Plot and practice on deposits

IT is common practice when one buys a ready-made house, to pay a deposit before signing a sale and purchase agreement (SPA). However, in the case of houses sold by developers (sell-then-build), the developers do not have the luxury of collecting a deposit before the signing of the SPA. Collecting a deposit was, in actual fact, allowed years ago, before 1989, but legislature had to intervene and prohibit this activity of developers when some unscrupulous ones ran off with the deposits collected from potential house purchasers.
This new law prohibiting the collection of deposits came in the form of the Housing Development (Control and Licensing) Regulation 1989. A special provision was added, making it an offence for any housing developer to collect any payment, by whatever name called, such as – deposit, option to purchase, advance, stakeholder sum – except when the purchaser has first signed the SPA. Failure to comply with this provision was made a criminal offence with a fine not exceeding RM20,000 or a term of imprisonment not exceeding
five years or both.
Point 1
All deposits collected by developers, unlawfully, have to be returned in full, without any deductions since the developer is the party in breach of the law. By his collection of money contrary to law, he is precluded from pursuing his case by relying on his own illegal act: ex turpi causa non oriter actio. (An action does not arise from a
bad cause, see: Latin for Lawyers.) This clear and well recognised legal maxim is founded in good sense. No court will enforce an illegal contract or allow itself to be made the instrument of enforcing obligations arising from a contract or transaction which is illegal.
The duty to observe the law is firmly placed in the hands of developers as illustrated in Daiman Development Sdn Bhd v Mathew Lui Chin Teck [1981] 1 MLJ 56, Sir Garfield Barwick further held that: "The duty of observing the law is firmly placed on the housing developers for the protection of house buyers. Hence, any infringement of the law would render the housing developer liable to penalty
and conviction".
Point 2
It is also unlawful for developers to use lawyers as a conduit to assist in collecting unlawful deposit as "stakeholders".
It was held in Wan Ming Sun v Planet Uno Sdn Bhd [2013] 1 LNS 371 that this was another method by developers to circumvent the mandatory provision of the law.
"The Option Fee is therefore a guise to circumvent the mandatory requirement of regulation 11(2). That being the case, it is amply clear that the Option for Sale is an agreement prohibited by law.
It matters not that the payment was placed with the stakeholder as contended by the counsel for the plaintiff.
Consideration which is forbidden by law is not lawful as provided under s. 24 of the Contracts Act. An agreement with unlawful consideration and whose object is unlawful is void and unenforceable under s. 25 of the Contracts Act."
Malaysian Bar has also advised lawyers vide "Bar Circular No 011/2014 dated 24 Jan 2014" not to collect any deposit on behalf of developers unless they (purchaser) are able and ready to sign the SPA concurrently … yet I notice that there are lawyers who continue to flout these provisions.
Point 3
If a deposit is paid in concurrent with the signing of the SPA, then pursuant to Clause 5(3) of the SPA, the developer is allowed to deduct 1% of the purchase price as fees, in case the purchaser fails to obtain the loan due to his ineligibility of income and has produced proof of such ineligibility to the vendor. However, this deduction is not applicable when the amount collected is prior to the signing of the SPA, as the developer has returned the entire deposit in full.
Point 4
Although the collection of deposit is unlawful, courts have held that the developers' obligation to complete the houses commence from the date of deposit and not from the date of the SPA. Referring to:
* Faber Union Sdn Bhd v Chew Nyat Shong & Anor [1995] 3 CLJ 797
"For the purpose of ascertaining the date of delivery of vacant possession of the relevant date when time starts to run is the date which the purchaser paid the booking fee and not the date of the signing of the SPA."
* Lim Eh Fah & ORS v Seri Maju Padu [2002] 4 CLJ 37
"The date of July 17, 1992", i.e the deposit payment date, was the date when the contract was struck, and the very date the respondent assumed responsibility to fulfill its part of the bargain. If the date of signing of the SPA were to be taken as the relevant date when time started to run for the delivery of the vacant possession, the respondent could willy-nilly pick any date it favoured to execute the SPA, which would certainly prejudice the interest of the purchaser."
The courts have once again shown that developers who are unscrupulous are not rewarded. So keep your deposit receipt as it may come in handy in allowing you, as the purchaser, to have the last laugh.
Dato Pretam Singh Darshan Singh is a lawyer by profession. Previously a senior federal councillor with the attorney general's chambers, a legal advisor and deputy public prosecutor, as well as president of the Tribunal for Home Buyers' Claims. He is now partner in a legal firm and legal advisor to a host of government departments and agencies. His years of experience and knowledge have seen him deliver presentations, talks and lectures besides contributing articles towards local dailies, journals and periodic publications.