Damages for late delivery

“MY new house is ready and I can now collect my keys,” or so the house-buyer thinks. No more having to pay rent.

But his dreams come crashing down, however, when he is informed that although he may have gained vacant possession, he cannot not move into his house because the Certificate of Fitness for Occupation (CFO) is not ready.

Months later, he receives a copy of the CFO, and when he asks to be compensated for the delay, the developer says liquidated damages for late delivery (liquidated ascertained damages or LAD) is calculated up to the date of their notice for delivery of vacant possession and not up to the date of the CFO.

Who then is to compensate the house-buyer who has to service a housing loan for a house he or she is not allowed to occupy, and who, at the same time, pays for a rented place while waiting to move in?

This is a common scenario faced by house-buyers for years.

Is the house-buyer entitled to damages up to the date the CFO is issued? The answer is a definite yes, if the sale and purchase agreement (SPA) is in the format prescribed by the Housing Development (Control & Licensing) Act, 1966 – year 2007 amendments, according to a recent decision of the Tribunal for Home Buyer Claims, a.k.a. the Housing Tribunal.

Recently I was in the vicinity of the Housing Tribunal located in the Wellbeing, Housing and Local Government Ministry building, and decided to pay a visit before my next meeting in Putrajaya.

As I entered the hearing room, the ongoing case involved a claim for LAD. It was by no means a simple LAD case. The developer’s defence ran into several pages and touched on several legal technical issues. I am writing this article to share with the readers the LAD issue vis-a-vis the CFO as opposed to the certificate of completion and compliance (CCC).

Is LAD calculated up to date of CFO or CCC?

Having stressed that the delivery of vacant possession in a housing project entailed more than just developers issuing their notice for delivery of vacant possession, the tribunal president went on to explain that the SPA contained specific requirements for delivery of vacant possession, which must be complied with.

One of these requirements as provided by Clause 26(2) of the SPA is that delivery of vacant possession must be supported by a CCC. The LAD must, therefore, be calculated until the date of the CCC.

That was simple enough to understand. But what happens if a CFO is issued instead of a CCC?

In the past when houses were certified fit for occupation by way of the CFO, developers were not required to procure the CFO before handing over the houses to their buyers. Developers would deliver vacant possession before the CFO was issued and would not be liable for damages or any delays in the issuance of the CFO. House-buyers would collect their house keys but would not be allowed to move into their newly-completed houses simply because the CFO had not been issued yet.

In 2007, the statutory SPA was amended. Developers were now required to procure the CCC to deliver vacant possession so that house-buyers could move in as soon as they collected their keys. This mode was more meaningful to buyers. The CCC system to certify a house or apartment safe for occupation was intended to replace the CFO system. Unfortunately, there were many cases where building approvals were given before the 2007 amendment with the SPA being signed after the amendment. In such cases, some local authorities insist that developers must procure the CFO, and not the CCC, even though the SPA says otherwise.

So, we have a situation where the SPA says that the developers must produce the CCC, but developers are not able to do so because the local authorities insist on the developers applying for the CFO. This was what had happened in the case being heard by the Housing Tribunal.

The developers argued that damages should be calculated up to the date of their notice for delivery of vacant possession and not the date of the CFO. Clause 26(2) of the SPA was not applicable because the local authorities insisted on the developers getting the CFO instead of the CCC.

This means that the developers would have to bear damages amounting to more than 10% of the purchase price if damages were calculated up to the date of the CFO. This explains why developers are fighting tooth and nail to save themselves a lot of money; money which should rightfully be paid to the house-buyers.

The SPA, in this case, was in the form of Schedule H (for strata properties such as apartments) and Clause 26(2) says that “the delivery of vacant possession by the vendor shall be supported by a CCC certifying that the said building is safe and fit for occupation and includes the handing over of the keys of the parcel to the purchaser”.

“To my mind, the provisions of clause 26(2) can best be understood and dealt with by tracing the purpose for which such provisions were made,” said the tribunalpresident. (See Star Online for the tribunal president’s analysis).

The tribunal president said substantial amendments were made to the housing legislations in 2002 and 2007 to protect house-buyers. The certificate of compliance was introduced and the SPA was amended to make it mandatory for delivery of vacant possession to be supported by the CCC. Developers were required to ensure their houses and apartments were certified safe and fit for occupation before delivery of vacant possession, as in Clause 26(2).

The tribunal president said the clause must be read to mean the CFO in cases where a CFO is issued instead of a CCC.

Here is her reasoning:

“... the CCC system of certification is a system ... much like the CFO. The 2007 amendment was to address the cumulative problem of house-buyers not being allowed to occupy their houses upon collection of their keys.

“How that certification is done is not the main purpose for this Clause 26(2). The crux of the issue is not about the system of certification (be it CFO or CCC), but about the house being certified as safe and fit for occupation.

“... the statutory SPA (after the 2007 amendment) refers only to the CCC. No mention is made of the CFO. To say that the CCC cannot be equated with the CFO will mean that in cases where the local authorities require a CFO (as opposed to a CCC), vacant possession can never be delivered in accordance with the provisions of the SPA because no CCC will ever be issued.”

The tribunal president said this interpretation defeated the purpose of the 2007 amendments to the statutory SPA, and made a mockery of parliament and the housing legislations.

The tribunal awarded damages up to the date of the CFO to the house-buyer.

Thumbs up to the Housing Tribunal

The Housing Tribunal assists parties in the conduct of their cases, especially when they are not represented by lawyers, and where one party is superior to the other. “Independent” legal representation is rarely allowed at the Housing Tribunal.

I am pleased by the detailed reasoning given by the tribunal and was impressed by attempts made in trying to settle the matter and the informal, yet solemn, atmosphere surrounding the entire proceedings. As I left the Housing Tribunalsome two hours later, I could not help but feel rather uplifted by my experience.

As I write, I wonder if the decisions of the Housing Tribunal ought to be reported and made available for public consumption. I intend to make representations to the Wellbeing, Housing and Local Government Minister that decisions of the Housing Tribunal should be made available for public reading on their website so that the public would be able to comprehend and aim towards the empowerment of information so as to make an informed decision.

If the Financial Mediation Bureau (under Bank Negara, http://www.fmb.org.my/pc04.cb.htm) can have its case reviews published on their website, and Tribunal for Consumer Claim (http://ttpm.kpdnkk.gov.my) decisions made available, why not the Housing Tribunal?

How to identify the differences

Last but not least, how do you know whether your SPA is in the format prescribed by the year 2007 amendment? Easy. Look for the defect liability clause in your SPA. If the defect liability period is 24 months, then your SPA is post-2007. I learned that at the Housing Tribunal that day too!

Here is a record of the Tribunal President’s analysis, as provided by Mr Chang Kim Loong, honorary secretary-general of the National House Buyers Association (HBA).

“Before a house buyer can move into his/her new house it must be certified safe for occupation. This used to be done by the local authority issuing a CFO. For decades, developers were not required to obtain the CFO before delivery of vacant possession. Many house buyers were not allowed to occupy their newly purchased houses or apartments even though they were completed, fully paid for and handed over to them, simply because there was no CFO.

“Many developers, having collected the full purchase price and handed over vacant possession, were not the least bothered about the delay in the CFO. Such delay was through no fault whatsoever of the house buyers and completely beyond their control. Yet they were the ones to bear the burden of financing houses they could neither move into nor rent out.

"In 2002, substantial amendments were made to the housing legislations to give added protection to house buyers.

 

"One such amendment was to address the problem of vacant possession without CFO. Developers were required to secure the acceptance of Borang E (Application for CFO) by the local authority before delivery of vacant possession.

“According to the then Housing Minister, Borang E once accepted by the local authority was ‘ ... sort of as good as a CFO’ because once the Borang E was accepted the CFO should be issued by the relevant authority within 14 days. In the course of my presiding at the Tribunal I have indeed seen many CFO issued within 14 days of acceptance of Borang E by the relevant authority.

“Unfortunately, there remained many delayed cases in the issuance of CFO and the nightmare continued for many vulnerable and innocent house buyers. In the year 2007, Parliament again tried to address the grievances of house buyers. The CCC was introduced and the SPA was amended to make it mandatory for delivery of vacant possession to be supported by the CCC.

"So for the first time in the history of the housing industry, developers (through their appointed Architects and Engineers), were required to ensure their houses and apartments are certified safe and fit for occupation before deliver of vacant possession. This is clearly reflected in Clause 26(2).”

 

The Tribunal President then went on to say that the CCC referred to in Clause 26(2) must be read to mean the CFO in cases where a CFO was issued instead of a CCC. Here is her reasoning:

“First and foremost, one must bear in mind that the CCC system of certification is just a system or mechanism, very much like the CFO system, for certifying that a building is safe for occupation, thus, permitting the house owners to occupy their houses.

“One of the main reasons for the 2007 amendments was to address the cumulative problem of house buyers not being allowed to occupy their houses upon collection of their house keys.

“This is clearly reflected by the then Housing Minister’s statement in Parliament that 'Pindaan ini dan peraturan baru diharap akan dapat menyelesaikan masalah di mana pembeli berjaya memperolehi kunci tetapi tiada CFO.' 

“It must be taken that the main purpose of Clause 26(2) is to ensure that the building in question is certified safe and fit for occupation when vacant possession is delivered so that house buyers can move into their houses. How that certification is done is not the main purpose of this Clause 26(2).

“The crux of the issue is not about the system of certification (be it CFO or CCC) but about the house being certified as safe and fit for occupation. 

“Further, it must be noted that the statutory SPA (after the 2007 amendment) refers only to the CCC. No mention is made of the CFO. To say that the CCC cannot be equated with CFO will mean that in cases where the local authorities require a CFO (as opposed to a CCC) to be issued, vacant possession can never be delivered in accordance with the provisions of the SPA because no CCC will ever be issued.

"It will mean that in cases where the local authority requires a CFO (as opposed to the CCC) to be issued there is no provision at all under these SPAs requiring the developers to ensure that the houses or apartments sold to the house buyers are certified safe and fit for occupation. Such interpretation will not only defeat the purpose of the 2007 amendments to the statutory SPA but make a complete and utter mockery of Parliament and the housing legislations.

“Clause 26(2) must be interpreted as requiring vacant possession to be supported by a certificate certifying that the building/house/apartment in question is safe and fit for occupation. Whether this certification is done by the former CFO system or under the new CCC system of certification is secondary and does not affect the developers’ responsibility to deliver vacant possession only when the building is certified safe and fit for occupation.”

 

Chang Kim Loong is the honorary secretary-general of the National House Buyers Association (HBA): www.hba.org.my, a non-profit, non-governmental organisation manned purely by volunteers. He is also an NGO councillor at the Subang Jaya Municipal Council. - The Star