From my years of experience in the real estate industry, I have seen many customers getting cold feet before the purchase of a property. One of the many reasons is the risks of buying a property under construction. I have also heard of stories where buyers were promised luxurious accessories, quality workmanship, etc. which ended up being an utter disappointment or having a delay in the handover of keys.
Well, that is why the Housing Development Act (HDA) is enforced to protect the rights of the buyers against any concerns they have in relation to purchasing a property. Hence, the different Schedules for the Sales and Purchase Agreement (SPA) under Regulation 11 of the HDA.
In general, Schedule G, H, I, and J are schedules issued for the Sales and Purchase Agreement (SPA) based on the type of property and its purchase method. These schedules exist to safeguard buyers against workmanship issues, land title issues, and most importantly, against unscrupulous developers.
Before we move on to the different schedules under the HDA, let us first understand the concept of the different purchase methods in Malaysia.
Difference between Sell-Then-Build (STB) and Build-Then-Sell (BTS) Properties
The idea of building then selling or selling then building may sound trivial for some, however, it makes a whole lot of difference when you truly comprehend it.
With the sell-then-build (STB) concept, developers are allowed to sell the housing units to potential homebuyers before the development is complete. In other words, the cash flow constraints by the developer are dependent on the effectiveness of their marketing team.
The sell-then-build concept is not a new concept in Malaysia and has been in practice for the past number of decades. It is beneficial for developers since they can unlock their cash flow early in the development phase and use it to finance the development. Furthermore, it provides them with the leverage to develop multiple projects simultaneously.
In most development, the minimum threshold for developers to break even on a new project is 55%. If the developer can secure the sales of 55% of the units available, they can quite confidently complete the project with little concern on cash flow.
Nonetheless, the STB system is not perfect with loopholes such as the issue of project abandonment. In fact, this loophole was terribly exploited by unscrupulous developers before the introduction of the Housing Development Act (HDA).
So much so that 198 Malaysian private housing projects were recorded to have been abandoned up to date. For such cases, the government will either use taxpayers’ money to revive these projects or to let the project rot until an interested party takes over the development.
Unfortunately for the homebuyers, they will have to carry the burden of monthly installments despite not receiving the houses anytime soon (if ever). Hence, it is extremely important to choose a reputable developer when considering the purchase of new development.
Do check out this post on what to look out for if you’re buying a new development.
With the build-then-sell (BTS) concept, developers are allowed to sell the housing units to potential homebuyers only after the projects are completed or partially completed. Essentially, there are two variants of BTS, which are the complete BTS 0:100 and the partial BTS 10:90. This is more common in the United States and Canada.
For complete BTS, the developer only sells the housing units once it is fully completed with a Certificate of Completion and Compliance (CCC). There are no down payments or progress payments required.
Conversely, for partial BTS, the developer can sell the housing units before it is fully completed. Thus, homebuyers are required to pay an initial amount of 10% of the agreed purchase price as a down payment upon signing the SPA and pay the remaining 90% upon project completion with the issuance of the relevant CCC, utilities connected, and the delivery of keys (Vacant Possession).
The BTS concept is said to be viewed favourably especially since the partial BTS tends to encourage developers to be innovative so that their products will be attractive for fast sales. Holding costs will also be lowered as developers want to quickly complete and sell their products due to the interests being charged on them.
In reality, there are only 4 developers in Malaysia that is capable of a build-then-sell system despite it being a favourable system for home buyers. The Malaysian regulatory body should look into encouraging more build-then-sell developers in the country.
With that said, it will be easier for you to understand the different schedules below once you have grasped the general idea of STB and BTS.
What is Schedule G?
Schedule G is used for the sale and purchase of residential properties sold under individual titles and delivered in the sell-then-build (STB) concept. It describes the different milestones for the construction progress and claims are allowed only with the architect’s approval.
Individual titled residential properties usually refer to landed properties such as bungalows, semi-detached houses, terrace houses, etc. that do not come with shared facilities. The titles are issued to the buyers upon signing the Memorandum of Transfer, a document to officially transfer the ownership of the housing unit from the developer to the buyer.
I have also written an article on the Memorandum of Transfer should you be interested.
What is Schedule H?
Schedule H is used for the sale and purchase of residential properties sold under strata titles and delivered under the sell-then-build (STB) concept. It typically describes the different milestones for the construction progress of condominium and gated community.
Strata titled residential properties typically refer to housing accommodations in a building or a piece of land that is subdivided into various parcels. For instance, apartments, condominiums, townhouses and gated community that comes with shared facilities. The buyers will have ownership over their own unit but not the land on which the housing unit is built, unlike individual titles where buyers have ownership over both the building and the land.
Hence, you should expect to come across details such as a highlighted drawing of your purchased parcel, the accessories provided, as well as clauses relating to the shared ownership of common facilities under Schedule H with regards to the SPA.
What is Schedule I?
Schedule I is used for the sale and purchase of residential properties sold under individual titles and delivered under the build-then-sell (BTS) concept.
With Schedule I, buyers can actually see the completed unit before deciding whether to purchase. I personally feel that it has its benefits since buyers have the assurance that there won’t be any abandonment of the project, delays in delivery, and they can check for themselves whether the quality of workmanship is satisfactory.
What is Schedule J?
Schedule J is used for the sale and purchase of residential properties sold under strata titles and delivered under the build-then-sell (BTS) concept.
Just like Schedule I, Schedule J was legislated under the SPA after the amendments made to the HDR in 2007. Under that amendment, the partial BTS 10:90 was introduced through the statutory agreements of Schedule I and J. As mentioned, this system requires buyers to fork out a 10% down payment upon signing the SPA while the remaining 90% is to be paid upon project completion, either upfront or by monthly instalments.
On a side note, you may obtain the pdf version of all Schedule G, H, I, and J from here.
What is Certificate of Fitness for Occupation (CFO)?
If you have been reading up on the built environment industry, I am pretty sure you will have come across terms like the Certificate of Completion and Compliance (CCC) and Certificate of Fitness for Occupation (CFO). Basically, both documents have the same function but are executed differently.
If you are wondering, the CFO we discuss here is not the Chief Financial Officer or Chief Funny Officer.
Jokes aside,
Certificate of Fitness for Occupation (CFO), also known as Certificate of Fitness, is an official recognition to certify that a building is well constructed, is fit for the purpose it was initially designed for, and is safe for occupants to live in. It is typically issued by the local authorities under the Uniform Building By-Laws of the Street, Drainage and Building Act 1974 (Act 133).
In general, a developer is only allowed to hand over the vacant possession to a buyer after receiving a confirmation letter from the relevant authorities. The importance of the confirmation letter is to verify that Form E, which is a statutory form used for CFO application, has been duly submitted and approved by the appropriate authority. Ultimately, it indicates that the building is safe and ready for occupation.
However, one of the weaknesses of the CFO is that it is less effective, more complex, and time-consuming. Some of the common complexity of the CFO is,
- Delay in certification by technical agencies
- Non-compliance of developer for Form E submission to the local authorities (LA)
- Various conditions imposed by the local authorities (LA) for the CFO application
- Delay in site inspections by the local authorities that should have happened right before the completion of works
These issues eventually lead to delays in project sign-offs for the property developers. In return, homebuyers are unable to move in or start renovation works due to the late issuance of Vacant Possession.
In 2007, the Certificate of Completion and Compliance (CCC) was introduced to replace the CFO system to smoothen the building process. The CCC is issued by a Principal Submitting Person (PSP) who is either a professional architect, engineer, or building draftsman registered under the relevant laws.
Similar to CFO, the CCC is vital for the delivery of the VP. It is also more advantageous and can resolve all the issues raised from the former CFO system via self-certification, self-regulation as well as cutting down on red-tapism, and corruption. This is because CCC deals mostly with the technical experts to ensure the building is occupied as soon as possible without compromising on safety.
Furthermore, a responsibility matrix method has been introduced whereby each construction phase is to be endorsed by the professionals or contractors using 21 stage certification forms (Form Gs). Subsequently, the quality of construction work has significantly improved since action can be taken on the respective parties that are responsible should any failures emerge in building works.
If you are interested to know more about CCC in detail, please click on the link here.
Final Words
Thank you so much for reading this article. I hope the information shared through my writing has been helpful in your journey in building your investment portfolio.
Until the next article, take care and stay safe.
