Claims For Late Delivery of Homes Likely To Spike


Vasantha Ganesan / The Edge Malaysia

July 1, 2020

Hakem Arabi & Associates

In February, a house buyer, who only wants to be known as Ong, inked an agreement with a reputable listed property developer to purchase a landed residence in Shah Alam, Selangor.

He wanted a bigger home to house his growing family. But now, four months later, he is worried that the near three-month halt in construction activities due to the Movement Control Order (MCO) will cause a delay in delivery of vacant possession of his property.

To make matters worse, the vendor has yet to update him on the status of the project despite multiple requests. Although he expects a delay, he is anxious to know how much longer it will be than the agreed upon 24 months.

Hakem Arabi & Associates
Adding to his worries are the strict standard operating procedures (SOPs) at construction sites that are likely to result in a smaller workforce and slower pace of construction.

He wonders whether these unforeseen changes will compromise build quality. Ong was hoping to move in by March 2022, but may now have to continue to live in his rented accommodation for a little longer.

He is not alone. Any purchaser who signed up to buy a property under development in the past couple of years and before the MCO came into force on March 18 is likely to see a delay in delivery.

Not surprisingly, at least two lawyers The Edge spoke to anticipate that property developers may have to shell out hundreds of millions for late delivery of vacant possession.

Housing legislation requires landed properties to be completed within 24 months of the signing of the sales and purchase agreement (SPA), and for high-rise units, 36 months.

Any delay in completion entitles purchasers to claim liquidated ascertained damages (LAD).

But can property developers be blamed for delays that are no fault of their own, such as the unprecedented Covid-19 pandemic?

Real Estate and Housing Developers’ Association Malaysia president Datuk Soam Heng Choon is keen to explain the builders’ position.

“We have had to completely stop work, [with] no revenue and no cash flow. We had initially thought it would be for just two weeks,” he tells The Edge. A month later, during the third phase of the MCO (April 15 to 28), property developers began applying to commence operations.

Data from the Construction Industry Development Board (CIDB) shows that up to June 14 — 89 days since the start of the MCO — construction work had restarted at only 28% of 7,760 sites nationwide.

Much of the delay is because foreign workers were required to undergo Covid-19 testing and had to get the green light before they could return to work.

However, the requirement has now been relaxed. On June 11, CIDB announced that foreign workers can return to work if they have applied to take the tests and are waiting their turn, or for their test results, provided that they adhere to the SOPs.

Soam believes that a majority of property developers resumed work last week.

Typically, delays in handing over vacant possession are likely to attract LAD. Soam is, however, hopeful that the Covid-19 Temporary Measures Bill, expected to be tabled in July, will provide relief from contractual obligations and any proceedings for non-fulfilment of contracts.

But would a mere six-month moratorium – similar to what was provided under Singapore’s Covid-19 (Temporary Measures) Act (2020) – suffice for a stay of legal proceedings?

Malaysia’s bill is likely to have a retrospective effect from March 18. However, Soam says Rehda’s request for “a longer and more practical (moratorium) period” is currently being deliberated. Nevertheless, he was mum on the proposed duration.

However that works out, a spike in claims appears inevitable.

Lawyer Ranjan N Chandran, a commercial and construction partner at Hakem Arabi & Associates, has already received a flood of enquiries.

“There will be more breaches of contracts by developers due to non-compliance of terms and conditions for the completion of a development project during this Covid-19 period. These contracts will have LAD clauses that will entitle purchasers to claim,” Ranjan says. SPAs under the Housing Development (Control and Licensing) Act 1966 (HDA) do not include a force majeure clause that would automatically provide a moratorium.

Apart from the few weeks of a total shutdown, Ranjan lists other issues that could cause further delays in completion. These include difficulty in mobilising the workforce at construction sites, stop-work orders (where cases of Covid-19 have been detected or because SOPs were not adhered to), SOPs on the number of workers allowed on site and social-distancing measures.

“Without an adequate workforce at the site, it is next to impossible to meet timelines,” he stresses. Disruption in imported material supplies could exacerbate the situation too, he notes.

When can a purchaser make claims?

Ranjan explains that for projects that were already delayed prior to the MCO, for which calculation of claims had already started, that would depend on whether the Covid-19 Bill covers delays in completion of projects and how far back the retrospective moratorium will extend.

Similarly, for those who signed an SPA and are awaiting vacant possession, it depends on how many months are provided for in a moratorium.

In the event that the developer is still unable to deliver, damages will likely have to be paid.

Zaid Ibrahim & Co senior associate Neo Chi Chyn says it is not even known whether the Covid-19 Bill will cover LAD, but in the event that it does, he reckons the moratorium is unlikely to be up to 12 months as it would be unfair to the purchasers.

“If a developer is suddenly issued a stop-work order, for example, for non-compliance of SOPs, he is likely to need more time to complete the project,” he says.

In his opinion, there will definitely be delays in completing projects as the MCO has already had an impact on the pace of construction. Any delay beyond the moratorium which may be provided for in the Covid-19 Bill is likely to attract LAD.

He gives the example of a purchaser who invests in a RM500,000 property. The LAD on the property — calculated based on clauses under schedule G and H of the HDA — would require the developer to pay RM136.98 per day (10% interest on RM500,000 multipled by the days of delay/365 days).

Hence, a delay of one month (30 days) could cost the developer RM4,109.58 for a single unit, and a RM1 million property, twice as much.

“Imagine if the project has 100 units. We are looking at RM410,958 per month (for a RM500,000 unit) and RM821,917 per month (for a RM1 million unit),” Neo explains.

Ranjan highlights a development on the LAD laws, based on a Court of Appeal decision published in the 2020 law journal.

In GJH Avenue Sdn Bhd vs Tribunal Pembeli Rumah, Kementerian Kesejahteraan Bandar, Perumahan Dan Kerajaan Tempatan and Ors and Other Appeals, the court decided that for an SPA under the HDA, the computation of time of LAD for late delivery of vacant possession starts when the SPA is signed, and not when the purchaser pays a booking fee or deposit.

This is because the collection of deposits, booking fees and initial payments under whatever name before the signing of the SPA is strictly prohibited under the housing regulations.

The Court of Appeal decision is a departure from the Supreme Court decision in the 1995 case of Faber Union vs Chew Nyat Shong & Anor, which decided that computation of time of LAD for late delivery of vacant possession commenced from the date the purchaser paid his booking fees. Ranjan explains that the SPA in the Faber Union case did not fall under the HDA.

Accordingly, for HDA agreements (which apply to residences, serviced apartments and small office/home offices), the LAD computation commences from the date the SPA was signed as parties cannot contract out of the HDA.

For non-HDA agreements — which cover business suites, small office, flexible office (Sofo) and small office virtual office (Sovo) — LAD computation may commence from the booking payment date as parties have the freedom to contract.

Original article