Sunday, September 25, 2005

To sell-and-build or build-and-sell?

The Sunday Star
Roger Tan

WHEN Malaysia should adopt the “build-then-sell” (BTS) concept seems to be a hot issue these days among housing industry players, especially after Prime Minister Datuk Seri Abdullah Ahmad Badawi said in 2004 that we should look into the feasibility of adopting it.

But how feasible is the BTS concept when for the past 40 years the inveterate “sell-then-build” (STB) system has been so ingrained in our housing industry?

Firstly, it must be emphasised that our current laws do, in fact, encourage developers to practise BTS as the STB system has also over the years become the bête noire of those who champion the rights of house buyers.

Currently, a developer is not required to open and maintain a housing development account or adopt the statutory Schedule G or H sale and purchase agreement (SPA) if the properties offered for sale have already been issued with the certificates of fitness for occupation (CFO).

This is partly the result of a revamp of the housing laws pushed through by the Housing and Local Government Minister Datuk Seri Ong Ka Ting in 2002.

During his first term of office, Ong managed to revamp our housing laws, and some of the changes include:

- The inception of the Tribunal for Homebuyer Claims.

- Extending protection to purchasers of housing units built by Federal and State government agencies and statutory bodies.

- Enhancing the investigation and enforcement powers of housing inspectors as well as increasing manifold, penalties for various offences.

- Requiring developers to submit periodical progress reports.

- Amending the Uniform Building By-Law 25 to state that in the event Form E has been submitted to a local authority and CFO is not issued within 14 days thereafter, then CFO will be deemed to be issued and this amendment has been gazetted by all the State Authorities.

- Giving the purchaser a right to terminate the statutory SPA due to his inability to obtain financing as a result of his ineligibility of income, in which case he is entitled to a refund of 99% of all monies paid to the developer.

But all these do not seem to impress the proponents of BTS who still feel that this is one concept which Malaysia should embrace as soon as possible. But groups like the National House Buyers Association do acknowledge that it may be too early for us to adopt a full form of BTS.

So they are now supporting a hybrid form of BTS whereby a developer can sell housing units before completion, but he may only collect a certain percentage of the purchase price (e.g. 10%) upfront with the balance payable only upon delivery of the housing unit with CFO. This system, first mooted by Ong, is better known as the 10/90 system.

The idea first came about in July 2004 after Ong’s trip to Australia to study the BTS concept practised there.

It appears to be modelled upon S9AA of the Sale of Land Act 1962 of the State of Victoria which provides as follows:

(1) A person shall not sell a lot in a plan of subdivision (whether certified or not) to anyone except a statutory body or authority if the plan has not been registered by the Registrar, unless-

(a) the contract for the sale of that lot provides that the deposit moneys payable by the purchaser are to be paid-
(i) to a legal practitioner or licensed estate agent acting for the vendor to be held by the legal practitioner or licensed estate agent on trust for the purchaser until the registration of the plan of subdivision; or

(ii) into a special purpose account in an authorised deposit-taking institution in Victoria specified by the vendor in the contract in the joint names of the purchaser and the vendor until the registration of the plan of subdivision; and
(b) the deposit moneys payable under the contract do not exceed 10 per cent of the purchase price of the lot.
(2) The deposit moneys paid by the purchaser prior to the registration of the plan under a prescribed contract of sale of a lot shall be paid (as the case requires)-
(a) to the legal practitioner or licensed estate agent acting for the vendor; or

(b) into a special purpose account in the authorised deposit-taking institution in Victoria specified in the contract in the joint names of the purchaser and the vendor.
(3) An account established under sub-section (2)(b) may be drawn upon only with the signature of both the vendor and the purchaser or the personal representative of the vendor or purchaser (as the case may be).

Much has been written elsewhere about the merits of the 10/90 system. But what are some of its drawbacks?

Firstly, section 9AA is not about selling and delivery of a housing unit. It is about a sale of land prior to the approval of plan. Thus in comparison, the issue of fairness does arise whether 10% is a reasonable sum to bind a developer as it is more akin to a situation where the winner takes all and the loser loses everything.
Secondly, is it fair for the purchaser to opt out of the sale if the completion of his housing unit is delayed when he can be adequately compensated with damages for late delivery?

Further, can a purchaser also opt out for any other reason? Whilst a developer is most likely to get the purchaser’s financier to undertake to pay the 90% of purchase price upon completion, there is really nothing to prevent a purchaser to opt out, say if upon completion the property price should plummet to a level which does not make sense for the purchaser to continue with his purchase.

Under these circumstances, is the developer entitled to specific performance? If not, will this not lead to the completed project being abandoned?

It is envisaged that under this practice, the developer will impose many conditions allowing him to withdraw from the contract, for example, if not many units are sold.

Financial institutions may not also come on board to finance a project unless a certain number of units have been pre-sold.

Therefore, is Schedule G or H SPA still required to be used? If so, it really does not make a lot of difference from the present system and the 10/90 system may in fact cause the purchaser to be embroiled in more legal battles over the current usual late delivery and poor workmanship complaints.

In this respect, it may not be so attractive for the developers to adopt the 10/90 system if they still have to comply with the existing strict housing development laws and State Governments’ polices on bumiputra ownership, low-cost housing and improvement service funds for infrastructure.

In fact, we should pride ourselves as one country which requires developers to follow a statutory SPA and open a housing development trust account compared to other countries which practise the STB concept.

What is more important is the provision of affordable housing to the people. The BTS and 10/90 concepts are more commercially-driven with little emphasis on the social aspect of a housing development.

While the purchaser’s rights may be strengthened under the 10/90 concept, he may be more disadvantaged economically as his need for affordable housing may no longer be within his reach.

We should focus more on the enforcement aspect and give a little more time for the 2002 amendments to bite in and if necessary, strengthen further the current laws.

Since the revamp of the housing laws in 2002, we have seen a vast improvement in the housing industry – reduction in abandoned projects, effective enforcement and effective dispute resolution by the Tribunal for Home Buyer claims.

It may be too soon to adopt a system which is not universally practised.

Roger Tan was a member of the Housing & Local Government Ministry’s Steering Committee on Legislative Drafting which drafted the 2002 amendments to the housing laws. He is currently also a member of the Bar Council.

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