LAST year in December, it was reported by online media that a cash purchaser’s house in Lunas, Kedah, was auctioned off by the financing bank because the progress payments she made to the developer allegedly never reached the bank.
When she sought to claim her single-storey home prior to the auction, she was informed that the redemption sum was about RM100,000, inclusive of interest and other charges. This was despite her showing evidence in the form of receipts of all payments made to the developer.
A similar incident happened six years ago in Taiping, Perak, where an old, established, laid-back community of mainly retirees found the roofs over their heads nearly – and in some cases, actually – blown away.
The purchasers had all paid the developer and moved into their houses, and had been turning them into homes for the past 10 years. Problem was, the purchasers paid the developers in cash remittance without taking out end-financing loans.
Unbeknown to the purchasers, the developer did not pay its bank to settle its loan vide bridging loans. The developer’s charge remained and grew into an increasingly larger debt to the bank.
Apparently, the developer’s bank had not been collecting repayments of the loan from the developer, even as the developer was collecting instalments from the purchasers, as provided in the schedule of the sales and purchase agreements (S&Ps).
Bank lax about non-performing loans
Having waited for 10 years for the developer to settle its loan, the bank realised the developer was not going to pay, and that foreclosure was unavoidable.
The bank had a problem – apart from the developer’s loan having ballooned over the years because of the bank’s laxity in not insisting the developer pay promptly – there was also political repercussion.
It meant the destruction of an old settled community in a pleasant, idyllic dormitory town of retiree purchasers; blowing up to full public view the injustice of the S&Ps; the solicitousness for developers in preference to purchasers on the part of powers that be; and the embarrassment resulting from the bank’s “philadelphic” ramifications.
The question is whether the bank breached the fiduciary duty of care for the purchasers as the bridging loan financier to the defaulting developer.
The crux of the problem is that the Housing Ministry’s prescribed S&P allows the developer to build the purchaser’s house with instalments of the price paid by the purchaser from the day the S&P is signed. On top of this, and even more severely, the developer is allowed to borrow from its banks on the security of the purchaser’s property.
Where a purchaser has paid the price in full to the developer, and the developer does not pay the developer’s loan secured by the purchaser’s property, the developer’s bank may foreclose and auction the purchaser’s property off to recover the developer’s loan.
The developer suffers nothing; it has received the purchase price and pocketed it. The developer borrowed from its bank and put the purchaser’s property up as collateral, and with foreclosure, the bank recovers its loan and the developer owes no money to the bank. The developer takes no risk and suffers no loss.
It is the purchaser who loses. He loses his house; has to settle the loan he took out to buy the house (with increasing interest); he is blacklisted, which means he can never borrow again; and can never buy a house again!
Is this fair to the buyer who never did anything wrong to the developer or to the developer’s bank? In the Taiping housing fiasco, some of the purchasers had to buy their houses again at prices bloated by 10 years’ arrears of interest (i.e. pay the developer’s debt) to stave off foreclosure and to ensure they do not have to go without roofs over their heads in their old age.
Housing Ministry to blame
Who is to blame for this sad state of affairs? We will consider each one in turn. The most obvious candidate is, of course, the developer. Not so. It is the Housing Ministry, for providing a standard-form S&P that allows this to happen.
Firstly, the S&P allows the developer to borrow money from a bank with a charge on the whole housing development land before it is sub-divided and sold. This pre-sale loan is referred to in the recitals to the S&P.
This is understandable as the developer needs money before sales. The result of this is that the purchaser buys an encumbered property, but is not told how much of the developer’s loan, if apportioned equally, is borne by each purchaser’s sub-divided land (the redemption sum).
After sales, the developer collects money from the purchaser from the day the S&P is signed, and should be able to make use of it to meet all the expenses of the development. However, after the sub-divided land is sold, the debt continues to swell, and no effort is made to keep the purchaser informed about the increasing amount of the developer’s loan or the redemption sum.
The purchaser’s consent to the additional, post-sale loans is taken for granted. In fact, the purchaser cannot withhold consent as long as he receives some fig-leaf protection from the developer’s bank in the form of an undertaking not to foreclose.
What is the use to the purchaser of the developer’s bank’s undertaking not to foreclose? What the purchaser needs is the absolute undertaking by the developer and the developer’s bank that a purchaser who has paid the purchase price will not face foreclosure vis-a-vis the disclaimer(s).
This would have helped the Taiping purchasers. It is therefore a matter between the developer’s bank and the developer, with the Housing Ministry playing the proper protective role required of it by law to ensure such an undertaking/disclaimer is given by the developer’s bank to the purchaser.
This and other issues arising from the S&P have been raised by the National House Buyers Association (HBA) to the Housing Ministry, which continues to procrastinate.
On the banks’ end
To the developer’s bank, the loans to the developer on the security of the purchaser’s land is regarded as if it is the developer’s property entirely; and it is of no concern to the bank that some of the purchasers have paid the developer, or that the developers may or may not have forwarded some of these payments to the bank.
The bank’s concern is whether the whole loan has been settled by the developer/borrower. If not, the bank feels secure in the knowledge that the entire housing development land is available to it to recover its loan(s), so as far as the bank is concerned, payments made by each purchaser to the developer is of no consequence – the transaction between the bank and the developer is the one that matters.
Under the S&P, there is also no control over how much the developer should be allowed to borrow, for what purpose, and by when it should be settled. Each loan to the developer increases the risks for the purchaser.
In the more decent past, developers borrowed only for the purpose of meeting the expenses of the housing development. A developer was allowed to borrow twice only – once before sale, and once after sale.
And, though the developer was not required to disclose the redemption sum, there was a very important safeguard: the developer had to settle the redemption sum to its bank before completion of construction so that at the end of the 24- or 36-month construction period, as the case may be, the property would be free from the developer’s encumbrances and safe from foreclosure. Even if the property was not transferred to the purchaser just as promptly, it would at least be safe from foreclosure.
The proposed solution
Banks/financial institutions should take the initiative to recover progressively the loan it had given the developer.
Banks should stipulate as a condition for giving loans to their customers (developers) that the latter open its Housing Development Account (HDA), a statutory requirement, with the same bank and require the instalments of the purchase price be paid into it. Then, the developers should authorise their banks to deduct the developer’s loan in instalments from the HDA so that when the purchaser completes payment, the developer’s loan is also settled.
There is no such statutory requirement in the S&P so if it happens at all, it’s serendipity!
HBA had meetings with the Housing Ministry to propose changes to the law and S&P to afford greater protection to purchasers within the framework of the sell-and-build, which the Real Estate & Housing Developers’ Association (Rehda) defends so fervently, but some pertinent ones have been objected by Rehda.
And, as if that is not enough, the ministry has also rejected those proposals vis-a-vis pre-determination of redemption sums quantified in the S&P transaction. That notwithstanding, the Housing Development Act 1966 states that it is inter alia for “the protection of the interests of purchaser…”.
The next continuing article will dwell on the new “protection” or whatever in lieu thereof vis-a-vis “redemptions and disclaimers”. – The Vibes, April 19, 2021
Datuk Chang Kim Loong is honorary secretary-general of HBA, a non-governmental and not-for-profit organisation wholly manned by volunteers
