More significantly, from Dec 1, 2002, a housing developer is entitled to charge an administration fee of RM500 or 0.5% of the purchase price, whichever lower, for its consent to the assignment between the first purchaser to any subsequent purchasers. Purchasers who have subsequently disposed properties would readily testify that in the past, housing developers have been charging exorbitant fees merely for some administrative work.

From a practical perspective, the housing developer maintains and manages a register of its purchasers, pending the issuance of individual title to the properties of the development. When the individual titles are ready for issuance by the authorities, it is compulsory for the housing developer to submit this register to the authorities. As such, before the time arrives for such submission, it is important that the register is properly and accurately maintained.

For this purpose, the housing developer requires notice of all intended assignments. Upon receipt of a notice, the housing developer will alter its register accordingly. It will also determine if there are arrears of charges due and payable by the first purchasers. For its attendance to such administrative work, the housing developer would, prior to the
change in law, impose an administration fee equivalent to a certain percentage of the purchase price. These percentages, ranging from 1% to 5%, would vary from housing developer to housing developer. In some cases where the purchase price of the property is over RM1 million, the administration fees payable would be, as mentioned in the preceding paragraph, substantial, if not exorbitant. With the recent amendment to the Act, the first purchaser will no longer be placed at the mercy of the housing developer in terms of the administration fee.

Inherent loopholes

On the face of it, the recent amendments appear to provide adequate safeguards and avenues of redress for home buyers when acquiring properties from a housing developer. They appear to represent the approach of the Ministry to emphasise and demand a higher degree of accountability and responsibility from licensed housing developers. This strong stance may compel intending housing developers to conduct proper and thorough feasibility studies of their proposed developments.

Only time will tell if the current changes will eventually eradicate the familiar grouses that we usually hear from our friends or relatives. Notwithstanding this, it can be seen that the Act still has inherent loopholes and uncertainties that must be eradicated. Besides these, the government may want to consider further amending the Act to confer on home buyers the right to collectively apply for and obtain the sanction or approval of the minister to summarily terminate the S&P made with a housing developer which has failed to commence construction (but has not exercised its statutory right to terminate the S&Ps) or abandoned construction works.

Perhaps, with the demand for other forms of residential property, for example, serviced apartments, the government will progress to enacting new laws to regulate and govern the development of other types of properties that do not fall within the purview of the Act with a view of producing similar adequate safeguards and protection of the rights of purchasers of such properties.