News Property Law To sell-and-build or build-and-sell? 
| To sell-and-build or build-and-sell? |
|
|
|
| Contributed by Roger Tan | |
| Sunday, 25 September 2005 08:46am | |
|
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:
The following have often been advanced as the pros and cons of the BTS model: Pros The purchaser gets to view the completed housing unit before paying any money to the developer. He gets also to examine the property and its workmanship and quality before committing himself legally to enter into the SPA as most of the time, advertisements do not give an accurate impression of the design, layout and specifications of the property. The purchaser is insulated from any risk of the completion of the project being abandoned or delayed, hence having to pay unnecessary amount of interest to his financier. This will in due course exterminate financially unsound, fly-by-night and errant developers. The purchaser only pays when the property is ready for occupation because the developer is solely and singly responsible for financing the construction and completion of the project. It will also promote the building of better quality houses if the developer wants its completed products to sell. The developer is exempted from the licensing provisions and also the requirement of having to maintain the Housing Development Account and adopt the statutory standard Schedule G & H SPAs. The developer gets to be paid a lump sum of the full purchase price and the risk of a purchaser defaulting in payment will not arise. There will be a fewer number of developers who will have the financial capacity to carry out housing developments and the industry will be monopolised by only big players who will dictate the cost and pricing of properties. Projects carried out by developers may also be on a smaller scale as developers will try to avoid their projects being abandoned due to poor sales. The costs of funding will also increase and this will be passed on to purchasers, resulting in higher selling prices. Where there are a lesser and smaller size developments, this will result in shortage of housing units, fueling further hikes in selling prices. Home buyers will have lesser choice of types of housing as developers will tend to build those types which are popular with the purchasers, hence discouraging genuine innovative products to be made available to the public. Developers will undertake housing development in more affluent locations and they will more likely not embark on any major housing development in remote areas and this will deprive lower income groups of owning properties even if it is a low-cost or medium-cost housing unit. It will require huge shareholders’ funds and capital commitment if a housing developer is unable to secure bank borrowings and banks will be reluctant to finance a project under a BTS concept due to the nature of the risks involved. Previously unknown developers will stand little chance of securing any project financing. Having said that, how many companies are there with huge market capitalisation which can adopt the BTS concept and how many times can they develop projects based on BTS? There will also be implications on downstream businesses as reduction in housing projects and the scale of housing development will affect other industries such as construction, building materials, professionals and banks and this may have severe social, economical and political implications. But there are other drawbacks to the 10/90 model too. Firstly, section 9AA is not so much about selling and delivery of a housing unit. It is more about a sale of land prior to the approval of plan. Even though "land" as defined includes buildings, 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. 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 as quickly as possible, 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. After all, this model is not practised throughout Australia as section 9AA only applies to the State of Victoria. However, if the government still goes ahead with the 10/90 model, then the next vexed question is how to sort out the legal framework, particularly whether the new laws should run parallel with the existing ones or otherwise.
|
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. 
| < Prev | Next > |
|---|
Circular No 110/2012: Seminar on Introduction to ICC Arbitration: An Insight into the 2012 ICC Rules
