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The Sick Project Crisis: A Legal Perspective on Addressing Malaysia’s Housing Projects Conundrum 

Article attributed to Dato’ Shamesh Jeevaretnam, Partner of Jeeva Partnership Advocates & Solicitors 

Amidst the towering skyline of Malaysia’s urban centers, a different kind of landscape unfolds—one of the unfinished projects and shattered hopes. These projects, referred to as “sick projects,” occur for a multitude of reasons but ultimately are detrimental to all parties, inflicting immense distress leaving people without homes and money, builders without payments, and overall a stagnating industry that is not pulling its weight in economic contributions.

And the concern is real, with a total of 657 projects of concern – comprising 110 delayed, 435 “sick”, and 112 abandoned, and the projection that said numbers will only continue to rise in the near term. 

And it is not just the buyers that suffer. When a developer abandons a project, it not only affects the buyers but also directly and harshly impacts the subcontractors and suppliers involved. These stakeholders may face unpaid bills, severe disruptions to their operations, and a significant loss of revenue. 

For developers, the impact of sick projects goes beyond financial losses. Their reputation suffers as a result, casting doubts on their ability to successfully deliver future projects. The tarnished image makes it challenging for developers to secure new partnerships and gain the trust of potential buyers and investors. The long-term consequences can be detrimental to their business prospects and overall sustainability.

Furthermore, investor confidence dwindles, leading to a decline in funding for new projects and partnerships with developers, resulting in a slowdown in real estate investments and overall economic growth. A clear indication of this trend can be observed in the construction industry’s decreasing contribution to Malaysia’s gross domestic product (GDP) falling from 4.7% in 2019 to the reported 3.4% in 2022.

While steps have been taken in recent months to address the issue, with millions still at risk, perhaps its time we take an even closer look into the matter, with a particular focus on how the legal system and policies in place impact this issue and what more could be done from these standpoints to improve the situation.

Legal solutions for those affected by sick projects
So what then can be done? As leaders within the property law practice, Jeeva Partnership is keenly engrained in how the law can be of aid in these circumstances. The legal system offers potential solutions. For developers, Extensions of Time (EOT) provides an option to mitigate the risk of being classified as a “sick” project. Meanwhile, buyers can look into Liquidated Ascertained Damages (LAD) as a form of recourse.

Developers can opt to apply for an Extension of Time under Section 12 of the Housing Development Act (HDA). This entails communicating with the Minister, highlighting the difficulties and hardships faced, and seeking an extension of the time frame for delivering vacant possession to purchasers, as provided for in Section 12 of the HDA.

Another viable option is to enter into mutual agreements with purchasers, where a new completion date is mutually agreed upon. In this scenario, purchasers consent to waive their claims for liquidated ascertained damages in light of the revised completion timeline. By reaching such agreements, developers can establish a more collaborative and flexible approach, striving to fulfil their obligations while mitigating the financial burdens imposed on purchasers.

When it comes to seeking legal recourse for the effects of sick housing projects, the legal system has gone to substantial lengths to protect buyers. With countdowns for completion begins from the date of deposit payment or the sale and purchase agreement, whichever is earlier (Faber Union Sdn Bhd v Chew Nyat Shong & Anor [1995] 2 MLJ 597) and the precedent that even circumstances arising outside of the control of the developer would not suffice to justify delays (Tang Kam Thai & Ors v Langkah Cergas Sdn Bhd & Ors. [2005] 7 MLJ 605).

This combined with the allocation to claim Liquidated Ascertained Damages (LAD) under Clause 20(2) of Schedule G and Clause 26(1) of Schedule H for project delays means that buyers do have a viable avenue for recourse. 

Yet the issue of “sick” housing projects not only persists but continues to rise. So the question must be asked, what more must be done?

Building a Better Future: Strengthening Malaysia’s Housing Sector

Based on the many years of experience that Jeeva Partnership has within the practice area and my personal familiarity with the legal systems and policies in place, I would recommend a series of measures aimed at revitalising the industry and safeguarding the interests of all stakeholders involved. 

Firstly, it is imperative to strengthen state planning regulations. This can be achieved through the implementation of stricter guidelines, which serve to minimise risks associated with sub-par construction practices and enhance the overall attractiveness of projects in the market. Additionally, evaluating developer capacity is crucial in ensuring the involvement of competent and reliable developers. 

By implementing these measures, a better-controlled environment can be created, leading to a reduction in sick projects, the promotion of responsible development practices, and ultimately contributing to the growth and stability of both the construction sector and the economy as a whole.

Furthermore, performance-based financing is an effective tool that encourages punctual project completion through the correlation between fund disbursement and strict adherence to project timelines and quality standards. This financing mechanism is not limited to a specific bank but can be adopted by various financial institutions, development banks, or government agencies involved in construction project funding. 

By implementing performance-based financing, developers would be incentivized to better meet project milestones and deliver high-quality results to access the allocated funds. This approach promotes accountability and fosters a culture of timely project delivery and superior workmanship in the construction industry.

To better protect homebuyers, it is imperative to mandate the full use and adoption of escrow accounts or performance bonds. These measures provide financial security and cover costs in the event of project delays or abandonment. Escrow accounts work by holding funds in a secure account managed by a neutral third party. The funds are released to the developer only when specific conditions, such as project milestones, are met. This ensures that homebuyers’ funds are protected and can be used to compensate them if the project faces issues. 

Enforceable penalties and liquidated damages clauses should also be implemented to ensure developers are held responsible for their actions. These clauses establish predetermined financial consequences that developers must face if they fail to meet contractual obligations, such as project completion deadlines. This provides a clear incentive for developers to fulfil their commitments and delivers financial recourse to homebuyers in cases of non-compliance.

Ultimately, while the law and policies in place do play pivotal roles, it is clear that greater collaboration among industry stakeholders from all corners will be required to ensure the establishment of effective project management practices, quality control measures, and risk mitigation strategies. 

There can be no debate that the “sick” housing issue is a critical national-level threat that must be addressed seriously, and as a legal professional who has seen the myriad of ways in which this issue can impact the populace at every level, I call on these industry players and government bodies to take firm and proactive action to curb this rising concern.

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