by Chang Kim Loong
It was reported recently that a purchaser’s house in Lunas, Kedah was auctioned off by the financing bank because the installments 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 is despite her showing evidence in the form of receipts of all payments made to the developer.
Another incident happened six years ago in Taiping, Perak where an established community of mainly retirees .
The purchasers had all paid the developer and moved into their houses in the last 10 years. Problem was that the purchasers paid the developers in cash without taking out end-financing loans.
Unbeknownst to the purchasers, the developer did not pay the developer’s bank to settle the developer’s loan via bridging loans.
The developer’s charge remained and grew into a huge debt.
Apparently, the developer’s bank had not been collecting payment of the loan from the developer, even as the developer was collecting the installments from the purchasers,
Bank’s laxity towards non-performing loans
Having waited for 10 years for the developer to settle his loan, the bank realised that the developer was not going to pay; that foreclosure was unavoidable.
The bank had a problem. Apart from the developer’s loan having ballooned over the years, there was also political repercussions.
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&P.
Question is whether the bank has breached the fiduciary duty of care to the purchasers as the bridging loan financier to the defaulting developer.
The crux of the problem is that the Housing Ministry prescribed S&P allows the developer to build the purchaser’s house with the installments of the purchase price.
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.
When a purchaser has paid the purchase 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; auction off the purchaser’s property to recover the developer’s loan.
The developer suffers nothing; he has received the purchase price and pocketed it. The developer borrowed from his bank and gave the purchaser’s property as collateral, and with foreclosure the developer’s Bank recovers its loan, and so the developer owes no money to the Bank; he takes no risk, suffers no loss.
Purchasers are the victims
It is the purchaser who loses; he loses his house; he has to settle the loan he took to buy the house with increasing interest on it; he is blacklisted which means he can never borrow again; 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; to ensure that they did not have to go without a roof over their heads in their old age.
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 sale.
The result of this is that the purchaser buys an encumbered property but the purchaser 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 sale 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 indebtedness continues to swell, and no effort is made to keep the purchaser informed about the increasing amount of the developer’s loan/ the redemption sum.
The purchaser’s consent to the additional, post-sale loans 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.
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-à-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 that 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 HBA with the Housing Ministry which continues to procrastinate.
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 developer’s bank that some of the purchasers have paid the developer and the developers may or may not have forwarded some of these payments to the developer’s bank.
The developer’s bank’s concern is whether the whole loan has been settled by the developer-borrower.
If not, the developer’s bank feels secure in the knowledge that the entire housing development land is available to the developer’s bank to recover its loan/s.
So as far as the developer’s bank is concerned, payments made by each purchaser to the developer is of no consequence; the transaction between the developer’s bank and the developer is the one that matters.
Under the then 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 to the purchaser.
In the past, developer’s borrowed only for the purpose of meeting the expenses of the housing development.
The 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 the developer’s 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 was free from the developer’s encumbrances and safe from foreclosure; even if the property was not transferred to the purchaser just as promptly. It was at least safe from foreclosure.
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 installments of the purchase price be paid into it.
The bank should be authorised to deduct the developer’s loan by installments 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 that if it happens at all, it’s serendipity!
HBA had meetings with the Housing Ministry’s to propose changes to the law and S&P view to give greater protection to purchasers within the framework of the sell & build (which REHDA defends so fervently).
But some pertinent ones been objected by REHDA, as if that is not enough, the Ministry’s too have rejected those proposals vis-a-vis pre-determination of redemption sums quantified in the S&P transaction.
My next article will dwell on the new ‘protection’ or whatever in lieu thereof vis-à-vis redemption and disclaimers.
This article is written by Datuk Chang Kim Loong, Hon. Sec-Gen of the National House Buyers Association (HBA), a non-governmental and not-for-profit organisation.