Options for buyers when developers go bust and projects are unfinished
Tue, May 07, 2019
IT IS a rare case of a Singapore developer going bust, leaving the residential projects unfinished.
But for some 183 people, their worst nightmare came true when developers of the 70-unit freehold condominium at Laurel Tree along Hillview Terrace and the 96 residential units and 17 shops in the Sycamore Tree project in Joo Chiat went belly up, leaving the projects uncompleted.
Receivers told buyers of Sycamore Tree development that United Overseas Bank (UOB) would drop the requirement for premium top-ups but on condition that buyers waive their rights to claim liquidated damages, which are compensation that developers must pay buyers for delays - against their progress payments. Based on the sale and purchase agreement, the developer will have to pay liquidated damages of 10 per cent per annum of what buyers have to pay.
The Business Times asked Tan Ching Chern, partner at Withers KhattarWong LLP, to explain the implications if buyers were to accept this waiver request.
Ms Tan said since the temporary occupation permit (TOP) was expected in Dec 29, 2016, the developer is late for both the service of the TOP Notice and the Notice to Complete (usually pegged at three years from the contractual TOP deadline).
"As such, the receiver should be asking for the waiver of both categories of late interest under the sale and purchase agreement,'' Ms Tan explained.
Under usual circumstances where the developer remains solvent, the buyers are contractually entitled to claim late interest of up to 10 per cent per annum of what the buyers had paid into the developer's project account for the period of the developer's delay in serving on the buyers the TOP Notice and the Notice to Complete respectively. Such late interest would come from the developer's profits or own funds.
However, in this situation where the developers are insolvent, it is unlikely that there is any money available to pay the buyers any late interest.
"While this option will not entitle the buyer to be compensated for the delays (since they would be waiving their right to any late interest), the main benefit of this option is that it would allow each buyer to still enjoy the benefit of the money that the buyer has already paid into the project account and the buyer would only have to pay the rest of the contractual purchase price to obtain the unit the buyer had contracted to buy - that is. no additional financial outlay towards this unit,'' Ms Tan said.
This is "a less costly option" for the buyer than having to "top-up" to contribute to complete construction because any such "top-up" would have to be paid using the buyer's own funds (since the CPF lump sum withdrawal and mortgage loan would only cover the previously approved portions of the contractual purchase price and not any additional "top-up" sums).
"The effect is that the buyer's next mortgage loan release towards the purchase price would only be processed by the buyer's own mortgagee after the full "top-up" has been paid by the buyer using the buyer's own cash,'' Ms Tan said.
She further advised: "For the avoidance of doubt, buyers should seek clarification from the receivers that in exchange for their waiver of the late interest, the receivers will be contractually bound to fulfil all terms of the original sale and purchase agreement - that is, not merely delivering vacant possession of the unit, but also delivering the Certificate of Statutory Completion (CSC) and separate legal title to the unit, as well as, providing the benefit of the 12-month defect liability."
The CSC and separate legal title are required for the buyer to be able to sell the fully completed unit to a purchaser in due course.
On what happens when the project is completed and buyers need to make claims, Ms Tan said: "During the 12-month defect liability period, the buyer can rely on the terms of the sale and purchase agreement, where buyers have the right to have defects rectified and the right to withhold up to 5 per cent of the purchase price, in the event that the receivers (stepping into the developer's shoes in the sale and purchase agreement) have failed to fulfil the developer's contractual obligations to rectify defects in accordance with the sale and purchase agreement."
The lawyer said since the developer is insolvent, it would not be advisable for the buyers to expect to recover any money from suing the developer.
The other option offered by receivers was to allow the receivers to sell the land and repay the outstanding loans owed by the developer to its paramount mortgagee, which is UOB.
But Ms Tan noted that with late interest continuing to accrue on the outstanding mortgage loans, it is unlikely that there will be any money left after paying UOB.
"Since suing the developer for damages would simply be a case of throwing more good money after the bad, the effect of this option is that the buyers will lose all the money that they have paid into the project account to-date and be unable to recover any damages,'' Ms Tan said.
"Realistically, this option is only expected to benefit the developer's paramount mortgagee,'' she added.