When end financiers sue house buyers when a project is abandoned, it makes a mockery of developers’ undertakings to banks to refund in the event of abandonment. To resolve this, some suggest end financiers should monitor developers’ construction progress and accounts (old school style) before disbursing house buyers’ loans to developers.

Funding via buyers’ loans

The Sell-Then Build (“STB”) system of building and selling houses is unique and has for many years controlled the housing development industry in Malaysia. Briefly, this system allows houses to be built in stages and paid for progressively after each stage of work is done.

The system sounds simple. But it is ridden with a host of problems. Stories are told about house buyers being played out under the system, not once or twice but many times over and in many ways.

Simply, the system is based on the business concept of using house buyers’ money to fund the housing development. In business jargon, it is about using other people’s money (OPM) to make profits.

In other words, developers under the system leverage on OPM to make business plan and profit goals. The obvious pitfall of the system is the potential risk of a housing project being stalled or abandoned leaving the buyers in jeopardy and having to resolve their own problems.

Project abandonment is a serious problem to the country such that the Government has had to intervene and pour in big funds to revive abandoned projects for the rakyat’s sake.

Apart from such problems, the STB system exposes house buyers to great risk caused by a breakdown in the system.

This article seeks to highlight a big breakdown in the current banking system that is meant to protect the buyers. It’s called “The Failed Undertaking”.

Old-fashioned values

There is a dhobi shop near my house. A Chinese couple in their 70s owns it. They have been running the family business for many years.

A few years ago, the husband had a stroke. He is wheelchair-bound now. With hired hands, the wife takes care of the business.

The husband has a daily routine. Every morning and evening, he would sit outside the shop to have his meals. He would read the newspapers while eating. Sometimes, he would watch passersby.

His wife keeps him company. Many old folks say the couple would belong to the old school. Old school means old-fashioned values such as responsibility, integrity, patience and commitment. In other words, the couple’s marriage is rooted in old school values.

Indeed, old school values seem less popular now. Why? Maybe because they are tough to follow. Nowadays, things seem to happen at high speed. Old school values build on time. Thus, they are often left behind.

Old school still relevant

In the context of the housing development industry, building houses the old school way may seem silly. Well, maybe that’s what many housing developers may say. The reason may be that profits ought to be made quickly. The old school way is archaic. They would slow down earning profits quickly.

However, old school concepts advertised in sales brochures have been used to entice sale of houses in housing projects by projecting an image of reliability, trustworthiness and good value.

“Misleading” Undertakings

Besides developers, other stakeholders in the housing development industry may also view that old school values are archaic. Respectfully, the banks may be such a stakeholder.

How so?

This may be seen in the undertaking letters given by a developer to a buyer’s bank (end-financier) and vice versa. In the undertakings, the developer agrees to refund moneys released by the bank if the project is not completed or abandoned. Likewise, the bank agrees to release the moneys to the developer upon this undertaking.

The undertaking is equivalent to a guarantee. It would have the legal force of a contract. On the surface, this undertaking would give the appearance of a check and balance mechanism between the developer and the end-financier (EF). The developer undertakes (promises) to refund the moneys to the EF if the project is delayed or abandoned. The EF releases the money to the developer on this promise.

The EF is the buyer’s agent. It would act on behalf of the buyer’s interest. Thus, it has a duty over the buyer’s money and must only release under stipulated conditions that have been agreed ie. the EF would only progressively release the buyer’s loan to the developer according to stages of work done.

However, in reality, a different thing happens.

Easy fixes

In reality, the undertakings are seldom enforced by any party. When the project is not completed or is abandoned, the EF would ask the buyer to pay the interest on the progressive payments already paid to the developer. If the buyer fails to do so, the EF would sue the buyer under the loan agreement.

Eventually, a bankruptcy suit would be taken against the buyer. Right or otherwise, many house buyers have been made bankrupt this way.

The bank would be reluctant to sue the developer on its undertaking, the reason being that it would seem worthless doing so because of the developer’s weak or doubtful financial position (hence abandoning the project). Also, suing the developer would be a more uphill task. Logically, suing the buyer would be an easy fix.

“Scrutinise Construction”

For the house buyer who’s caught in this quagmire of financial woes, a noble desire to own a house may become a nightmare that haunts for many years.

Many buyers have asked, “It’s not my fault that the project is not completed or abandoned. Why should I pay for the loan and don’t get a house?”

Some court decisions fail to recognise the buyer’s lament and show little empathy to this problem. Is there a solution for house buyers?

Old school bankers say there is. The way is to scrutinise relevant details concerning the project before releasing the moneys to the developer.
For example, if the bank suspects something amiss in the developer’s accounts or if the project is delayed, bringing about foreseeable risk to the recoverability of the loan, the bank would query the developer based on the developer’s undertaking to the bank.

In other words, before moneys are released for the progressive payments, the banker would meticulously monitor the release to ensure recoverability of the loan.

Consequently, this would increase the chance of successfully earning profits (i.e. interests) from the loan.

The developer would be the first person on the old school banker’s black list.

Such old-fashioned practices would also reduce the incidence of the house buyer’s loan becoming a NPL (non-performing loan) due to project non-completion or abandonment.

“Social Responsibility”

William Shakespeare, the author of Hamlet wrote: “To be or not to be, that is the question”.

In the story, Hamlet, the main character, was musing between the inescapable sufferings in life (troubles; heartaches; dissatisfaction) and the fear and uncertainty of death. The musings were that life is tough, but death may be worse. One would need to choose between life and death. Thus, the question: “To be or not to be”.

For this article, the question is: Would bankers, because they are responsible to the buyer (customer), monitor in old school style the progressive works and accounts of the developer in order to reduce the number of NPLs caused by project non-completion or abandonment?

Or would they prefer using the easy-fix way of suing immediately the house buyers for loan defaults arising from project non-completion or abandonment?

If the bank says, “Protecting customers is not our job”, the next question would be: Would banks continue to ask for the developer’s undertaking as a pre-condition for the progressive payments to the developer? If they do, it is submitted that they would be treating the letter of undertaking as an empty promise which is a mere cold comfort that benefits nobody (Ed’s Note: It is misleading as well.)

While old school ways may be tough, easy-fix ways may be socially damaging as it would tantamount to our ex-prime minister’s (Tun Abdullah Ahmad Badawi’s) saying, “Profits Privatized, Loses Nationalised”.

Banks and even Bank Negara Malaysia can play a bigger role to complement efforts to promote housing development laws for the benefit and protection of house buyers.

This situation has persisted for far too long and it behooves the government to address this situation as a matter of urgency. After all, the “people come first”, as per our national “mantra”. To further delay this matter is to further burden the “rakyat” unnecessarily.

Editor’s Note:

Banks should be made to exhaust all other legal avenues first before suing the buyers. In fact, they should give a moratorium to buyers over the loan repayment until the abandoned project is revived or otherwise resolved through other means. This should be treated as part of the banks’ “national duty” or “corporate social responsibility”.

Some banks spend millions per year for their CSR activities, why not channel this to giving buyers of abandoned projects a moratorium and make a big media blitz of it? Imagine the goodwill and powerful brand loyalty that can be generated from this one act of responsibility!

Robert Tan views that banks have a big role to play to complement government’s efforts to promote housing development laws for the protection of house buyers. He is a Legal Adviser of the National House Buyers Association.

NATIONAL HOUSE BUYERS ASSOCIATION [HBA]

 No. 31, Level 3, Jalan Barat, Off Jalan Imbi, 55100, Kuala Lumpur
Tel: 03-2142 2225 | 012- 334 5676 | Fax: 03-22601803