When a project stops after down payments are received: buyer rights and risk protection

Introduction

Presale, in which buyers pay booking deposits and down payments before the building is complete, is an important source of funding for a project. It is also the period in which buyers bear risk directly on the seller's financial position. If the project is not completed, buyers are usually unsecured creditors and need a long time to obtain a remedy.

1. The vulnerable period

The period from the down payment to ownership transfer can last 2–4 years. During that time, money from many buyers typically goes into the developer's accounts with no security. A project may stop for many reasons, such as cost overruns, sales below target, a loan that is not approved, a contractor stopping work, or money being used for the wrong purpose. Readers should not conclude that there has been fraud from a work stoppage alone.

2. Effects on buyers who have already paid

2.1 Rights under the contract

The standard-form contract under the 2000 announcement (which must be checked against the version actually used) lets the buyer choose between terminating the contract and claiming a refund, or keeping the contract and claiming a daily penalty of not less than 0.01% of the price, capped at 10%, when the seller delivers late.

2.2 Typical steps

1. Gather the contract, receipts, proof of payment, advertisements and photos of progress.
2. Send a notice of termination and demand for a refund in accordance with the contract terms, setting a deadline.
3. Complain to the relevant authorities or file a case in court, which may be a consumer case depending on the nature of the matter.
4. Ask the court to consider interim protective measures before judgment where there are legal grounds.
5. Once judgment is obtained, proceed to enforcement.

2.3 Creditor ranking when a company becomes bankrupt

As a general rule, secured creditors have rights over the secured assets first. Certain debts, such as tax debts and employee wages, may have priority under bankruptcy law. Buyers who hold no security are usually ordinary creditors alongside trade creditors and share pro rata in the remaining assets, which may be small or nothing at all. The actual ranking depends on the type of debt and must be assessed case by case.

3. Legal liability

3.1 Civil liability

A seller in breach may have to refund the money with interest, pay damages and pay the contractual penalty. The court may reduce a penalty that is disproportionately high. The rate and method of calculation depend on the contract and the law in force at the time.

3.2 Criminal liability

A breach of contract is not automatically a criminal offence. The facts and intent must be proved for the relevant offence. Offences under the Criminal Code that may be relevant include:

• Fraud, Section 341
• Public fraud, Section 343, where the public is deceived within the elements of the law
• Misappropriation, Section 352, which depends on the status of the money and the duties involved on the facts

Penalties and the aggregation of penalties are determined by the judgment, so maximum-penalty figures should not be used as a general conclusion.

3.3 Personal liability of directors

A company is a legal entity separate from its directors and shareholders. Whether a director or other person is personally liable depends on the evidence and on their involvement in the acts; it does not arise automatically. Buyers should have a lawyer assess the position before accusing anyone.

4. The process step by step

Step 1: Complaint

Relevant channels include the Office of the Consumer Protection Board (OCPB), the land office for matters relating to condominiums, and the inquiry officer where a criminal offence is suspected.

Step 2: Interim protective measures

The court may consider seizing or freezing assets before judgment, or other measures under the law, where there is sufficient evidence. The extent to which an order affects the company or its directors depends on the case.

Step 3: Bankruptcy or business rehabilitation

Where the legal conditions are met, creditors may apply for bankruptcy or for business rehabilitation. In bankruptcy, the official receiver collects the assets and distributes them to pay the debts. In rehabilitation, a plan preparer or plan administrator is appointed by the court, and debts are paid in accordance with the plan.

5. Market impact

When one project runs into trouble, the effects can spread to other buyers. Banks may tighten lending, and investor confidence in the area may decline. Developers in general therefore benefit from good disclosure standards and controls over money.

6. The role of escrow

An escrow mechanism means that down payments go into an account controlled by a neutral custodian and are released in line with work progress. Singapore and Malaysia have project account systems regulated by law. Thailand has the Act on the Protection of Contracting Parties' Interests 2008, but it does not apply to every sale of condominium units. Buyers must therefore check whether the project provides for it and what the conditions for releasing money are.

7. Lessons from incidents of this kind

Reported cases of projects stopping construction often share common features: work progress is lower than the money received, there is no project loan or reserve funding, and there is no control over how buyers' money is used. Once the legal process begins, a remedy may take several years and the refund may be incomplete.

8. What buyers should check before paying

• Check the company's details, registered capital, shareholders, directors and financial statements from the DBD.
• Check the project's building permit, EIA and title deed.
• Ask about the status of the project loan and the financial backers.
• Compare actual construction progress with the money received from buyers.
• Request the escrow agreement and the conditions for withdrawals, if the project provides for one.
• Read the penalty, deadline and refund provisions.
• Have a real estate lawyer review the contract before signing.

Conclusion

The law gives both civil claims and, in some cases, possible criminal liability, but remedies after the event carry high costs and uncertainty. Checking before paying is therefore the better protection. This article is general information; those affected should seek advice from a lawyer for their own case.