Category Archives: Housing Law

Issues in the statutory housing sale agreements in Peninsular Malaysia: A case study of abandoned housing projects

Md Dahlan, Nuarrual Hilal (2015) Issues in the statutory housing sale agreements in Peninsular Malaysia: A case study of abandoned housing projects. The Law Review. pp. 377-397. ISSN 1985-0891

Abstract

The use of statutory housing sale agreements (“the said agreements”) as enshrined in the Housing Development (Control and Licensing) Regulations 1989 is mandatory for all housing developers in Peninsular Malaysia.The use of the said agreements is to ensure protection to house purchasers against irresponsible housing developers.However, in practice, it is evident that the terms of the said agreements are inadequate to provide purchasers with the required protection particularly in abandoned housing projects. This paper aims to highlight this issue.This paper is also the fruit of a research exercise using legal research and qualitative case study methodologies. It finds that there are certain lacunae in the terms of the said agreements that have caused the said agreements’ inability to face the problems of abandoned housing projects to the detriment of the house purchasers’ rights.Further, there are certain housing transaction practices that have caused grievances to the house purchasers. The author provides, at the ending part of this paper, some proposals to overcome the highlighted problems.This is a part of the initiatives to strengthen the said agreements to become more protective to house purchasers.

Keywords: Statutory housing sale agreement, issues, abandoned housing projects, Peninsular Malaysia, grievances to purchasers.

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Some drawbacks in the Australian Buying Off the Plan

Buying off the plan means buying property with the advance of some deposit (usually at 10% of the purchase price), while the remaining 90% will be paid after the developer completes constructing the property together with the necessary certificate of completion/fitness which warrants delivery of vacant possession and occupation. This can protect purchasers against losses due to incomplete project or abandoned property project.

Nonetheless, there are some drawbacks of this plan. This is revealed in an article entitled “in Asking the right questions pays off when buying off the plan” appeared in Herald Sun written by Neelima Choahan in Herald Sun Real Estate – http://www.heraldsun.com.au/realestate/news/asking-the-right-questions-pays-off-when-buying-off-the-plan/story-fni0ckoj-1226910382891.

“New data from property consultants Charter Keck Cramer reveals the number of off the plan apartment releases soared 103 per cent from just over 7000 to more than 14,000 between 2009 and 2013. But the biggest gains have been in the outer suburbs of Melbourne where off the plan releases increased a whopping 2350 per cent from 42 to 1029 apartments, a whopping 2350 per cent jump.”

Charter Keck Cramer director Sam Nathan said Melbourne’s apartment sector had matured significantly in the past five years.

“Melbourne’s favourable planning strategy, dynamic private development sector and supply opportunities have driven the new releases,” Mr Nathan said.

However, he said the apartment market in the city fringe, inner and middle regions was still in its infancy.

Property group 360° director John Meagher said buying off the plan held a lot of financial advantages for well-informed buyers.

But for the uninformed there were many hazards that could turn the expectation of a great investment into a financial and emotional headache.

“Buying off the plan is a literal term for purchasing property that has not yet been built,” Mr Meagher said.

“In other words, it is making a decision to buy an apartment or house based on the documentation available prior to construction.”

Mr Meagher, who has just released a guide to buying off the plan, said buyers must consider the financial, technical and legal requirements before signing on the dotted line.
“Buyers should ask how much deposit needs to be paid, when the balance of purchase price is due to be paid under the contract of sale,” he said.

Mr Meagher said buyers in Victoria should investigate how much stamp duty they would have to pay on settlement.They should also find out the due date for payment and the sunset clause, Mr Meagher said.

“The sunset clause is the date by which the developer has to deliver the property to the purchasers,” he said.

“If the developer doesn’t deliver the property within the timeline, the purchaser is entitled to a reimbursement of the deposit and can walk away from the contract of sale. Alarm bells should ring if the sunset clause is too long.”

Being aware of important technical information when buying off the plan made all the difference between a good and bad investment, he said.

“Some agents will quote room sizes using measurements taken to the exterior of the building,” Mr Meagher said.

Other things to look out for were high rental guarantees used to set prices above market value and if car parking and air conditioning were included in the price.

Remember to ask the question, ‘What is included in this price?’, he said. “Don’t always assume you are buying what you see in the developers’ sales centre or brochure,” Mr Meagher warned. “Additional priced upgrades may be shown in the display.”

Buyers should check the developer’s background, obtain proof of progress and keep the contract handy during final inspection to double-check before settlement.

He urged buyers to go with experience. “You don’t want to be guinea pig, buying in a development where the developer is going through the processes for the first time and learning at your expense,” he said.

“The bottom line is you can never ask too many questions or have too much information about a property you are interested in buying.”

Practical planning pays off

BEFORE buying her new off-the-plan apartment, Euphie Rong made sure she asked all the right questions.

Despite that, the end product wasn’t quite what the financial markets client specialist imagined.

In fact, the one-bedroom abode in the CBD surpassed all her expectations.

“Thankfully, it was even better than my expectations,” Ms Rong said. “It has very good views of the city and lots of sunlight.”

Ms Rong, who has entered into the off-the-plan market for the first time, said doing her homework was the key to success.

“I looked at the plan carefully and I got as much information as I could,” she said.

“I also researched the developer and the builder to see what their track record was in terms of delivering on time and the quality of their project.”

Ms Rong also compared the established one-bedroom apartments in the CBD on offer before making her choice.

She said buyers should consider the “hard” and “soft” elements of the development before making a decision. “The hard (elements) are the construction, the quality, the material, the location — so the property itself,” Ms Rong said.

“The soft (elements) are the pricing and your own requirements.”

“No one knows the project 100 per cent — either the sales person or the project manager. But if you ask the questions, you’ll get the answers.”

A New Email on the Grievances of an Abandoned Housing Project Purchaser

Dear En. Hilal,

I read your articles on abandoned housing project. Being very convincing with your expertise in this field, here I would like to get your brilliant  and tips.

Background

My name is…. In 1998, I purchased a unit of apartment in…. This project was ran by …. (the developer) I get into a contract with … (the bank) to finance my purchase of the apartment unit. …had released the 1st 10% of my loan to …(the developer).

In Dec.2002 this project was declared abandoned by KPKT (Ministry of Housing and Local Government). Few years later … (the developer) was declared bankrupt. Few years after the declaration that this project was abandoned, I had requested …(the bank) to close my loan account as I would like to settle all the 1st 10% which was disbursed to…(the developer), envisaging that I want to avoid paying the interest for that 10% for good. The bank told me that was not possible.

In 2006, I went oversea to further study and till now still in oversea. I did not have any contact with the bank anymore. The interest from my housing loans kept on accumulating plus all legal fees, late payment fees and other related fees.

This month Jan 2014, by chance I had contacted the organizing committee of purchasers of…(the developer) project and he told me that the project was taken over by another developer but my unit fall under cancelled project, whereby the developer had received the approval from the court to cancelled the project of my unit and will reimburse all the money the purchasers had spent to buy the unit in that parcel, they will reimburse ONLY the amount that the bank had released to…(the developer) and the 10% down payment, other related cost like lawyers fees for the bank and the developer and related fees will not be included.

I have contacted the related persons from the new developer, and they had informed me that they had released the cheques under my names to…(the bank) and the cheque was cleared in Nov 2013. The bank did not contacted me, I understand because I was not contactable. Then I contacted the person in-charge from the Loan monitoring unit in…(the bank) and they admitted that they had received and cleared the cheque.

I have requested the Bank to reconsider and recalculate the settlement of my debt to…(the bank), and I have also requested them to minus the 5 years waiver exemption of paying the interest for that abandoned project as announced by the Government, and I requested the bank to minus all legal fees too during the 5 years waiver / exemption of paying the interest.

My Questions

  1. Am I correct to request all those 3 issues to be reconsidered for the settlement of my loan with…(the bank) for this abandoned project? If not, could you please advise or suggest me what actually the correct thing to do or to request?
  2. Do I have to provide the Bank with the necessary docs related to this issue? If yes, what are the documents would be?
  3. I have also requested the bank to remit all the balances from that settlement amount to my personal account.

 Below is the draft of my email to the person in-charge in …(the bank). I really appreciate if you could have a look on my drafted email below and please feel free to amend or add any wording if you think necessary/appropriate. I really appreciate if you could give me the feedback ASAP so that I could contacted those persons accordingly ASAP too.

Assalamualaikum …,

As per our discussion on the phone this morning, could you please proceed with the necessary for my below requests pertaining to the settlement of my HL with …(the bank) for the abandoned project under…(the developer).

The Request

  1. I would like to request the waiver of interest exemption as announced by the government for any abandoned project. this waiver should be commenced from the date the project was declared abandoned by KPKT (Kementerian Perumahan dan Kerajaan Tempatan/ Pihak berkuasa yang berkenaan with maximum terms of 5 years.
  2. I would like to request the waiver of all legal fees imposed on this account during that waiver period too with the reasons explained in my previous email.
  3. I would like to request that all the balances from this settlement to be refunded to my …(my bank) account no…………………………………………..

Thanks and kind regards

 My answer…

Assalamualaikum…

I feel sorry for the disaster that strikes you.

This is an opinion regarding your case. Nonetheless, my advice/opinion below is subject to without prejudice basis.

Your housing developer went bankrupt and wound up, leaving the housing project abandoned. In Malaysia, the normal and general possibility that the abandoned housing project can be revived is remote. At the end of the day, you may not get the duly completed house and that you may have to settle the loan that had been advanced to the defaulting abandoned housing developer. Even if you sue the wound up housing developer, this may not help you either. As the remaining funds may not be adequate to compensate you for all the losses you suffer. In this situation, legally, you may apply to the court to lift the corporate veil, requesting the court to order the directors to pay compensation and be liable to you.

On the other hands, you could report to the police for the fraud that the company/director committed. Further, a report should be lodged to KPKT, so that KPKT can take action in accordance with the provisions under the Housing Development (Control and Licensing) Act 1966 (Act 118) against the defaulting directors of the abandoned housing developer company.

In short and by and large in Malaysia, there is no law that governs abandoned housing project, its rehabilitation and that can protect the aggrieved purchasers’ interests today (including obtaining damages and compensation).

As regards your problem (in 2002) on…(the bank) for releasing some percentage of the loan, it is a law that you as the customer has a right to order …(the bank) not to release the loan to the defaulting developer (see Hoo See Sen & Anor v. Public Bank Berhad & Anor [1988] 2 MLJ 170, (Supreme Court)). The act of the bank in releasing the first 10% to the developer, despite your request to them not to do so, was wrong in law and knowing that the project was declared abandoned by KPKT. On this, I think you should provide proof of their negligence and breach of duty as the bank. You should also report this to Bank Negara Malaysia to take action and can sue them for their breach of duty of care/negligence. You may also claim damages/compensation for the losses you suffered.

You are also entitled to get an endorsement and certification from KPKT on your right to have the calculation of the interests of your loan be stopped from the date the housing project has been declared abandoned by KPKT. As regards your right to get back all legal fees and related fees, I think, you have to personally sue the wound up housing developer and by lodging Proof of Debt (POD) to the liquidator and you will become an unsecured creditor who may entitle to the balance moneys that the wound up company left.

In 2013, you said …(the bank) released some loan to the new developer. I cannot imagine, how could the bank release the money to the new developer, if your house has been cancelled for further development? In this case, I think …(the bank) was negligent and breached their duty. You can ask them to cancel the payment made and make a statement that you shall not be liable (to repay/settle the loan) to the wrongful release of that loan to the new developer.

Finally, you are entitled to the requests (waivers) you made to…(the bank). If they still hesitant to entertain your request, you may report to Bank Negara Malaysia for further action. Provide all proof as well.

Before I end this email, I have a question:

Is there any court order regarding the rehabilitation of the project and on the handing over of the project from…(the developer) to the new rehabilitating developer? The court order should provide certain terms as regards the rights of the purchaser to proceed or not to proceed with the rehabilitation, terms that protect the purchasers’ interests etc and the duties of …(the bank).

Good luck

Associate Professor Dr. Nuarrual Hilal Md. Dahlan ACIS, Institute for Governance and Innovation Studies, Universiti Utara Malaysia, Sintok, Kedah Darul Aman.

Buyers of Abandoned Property Project Seek Help

From: http://komunitikini.com/kl-selangor/property-buyers-of-abandoned-project-seek-help (accessed 20 October 2011)

Posted on October 7, 2011 by Leven Woon

The Bukit Beruntung Super Link once promoted by developers as a vibrant commercial center dubbed the “second Petaling Jaya”, remains incomplete after 14 years.

Ten of the property buyers, who came to Selangor Secretariat yesterday, requested the assistance of Menteri Besar Khalid Ibrahim to rehabilitate the construction of the incomplete buildings and to issue a certificate of fitness (CF) and provide water and electricity supply for the complete blocks.

It is understood that blocks A and B of the four-block project are near completion, however the remaining two blocks only show minor to no construction at all.

“But even the completed blocks have been subjected to vandalism, toilets and electric meters in my shop are totally damaged,” Vicky Lee, owned of a unit on the fourth-floor of Block A said.

Located at Serendah, Hulu Selangor, the project was branded by developer Talam Corp in 1997 as having close proximity to four universities and a hotel as well as being on the route of Kuala Lumpur – Genting Highlands.

Buyers said that RM288,000 was the minimal price for a ground floor unit, as for the top floor (forth), the price was set at RM39,000.

Talam, who promised to deliver the property by 2000, subsequently went into liquidation and abandoned the project.

In 2003, it was discovered that the land was converted from commercial to residential use.

Buyers said Selangor government met them four times since March 2008, but nothing has transpired from the meetings.

“The last meeting we had was a year ago, we hope they can look into our plight seriously and take real actions,” Lee said. (emphasis added).

Owners of Once-Abandoned TTDI Condominium “Abandoned” Again

From: http://komunitikini.com/kl-selangor/kuala-lumpur/owners-of-once-abandoned-ttdi-condominium-%E2%80%9Cabandoned%E2%80%9D-again (accessed 20 October, 2011)

Posted on July 20, 2011 by Leven Woon

Sudah jatuh, ditimpa tangga. Purchasers of the once-abandoned Kondominium Mas Kiara were recently shocked to discover that their units have been sold to third parties by the liquidator of the now-defunct property company.

About 23 purchasers, who bought their units in 1995, alleged that the new developer, Intan Permata Properties Sdn Bhd (IPPSB), has not only failed to give them the much-delayed units, but have instead sold them on to new buyers.

One purchaser, Syaniza Hisham…, claims the developer disputed, without cause, many of the original purchasers’ legal documents when they were asked to sign a new sales and purchase agreement (S&P) in 2007.

“Some 100 purchasers were not invited to sign new S&Ps eventually due to unreasonable excuses such as non-payments although they have shown the receipts,” she added.

“Some of them were asked to show their purchase documents to a lawyer. They went to meet the lawyer a few times but in vain. Eventually the developer claimed they were not interested [to meet with them],” she said at a press conference yesterday.

Syaniza claims those units have been resold to new buyers for between RM400,000 and RM500,000, much higher than the initial price of below RM200,000.

Another purchaser, Hamzah Ibrahim, said the Ministry of Housing and Local Government had, in a meeting, stated that IPPSB can only sell the remaining 53 units which had not previously been sold, and assured that the right of existing purchasers will be protected.

“Many of us feel cheated as we have paid up to 80 percent of the loan instalments,” lamented Hamzah.

Sixteen years dreaming of a new home

Launched in 1995, Kondominium Mas Kiara in Taman Tun Dr Ismail consists of two blocks and 240 units with a built up area of 1,300 square feet.

The purchasers were promised their dream homes in three years, but instead they waited until 2003 to find out the initial developer Petplus (M) Sdn Bhd had been liquidated.

In 2004, IPPSB took over as the new developer and thus began the new saga.

All purchasers who attended the press conference yesterday said they refuse any compensation and only want their units to be handed over to them in the soonest possible time.

They also want IPPSB to recognise them as the genuine purchasers. (emphasis added).

News on Home Warranty Insurance in New South Wales

NSW Building Cuts Bad For Owners: Greens

From: http://news.ninemsn.com.au/national/8362627/nsw-building-cuts-bad-for-owners-greens (accessed 19 October 2011)

New home building laws that have cut the warranty period for defects will leave owners “substantially out of pocket”, the NSW Greens say.

The Home Building Amendment Bill 2011 passed the state’s upper house on Wednesday, and included changes to the statutory warranty.

Currently, homeowners and builders can claim for building defects up to seven years from the date of work.

But in a move to align the claims period with the Home Warranty Insurance Scheme, that time limit has now been cut to six years for structural defects, and two years for non-structural defects.

“This reduction in warranty period will leave thousands of homeowners across NSW substantially out of pocket if they fail to identify defects in time,” Greens MP David Shoebridge said in a statement.

“Some defects like those of internal and external tiling can often take considerable time to identify.”

NSW Housing Minister Anthony Roberts said the existing seven year guarantee was not a “common sense approach” because it became difficult to establish whether a defect was caused by a builder or ordinary wear and tear.

“The changes to statutory warranty periods recognises that the current blanket approach to statutory warranties for structural and non-structural defects does not reflect market realities,” Mr Roberts said.

“Nor does it provide any incentive for homeowners to deal with defects in a timely manner.”

He said most complaints about non-structural defects were made within two years, and most complaints about structural defects were made within six years. (emphasis added)

Abandoned Housing Projects in Lagos, Nigeria

Fed Govt, Lagos move to settle rift on land ownership

From: http://www.thenationonlineng.net/2011/index.php/business/building-properties/23178-fed-govt-lagos-move-to-settle-rift-on-land-ownership.html (accessed 18 October 2010)

By OKWY IROEGBU 8 hours 51 minutes ago

In Lagos, land is like gold. The high accommodation in the upscale areas of the state attests to this. It, therefore, does not come as a surprise that the crux of the altercation between the Federal and Lagos is on which of tier of government controls the ‘Black Gold’ in Nigeria’s commercial headquarters. Investigations by The Nation reveal that about 70 per cent of the state landmass is under federal control because the state once served as the seat of the Federal Government. The imbalance in land ownership has largely affected real estate development, but with the near resolution of the impasse between both parties, the sector may yet witness unprecedented growth, writes OKWY IROEGBU.

There are indications that the stalled housing development in the high brow and middle class areas of Lagos will soon be revived with the near resolution of the disagreement between the state and Federal Government.

There has been contention on whose domain resides the available land mass meant for construction and some of the abandoned housing projects.

The Federal Controller, Ministry of Lands, Housing, Urban Development, Lagos, Mr Temitope Olayinka Onaeko, explained that the problem of the state is land based because a larger percentage of it is on water, adding that land is the greatest resource of the state.

He said: “The Federal Government has between 60 and 70 per cent of landmass in Lagos State and this is the crux of disagreement between her and the state.

“There would have been increased housing development in the Lagos, especially from the massive empty plots in Ikoyi and Ikeja, but they have been stalled as the state has refused to issue development permits to developers and private sector operators engaged by the Federal Government to develop houses.”

He said: ‘’Though we have provided funding and the needed land for the earmarked projects, they cannot take-off because the state denied them approval plans, but very soon the gray areas will be sorted out.”

Onaeko said the government is trying to harness to the full benefit of the vacant housing estates previously occupied by federal civil servants in Satellite Town, Ikoyi and Ikeja GRA as a result of the monetisation policy of government.

The Controller also disclosed that his ministry is also embarking on site and service scheme in Abesan, Epe, Ikorodu and Iyana-Ipaja to serve the low income earners.

However, he stressed that the government is looking beyond the land rift to collaborate with the state on Millenium Development Goals (MDG’s) in of water provision and street lightning.

The Minister of Lands, Housing and Urban Development, Ms Ama Pepple, said under the Federal Government’s Transformation Agenda and Vision 20:2020, the provision of accessible and affordable housing remains one of the strategic national imperatives for guaranteeing the well-being and productivity of the citizens and provides one of the most potent platforms for job creation.

She said the government new line of thinking is to partner with the private sector in housing delivery due to the huge capital outlay.

She said: “Real estate development requires huge capital outlay and it is recognised that the government alone cannot tackle the problem. The government requires partnership with private practitioners in the real estate industry to create the necessary infrastructure at the desired scale. Therefore, the government at all levels, are expected to play the key role of facilitators.”

The Minister, who was represented by the Director, Architectural Services in the ministry, Mr Gidado Sani, said the government has opportunities in the sector and it encourages national, international and multi-nationals to avail themselves of them.

In furtherance of government’s policies to move the sector forward, the Federal Mortgage Bank of Nigeria(FMBN) was recapitalised to reposition it to meet the challenges of real estate with internal strategies that will make mortgage lending easy for citizens.

She reiterated that the government has strengthened its site and service scheme to develop infrastructure at different locations across the country to enhance suitable housing development through a well-planned environment to reduce urban sprawl, informal and haphazard housing construction, lacking in basic services.

She pledged the readiness of the government to pursue tirelessly the provision of housing to assist, especially the vulnerable sector of the economy and the poor who cannot on their build decent accommodation. (emphasis added)

REHABILITATION OF ABANDONED HOUSING PROJECTS: A COMPARATIVE ANALYSIS ON LAWS AND PRACTICES IN PENINSULAR MALAYSIA, NEW SOUTH WALES AND AUSTRALIA – US-CHINA LAW REVIEW, Vol. 7, No. 8, August 2010 (Serial Number 69), pp. 1-26.

REHABILITATION OF ABANDONED HOUSING PROJECTS: A COMPARATIVE ANALYSIS ON LAWS AND PRACTICES IN PENINSULAR MALAYSIA, NEW SOUTH WALES AND AUSTRALIA – US-CHINA LAW REVIEW, Vol. 7, No. 8, August 2010 (Serial Number 69), pp. 1-26.

Authors:

Nuarrual Hilal Md. Dahlan

Md. Rejab Md. Desa

College of Law, Government and International Studies,

Universiti Utara Malaysia

Excerpts

Abstract

Even though there are laws and policies promulgated by the Malaysian government to govern housing industry, abandoned housing project is still one of the housing malaises in Peninsular Malaysia. If it is not feasible to rehabilitate the abandoned housing projects, they will be stalled forever to the detriment of the purchasers. Virtually, there is no universal way to resolve this problem due to the fact that issues faced by the stakeholders are different in almost every abandoned housing project. Thus, different methods are absolutely necessary to tackle the problems especially to rehabilitate those projects. To this point, laws and practices in New South Wales, Australia may deserve consideration.

Keywords: abandoned housing projects, rehabilitation, Peninsular Malaysia, New South Wales, law and practice.

THE POSITION IN NEW SOUTH WALES (NSW), AUSTRALIA

As in NSW there exists a ‘full build then sell’ system coupled with the statutory requirement on the owner-builder and the developer to possess Home Warranty Insurance, it is opined, the problems of abandoned housing project and its consequential losses will be minimized in NSW.  On the other hand, if the owner-builder chooses to apply the ‘buying off the plan’ or ‘quasi build then sell’ system, the interests of the house purchasers will, to some extent, be protected also. Likewise the rights of purchasers are protected, even if an inevitable abandonment also does occur in NSW, because there is a Home Warranty Insurance which could cover any non-completion of the residential works undertaken by the owner-builder, the developer and the licensed contractor due to insolvency, death or disappearance of the owner-builder, developer or contractor (sections 92, 99(1)(a)(b), 95, 96 and 101 of the Home Building Act 1989 (HBA) and regulation 56(1) of the Home Building Regulations 2004 (HBR)).

The insurance coverage is to protect the purchaser against any risk of loss resulting from non-completion of the residential work because of the insolvency, death or disappearance of the owner-builders or the contractors and for the purpose of recovering any compensation from the owner-builders, the developers and the contractors for any breach of statutory warranty in respect of the residential building works or to have owner-builders, the developers and the contractors rectified any such non-completion of works or defective works (section 99 and section 101 of the HBA and regulation 56 of the HBR).

The subject matter and period of coverage of the insurance must include loss arising from non-completion of the work for a period of not less than 12 months after the failure to commence, or cessation of, the residential building works (section 103B(1) of the HBA).  Other types of losses covered are–structural defect, if discovered in 6 years after the completion of the work or the end of the contract relating to the work, whichever is the later (section 103B(2)(a) of the HBA).  For losses other than structural defect, the insurance can cover defects within 2 years after the completion of the work or the end of the contract relating to the work, whichever is the later (section 103B(2(b) of the HBA).  The contract of insurance too must contain a mandatory provision imposing obligation on part of the insurer to pay any claim once the losses as covered by the policy occurred (section 103B(5) of the HBA).  The minimum coverage for the insurance is $300,000.00 for each dwelling.(regulation 60 of the HBR read together with section 102(3) of the HBA).  For a single residential flat building where the contract price exceeds $12,000.00, the coverage must also cover the (a) work on the common property of the existing single residential flat building and (b) work on an existing single residential flat building if the whole building is owned by the same person (regulation 69 of the HBR)”

 

NEW ARTICLE PUBLISHED IN THE MALAYAN LAW JOURNAL [2010] 6 MLJ LXXV; [2010] 6 MLJA 75 AND SHARIAH LAW REPORT [2010] 3 SHLR 90

NEW ARTICLE PUBLISHED IN

THE MALAYAN LAW JOURNAL [2010] 6 MLJ LXXV; [2010] 6 MLJA 75

AND SHARIAH LAW REPORT [2010] 3 SHLR 90

TITLE:

SHARIAH AND LEGAL ISSUES IN THE BAY’ BITHAMAN-AL-AJIL (BBA): A VIEWPOINT

AUTHORS:

Nuarrual Hilal Md Dahlan

College of Law, Government and International Studies

Universiti Utara Malaysia

and

Sharifah Zubaidah Syed Abdul Kader Aljunid

Ahmad Ibrahim Kulliyyah of Laws

International Islamic University Malaysia

Some of the excerpt

“Abstract

The primary duty of Islamic banks and financial institutions in Malaysia is to carry out Islamic banking and financial activities and to offer products that are in accordance with Islamic teachings. These products are subject to the scrutiny and approval of the Bank Negara’s Shariah Advisory Council (‘SAC’) and the internal Shariah Advisory Bodies (‘SAB’) or the Shariah Committees of the respective financial institutions. Despite having been in existence for more than 25 years, it remains unclear on whether Islamic banks and financial institutions in Malaysia have been satisfactorily carrying out this duty. One area worth examining is the transaction involving house buying, particularly, falling under the purview of the Housing Development (Control and Licensing) Act 1966 (Act 118) and transactions involving houses pending completion. This paper examines this area of transaction and loan agreement, effected via the Bay’ Bithaman al-Ajil (‘BBA’), that Islamic banking and financial institutions in Malaysia provide. The purpose of this paper is to examine the extent of which the sale and purchase agreement and the loan agreement have complied with the requirements of Islamic law in protecting stakeholders and to provide practical suggestions to improve the existing practice. The functions, roles, establishment and problems plaguing the SAC and the SAB are also examined, particularly in respect of their role in advising the institutions on transactions involving house buying in Malaysia, bearing on provisions of the recent statute – the Central Bank of Malaysia Act 2009 (Act 701), enforced on 19 August 2009. The paper concludes that the current practice of the BBA is contrary to the teachings of Islam and should be modified and revamped until it is fully able to protect the interests of the purchaser/borrower.

This paper examines the provisions of the standard BBA agreement as practiced by Islamic banks and Islamic Window Banks (‘IWB’) in Malaysia, as to whether the BBA is compatible with the requirements of the Shariah (Islamic law), specifically insofar as it relates to the purchase of houses-still-pending-completion and abandoned housing projects.

The determination is paramount because of the requirement for Islamic banks and IWB to uphold the principles of Islamic law in its operation. Several questions can be posed as follows:

(1)    Whether the said BBA complies with the requirements set out by Islamic law?

(2)    If the said BBA does not comply with Islamic law, whether the public or the stakeholders can apply for a court declaration that the BBA, as practised by Islamic banks and IWB, endorsed by the SAC and the SAB, is null and void and is ultra vires to the provisions of the Islamic Banking Act 1983 and the Banking and Financial Institutions Act 1984, in that the operation of Islamic banks and Islamic IWB shall be in accordance with the teachings of Islam?

(3)    Whether the decisions and the advice of the SAC and SAB can be challenged in a court of law if the BBA or other types of products are considered null and void under Islamic law, in light of the latest development of the position of the SAC and SAB in the recent decided case law and the new statute — Central Bank of Malaysia Act 2009 (Act 701) enforced since 19 August 2009?

(4)    Whether the SAC and the SAB are duty bound to act reasonably and in accordance with the principles of natural justice and observe the duty of care as propounded under the law?

OUR OPINION ON THE BBA OF HOUSE FINANCING IN MALAYSIA

Although judicial decisions have held that the BBA does not involve elements of riba’, in the writers’ opinion, the BBA as practiced in Malaysia may not be valid on the ground of the elements of gharar contained in it. Hence, following the elaboration on gharar al-fahish (exorbitant gharar) and the judicial decisions that the BBA contains the riba’ element, the following are the findings of the writers in respect of the BBA as practiced in Malaysia by the Islamic financial institutions.

(1)    The BBA is void for it inherently involves gharar al-fahish elements, particularly in the case of a transaction financing a house pending completion. The elements of gharar al-fahish are the grievances of the purchasers in abandoned housing projects which have been elaborated above.

(2)    In houses pending completion, where the transaction involves the application of Schedules G, H, I and J of the Housing Development (Control and Licensing) Regulations 1989 or otherwise, normally the purchaser/borrower may pay some portion of the price as deposit. However, on payment of the deposit and on the execution of the sale and purchase agreement with the developer, the purchaser applies for a housing loan (BBA) from an Islamic bank to finance the balance purchase price. This is effected by the PPA and PSA as well as other documents such as the charge document or deed of assignment or power of attorney (‘PA’), as the case may be. Normally, in the purchase of house, the purchaser pays a deposit representing 10% of the purchase price. The balance purchase price (90%) will be paid by the bank to the vendor/developer progressively. The bank granting the loan (90% of the purchase price) to the purchasers to complete the sale will charge the said house as collateral to the loan. The title to the housing unit will not be registered into the purchaser’s name until and unless the purchaser has fully settled that loan (90% of the purchase price) together with the profit margin (the sale price) to the bank. Once the purchaser has fully settled the sale price (usually in installment), then will the bank discharge the collateral (the house as the security to the loan) and will allow the transfer of the house into the purchaser’s name. However, the issue is, whether the purchaser/borrower had acquired full ownership (milk al-tam) warranting him to become the full and absolute legal owner (not just being an equitable and beneficial owner) to the purported house on the payment of the deposit and on the execution of the sale and purchase agreement when his name has yet to be registered as the registered proprietor of the property at the land office. It is still doubtful that he has obtained any legal ownership (milk al-tam) to the purported house to warrant him to ‘sell’ the purported house to the Islamic bank for the latter to re-sell the purported house to him (the purchaser/borrower) in accordance with bay al-inah or murabahah principles. Thus, in transactions involving houses pending completion, the issue of ownership of the purported uncompleted house is still unresolved. In other words, the ownership is not a full (milk ghair al-tam) and unconditional ownership but an incomplete ownership (equitable/beneficial ownership). Incomplete ownership would not give any absolute power/authority on part of the purchaser to sell the purported house to an Islamic bank. However, it may be argued that, the purchaser/borrower can sell the purported house to the Islamic bank, even though his ownership of the house is still incomplete, in order to get the housing loan from Islamic bank, on the condition that the actual owner (the developer or the like) has agreed to such an undertaking. Be that as it may, in the opinion of the writers, this is still not acceptable under Islamic law, as the ownership of the purchaser over the house is still incomplete (milk ghair al-tam) which can justify the selling of the house by the purchaser to the bank and for the bank to re-sell the house to purchaser, under bay’ al-Inah and murabahah modes. This is to avoid the possibility of gharar in the transaction. It follows that the charge created over the house (which is still under milk ghair al-tam) as the security to the BBA may also not be valid under Islamic law, as the house is still not absolutely/fully owned (milk ghair al-tam) by the purchaser/borrower to warrant selling the said house to the bank for the bank to re-sell the house under the BBA transaction.

(3)    It is opined that, the current practice of the BBA seems absurd, in the sense that, the house which is subject to the charge being a security to the BBA, is also considered under the ownership of the bank. The bank’s ownership over the house is explicitly stated in the PPA and PSA. How could the bank as the ‘owner’ of the house, ‘charge’ their own asset? Thus, the positions and status of the house, the charge, the ownership, the purchaser, the bank and the developer in the BBA transaction are ambiguous and not certain. This can lead to gharar. It should be noted, notwithstanding a charge has been created against the land and in an abandoned housing project, in the event of a default on the BBA repayment by the purchaser, the bank may also be not able to enforce the charge and foreclose the security as the house is still not complete and it is doubtful that there is any interested buyer to bid for the purchase of the house/project.

(4)    The BBA is void, based on judicial decisions, on the ground that the practice is inequitable and unfair to the general public. The inequitable element is that the profit margin is higher than the debt owed. This would amount to a riba transaction. Secondly, if the borrower defaults, he has to pay the whole amount of the debt and the profit margin for the whole repayment of the installment period without being entitled to any equitable and appropriate rebate.

(5)    There will be no adversity (hardship) in rejecting the Malaysian style of BBA. In other words, the degree of necessity (darurah) does not exist currently in Malaysia for allowing the practice of the BBA (hybrid of Bay’ al-Inah and murabahah), which are rejected by majority of jurists as it may involve riba’ elements. Instead, other modes which are more equitable must be implemented such as musharakah (partnership) or Ijarah (rental/lease). Some quarters may argue that the practice of the BBA is for the maslahah/maslahah amah/maslahah al-mursalah (public interest) of the ummah (Muslim society), in line with the maqasid al-Shariah. However, to reply this, the maslahah must not be in derogation of the express provisions of the primary texts (the Quran and sunnah) which clearly prohibit gharar, riba’ and other inequitable/unjust practices. It (the BBA) may be applicable if there is a necessity (darurah) for it. However, it is opined that the degree of necessity (darurah) for the practice of the BBA in Malaysia warranting the application of the BBA has not yet actualised. We have the means to replace the BBA with better products, but we do not resort to them. This is sinful. This is akin to the requirement that to perform the obligatory prayer (solah fardu), one shall have to stand up (qiyam). If he has the ability to stand up (qiyam) without any difficulty or hardship, but instead he chooses to pray by sitting down, his prayer is rejected as the rukun (pillar) of the prayer (solah) has not been fulfilled. Similarly in the BBA, we have the ability and means to use better Islamic products such as musharakah and ijarah in house financing, but we choose the BBA (the Malaysian BBA). The reason for this may be due to the  economic and/or maximisation of profit factors. Thus on this footing, it is opined that the rationale and reason for adopting the Malaysian BBA is not satisfactorily sound.

(6)    If the housing project fails and is subsequently abandoned, the purchasers are still required to pay the monthly installments to the bank. There is no term in the BBA that protects the interest of the purchasers if in the course of construction, the houses are abandoned.

(7)    The banks absolve any liability for ensuring the completion of the houses. The banks do not consider the grievances faced by the purchasers of abandoned housing projects. What the bank wants is for the installment monies of the BBA to be fully settled by the aggrieved purchasers.

(8)    Purchasers are the aggrieved party when an abandonment occurs. They must pay their monthly installments yet they cannot occupy the purported houses. Consequently, they would have to rent other premises and have to face other grievances, pecuniary and non-pecuniary. There is no term in the BBA which can provide measures to face these problems.

(9)    In the BBA, through the PSA, the banks are owners of the property. Logically, the owner is obligated to ensure that the purported houses will be duly completed and duly handed over to purchasers and the titles can be registered in the purchasers’ names. There is no guarantee that at the end of the day, if the project is abandoned or the property has not been duly constructed, the bank as owner must either do whatever is necessary to protect the interests of the purchasers or to compensate the purchasers or to return back all the monies paid to them (restitution and indemnity). There is no term prescribing this duty on the banks in the PPA and PSA.

(10)  There are no preventive and curative measures provided in the BBA, especially in the PSA, to avoid losses on part of the purchasers due to the abandonment of houses which they purchased.

(11)  There is no term in the BBA which provides the purchasers with the right to sue the bank for the calamities that have occurred or the right to claim compensation and damages. Provisions such as defect liability period, protection against sub-standard housing constructions, the guarantee that the titles to the property are to be registered into the purchasers’ name on full settlement of the loan and compensation for late delivery of vacant possession and the obligation of the bank to obtain the CCC, must also be made clear and provided in the BBA.

Happy reading.

INSOLVENCY LEGAL ISSUES IN THE REHABILITATION OF ABANDONED HOUSING PROJECTS–PART TWO

ISSUES

Certain questions can be raised emanating from the rehabilitation abandoned housing projects whose developers are wound up by the court, i.e:

  • Whether the liquidator is obliged to carry on the development and rehabilitation of the project left abandoned by the developer company?
  • Can the purchasers and other stakeholders in abandoned housing projects request the liquidator to carry on the balance construction of the projects?
  • Is there a statutory and legal duty on part of the liquidator to carry on the balance construction for the benefit of the stakeholders, particularly the purchasers?

Based on the reading of the above provisions, in particular sections 236(1)(a), 236(2)(d), 236(2)(i) and 236(2)(j) of the Companies Act 1965 (“CA”), it is clear the duty to carry on the balance incomplete construction of abandoned housing projects can fall on the shoulders of the liquidator.

However, if there are many problems in the attempt to rehabilitate which can lead to a possible failure to duly complete the project or the available funds to generate the rehabilitation are not sufficient, whether, under these situations, the liquidator has breached the statutory duties as prescribed by the CA, if the liquidator fails to effectively implement the purported rehabilitation?

In the opinion of the author, there is no clear cut answer to the above question. In the observation of the author, if the liquidator of the company is the Official Receiver (OR), he may not carry out the rehabilitation. The reasons are as follows:

1) The official assignee has insufficient knowledge and expertise to warrant them to carry out the rehabilitation; and,

2) The official assignee has insufficient staff and manpower to enable them to resume the construction or to rehabilitate the projects.

This position can be illustrated in Taman Harmoni, Balakong, Mukim of Cheras, District of Hulu Langat, Selangor, Taman Lingkaran Nur, Kajang, Mukim of Cheras, District of Hulu Langat, Selangor, Taman Seri Simpang Jaya, Mukim of Kangkung, District of Kota  Setar, Kedah, Taman Seri Marina, Mukim of Kuala Kedah District of Alor Setar, Kedah  and Taman Junjong Jaya, District of Kulim, Kedah.

The most that the Official Receiver (“OR”) or, sometimes, the private liquidator, may do is to find eligible third party buyer to buy up the project together with the liabilities of the wound up housing developer companies. The proceeds of the sale are to be used to pay off the debts of the creditors of the companies in accordance with section 292 of the CA (Priorities of Payment). This approach can be seen in Taman Lingkaran Nur, Kajang, Mukim of Cheras, District of Hulu Langat, Selangor, Taman Cemerlang, Lot No. 3254, Mukim 13, Thean Teik Highway, Bandar Air Itam, Pulau Pinang, Taman Sri Angsana Hilir Ampang, Mukim of Ampang, District of Hulu Langat, Selangor, Taman Kenanga Fasa 2A, 3A, 3B, 4A, 5A, 4B, 5B and 5C, Bandar Baru Salak Tinggi, Mukim of Dengkil, District of Sepang, Selangor  and Desa Beruntung, Mukim of Ulu Yam, District of Hulu Selangor.

However, if the private liquidator is appointed, in most cases, there is a possibility that they will rehabilitate the abandoned housing projects. (Query: Whether the private liquidator is interested to make profit or to help the purchasers?) This is evident in Taman Villa Fettes, Lot Nos 141 and 3622, Mukim 18, North East District, Pulau Pinang and Taman Junjong Jaya, Mukim of Junjong, District of Kulim Kedah.

Nonetheless, the private liquidator may not so proceed with the rehabilitation if there is insufficient fund to revive the projects or the project is too difficult for rehabilitation. This situation happens in Taman Junjong Jaya, Mukim of Junjong, District of Kulim, Kedah Darul Aman. The appointed liquidator was unable to proceed with the rehabilitation of the project as there is a shortage of funds to run the purported rehabilitation.

Several questions can be posed following the above discussion:

  • If they (the liquidators) have defaulted in the carrying out the rehabilitation, whether they can be considered as having breached the statutory or legal duty?
  • Whether they (the liquidators) are under a duty of care and legal duty to protect the interest of the purchasers and other stakeholders in the rehabilitation of abandoned housing projects? Just in as much as the company is liable, under the provisions of Act 118?
  • What is meant by the word “Vendor” which includes its successors in title and permitted assigns’ as enshrined under clauses 13, 35, 31 and 35 of the respective statutory standard sale and purchase agreement (Schedules G, H, I and J)? Is also liquidator (OR or the private liquidator) covered by this provision? If in the affirmative, then the liquidator shall have to act on behalf of the vendor developer (if the vendor is wound up) for completing the construction of the project and likewise be subject to the provisions under Act 118 inasmuch as the vendor would be subject to and are also liable to protect the interests and rights of the purchasers, as required under Act 118.

Logically, the liquidators are liable to carry out rehabilitation and be subject to the provisions of Act 118, insofar as these are reasonable and within their power and capability. Nevertheless, insofar as the author’s scrutiny none in the case law and in practice, the liquidator are subject to Act 118 and under no duty (legal and statutory) to rehabilitate the abandoned housing projects. The reasons are provided above, i.e no sufficient funds, no expertise and shortage of manpower. On the other hand, it is argued, to impose statutory and legal duty for carrying out rehabilitation and be subject to the provisions of Act 118 is unfair and inequitable for the liquidators. This is being so as the primary duty of the liquidator, insofar as the insolvency law in Malaysia is concerned, is to carry out the business and affairs of the wound up companies to settle the debts of the petitioning creditors and other secured and unsecured creditors. In other words, once a housing developer companies are wound up under the CA, the housing development business carried out are also defunct. The liability to carry on the development by the liquidators, in favour of the aggrieved purchasers, (even though they can be considered the permitted assigns or successors in title to the wound up companies), cannot be imposed or presumed on part of the liquidators. One of the reasons is that there is nothing expressly provided in the CA which imposes a duty on the liquidators to protect the rights of the purchasers, unless, it is expedient and necessary in the opinion of the creditors, in the course of managing the winding up process.

Following the above statement, in abandoned housing projects in Peninsular Malaysia whose housing developer companies have been wound up, there is a strong possibility that the liquidator (OR or the private liquidator) may not rehabilitate the project in the protection of the purchasers’ interests. This also means that, unless the project is taken over by a white knight or interested third party, the projects will be stalled forever without any relief and the interests and rights of the purchases will be detrimental.

It should be noted, provided that there is enough funds to run rehabilitation and the liquidator is willing to undertake rehabilitation of abandoned housing projects, in carrying out the business and affair of the wound up company, and that the creditors have consented, the liquidator (OR and private liquidator) may appoint special manager to help them in dispensing with the duties and to smooth out the rehabilitation works. This is provided in section 246(1)(2) of the CA. This special manager, it is opined, may consist of project manager or architect or engineer or building contractor.

CASE LAW INVOLVING REHABILITATION OF ABANDONED HOUSING PROJECT OF THE WOUND UP HOUSING DEVELOPER COMPANY

There is a reported case law on the rehabilitation abandoned housing project of a wound up housing developer company. The case is Hongkong and Shanghai Banking Corporation Ltd v Kemajuan Bersatu Enterprise Sdn Bhd [1992] 2 MLJ 370; [1992] 1 LNS 26. In this case, the developer company (respondent company/judgment debtor) was in the course of winding up by the petitioning creditor (Hongkong and Shanghai Banking Corporation Ltd), where later provisional liquidators were appointed pursuant to section 231 of the Companies Act 1965, for the purpose of carrying out the rehabilitation of the housing development project left abandoned by the developer company (the judgment debtor). The rehabilitation of the abandoned project was financed by a loan from TPPT, Bank Negara (Tabung Pemulihan Projek Perumahan Terbengkalai). The provisional liquidators were appointed by the High Court on the application of the creditor for the purpose of rehabilitating the abandoned housing project. The power to appoint a provisional liquidator is given to the court pursuant to section 231 of the Companies Act 1965. It can be exercised at any time after the presentation of a winding-up petition and before the making of a winding-up order. Rule 35(1) of the Companies (Winding-Up) Rules 1972 elaborates on the power—the application for the appointment has to be made by ‘any creditor or contributory’ who should prove ‘sufficient ground’ for the appointment by affidavit. Provisional liquidators, in this case, had been appointed to investigate the affairs of the respondent company in its own right or in its capacity as a trustee, to enable the respondent company to complete current contracts, to enter into new contracts and execute the relevant documents; and to represent the respondent company in legal proceedings. The High Court also ordered that the provisional liquidators ought to file a preliminary evaluation report on the respondent company, together with a feasibility report on whether the abandoned housing project can be successfully revived and completed together with specific recommendations as to the ways and means of achieving the required objectives. The provisional liquidators’ costs, charges, and expenses for works carried out until the hearing of the petition shall be paid by TPPT Sdn. Bhd. The help from TPPT came only in the mid-1990, while the project was abandoned since 1984. This means that, it is submitted, the project had been abandoned without any rehabilitation, for about 10 years (1984 to mid-1990). The provisional liquidators were, finally, also appointed as liquidators of the respondent company through the winding up order made the court on 22 January 1992.

FINDINGS AND SUGGESTIONS

  • There is no provision in the CA which expressly imposes a duty on the liquidator, either the OR or the private liquidator, to rehabilitate abandoned housing projects and to protect the interests of the purchasers;
  • In practice, the liquidator is under no duty to rehabilitate and to protect the interests of the aggrieved purchasers in abandoned housing projects;
  • The duties of the liquidators are to realize the assets and run the affairs of the wound up company for the purposes of settling the debts of the creditors secured or unsecured and in the interests of the creditors;
  • The is a legal and statutory gap in the CA (especially when companies are wound up) when housing projects carried out by the wound up housing developer companies are abandoned for enabling effective rehabilitation be carried out in the protection of the purchasers’ interests;
  • Insofar as the legal situation in Malaysia in concerned, Act 118 needs to be amended by introducing new legal provisions to cater for the problems of abandoned housing projects especially for governing their rehabilitation and to protect the interests of the customers (purchasers) of the wound up companies; and,
  • It is incumbent that all applicant developers should possess housing development insurance to cover any shortfall in funds to run rehabilitation; and,
  • It is a high time for the government to introduce a special legal regime governing rehabilitation of abandoned housing projects, for instance a provision for appointment of a caretaker to manage rehabilitation of the abandoned housing developer companies for the benefit of the aggrieved purchasers and thus can eliminate the problem as to who should carry out rehabilitation of abandoned housing projects.