Legal effect of booking fees

IN a recent landmark decision, the Federal Court held that where there is late delivery of vacant possession by housing developers, liquidated agreed damages (LAD) would be calculated from the date of payment of the booking fee.

The Federal Court rejected the argument for a literal interpretation of the phrase “from the date of this Agreement” contained in the statutory sale and purchase agreements. Instead, it held that the Housing Development (Control and Licensing) Act 1966 (HDA) and Housing Development (Control and Licensing) Regulations 1989 (HDR) are both social legislation.

The Federal Court took cognisance of the intent of the Parliament and held that the HDA and HDR were both enacted in order to protect the interest of house buyers.

The Federal Court held that despite the strict prohibition against the collection of booking fees pursuant to the HDR, the practice of collecting it is still rampant in the industry. The Federal Court held that if it is the attempt of housing developers to secure an early bargaining through the collection of booking fees, then developers would have to be bound to the booking fees and the full extent of the LAD payable in respect of late delivery of vacant possession.

It is interesting to note that while this decision may at first glance be seen as a form of rebuke to developers, the Federal Court may have instead obliquely recognised the act of collecting booking fees and given it legal effect, which goes to the root of the formation of a contract.

The Federal Court found that a booking fee is sufficient to show the existence of a contract. This raises some questions in relation to the basic principles of a contract in that an illegal consideration is not a valid consideration.

As collection of a booking fee is illegal, the consideration of the “valid” contract, namely the booking fee, would be illegal.

However, the Federal Court held that where one party commits an illegal act in securing the contract, this would not render the contracts illegal per se. The illegality was construed against the developers alone, and this would not render the contract void.

The most basic rule of statutory interpretation is that a statute should firstly be interpreted in accordance to its plain and ordinary meaning. In this decision, the Federal Court did not find that there was any ambiguity in the words “from the date of this Agreement”. However, it held that the literal rule is immediately displaced when interpreting social legislation, namely the HDA and HDR. The Federal Court held that the underlying purpose is to protect house buyers and that developers should reap what they sow.

Since the very act of collecting booking fee is illegal, developers should be bound by their action and deal with the consequences by deciding that LAD should be calculated from the date of the collection of the booking fee.

The practical impact of this decision on the housing development industry remains to be seen, but it is certain that developers will have to immediately consider making changes to their standard practice to ensure that it is consistent with this decision.


Kuala Lumpur

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