Abandoned Homes, Abandoned Dreams?

With the increasing number of abandoned houses and affected house buyers suffering various degrees of financial hardship, we surmise that no amount of legislations would totally eradicate such problems against wayward developers. 

More often than not, being able to save up for your first down payment on your soon-to-be home is something most of us strive for. The exhilaration of signing your S&P becomes a fond memory, not just among home buyers, but also for investors. So for all that to be taken away, because the developer abandoned the construction of your dream home midway, is a devastation few can imagine.

As of June 2015, Malaysia recorded 10,403 house buyers who were affected, with a total of 15,206 abandoned housing units from 53 housing projects. Selangor, Perak and Johor recorded the highest number of abandoned housing projects.

The Ministry of Urban Wellbeing, Housing and Local Government regards abandoned housing projects as a serious problem.

If a developer is blacklisted, the company and its board of directors will not be able to apply for licences and advertising permits. It will also not be able to renew its advertising and sales permits, and the company name will be added to the ministry’s website.

A project is considered abandoned if:

There is no significant construction activity at the site for six consecutive months.

The developer is under the control of the Official Receiver.

The developer admits in writing to the Housing Controller that it is unable to complete the project.

Dire Straights

Under amendments to the Housing Development (Control and Licensing) Act 1966, all licensed housing developers who fail to complete a housing project or have caused a project to be abandoned is deemed to have committed a criminal offense. The latter is punishable, with a fine of not less than RM250,000 and not more than RM500,000 or jail up to three years, or both.

There are several reasons why housing projects are abandoned, and these include poor management, lack of finances, low buyer response, legal disputes and the rising cost of materials. To address the issue, Deputy Urban Wellbeing, Housing and Local Government Minister Datuk Halimah Mohd Sadique Halimah explains that amendments were made to the Housing Development Act to ensure that stricter regulations are imposed on developers to give house buyers greater protection.

“For example, developers will have to place a deposit of 3% of their project’s total cost with the housing fund, compared with RM250,000 previously. Buyers can also now terminate their agreement with the developers if there is no sign of work at the project site for six months,” she says, adding that the ministry would also step in to assist affected house buyers to negotiate loan terms.

Inadequate Laws

Are the current regulations sufficient to protect home buyers though? Chang Kim Loong, National House Buyers Association secretary-general (HBA), comments, “Although the Housing Development (Control & Licensing) Act 1966 (HDA) has been tweaked and tuned on numerous occasions in the past, it has not been able to address the issues of abandonment adequately.”

“The latest round of amendments to the Housing Development (Control & Licensing) Act were tabled in Parliament and debated in December 2011. Its implementation was delayed because of the governing HD Regulations, 2015 (HDR) and a host of other crossed referred laws that relate to strata management and maintenance. It finally came into operation on June 1, 2015,” he adds.

The procedures for the control and licensing of housing developers have now been made more stringent so that non bona-fide developers would be marginalised. The effectiveness of the revamped act remains to be seen and would depend on the degree of enforcement carried out.

The crux of the problem lies in the system of delivery, such as the sell-then-build (STB) concept. It exposes buyers to the business risks that developers face, which should not be the case. This is the key reason why the government has to enact laws in its attempt to protect house buyers.

Yet, looking at the number of abandoned projects and house buyers involved who are suffering various degrees of financial hardship, it seems that no amount of legislations would be able to totally eradicate the problems brought by wayward developers. In the majority of cases, the projects are successfully completed and the house buyers can count their blessings. When a housing project fails, the buyers are left in the lurch.

Back in April, in his speech at the 7th Affordable Housing Projects Conference, Syarikat Perumahan Negara Bhd (SPNB) former president Dato’ Dr Sr Kamarul Rashdan Salleh, states that stricter rules should be implemented. His suggestions include increasing the number of housing deposit for licensing; introducing mortgage insurance schemes; and ensuring that the delivery of vacant possession and transfer of land is concurrent with the payment schedule; to enforce the House Buyers Claims Tribunal in accordance with Act 118; and to include a provision that allows the prosecution of developers who fail to complete their projects within the stipulated time.

Stories of Revival

A case study, conducted by Dato’ Dr Sr Kamarul, revealed that a single storey medium cost development in Taman Senawang Jaya, Seremban, that was abandoned in 1987 was only revived in June 2007, a staggering 20 years later. It was finally completed in May 2009, and more than RM9.5 million was spent rehabilitating the project which sits on almost eight acres of land.

He was quoted as saying, “We did not pass on any additional cost to the house buyers, and we also absorbed the deficit incurred in completing the project. The Certificate of Fitness for the project was obtained by the Seremban Municipal Council two years after SPNB took over the project.” The project had a balance of RM2.78 million to be collected, with a rehabilitation cost of RM15.31 million and was at a deficit of RM12.53 million.

Another example is Plaza Rakyat, a development by Plaza Rakyat Sdn Bhd (PRSB) located in the heart of Kuala Lumpur. It has been an eyesore ever since all works halted in 1997 due to the 1997/1998 Asian Financial Crisis. In 2010, the government terminated PRSB’s contract, 12 years after the project was abandoned. As of December 2012, only the base of the complex has been completed.

Ivory Properties Group Bhd (IPGB) is reviving the development of the project with a revised RM8 billion in Gross Development Value. In 2014, Kuala Lumpur City Hall (DBKL) took vacant possession of the abandoned project site after repaying PRSB’s RM150 million loan taken from a consortium of banks.

Another development, which took much shorter time to revive is Bandar Alam Perdana in Shah Alam. The project, scheduled for completion in 2002, was already at 80% completion before it was abandoned that same year. LBCN Development Sdn Bhd, a subsidiary of Prime Utilities Bhd, was the developer who was tasked to complete the project.

According to LBCN’s Chairman Datuk Nik Ezar Nik Bolia, the project was abandoned because the developer Vega Builders Sdn Bhd faced financial problems and had a shortage of workers. The mock keys were only recently handed over, April of this year, to the home owners who have been waiting for over 14 years for their units.

Lengthy Processes

From a liquidators’ perspective, Kumar Nathan of Rimbun, a boutique firm specialising in corporate recovery and project rehabilitation, explains that when a project is abandoned, an appointed liquidator becomes the de facto developer or land proprietor. This means the liquidator assumes the pivotal role in liaising with purchasers, financier, authorities, utility providers, contractors, consultants and the courts.

The sale and purchase agreement, previously signed with the defunct developer remains in force, and the liquidator, after taking note of the legal, technical and commercial considerations, will have to make a decision on whether rehabilitation is a viable option. After the project is revived and the CCC/CFO obtained, the liquidator – in the case of strata property – will have to apply for the strata title, effect its transfer and form a management corporation when the required numbers have been transferred.

The quantum of work (electrical, plumbing, roofing, water reticulation, sewerage system, etc) carried out in an abandoned project varies and in rehabilitating it, the work needs to be carried out almost simultaneously. Any delay in one activity will have a ripple effect, which explains why the process takes so long.

Necessary Action

The stakeholders involved in this sticky situation all have a responsibility to be more proactive. Kumar suggests that the National Housing Department (NHD) should consider establishing a panel of ‘forensic accountants’ in collaboration with the Malaysian Institute of Accountants (MIA), to audit the Housing Development Account utilisation, architect certification for progress claims and physical work at site for projects that fall under the ‘sick’ category. This will act as a deterrent for errant developers and provide the NHD with a means to salvage a project before it becomes abandoned.

The NHD should also take a proactive stance in levying criminal prosecution against a developer who abandons its projects, either through wilful negligence or fraud. It should be noted that no criminal action has been taken against errant developers as there were no provisions in Act 118 to do so prior to the current amendment.

Buyer need to be wary of recent practices by developers providing ‘free legal service’ as a carrot to entice purchasers as this predicts the problems highlighted above when common lawyers are engaged. To avoid being penny wise pound foolish, purchasers should engage their own lawyers to ensure that the sale and purchase agreement is properly drafted; the charge on the property by the bridging financier is discharged; the land in which the project is being developed has been properly converted; and the relevant premium is paid.

Professionals have an equally important role to play. Architects play a crucial role in certifying progress claims that will enable the developers to drawdown from the financier. They often face a dilemma as their fee is paid by developers who could exert tacit pressure for the architect, to certify work that was not carried out in return for prompt fee settlement.

As such, the government should look into the feasibility of developers paying the architects fees upfront to the Malaysian Board of Architects (MBA), which will then release the payment in accordance with the architect’s certification. Lawyers, on the other hand, should desist from acting for both the developer and purchaser simultaneously due to the conflict of interest, and ensure proper checks are carried out on land matters, the developer’s license and advertising permit before taking up the assignment.