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KUALA LUMPUR (Reuters) - A $1.7 billion property deal that was expected to ease the debt burden of Malaysian state fund 1Malaysia Development Berhad (1MDB) fell through on Wednesday, complicating Prime Minister Najib Razak's efforts to move on from a financial scandal surrounding the fund.
TRX City Sdn Berhad, a former 1MDB division now owned by the Malaysian finance ministry, said the deal had lapsed to sell 60 percent of Bandar Malaysia, a major property development project on the site of the former Sungai Besi air force base in Kuala Lumpur, because the buyers "failed to meet the payment obligations".
In December 2015 Iskandar Waterfront Holdings, owned by Malaysian tycoon Lim Kang Hoo, and China Railway Engineering Corp (CREC) had said they would buy a 60 percent stake in Bandar Malaysia from 1MDB for 7.41 billion ringgit ($1.7 billion).
The joint venture Iskandar Waterfront and CREC group, IWH CREC Sdn Bhd, said in a statement that TRX City's termination notice and press statement "does not fully and accurately reflect the circumstances and conduct of the parties in this matter."
It said the group was reviewing the contents of the notice and statement with its advisors and legal counsel.
Prime Minister Najib had said at the time that the sale, plus other deals, would mean 1MDB's major challenges were now behind it.
1MDB had racked up more than $11 billion in debt before beginning a restructuring program in 2015. The fund is also the subject of money-laundering investigations in at least six countries.
1MDB has denied any wrongdoing.
"TRX City will immediately be inviting expressions of interest for the role of master developer of Bandar Malaysia, with full ownership being preserved by the Ministry of Finance," the company said in a statement.
TRX City, which the finance ministry took control of last year in the wake of the scandal, said the ministry would remain its sole shareholder.
When the Bandar Malaysia deal was first announced 1MDB said Iskandar Waterfront would hold 60 percent of the venture, buying the 1MDB stake, while China Railway Engineering would hold the rest.
The Bandar Malaysia development will include a hub for a digital free trade zone and a terminal for the high speed rail connecting Kuala Lumpur and Singapore.
Last week, 1MDB agreed to pay $1.2 billion to Abu Dhabi's International Petroleum Investment Co (IPIC) to resolve a debt dispute, a move giving a boost to Najib ahead of elections that could be called later this year.
Reporting by Praveen Menon and Liz Lee; Editing by Jane Merriman, Greg Mahlich