Where the required bylaws and safeguard against the errant developers are not present, more often than not, there is misuse of funds and/or mismanagement, leaving the housing project abandoned. The developer facing “Chapter 11” provides no way out for the innocent homebuyers and/or investors.
In the event, there is subsists a bridging loan, that is a loan between the developer and his bank to finance the development, the bank must be vigilant in exercises their rights as debenture holder.
A conservative approach may result in chaos as if the bank is reluctant to step into the shoes of the developer, and even on some occasions financially assist. The errant developer would have fled leaving the project abandoned and the purchases without remedy.
This would leave the end financier, that is the purchasers’ bank in a total lurch. The bank and the purchasers are in no position to exercise any leverage, particularly against the delinquent developer.
The end financier is then left without the landed security to foreclose. The quite unlucky innocent purchaser continues to pay interest on his borrowings (and not principal). Sometimes, the best solution is for the purchaser to pay off the loan.
This is why we have avidly recommended that the end financier and the bridging financier be one and the same. Interestingly, who will push on this?
It would be in the end financier interest to push the bridging financier but ,it is the bridging financier that usually chosen first. Hence the prudent developer would push for the bridging financier to end finance. However, most prudent developers aren’t recalcitrant. Thus, should the burden fall back again on the innocent purchaser and homebuyer. Purchasers should be forewarned in instances where the bridging financier has not taken up the end financing as well.
Needless to say, as confusing all of this is, the solution provided above isn’t holistic and the purchaser must be left to fend for his own.
In a decided case, the purchasers formed a collective action legal committee and commenced legal proceedings for liquidated damages. One may ask what is the wisdom in this? Using the liquidated damages, the purchasers entered into a settlement with an independent contractor to complete the development using the unsold units. The end financiers supported the purchasers on this and became co-plaintiffs in some occasions. The developer succumbed to this on the threat of the purchasers’ winding up the developer. The independent contractor completed the project with some reservations. Thereafter, the purchasers wound up the developer appointed a provisional liquidator to complete the developer’s duties. A Committee of Inspection and Joint Management Body were set up etc.
This was an interesting solution to an intriguing problem.
The relevant bodies must ensure that there are safeguards put in place prohibiting and discouraging errant developers from manipulating this once “unguarded fence” which is still failing. The current push for developers to sell “completed units” even at a premium is still advantages in the authors’ opinion until a better solution to remedy the problem surfaces.
