A Long Awaited Reform to Housing Development Laws

Kwan Kin Sum examines the latest legislative enactments that affect the housing development industry

 

 

 

Background

The emerging preference of homeowners for residential developments that offer security, privacy and attest to their affluent lifestyle has led to a proliferation of gated community developments ("GD") in Malaysia.

 

Although the Strata Titles Act 1985 ("STA") and the regulations made thereunder are the primary legislation that regulate GD that involve condominium and apartments, there are no specific legislation that regulate GD for landed properties that comprised of bungalows, semi-detached houses or terraced houses.  Further, high-rise residential properties built on commercial development lands did not come within the purview of the Housing Development (Control & Licensing) Act 1966 ("HDA").

 

The management of GD came under scrutiny with complaints of inordinate delays by developers in handing over management to homeowners and property management companies absconding with sinking fund moneys.

 

The local authorities were also not spared from criticism. On various occasions, property developers and homeowners complained that delays by the authorities in issuing certificates of fitness for occupation ("CFOs") – a pre-requisite to the right to occupy a residential property – prevented homeowners from moving into their homes long after physical construction had been completed.

 

Before individual titles are issued and transferred to homeowners, they encountered various procedural road-blocks and delays in selling their properties and in making claims against property developers for compensation for late-delivery of their properties.

 

Abandoned housing projects from the last two economic downturns were grim reminders to the Government of the need to provide greater protection to the purchasers from failed housing schemes.

 

This unsatisfactory state of affairs gave impetus to the Government to undertake a wholesale review of the laws that regulate housing development in Malaysia and culminated in the passing of the Strata Titles (Amendment) Act 2007, the Housing Development (Control and Licensing) (Amendment) Act 2007 and the Building and Common Property (Maintenance and Management) Act 2007 in December 2006.  These laws came into effect on 12 April 2007.

 

In the light of this background, we now examine the changes that these new laws will bring to the housing development industry in Malaysia.

 

Strata Titles (Amendment) Act 2007

 

 

Subdivision of land made possible

 

Presently the STA only allows for subdivision of buildings and not land into parcels. The amendments enable land to be subdivided into land parcels and for strata titles to be issued. The amendments also permit management corporations ("MC") to be established for landed properties. These changes enable GD that comprise landed properties, or a combination of landed properties and high-rise residential properties to come within the ambit of the STA, thereby lifting the cloud of uncertainty that hitherto existed as to the legal framework that regulates such developments.

 

 

Initial period shortened

 

The transition period when practical management of the strata scheme passes from the developer to the purchasers, known as the "initial period" ("IP") under the STA, has now been shortened from one-third to one-quarter of the aggregate shared units.

 

 

New responsibility on MC to provide audited accounts

 

To promote transparency and accountability, an MC is required to prepare accounts during the IP. Such accounts are to be audited by a registered auditor and be presented to the Commissioner of Buildings under the Building and Common Property (Maintenance and Management) Act 2007.

 

A parcel proprietor may apply to the Commissioner to inspect the audited accounts. The MC is also required to present the audited accounts at its first annual general meeting.

 

 

Time-Frame for Subdivision

 

A new time-frame is introduced for submission of applications for subdivision of buildings erected (as opposed to completed) after the commencement of the new laws. Where a sale and purchase agreement of any parcel is signed before the building is erected, the application must be made within six months from the date of erection of the building and upon the issue of the Certificate of Completion and Compliance ("CCC"). Where a sale and purchase agreement of any parcel is signed after the building is erected, the application must be made within six months from the date of the first sale and purchase agreement and upon the issue of the CCC.

 

Housing Development (Control & Licensing) (Amendment) Act 2007

 

 

Legislative Intent

 

Parliament has now clarified the legislative intent of the HDA by expressly stating that the HDA is for "the protection of the interest of purchasers". This will enable the Courts to adopt a purposive approach in interpreting the provisions of the statute.

 

 

Ministerial Discretion

 

As mentioned earlier, residential properties, such as exclusive service apartments, which are constructed on land designated for commercial development do not come within the HDA. This loop-hole enabled developers to contract with purchasers on terms that invariably favoured the developers. The amendments confer a discretion on the Minister to prescribe any type of accommodation to be a "housing accommodation" so as to bring the development within the purview of the HDA. The decision of the Minister is final and not subject to judicial review. This discretion will enable the Minister to safeguard purchasers by quickly closing any loop-holes that innovative developers may find to circumvent the HDA.

 

 

The Build-then-Sell Concept

 

Another noteworthy change is that the amendments permit the Minister to exempt any housing accommodation from the provisions of the HDA on such terms and conditions as the Minister may specify. This discretion may be used to further the government's objective to promote the 10:90 Build-then-Sell ("BTS") concept (as opposed to the prevalent industry practice of the Sell-then-Build concept) by exempting BTS projects from various provisions of the HDA.

 

To encourage the BTS concept, the government announced several incentives for developers on 13 April 2007. These  include (1) exemption from paying RM200,000 deposit for a housing development licence, (2) fast lane priority on approval process involving land conversion, planning permission and building plan, and (3) approval within 4 months with the new One Stop Centre ("OSC") that replaces the local authority’s planning and development division. The OSC will extend fast lane approvals to BTS, high impact projects, projects attracting foreign investment and government projects.  Other projects will require 6 months for approval.

 

 

New Certificate of Completion and Compliance

 

To reduce bureaucratic red-tape and encourage self-regulation by the industry, the government has replaced the CFO with the Certificate of Completion and Compliance ("CCC"). The CCC is to be issued by a Professional Architect, Professional Engineer or building draughtsman registered under any written law. To safeguard the interest of purchasers, the amendments confer a direct cause of action on the purchasers against the party that issues a CCC for any negligence in connection with the issue of such certificate.

 

 

Purchasers' Right to Terminate Agreement

 

Prior to the amendments, the statutory right to terminate the sale and purchase agreement was accorded to the developer only. Purchasers are now allowed to apply to the Minister for approval to terminate the sale and purchase agreement within six months after the execution of the first sale and purchase agreement where a minimum of 75% of the purchasers and the developer agree to the termination. The developer is precluded from unreasonably withholding its consent to the termination. The efficacy of this amendment is limited as the six-month deadline within which such right is to be exercised means that purchasers may resort to the provision only in cases where a project is abandoned during the early stages of the development.

 

It is submitted that the objective of safeguarding purchasers from abandoned housing projects will be better served by ensuring that only parties with adequate financial resources are permitted to undertake housing development.

 

 

Properties under Master Title

 

Presently a purchaser is required to obtain the Developer's consent before he can assign his rights under the sale and purchase agreement. The amendments dispense with the requirement for such consent for sub-sale transactions. The purchaser is only required to serve notice on the developer in the manner set out in the new provisions. This change may expedite the completion of sub-sale transactions.

 

Similarly, a purchaser who has assigned his rights to a financier is required to obtain his financier's consent before initiating legal proceedings against a developer in relation to the sale and purchase agreement. The amendments confer a right on the purchaser to do so in his own name without his financier's consent provided that he notifies the latter within the specified time frame.

 

 

Power to freeze Housing Development Account

 

The amendments confer power on the Controller of Housing to freeze the Housing Development Account if he has reason to believe that the developer is carrying on his business in a manner detrimental to the interest of the purchasers or in contravention of the HDA.

 

 

Duty of Lawyers as Stakeholders

 

A lawyer who holds money as a stakeholder is not spared from the new laws. The amendments render it an offence for a lawyer who acts as a stakeholder under any sale and purchase agreement for a housing development scheme to release money to a developer or to any other person if he knows that such an act is contrary to the agreement.

 

Building & Common Property (Maintenance & Management) Act 2007 ("BCPA")

 

Presently the management of strata schemes lies solely with the developer until the MC is formed.  The enforcement of the BCPA will give the parcel owners a say in the way their parcel units are managed and maintained before the MC is formed.  In essence, the BCPA provides for the appointment of a Commissioner of Buildings and the establishment of a Joint Management Body ("JMB") comprising the developer and the purchasers.

 

The BCPA will also apply to strata schemes completed before the commencement of the BCPA where the MC has not been formed. In such event the BCPA requires the JMB to be established within 12 months from the commencement of the BCPA. Where the strata scheme is completed after the commencement of the BCPA, the JMB is required to be established within 12 months from the date of delivery of vacant possession. The duties of the JMB are set out in detail in the BCPA and cover areas ranging from general management and maintenance of common property to determination of charges for the same.

 

The BCPA also provides for a new Building Maintenance Account to be set up by the developer for the deposit of all charges received from the purchasers (within two working days of receipt) and charges to be paid by the developer (in respect of parcels not sold) for the maintenance and management of the common property. The BCPA expressly excludes such money from being the property of the developer in the event the developer goes into liquidation. The BCPA also provides for the setting up of a Building Maintenance Fund and Sinking Fund and the appointment of a Managing Agent.

 

 

Conclusion

The Ministry of Housing and Local Government must be commended for its attempt to address the various problems that have plagued the housing development industry in Malaysia. The extent to which the amendments will succeed in resolving these problems remains to be seen. In any event, these new laws will bring radical changes to the local housing development industry.

 

 

Kwan Kin Sum ( This e-mail address is being protected from spambots. You need JavaScript enabled to view it )

 

 

EDITOR’S NOTE: The Housing and Local Government Deputy Minister Datuk Seri Lajim Ukin said that developers who neglect or abandon their projects could be charged in court when amendments to the Housing Development (Control and Licensing) Act 1966 (Act 118) are passed by Parliament. Currently, there were no specific provisions under the Act which provided for such action to be taken against developers who failed to complete their projects.

 

(Source: Bernama, New Straits Times; Original Title: Dewan Rakyat: Amendments To Act 118 Will Allow Errant Developers To Be Charged; Date: 09/12/2010;)

 

 
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