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It's time to make all new home builds developer-financed

BIScom Subsection: 
Editorial Staff

As Australian home-builder Collier Homes goes into liquidation, it's time to question, both in Australia and in other countries, whether purchasers should be required to make payments, beyond a reservation deposit, on new builds. Major reform is needed.

The case of those who had paid deposits and stage payments to Collier Homes is the latest in a long line of buy-to-build schemes that have left prospective purchasers liable under a loan for a property that is, at present, in the hands of liquidators and, because of insolvency law, may never be handed over, even in their current condition for completion.

It is reasonable that architect-supervised single builds should be excluded from this policy: in those cases, the home is built "to order" either from modular schemes or from scratch. In those cases, it is usual for materials to be paid for in advance and for stage payments, perhaps in an escrow account, at completion of defined points in construction. At each of those stages, there is, in properly drawn contracts, inspection and approval of the work done.

In cases such as Collier Homes, there are several laws that create a hole into which the person who thinks they are buying a home falls.

First is that, when buying off the plans, there is at that point nothing to buy. In the case of a property built on land, there is at least a plot of land which has some value and to which a title may attach. In the case of apartments above the ground floor, however, there is, at least initially, nothing but air. That means that a "mortgage" cannot exist, in its ultimate form, and borrowers are therefore taking what amounts to a personal loan, although most think it's a mortgage. Additionally, the "mortgage" cannot, usually, be taken by someone who does not own the property. Builders do not transfer ownership of the land until the project is completed: in Malaysia, for example, they frequently do not transfer ownership of apartments for more than ten years after construction and after the authorities have certified the building complete. Malaysia has adopted a system of buyer-finances similar to the Australian system. It has also adopted a deposit and payment system similar to that in Australia which leaves purchasers exposed to many risks unrelated to the current case.

A mortgage is a legal document that transfers ownership of the property to the lender for the period of the loan in which case it is re-transferred to the borrower or until default in which case it is repossessed. More common is a legal charge under which ownership remains with the purchaser but rights are reserved to the lender who, in the case of default, may exercise the charge and repossess the property. However, in both cases, there must actually be a property and it must be owned by the borrower.

Those who purchase under the system where the purchaser borrows money for the construction of the house rarely understand the basic risks:

First, they are paying for something they do not own and will never own unless the builder completes the project to the satisfaction of the building authorities and gives effect to the transfer

Secondly, they might think they are paying for fixtures and fittings but in fact, they are simply making payments into a general pot. This is why many developers move entire developments along at the same pace, even if they don't have buyers for all of them.

Third, developers are not required to put payments into any form of escrow or client's account. The money goes into their general pot which they spend in the ordinary course of business. So if they are in arrears with last year's taxes, that's where your payments go, not to funding the next part of your construction.

Fourth, if a builder goes out of business, you still have the loan but you have no property that you can sell to cover it. A liquidator is under a duty to "get in" all assets and, after payment of various priority debts (which includes their often very substantial fees) he distributes whatever is left. Those priority debts include taxes, wages (but not sub-contractors' fees) and, ironically, any secured loans, including mortgages, the developer may have on the land or other assets. Usually, plant and machinery is subject to a form of security called a floating charge and so, commonly, are materials that have been paid for but not yet incorporated into a construction. Things such as site huts and some plant and machinery are often on leases and are therefore not the property of the failed company.

There are forms of insolvency that fall short of liquidation: one is receivership. If a builder goes into receivership, all its assets are transferred to the receiver who then uses them to continue the business, either until a project is finished or until a purchaser is found. In the Collier case, the company has gone straight into liquidation. While liquidators have some limited powers, they are not generally able to run a business unless there is a demonstrable benefit to the creditors.

The creditors in this case are not only purchasers: they are banks and finance companies, suppliers and sub-contractors.

For purchasers, this means that they are not exactly last on the list but they are amongst a group that is. They may be paid a fraction of the amount that they have handed over, but only after the liquidator has sold all the assets he can find.

The question, then, is will another builder pick up the project and re-start construction and, if he does, what condition will the partially built homes be in? In Malaysia, there are many unfinished developments, some of hundreds of homes. Some of those homes have been paid for, in full, but the builder's liquidator has not transferred them because the site, as a whole, has not been signed off.

It is clear that this system of financing puts purchasers at great risk. It is time that the system was revised not by industry code, as Malaysia has tried to do, but by legislation.

Families, like those who are now paying the mortgage on their existing home, plus the loan for the new home, and who are quite possibly never going to be able to move into it, should not be put at risk by bad law and practice.