Developers defaulting on maintenance fee of unsold strata property seen to rise

This article first appeared in The Edge Malaysia Weekly, on July 5, 2021 - July 11, 2021.
Developers defaulting on maintenance fee of unsold strata property seen to rise
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AS Covid-19 numbers remain high and lockdown measures are tightened, the property market is expected to remain subdued. This could potentially lead to property developers having to hold onto their unsold strata assets for a longer period.

However, the longer they hold onto their assets, the more they would need to fork out in terms of contribution to the property’s maintenance fee and sinking fund. Developers are required by law to pay the monthly maintenance fee and contribute to the sinking fund, but many are defaulting on their payment, citing financial distress. This is expected to result in millions of ringgit in defaults, as well as poorly managed strata properties.

Lawyer Ranjan N Chandran, a commercial and construction partner at Hakem Arabi & Associates, believes that some joint management bodies (JMB) and strata owners may be unaware that even developers are duty-bound by the Strata Management Act 2013 (SMA 2013) to pay the monthly maintenance charges and towards the sinking fund for the unsold units as the strata owner of the development.

“There are good developers and the not-so-good ones. That is why some developments are poorly maintained due to inadequate collection as the not-so-good developers are not paying [their fair share of money] for their unsold units,” Malaysia Institute of Property and Facility Managers (MIPFM) president Adzman Shah Mohd Ariffin tells The Edge.

“Some developers were facing financial difficulties even before the Movement Control Order (MCO) and [their] situation has worsened due to the MCO. The default on payment of maintenance charges and sinking fund has led to their assets falling into disrepair,” he says, adding that the default amount is running into millions of ringgit and it could get worse under the now-extended MCO.

Ranjan agrees that the MCO is likely to exacerbate the situation. “Many developers will be cash-strapped amid the current challenging economic climate and may choose to ignore their maintenance and sinking fund payments for these unsold units.”

Both experts say that to the best of their knowledge, they have only mostly seen errant individuals taken to task while cases involving errant property developers are few.

In June last year, the Subang Jaya Municipal Council secured a conviction against the owner of a strata property who had failed to comply with the award handed down by the Strata Management Tribunal (SMT). The owner, who had failed to pay his outstanding maintenance fee, was fined RM5,500 in default one month’s jail and ordered to pay the maintenance fee.

Section 123 of the SMA 2013, which came into force on June 1, 2015, provides that an award made by the SMT is deemed to be an order of a court and that non-compliance with the award constitutes an offence. The offence is punishable with a fine not exceeding RM250,000 or imprisonment for a term not exceeding three years, or both.

“The criminal penalty imposed by the court against a strata property owner who fails to comply with an award by the SMT for failure to pay the outstanding maintenance charges and contribution to the sinking fund must likewise apply with equal force to a defaulting developer,” Ranjan says.

“The duty and obligation of the developer to pay the maintenance charges in respect of the unsold units can be found in Section 10(3)(b) of the SMA 2013, which expressly states that the developer is to establish a maintenance account and shall deposit into this account the charges to be paid by the developer in respect of those parcels in the development which have not been sold.”

Sections 11(3)(b) and 11(4)(b) of the SMA 2013, meanwhile, require the developer to establish a sinking fund account and to contribute to the sinking fund in respect of parcels in the projects that have not been sold by the developer.

The sinking fund is a hedge against misfortune and is typically used against future expenditure such as large-scale repairs or major works on a building while the maintenance fee is used for the upkeep of the surrounding areas of the property.

Currently, there is a lack of action being taken against developers who fail to pay for these unsold units, Ranjan says, adding that it is “disappointing” that there has been “no decision yet by the SMT and no criminal prosecution” against property developers.

SMT is a body established under the SMA 2013 and can hear on matters relating to claims for recovery of charges such as money collected for maintenance of the property, among others. Those who are entitled to file a claim include developers, purchasers, JMBs and management corporations (MCs).

A JMB, comprising the developer and purchasers of the parcels in the building, is formed when the parcel units are not issued with strata titles yet and will continue to function until the strata titles are issued. Once the book of strata register is opened, the MC, typically comprising the purchasers who have transferred the strata titles to their names, is set up.

“Why only look at strata owners on their default? When is the law going to catch up with developers for their dereliction of duties and responsibilities?” asks Ranjan.

He adds that the maintenance charges and sinking fund to be paid by the developer in respect of these unsold units can be a colossal amount, depending on the number of unsold units, and must be held by the developer as trustee for the property owners.

Sections 15 and 16 of the SMA 2013 mandate the property developer to transfer and hand over the balance monies in the maintenance and sinking fund accounts to the JMB once it is formed.

The payments made by the property developer for the unsold units much be reflected in the annual audited accounts and made available for production and inspection by the property owner or the JMB when requested. There must be full transparency and accountability, he adds.

According to him, the SMA 2013 is a watertight legislation with laws to compel the developer to perform its fiduciary duties to pay with regard to the unsold units and safeguard the best interest of the property owners.

However, without action being taken against defaulting developers, that law will be ornamental due to weak enforcement, says Ranjan.

To be clear, once the first key or vacant possession of a particular project has been handed over, the purchaser will have to start paying maintenance charges for the unit he or she purchased while the property developer too has to start paying maintenance charges and the sinking fund for the unsold units.

Should the purchaser or the developer default in their payments, the JMB and MC can take the matter to the SMT. The SMT can issue an award that requires the parties to pay. The decision of the SMT is binding and deemed as an order of a court and can be enforced. Non-compliance of the award is a punishable act and the parties can be taken to court for the punishment to be meted out.

Still, Adzman says commencing legal proceedings against property developers can be tough. For one, the SMT can only listen to claims that are below RM250,000. For larger sums, the case has to be taken to court and it is costly for the JMB or MC to take “Goliath” to court.

It is noteworthy that the decision of the SMT can be challenged at the High Court by way of a judicial review application on grounds of “serious irregularities”.

What can the property developers do in the interim? “This is where the developers must take prudent measures to rent out these unsold units in the hope of generating income,” Ranjan says.

Adzman believes renting out premises for short stays could be a solution, although he sees rising incidences where the JMB and MC prohibit short-term rentals in their properties.

 

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