ISSUES OF KHIYAR IN CONTRACT: A CASE STUDY OF THE HOUSING STATUTORY STANDARD SALE AND PURCHASE AGREEMENTS IN THE HOUSING DEVELOPMENT (CONTROL AND LICENSING) REGULATION 1989 IN PENINSULAR MALAYSIA

INTRODUCTION

It is well entrenched that the application of the statutory standard formatted sale and purchase agreements (Schedules G, H, I and J (hereinafter referred as ‘the said agreements’)) as provided in the Housing Development (Control and Licensing) Regulations 1989 (‘Act 118’), is mandatory for all house purchases in Peninsular Malaysia pursuant to regulations 11(1) and 11(1A) of the Housing Development (Control and Licensing) Regulations 1989 and the principles decided in Rasiah Munusamy v. Lim Tan & Sons Sdn. Bhd [1985] 2 MLJ 291, Sea Housing Corporation Sdn. Bhd v. Lee Poh Choo [1982] 2 MLJ 31 (FC), Kimlin Housing Development Sdn. Bhd. (Appointed Receiver and Manager) (In Liquidation) v. Bank Bumiputra (M) Bhd. & Ors [1997] 2 MLJ 805 (FC) and MK Retnam Holdings Sdn. Bhd v. Bhagat Singh [1985] 2 MLJ 212.

Parliament enacted the Housing Developers (Control and Licensing) Act 1966 (Act 118) for the purpose of protecting the rights of the purchasers. In Khau Daw Yau v. Kin Nam Realty Development Sdn. Bhd. [1983] 1 MLJ 335, HC, VC George J, at page 341, said:

‘The scheme of the Housing Developers (Control and Licensing) Act 1966, and the Rules of 1970 is to provide a measure of protection to purchasers of housing accommodation in a housing development against unscrupulous developers’.

1) Whether the said agreements contain khiyar terms?

2) Whether the said agreements comply with Islamic Law insofar as khiyar term is concerned?

3) If there is a khiyar term, whether the term is sufficient to protect the purchasers’ rights in abandoned housing projects?

4) If there is no khiyar term in the said agreements, how to formulate a khiyar term that can provide certain protection to the purchasers against the problems of abandoned housing projects?

KHIYAR

Khiyar means a right of the parties to the contract to choose either to proceed with the contract or to void it due to defect found in the subject matter or the subject matter does not comply with the specifications and terms of the contract.

The authority for khiyar is the hadith of the Prophet Muhammad (Peach Be Upon Him) who said: ‘whenever you enter into contract, say to the other party that there shall be no fraud, and I reserve my right of khiyar in three days’. The purpose of the right of khiyar is to protect the interests of both parties to the contract against fraud (ghabn) or risk (gharar).

There are various types of khiyar according to the Muslim jurists. For example, according to the Hanafi school, there are seventeen types, according to the Maliki school there are two, while the Shafiee’ school opines there are sixteen.

Khiyar al-Shart

Khiyar al-’Ayb

Khiyar al-Wasf

Khiyar al-Ru’yah

Whether The Said Agreements Contain Terms of Khiyar?

There is no term for a right of khiyar (a right to nullify the said agreements and request for the return of the money paid and costs (indemnity and restitution)), especially khiyar al-’ayb, in the said agreements.

Similarly, there is no term and condition in the said agreements allowing purchasers to exercise inspection and examination of the completed units to ascertain its fitness and compliance with the terms and conditions of the sale and purchase agreement and the law, before the taking of vacant possession of the purported housing units.

Be that as it may, there are terms and conditions in the said agreements, in regard to the undertaking and covenant by the vendor developer to rectify any defective work, pay corresponding reduction in the purchase price or damages, and to pay late delivery damages. These obligations are provided in:

1) Clause 13 for Schedules G, H, I and J in respect of ‘materials and workmanship to conform to description’;

2) Clause 22 (Schedule G), clause 25 (Schedule H), clause 22 (Schedule I) and clause 25 in respect of ‘Time for delivery of vacant possession’; and,

3) Clause 25 (Schedule G), clause 29 (Schedule H), clause 25 (Schedule I) and clause 29 (Schedule J) in respect of ‘Defect liability period’.

Thus, to a certain degree, it is submitted that, with the above terms, the said agreements have generally complied with Islamic Law, to the effect of protecting the rights of purchasers, despite the absence of khiyar.

Notwithstanding the above, the right of khiyar is guaranteed under Islamic Law given to the contracting parties. This is based on a Hadith of the Prophet (PBUH), reported by Habban bin Munqidh and for avoiding possible commission of gharar. Thus, in this respect, it is opined that the said agreements have not complied with the requirement of the Hadith, for there is an absence of the term of khiyar, especially in the event the project undertaken is abandoned and on the occurrence of other exorbitant risks/fraud (gharar al-fahish) to the housing units purchased by the buyers. This is in line with the Hadith of the Prophet (PBUH) — ‘Those who act not in accordance with our requirement, the act is rejected and those who invent a new thing into our religion, he too is rejected’.

It may be argued that, it is allowed not to provide terms for a right of khiyar in the sale and purchase agreement, so long as there is no possibility for the commission of gharar, thus warranting the legality of the said agreements, according to Islamic Law. In abandoned housing projects and other consequential exorbitant losses, emanating from housing abandonment or otherwise, suffered by purchasers in housing transactions there is actual occurrence of gharar and the gharar is exorbitant (gharar al-fahish), resulting in the said agreements being void on part of the government and the vendor developer, as there is no provision for protection against the occurrence of abandonment and the ensuing grievances. In addition, even if there were terms of khiyar incorporated into the said agreements, despite the existence of a compensatory clause for any defective work becoming apparent within 18 months or 24 months, as the case may be, of the delivery of the vacant possession, these rights are of no use on the ground that the purchasers might not be able to get back the purchase monies paid or the developers fail to carry out the necessary rehabilitation as they have no monetary provision and might have run away escaping from further liability.

Further it is opined, liquidated damages and repairing of the completed building are only applicable if there is only immaterial/minor risk or fraud or defect (gharar al-yasir), not warranting the invocation of the right to exercise khiyar and that the purchasers agree to proceed with the contract, such as the failure of the vendor developer to complete the house on time as promised i.e delay in delivering the vacant possession on the date as promised or certain minor defective substandard works due to poor workmanships undertaken by the developers.

As submitted by the author earlier on, there are certain quarters arguing that the absence of khiyar will not vitiate the legality of the said agreements on the ground of maslahah al-mursalah, istihsan and ‘urf, even though pursuant to the primary legal texts (Quran and Sunnah), the said agreements are considered to be void. The author would like to emphasize that the applications of maslahah al-mursalah, istihsan and ‘urf are only applicable when there is hardship (darurah) to the people and the applications are only ad-hoc and temporary, not permanent. To allow these modes (maslahah al-mursalah, istihsan and ‘urf) of Islamic jurisprudence is to undo the full application and enforcement of the primary legal texts on khiyar and this may warrant the failure to comply fully with the requirements of the primary legal texts (Quran and Sunnah) and cause lackadaisical attitude among the people to comply, seriously, the original shariah legal requirements. This will not be the intention of the Shariah.

The author does not see any hardship if various khiyar were to be incorporated into the said agreements. On the other hand, this term (khiyar) will augment and beautify the said agreements and will achieve social justice and equity (including preserving the rights of the public purchasers against any housing catastrophes such as abandoned housing projects, its consequential losses, serious poor workmanship and other exorbitant risks and defects in housing buildings and other housing woes). In the wider sense adequate terms capable of protecting the rights of consumer purchasers, will increase the public confidence in the legal system, housing law, housing industry in Malaysia and the machinery of the Government. Further, the vendor developer on the other hand will become more responsible by the existence of khiyar terms in the said agreements (for example, to be careful not to abandon the projects and comply fully with the terms and conditions in the said agreements). This suggestion also complies with the mode of sadd al-zara’ in Islamic jurisprudence to prevent the occurrences of gharar (risk), ghabn (fraud) and other losses to purchasers.

It is opined the following should be considered for amending the said agreements in order to be in line with the requirements of Islamic Law, insofar as the right of khiyar is concerned:

1) A right of khiyar arises when the project falls under the definition of abandoned housing unit. It is opined, when housing project is abandoned, exorbitant defect or gharar al-fahish occurs. Right of khiyar should be given to the purchasers (i.e get back all the moneys paid and compensation for losses suffered—restitution and indemnity);

2) However, the right of khiyar does not arise if the delivery of the houses is delayed and it does not fall under the definition of abandoned housing unit or the losses and damage to the purchasers are insignificant, being only gharar al-yasir. In this respect, the purchasers are only entitled to late delivery damages (as statutory or equitable compensation). This is because the delay to deliver the houses is only a light/slight defect (al-yasir);

3) Abandoned housing unit is an exorbitant defect, thus, purchasers of abandoned housing projects have two (2) choices: a) right of khiyar (cancellation of the contract, entitle to refund of all the moneys paid and compensation from the developer for the losses or injuries suffered); or, b) proceed with the contract, provided the housing development insurance, which is imposed on all housing developers can be used to finance the cost of rehabilitation of the abandoned units until their duly completion;

4) In the case of defective workmanship or defect houses in the houses occupied by purchasers found and discovered during the defect liability period, if the defective workmanship or defective house is fahish (exorbitant), the purchasers also have two (2) choices: a) can claim khiyar; or, b) proceed with the contract provided the developer uses housing development insurance to repair the exorbitant defect – defective workmanship or defective house (al-fahish).

In the author’s view, in consequence of the possibility of invocation of the right of khiyar by the aggrieved purchasers above, the vendor developers may guard themselves against the losses caused by the cancellation of the contract with the insurance coverage that they might have held. Likewise, if the purchaser holds insurance against any defective works and losses emanating from the housing transaction, the insurance can cover the losses that he suffers. Possession of insurance is allowed under Islamic law provided this is done based on mutual trade and commerce and be free from unlawful transaction such as riba, corruption, maysir, gharar and from unlawful substances for example wine, blood etc.

Case law

There is a case law relating to the abandoned housing project. In this case, the court allowed the application of the aggrieved purchaser to nullify the agreement entered into with the vendor developer when the project carried out by the vendor developer was abandoned. This case is Diong Tieow Hong & Anor v Amalan Tepat Sdn Bhd [2008] 3 MLJ 411 (High Court at Kuala Lumpur). In this case, the court held that, the aggrieved purchasers to an abandoned housing project is entitled to a recession of the sale and purchase agreement with the defaulting abandoned developer as the developer had abandoned the project. Secondly, the purchasers also are entitled to get late delivery damages calculated from the promised date of delivery of vacant possession until the date of the recession of the agreement. The purchasers also succeeded in obtaining the return of all payment they made to the developer. However, the purchaser in abandoned housing project must serve notice of termination on the defaulting abandoned developer and the land proprietor in a joint venture housing project to entitle him to compensation even though the blame and fault were well proven fell on the vendor’s shoulder. This is illustrated in Zulkepli bin Mohamad Zain & Ors v BCM Development Sdn. Bhd. [2010] MLJU 1165 (High Court of Malaya at Johor Bahru). In this case, a purchaser to an abandoned housing project failed to serve notice of termination of the agreement on the developer and the proprietor of the land (if there was a joint venture). The court held that, if any of these parties (the developer and the proprietor) is not served with the notice of termination, the purported termination will not be recognized under the law. This is because serving of notice on one party alone renders the notice defective and incompetent pursuant to sections 6(a), 67 and 77 of the Contracts Act 1960. Following this failure, the purchaser is not entitled to any compensation and damages from the defaulting abandoned housing developer, even though the developer had breached the terms and conditions of the agreements, by abandoning the project.

Thus, bearing on the above case law, it is a high time and appropriate for the government to incorporate right of khiyar into the said agreements, in case the project undertaken by the vendor is abandoned. This is to protect the inherent right of the purchasers in abandoned housing and the purchaser would not to be burdened with the technical legal requirement as seen in Zulkepli bin Mohamad Zain.

RECENT DEVELOPMENT ON MEASURES TO DEAL WITH ABANDONED HOUSING PROJECTS

Recently the Malaysian government has announced certain measures to deal with the problems of abandoned housing projects. This includes the proposed amendments to Act 118. The proposed amendment is this–any housing developers who have abandoned their abandoned housing projects will be subject to a criminal penalty. This will come into effect with the enforcement of the new amendment to Act 118 that all licensed housing developers who failed to complete a housing project or have caused the abandonment of the project shall be deemed to have committed a criminal offence. Upon conviction, such a developer is liable to a fine of not less than RM250,000.00 and not more than RM500,000.00 or to be jailed up to three years, or both. This is provided under a new section in Clause 9 of the Housing Development (Control and Licensing) (Amendment) Bill 2011. Apart from that, Clause 5 of the bill, which is aimed at replacing Section 8A of Act 118, will also give the buyer the rights to terminate the sale and purchase agreement if the developer refused to continue implementing the project after six months from the date of the agreement. Furthermore Clause 3 of the Bill, which is aimed at amending Section 6 of Act 118, states that the deposit to obtain housing development licence to be increased from RM200,000 to three per cent of the estimated cost of the project. This is to ensure that only developers who have sufficient financial ability will be allowed to implement housing projects. Clause 8 of the Bill, which is aimed at amending section 16AD of Act 118 to increase the minimum penalty of RM10,000.00 for non-compliance of tribunal award to a maximum of RM50,000.00. On the other hand, clause 6 is aimed at amending sub-section 16N (1) of Act 118 to give more power for the tribunal to hear claims on a sale and purchase agreement involving unlicensed housing developer. The proposed clause 10, however, aimed at amending section 24 of Act 118 to increase the maximum fines for any violations of the law to RM50,000.00 from RM20,000 previously.

The author commends the above move by the government. However, the above approach in making the abandoned housing developers criminals only serve as a penal measures and not preventive. The best method to arrest the occurrences of abandoned housing projects in Malaysia is by way of introducing the full build then sell concept of housing delivery. The above penal provisions may not be effectual if the enforcement and implementation of the law is weak due to insufficient professional staff, inadequate administrative logistics, insufficient legal and technical knowledge of the staff and inefficient administration of the housing regulatory bodies. Thus, the problems of abandoned housing projects still cannot be totally eliminated.

In another new development involving abandoned housing projects are the initiatives adopted by PEMUDAH. According to PEMUDAH, in order to deal with the problems of abandoned housing project, government should adopt Build-Then-Sell Concept (BTS) in the Malaysian housing industry. Nonetheless BTS has not been defined by PEMUDAH. However, the question is whether this BTS is a “full build then sell” or a “quasi build then sell” concept? If it is a “full build then sell”, i.e the developer is required to duly complete the construction of the houses and only upon the receipt of CF or CCC, will the developer sell the houses, then this proposed BTS is the most appropriate measures to deal with the problems of abandoned housing projects. This method will totally eliminate the problems of abandoned housing projects. On the other hand, if BTS means a “quasi build then sell”, or a “10-90 concept”, i.e the purchaser only needs to pay 10% of the purchase price on the signing of the sale and purchase agreement and the 90% purchase price will only be paid to the developer on the duly completion of the houses, the author is still doubtful and skeptical as to whether this concept can eliminate the occurrences of abandoned housing projects altogether? This is because there is no guarantee that during the course of development using this concept (quasi build then sell or 10-90 concept), the developer will not abandon the project.

PEMUDAH also proposed Home Completion Insurance or Guarantee Scheme to face the problems of abandoned housing projects. In the opinion of the author this is a very good suggestion as this means can settle the problem of insufficiency of fund on part of the defaulting developer and facilitate the rehabilitation by white knights. Nonetheless the details of this proposal are yet to be worked out. It is hopeful that this proposal and its details can be workable and sufficient to deal with the problems of abandoned housing projects satisfactorily.

PEMUDAH in their final proposal also proposed that the schedule of payment for the respective agreements (Schedules G, H, I and J) should be amended. The proposal also aims to ensure that the title and the vacant possession can be made simultaneously.

Other initiatives as proposed by PEMUDAH in order to curb the occurrences of abandoned housing projects are as follows:

1) Proposed the government to apply Build-Then-Sell (BTS) Concept by licensed developers which to be fully implemented by 2015 with the house buyer shariah compliance financing scheme; and

2) Proposed to the government that certain amendment to the of Housing Development (Control and Licensing) Act 1966 (Act 118) be made which included:

• Increase in deposit from RM200,000 to three per cent of total estimated physical development cost which also includes professional fees for the Housing Development Account (HDA);

• House buyers having the option to cancel their Sale and Purchase Agreement (SPA) in the event that the project does not take place within six months of the agreement being signed;

• Extending the House Buyers’ Claims Tribunal (TTPR) scope to enable house buyers to claim damages from unlicensed housing projects;

• Imposing a maximum penalty of RM50,000 from RM20,000 for any offence made by developers to any provision under the Act 118;

• Prosecute developers responsible for abandoned housing projects; and

• Definition of “Housing Developer” has been expanded to include Liquidators where their role is to revive abandoned projects should the developer companies go for liquidation.

The government is also planning to conduct a study to unravel the problems faced by the aggrieved purchasers who are victims in abandoned housing projects. According to the Housing and Local Government Minister, Datuk Seri Chor Chee Heung “A special committee will be formed to look into this issue and to find ways to assist them.” At present, he said, buyers who took housing loans from the government would have their loans cancelled if they became victims of abandoned projects. “They will be considered for another housing loan, or have their four per cent interest rate deferred,” he added.

Further the Minister said, MHLG has taken several initiatives to assist victims of abandoned housing projects. He said the initiatives included providing a verification letter to funding institutions that the projects have been abandoned and assist buyers to discuss how their loans could be resumed after rehabilitation works started. “Such loans would be subjected to the funding institution’s valuation and based on the merits of each case but if the buyer is not assisted, a complaint can be lodged with the ministry which would be referred to Bank Negara Malaysia (BNM)”, the Minister explained. Chor said MHLG has also proposed for a working paper to be presented to the National Economic Council in order for BNM to recommend ways to assist the victims of such projects if the funding institutions fail to give them due consideration. He added that the government and related parties in the industry were discussing holistic ways to best implement the build and sell system.

It is submitted that the proposal that the house buyer be given a right to cancel their sale and purchase agreement (SPA) if his housing project does not take place within 6 months of the agreement being signed if a good move and serve as a khiyar right to them. However, the requirement that this proposal is restricted to a period within 6 months of the agreement being signed is quite inappropriate. There are many housing projects which have become abandoned after 6 months of the signing of the sale and purchase agreement. In this situation (after 6 month of the signing the sale and purchase agreement), the purchaser has no right to cancel the agreement. Thus, this is unfair to the purchasers.

Secondly, none in the above proposals and initiatives mentioning about the need to amend the said agreements in order to render them becoming shariah compliant products, particularly involving the issue of khiyar and proposal for its incorporation into the said agreements and thus can provide better protection to purchasers in abandoned housing projects. Thus, this paper is timely and the author hopes that this writing will further enhance and enrich the existing government and PEMUDAH’s proposed measures and initiatives to tackle the problems of abandoned housing projects and its consequences in particular on the importance of improving the said agreements, including incorporating term of khiyar.

RECOMMENDATIONS AND CONCLUSION

To give better protection to the purchasers, the said agreements should incorporate khiyar terms (option) and damages (liquidated and un-liquidated) due to the abandonment of the housing unit and on the occurrences of exorbitant defective works. The khiyar is a composite of khiyar al-syart, khiyar al-ayb, khiyar al-rukyah and khiyar al-wasf. This khiyar (option) can specifically be invoked on the occurrences of these events i.e when the housing units purchased are abandoned, i.e falls under the definition of “abandoned housing unit” as defined by the Act 118. and the defective works are exorbitant. In respect of other minor defective works, the right of khiyar, it is proposed, would not be given. This is because these minor defective or substandard works done by the vendor developer and the losses of the purchasers should be covered and remedied by the housing developer’s housing development insurance coverage. For this matter to be applicable, Act 118 should be amended by imposing on the applicant housing developers to possess housing development insurance before housing developer’s licence can be granted to them.

The author proposes the statutory definition of “abandoned housing project” be incorporated into Act 118. It is suggested that the following statutory definition of “abandoned housing unit” to be inserted into section 3 of Act 118 are as follows:

Addition to section 3, of Act 118:

‘Abandoned Housing Unit’ means any housing development unit where the developer fails to complete it within one year after the request notice to complete has been served by the Controller to the said developer or in respect of the incapable developer, after the expiry of the period within which a developer shall have to complete the construction of the unit either in 24 or 36 months, as the case may be, in accordance with regulations made controlling the rehabilitation of abandoned housing projects.’

‘Incapable Developer’ means any developer who is in the opinion of the Controller, on whatever reasons, is not able to duly complete or carry out the construction of the purported housing unit during the period within which a developer shall have to complete the construction of the unit either in 24 or 36 months, as the case may be.’

For the purpose of rehabilitating abandoned housing projects, it is proposed that once a problematic housing unit falls under the statutory definition of “abandoned housing unit”, the Minister of Housing and Local Government should order that such a unit be rehabilitated immediately.

From the above suggestions, the following term is proposed to be incorporated in the said agreements respecting the right of khiyar (option) and damages (liquidated and un-liquidated) due to the abandonment and exorbitant defective works. It is proposed new clauses 22B (1) for Schedules G, clause 25B (1) for Schedules H), clause 26B (1) for Schedule I, clause 25B(1) of Schedule J be introduced to incorporate term of khiyar (option), viz:

‘In the event the construction of the said property/building is terminated or abandoned and falls under the definition of ‘abandoned housing unit’ defined under Act 118 and the occurrence of exorbitant defective works, the purchaser shall have a right of option to rescind the agreement with the vendor and entitled to recover back all moneys paid and liquidated and un-liquidated damages for the damage and losses suffered and costs incurred due to the abandonment and exorbitant defective works from the vendor’

By incorporating the above khiyar term in the said agreements, it is the author’s view that the said agreements will be more protective to purchasers in the event of abandonment of their housing projects and on the occurrences of exorbitant defective works.

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