THE National House Buyers Association (HBA) has complained to the minister and those under her charge about purchasers, especially cash purchasers, becoming victims in losing their homes as a result of foreclosure proceedings taken against them by banks to recover loans taken by developers secured by purchasers’ houses bought from the same developers, because the said developers did not settle the loans taken by them.
The crux of the problem is that the Housing and Local Government Ministry-prescribed Sale & Purchase Agreement (S&P) allows developers to build the purchaser’s house with the installments of the purchase price paid by the purchaser from the day the S&P is signed. On top of this, and even more seriously, the developer is allowed to borrow from the developer’s banks on the security of the purchaser’s property. The purchaser’s consent to any additional, post-sale loan is taken for granted. In fact, the purchaser cannot withhold his consent as long as the purchaser receives some fig-leaf protection from the developer’s bank in the form of an undertaking not to foreclose.
The developer’s loan and the developer’s bank – the purchaser’s risk
By almost a sleight of hand, as it were, it has come about that the purchaser who goes to the developer to buy a house ends up handing over his property to the developer to create a charge (mortgage) on it for the developer’s benefit, with all the attendant risks to the purchasers losing it if the developer does not settle the developer’s loan. And, the purchaser is completely helpless to do anything against it. Is there any justice?
The developer’s pre-sale loan and non-disclosure: tantalising problem for cash buyers
The developer is allowed by the SPA to borrow on the security of the entire housing estate, including the purchaser’s, as yet un-subdivided and undeveloped. The developer does this for the first time before the property is sold to the purchaser; (the pre-sale loan). At this stage, the developer borrows on the security of the entire housing estate land to meet the initial expenses of developing the housing estate; this is understandable, perhaps even necessary, under the sell-then-build (STB) system. This is referred to in the recitals:
And whereas the said land is charged to… as security for the financial facility granted to the vendor (developer).”
As a result, the purchaser buys encumbered property, and is forewarned about it but the total amount of the loan taken by the developer (the developer’s redemption sum) is not disclosed to the purchaser and, more importantly, neither is he told about the redemption sum per lot; the resulting sum if the total amount borrowed by the developer is divided equally among all the subdivided lots (redemption sum per lot).
The pre-sale loan taken by the developer should be enough to enable the developer to meet all the initial expenses of the housing development. As soon as the SPA is signed, the developer will receive the deposit and payments progressively from the purchaser at each stage of construction, which will be enough to pay off the pre-sale loan and meet the expenses of construction, and after the end of the construction period, no more payments will accrue to the developer from the purchaser; hence, Clause 3(1) concludes:
The proprietor and the vendor hereby undertakes (sic) that the said Property shall be free from encumbrances immediately prior to the Purchaser taking vacant possession of the said Property.”
This simple arrangement gives the developer the comfort of using the purchase price to meet construction cost and other related expenses as governed under the Housing Development Account, and gives the purchaser the assurance that the developer’s charge is going to be removed.
The settlement of the developer’s charge is achievable, though there is no mechanism to ensure it happens; developers are expected to and do, in a majority of instances, use a portion of each installment of the purchase to clear the pre-sale loan and the charge they had created on the purchaser’s sub-divided lot and achieve a safe position for the purchaser. If this happens, then it is serendipity.
Sceptical safeguard
New Clause 3(4) of the Schedule G – SPA (as provided by the HD Regulations, amended 2015), was introduced when HBA vehemently insisted the redemption sum to be quantified, in no uncertain terms, and disclosed in “ringgit and cents” in the preamble to the standard SPA to ensure that “naïve cash purchasers” especially, must know that a sum is payable for redemption purposes. We have received numerous complaints that their developers failed to redeem from the onset but instead pay off the redemption sum at the last stages of the Schedule of Payment some developers do not even redeem when delivering vacant possession, and buyers are left to fend for themselves.
New Clause 3(4) is reproduced below for easy reference:
Clause 3(4) – A proportion of such part of the instalments envisaged in items 2(a), (b) and (c) of the Third Schedule as may be agreed between the Developer and its financier (taking into account the redemption sum) and which proportion shall be informed to the Purchaser separately in writing shall be applied towards settlement of the redemption sum in full. In the event the redemption sum is greater than the said instalments, the redemption sum shall be fully settled by the Developer to its financier with the consent of the Purchaser before payment by the Purchaser of monies in excess of 50% of the purchase price.
We believe that this Clause 3(4) was instead drafted by Attorney-General Chambers (AGC), in lieu thereof, to ensure that the redemption sum for the property in question does not exceed 35% of the purchase price. Hence, the provision that items 2(a), (b) and (c) of the 3rd Schedule, which total 35% of the purchase price, are to be utilised for payment of the redemption sum.
HBA has taken the view that any purchase price in excess of 45% (10% upon signing, which is paid to the developer, plus the said 35%) should not be payable by the purchaser until the property is fully redeemed. In other words, if the redemption sum is more than 35% of the purchase price, the developer will have to “top up” to redeem the property before any further payment beyond the first 45% of the purchase price can be claimed from the purchaser (or the purchaser’s financier). Unfortunately, Clause 3(4) now provides for monies in excess of 50%, instead of 45%, to be not payable until the redemption sum is fully paid by the developer. In our humble opinion, we feel that the expression “in excess of 50%” is a mistake as it should be 45%. We are hopeful that the mistake will be rectified in the future amendments. We stand corrected.
In the meantime, what is clear to us is that there should be no payment beyond 50% of the purchase price until and unless the property is fully redeemed by the developer. In cases where the redemption sum is not more than 35% of the purchase price, there is, of course, no issue. Where the redemption sum is more than 35%, however, parties may have to agree separately for a further sum of up to 5% only to be paid by the purchaser (or the purchaser’s financier) towards the redemption sum; any redemption sum beyond that will have to be paid by the developer since the purchaser is not obliged to pay beyond 50% until the property is fully redeemed by the developer. Until the necessary amendment is made, it is our hope that developers’ banks will cap redemption sums to a maximum of 35% of the purchase price.
Why play with semantics?
We had previously written to the Housing and Local Government Ministry’s legal head seeking their rationale and how they came up with this confusing clause. Why pussyfoot around with semantics when a redemption sum can be quantified on a per lot basis? Ask any experience banker.
Advice to cash buyers
Buyers should take a small quantum of loan, even if they had sufficient cash. You don’t have to take a 100%, but take an end-financing loan so that the bank will do all the due diligence and you can deal with the bank that operates in a highly regulated environment. Cash buyers place themselves at high risk if they do not know how to safeguard their own interests.
The same goes for buying second-hand cars where the bank, in a hire-purchase facility, would run a check on the customs and excise tax, import permits, engine numbers, blacklisting by the police and so on.
Bank must take responsibility
Although bridging banks may not be privy to the S&P, buyers are similarly not privy to the developer’s bridging loan arrangement. They should ask the developer’s client if there are any cash buyers in the midst. Wouldn’t details of buyers and developer’s sales be made readily available to the banks in the form of quarterly status reports, as demanded of them in the Debenture and Facilities Agreement? Conniving and deceitful developers would probably hide such facts. – The Vibes, April 20, 2021
Datuk Chang Kim Loong is secretary-general of the National House Buyers Association (HBA), a non-governmental and not-for-profit organisation manned wholly by volunteers
This article is the second of a two-part series. The previous article, Letter – Risky redemption sums and disclaimers in home-buying: Part 1 – Chang Kim Loong, can be found here
