Extended defect liability: Is it meaningful?
NST-Prop 28/10/2006  By S.Y. Kok

A legal opinion of what it really provides, and whether it should be adopted industry-wide

ON the surface, news that some developers are offering buyers warranty periods twice as long as what they're obliged to provide for houses they build sounds welcoming. So too might news that Housing and Local Government Minister Datuk Seri Ong Ka Ting is contemplating making it a new standard for the industry.

However, beneath the glitter and "feel-good" sentiments of having a Defect Liability Period (DLP) of more than the required 18 months, there are reasons for concern.

In my opinion as a solicitor familiar with the laws governing the housing industry, the move by certain companies to provide an "18+18" or - as was recently advertised - a five-year DLP,  is nothing more than a sales ploy.

In the light of existing housing laws, we need to examine if there is a necessity for the Housing Ministry to adapt an extension.

Origin and purpose of DLP

The DLP, as spelt out in the standard Sale and Purchase Agreements (SPAs) for housing (Clause 26(1) in Schedule G for landed properties and Clause (30(1) in Schedule H for stratified units), is actually a doctrine of implied warranties that came about as a result of our Sell-Then-Build (STB) mode of housing delivery.

However, this principle (adopted from the United Kingdom) only operates in favour of buyers of houses under construction. It is of no relevance to those buying completed houses or units employing the "Build-Then-Sell" (BTS) formula.

The reason is because BTS turns the tables. Since it permits buyers or their surveyors to appraise the actual physical condition of a completed property, the onus is on them to be on their guard and exercise caveat emptor (meaning buyer beware) when entering into transactions, responsible (as in the case with STB).

The legislative philosophy underlining STB units is to ensure that buyers will not be short-changed - that when their homes are ready, they will be made using good workmanship, with building materials as specified, and which will be fit for human habitation. And since their units wouldn't be ready for inspection, caveat emptor cannot apply.

Two types of defects

Another point of interest in the DLP provision is that I believe the Housing Development (Control & Licensing) Act 1966 (and its standard SPAs) has divided into minor and major construction defects.

In my opinion, Clauses 26 or 30, as the case may be, focuses only on minor defects, while major ones are covered by common law following a breach of the fundamental terms in a contract.

As it stands, minor defects are confined to:

i) Those that become apparent in a housing unit within 18 calendar months from the date of vacant possession is delivered. These can include water leakages (either from the roof or an upper floor apartment); from water pipes or water closets; cracks in the wall or floors; electric wires connected to wrong electrical points; uneven and wavering floors; doors and windows that are out of alignment; and missing water and electric fixtures and fittings;

ii) Shrinkage within the same housing unit; and

iii) Other faults not covered by the above two situations.

Thus, buyers who have taken vacant possession of their units and discovered defects, shrinkage or other faults needing repairs are required by law to notify their developers within 18 calendar months.

Such defects may hamper the continued occupation of their units and make living conditions uncomfortable, but they are not deemed life threatening, compared to say a structural crack that can lead to building collapse and loss of lives.

There are several reasons for my opinion that the DLP as spelt on in the standard SPAs cover only minor defects.

The first can be found in the fact that if faults are not speedily rectified by a developer, they can be carried out by the aggrieved buyers after the conditions spelt out in their SPAs have been satisfied.

Among these conditions is that the cost of repair must first be made known to the recalcitrant developer and that the work must not exceed the retention sum of five per cent of the purchase price, as determined under Item 5 of the SPAs Third Schedule of Payment.

Hence, for a RM100,000 house, a maximum of only RM5,000 can be spent which is certainly too small an amount to meet expenses associated with major rectification work.

I have also found judicial foundation to support my opinion. One comes from a judgment delivered by Justice Suriyadi in the High Court of Malacca in 1996, involving four rows of single-storey terrace houses that had to be torn down and rebuilt because of serious defects.

Referring to the clause on DLP, the judge held that it merely lays down the responsibility of the vendor (the developer) "over the minor defects within one year of the delivery of vacant possession and its subsequent liability", should new ones be discovered.

In contrast to minor defects, major structural defects are way beyond the ability of buyers to rectify as they could, eventually, cause completed housing units to collapse, either totally or partially, and are without exception, life-threatening.

Because of such grave consequences, buyers don't have the right to repair or rectify any structural defect.

An example of a major defect was when a 300 gallon water tank crushed through the ceiling of a double-storey terrace house in Telok Gedong Indah (New Sunday Times, May 14,2006). Obviously, that incident was the result of a defect that would not have occurred had it not been for negligence on the part of the developer.

As for the infamous Highland Towers collapse in Ampang, Selangor, the soil movement triggered off by a landslide hit the foundation columns of one of the two blocks, causing it to collapse. The DLP had long been over, and many lives were lost in the tragedy, but the 18-calendar month period did not bar civil claims against the developer.

This is because housing SPAs do not expressly rule out such an action. Neither do they expressly state that after the prescribed 18 calendar months, the developer will no longer be responsible to its buyers for actions that are to be founded in contract or in tort.

This legal issue was examined by Justice Ramly Ali, who ruled that buyers can still enforce their rights for breach of contract, under common law, after the DLP has expired.

The judge was clear in that the end of a DLP does not restrict or expunge the basic rights of aggrieved buyers to sue a developer for damages in respect of major defects under common law.

The judge said: "In other words, all provisions in the SPA are actually statutory requirements that must strictly be complied with."

He added that the clauses regarding DLP are "meant to be additional protection for house buyers, without affecting or limiting their rights under the common law".

Therefore, any major defect that crops up after the expiry of the 18 month warranty period would require the developer to rectify it speedily, or face civil suit under common law for breach of contract.

Should a developer on its own volition want to offer a 36-month (or 18+18) warranty, so be it. Beyond the original 18 months, any defect that surfaces will, in most likelihood, be a major fault requiring affected buyers to seek legal redress from a court of law and not from their SPAs.

The Housing Ministry, being a governmental and regulatory body, should not react with knee-jerk legislation.

The minister ought to think through the legal issues before making what may appear to be a rash and impetuous statement about enforcing a 36 months' warranty period on all developers.

S.Y.Kok is the author of the book, "Law Governing the Housing Industry". He declares he attempts to project the impartial view on housing in this Viewpoint column and does not wish to be branded as favouring either developer or purchaser.