Construction can be a complicated business. You can’t just arrive with a hand-drawn plan, and see it turned into your dream home a few months later.
There are numerous layers of oversight and approval required, from architects drawing up plans, right through to permission for where your drainage ditches should be.
That’s not even taking into account the complex task of physically building the actual project from ground up.
This complexity can sometimes mean delays that occur throughout the entire construction process.
Those delays can be due to an impact on several key parties – whether it’s the architect, engineers, contractor, or even the client.
In order to provide for this possibility, a proper construction contract should include an important clause: the ‘Extension of Time’ (EoT)!
What Is 'Extension Of Time', And How Does It Work?
The Extension of Time (EoT) clause provides a mechanism for the completion date of a construction project to be adjusted (where NECESSARY), while also offering protections to the client.
In reality, there are numerous challenges that could delay the construction of a project, such as:
Overruns on key construction elements.
Even the more serious example of the Movement Control Order (MCO) due to the COVID-19 outbreak can be considered.
There’s a whole lot of this world that’s sadly outside our control! The Extension of Time clause is designed to ensure that a contractual structure is in place to deal with such unforeseen delays.
In the event of a delay, an Extension of Time can be undertaken, and extending the scheduled completion date.
This will normally come with a contractual penalty, as described by the Liquidated Ascertained Damages (LAD) clause.
That penalty imposed can get expensive pretty quickly, if the contractor falls seriouslyyy behind on their project.
Hopefully you’re not lost in the contractual jargon by now! Because we’ve got one more important point to raise: An Extension of Time can be either prospective, or retrospective.
In most cases, this extension should be made prospectively, which means to notify in advance BEFORE the contractor passes the agreed completion date.
However, in some cases, an Extension of Time clause will allow for a retrospective application (AFTER the date is passed), with liquidated damages then worked out after the completion of the contract.
Do note that construction contracts can vary, and there's no single standard Extension of Time clause.
This means the conditions and obligations around extensions, and liquidated damages, depend heavily on just how well-crafted the contract is.
How Are Homebuyers Affected By Extension Of Time?
Extensions on the time it takes to construct a project can have negative impacts on homebuyers, especially if they have a family.
Say you’ve purchased a newly launched condominium that’s due for delivery in 36 months, only to find the deadline approaching with the property not fit for habitation; there’s no doubt you’re going to be frustrated. The Extension of Time clause is designed to protect you in these circumstances.
The Sales and Purchase Agreement (SPA) sets out terms for the completion of property by developers.
It mandates that landed properties must be completed and delivered within 24 months, whereas stratified properties must be within 36 months.
Failure to deliver within this timescale means the developer must pay penalty fees to the homeowners, equivalent to 10% per annum of the purchase price.
This means that while you might not get your lovely new home on time, at least you get financial compensation for your distress.
It had previously been possible for developers to apply for an Extension of Time from Malaysia’s Housing Controller, that sidestepped the need to pay damages, but a ruling by the Federal Court in 2019 deemed that power was invalid.
That means homebuyers are once again fully protected from construction extensions, and that contractors or developers are obliged to pay the penalty as per the contract.
The ruling, announced by Chief Justice Tengku Maimun Tuan Mat, stated the following:
"These modifications and the granting of extensions of time to the developer do not appear to protect the purchasers, which militates the intention of Parliament. Allowing the controller to waive or modify the terms and conditions of the contract of sale would deny purchasers their right to claim damages."
This is an important victory for homebuyers, whose rights to compensation for late delivery were overruled by prior rulings from the Housing Controller.
How Does Extension Of Time Affect The Progressive Payment Schedule?
The progressive payment schedule for purchasing properties is defined under the Housing Development Act 2012.
It sets out the schedule for payments on purchasing landed residential and stratified residential properties, based on different elements of the work.
In other words, it’s a mandated timeline that determines when payments need to be made. In total, 80% of this progressive payment is made prior to the full completion of the property.
Yet, this amount relates to completion of key elements of the work, from foundations through to plumbing. Here's a quick look at the rough breakdown:
Once a particular element has been completed, the homebuyer must make payment of the agreed amount within 21 days of receiving a notice.
That means the obligation of payment is based on completion of the project elements, and not a defined date.
If a project element is delayed, a contractor should not sign off and cannot issue a demand for payment for that element, regardless of their initial construction timeline projections.
Once the property is complete, a further 12.5% payment is required at the point when the ‘Purchaser takes possession of the said Parcel with water and electricity supply ready for connection to the said Parcel’.
The remaining 7.5% is paid after the Purchaser receives the Notice of Vacant Possession of the parcel.
The key point here: Payment notices are determined based on completion dates, not expected timelines.
If the contractor is delayed in completing the construction, they should also be delaying sending you the bills.
As always, this is a VERY important (and complex!) element of contractual agreements. So, always have a professional check this over to ensure you’re not sleepwalking into a bad deal, or losing your property rights due to confusion over payment terms.
Extension Of Time FAQs
The Extension of Time clause is a complex, but essential, element of any construction contract. Here are a few other frequently asked questions that clarify what that means.
1) What does Covid-19 mean for extensions on construction?
Covid-19 and the Movement Control Order (MCO) creates a difficult situation for contractors, meaning they're not allowed to access the site to continue construction.
This situation is generally covered by the force majeure clause, or Impossibility/Frustration of Time Extension.
Force majeure, essentially meaning circumstances outside of your control, will usually result in an extension to time without any financial implications.
Individual contracts may interpret this differently through Impossibility/Frustration of Time Extension, and should be checked accordingly by a professional.
2) Does every contract have the Extension of Time clause?
A good construction contract should already have this included, but that’s not to say all contracts are good!
Always get your contract checked by a professional. Any professionally drafted SPA should also include these protections.
3) When is the delivery of residential property due?
Within 24 months for landed property, or 36 months for stratified property, based on the date noted on the SPA.
4) Should I sign away my Liquidated Ascertained Damages rights?
Some unscrupulous developers may try and get you to sign away your rights to a claim for liquidated damages.
Simply put – don’t let them! This is an important piece of financial security for you as a homebuyer, and a possible.
If you've just bought a brand new (or currently under construction) property, you should know that it comes with a 'warranty'. Better read up on what the Defect Liability Period (DLP) is all about, while you still can!