Contributed by Gregory Das
The repeated extension of the movement control order (MCO) has led to a heightened possibility of a developer’s exposure to claims for compensation for the late delivery of vacant possession of housing units. This is despite the present partial relaxation of the movement restrictions, which for many developers could not have come sooner.
Developers exposed to late delivery claims should attempt to obtain an extension of time from the Ministry of Housing and Local Government for the delivery of these housing units. Such attempts could be made under the Housing Development (Control and Licensing) Act 1966.
However, there is no guarantee that the minister would grant a time extension.
Moreover, there is no scope for the force majeure principle (or an “act of God” defence) in the context of SPAs under the Act as in the case of the Federal Court in SEA Housing Corp Sdn Bhd vs Lee Poh Choo [1982].
In the current circumstance, what would be a possible defence for a developer to a claim for the late delivery of vacant possession, given the request for an extension of time is refused by the minister or is otherwise not possible?
The legal principle of the ‘frustration of a contract’ could provide the answer.
The frustration of a contract arises where the performance of a contractual obligation becomes impossible for reasons not caused by the parties. In other terms, the principle of frustration applies where a supervening event causes a fundamental or radical change to the contractual duties.
Ostensibly, the present restrictions in movement could provide a basis for the principle to apply to the extent that these restrictions have rendered impossible the timely delivery of vacant possession of the housing unit.
A contract that is frustrated is rendered void in law. This means that both parties to the contract are no longer required to perform its terms.
A principal consequence of the frustration of a contract is that the parties to the agreement are returned to the positions they were in before the contract was formed, as far as possible. This means that any monies paid under the contract must be refunded.
In the context of a sales and purchase agreement (SPA) under the Act, the frustration of the contract could, as an example, result in a developer’s reimbursement of the booking fee paid by the purchaser.
However, depending on the facts of the case, the frustration of an SPA would not ordinarily result in the developer’s payment of the entire purchase price of the housing unit to the purchaser as in the case of Arab Malaysian Bank Berhad vs Strategi Cerah Sdn Bhd [2006].
Until recently, the law held that the principle of frustration does not apply to SPAs under the Act. This was in view of Regulation 11(3) of the Housing Development (Control and Licensing) Regulations 1989.
Regulation 11(3) provided a developer with the option of requesting for an extension of time to deliver vacant possession of a housing unit. The courts decided that developers that did not exercise this option under Regulation 11(3) could not later rely on the principle of frustration as a defence to a claim for compensation for late delivery as in the Court of Appeal in Sentul Raya Sdn Bhd vs Hariram Jayaram [2008] case.
However, Regulation 11(3) has now been struck down. It is no longer applicable given the recent Federal Court decision in the Ang Ming Lee vs Menteri Kesejahteraan Bandar, Perumahan Dan Kerajaan Tempatan [2020] case.
Therefore, under the present law, there appears to be scope to invoke the principle of frustration as a defence to a claim for the delayed delivery of vacant possession.
However, as stated above, the principle of frustration only applies where the performance of a contract is rendered impossible by events. This naturally means that all alternative avenues and attempts to fulfil the obligations under the SPA must first be pursued before the principle of frustration could be invoked.
The alternative options for a developer to pursue in response to the difficulties faced in effecting a timely delivery of vacant possession in the present circumstances could be the following:
- Seek written directions from the minister under Section 12 of the Act for the purposes “of ensuring compliance with this Act” by extending the time for the delivery of vacant possession. Alternatively, a developer could seek an exemption from the provisions of the Act under Section 2(2) in respect of the compliance with the timelines for the delivery of vacant possession from the minister; and
- Attempt to reach an agreement with the purchasers (with the involvement of the Housing Controller) on a new completion date for the housing project. This was achieved in the Court of Appeal case of Oxbridge Height Sdn Bhd vs Abdul Razak Mohd Yusof [2015] where the developers and purchasers agreed on a new completion date due to financial difficulties and persistent flooding in the area that jeopardised the timely construction of the parcel units.
In the event these alternative options fail, there could be scope for the principle of frustration in defence to a claim of late delivery of vacant possession.
Gregory Das is a practising dispute resolution lawyer in Kuala Lumpur and is familiar with housing development disputes.
Disclaimer
This article is intended to convey general information only. It does not constitute legal or other advice or the provision of legal or other professional services, and shall not be relied upon as such.
This article cannot disclose all of the risks and other factors necessary to evaluate a particular situation. Any interested party should study each situation carefully. You should seek and obtain independent professional advice for your specific needs and situation.
