Collateral Warranties: Should construction protection be extended to home buyers?

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This article deliberates whether we should include a new clause in the statutory Sales and Purchase Agreement (SPA) to allow property purchasers to ‘inherit’ the warranties of the related manufacturers, contractors and suppliers, from property developers.

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What is the purpose of Collateral Warranties?

A collateral warranty is a contract that supplements a primary contract that extends the benefit of the warranty given by a party under the primary contract (known as warrantor) to a third party who is not a party to the primary contract (known as the beneficiary). Such a contract gives a direct contractual relationship between the warrantor and the beneficiary which will otherwise not exist.

What does a collateral warranty mean in construction?

Property development is an intricate work involving multiple stakeholders – from the developer to the main contractor, and from the main contractor to various sub-contractors. At the other end of the property chain, there are home buyers who purchase the property from the developer. As it goes along, the same property may be sold to subsequent purchasers in the secondary market.

In a typical scenario, a developer, who is known as an employer in the construction field, engages the main contractor by way of a building contract to construct the building as a whole. The main contractor then awards different types of work to various sub-contractors by way of letters of award or letters of appointment. Meanwhile, the developer enters into Sales and Purchase Agreements with purchasers.

Such contractual relationships in property development are mutually exclusive. The developer is contracted to the main contractor, while the main contractor is contracted to the sub-contractors. On the other hand, the developer is contracted to the purchasers of the property. These contracts do not overlap or override one another.

Warranty for Specialist works 

Specialist contractors are sub-contractors engaged for their expertise and speciality in select areas of construction such as

  • waterproofing work
  • proprietary roof truss system
  • paintwork
  • aluminium works such as door, window and louvre
  • mechanical & electrical works such as fire-fighting system, auto-gates, lifts and escalators
  • termite treatment

This specialist works normally come with an extended warranty, with some ranging up to 10 years. However, unless otherwise provided for, the extended warranty is only given to the party who engages them, i.e. the main contractor. In some cases, it may be required to be extended to the developer. Nonetheless, it typically does not extend to the purchasers of property.

Home buyers are a Third Party, who cannot exercise rights on contractors’ warranty

Development of residential property in Malaysia is governed by the housing development laws – the Housing Development Act (Control and Licensing) Act 1966 and the rules enacted thereunder.

In a Sales and Purchase Agreement for a residential property provided under the housing development laws, a property developer must provide protection to home buyers for defects liability for a period of two (2) years from the delivery of vacant possession. This is known as the defect liability period (DLP).

Once the DLP lapses, the purchasers, as end-users, will be without cover should further defects appear. This is despite the fact that warranty from the contractors may continue to run beyond the two-year defect liability period undertaken by the developer.

The doctrine of privity of contract only extends contractual rights to the parties to a contract. As purchasers are not contracted to the main contractor or sub-contractors, they do not enjoy the benefit of any warranty given under these contracts.

Home buyers are regarded in law as a third party to these contracts (or warranty). As the third party, they generally cannot enforce the warranty given under these contracts.

READ: Water leak in condo: Who is responsible & how to prevent inter-floor leakage?

What does a Collateral Warranty do? 

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© Rosley Majid / EyeEm / Getty Images

The simple answer is that a collateral warranty extends the protection to purchasers.

If specialist works do in fact come with a warranty for an extended period, why is the warranty not extended to the home buyers, as end-users?

After all, purchasers are the ones affected by defects that may only surface after the expiry of the defect liability period covered by the developer.

Unlike other jurisdiction such as the United Kingdom, third party rights are not given legislative protection in Malaysia. This makes an appealing case for parties to seek additional rights through other means. One option is collateral warranties.

A properly drafted collateral warranty will extend contractual rights to the purchasers to claim a warranty on the work within the given warranty period. In cases where the warranty period is longer than two years, it will naturally extend protection to the purchasers beyond the defect liability period of two years.

The notion of collateral warranty is especially pertinent in specialist works for the following reasons –

  • repair or remedial work on specialist works require expertise and are generally more costly
  • specialist works would have come with an extended warranty in the first place
  • exposure of specialist contractors may be covered by insurance or professional indemnity insurance

While a developer may require specialist contractors to extend the warranty to them, it must be kept in mind that the developer’s liability to purchasers is limited to a period of two years. Beyond this period, home buyers are at best only able to request the developer (on a goodwill basis) to claim on the warranty from the specialist contractors – that is provided that the existence of an extended warranty is disclosed to the purchasers.

Since a developer is not legally bound to make good the defects after the defect liability period, the purchasers may end up losing out on the benefit of the extended warranty. A collateral warranty may be a solution to this issue.

Manufacturers’ warranties clause in SPA

The Minister of Housing has often advocated in the media that she will be passing new laws for the protection of home buyers. Then why not we have a new clause in the statutory Sales and Purchase Agreement to allow purchasers to ‘inherit’ the warranties of the manufacturer’s, contractors’ and suppliers’ warranties given to the housing developers? The warranties should cover any of the materials, equipment and appliances installed by the developers or their agents.

Notwithstanding the proposed assignment of collateral warranties to purchasers, the housing developers must remain entirely responsible for the performance of their obligations to the purchasers during the DLP.

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Pride of a responsible housing developer

Currently, some home buyers even told us of the ‘extras’ they have received during delivery of vacant possession, which surely endears them to their property developers. These are some of the ‘welcome packs’ that they have received: useful gifts like a key box; warranties from paint companies, auto-gates, pest control, electrical appliances; certificates of treatment for termites/pest control; a certified copy of the Certificate of Completion and Compliance (CCC) issued by the architect and certified copies of the building plans and plans that relate to electrical wiring and water piping so as to facilitate future renovation.

There are responsible property developers, in our midst, whose names are synonymous with quality and trust. They are able to win over home buyer’s confidence. Today, they have created their own brand names. No wonder some developers do not advertise, yet all their units are sold out even before the official launch.

This article is jointly written by Kennie Ang Joo Koon, one of HBA’s volunteer lawyers and Datuk Chang Kim Loong, Hon. Sec-Gen of the National House Buyers Association (HBA), a non-governmental and not-for-profit Organisation manned wholly by volunteers. 

 


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