Service charges or maintenance levies are how property owners within a Jointly Owned Property (JOP) development contribute towards the costs of running and maintaining their real estate investment. All JOPs impose regular service charges, which are levied against all unit owners based on the entitlement attributed to each unit. Without this financial contribution, the Owners Association (OA) wouldn't be able to pay those running costs, resulting in a slowly deteriorating building and a subsequent drop in the market value of every property in the development.
It's interesting to note that an examination of an OA's bank account will generally indicate the future prospect of a JOP development. If there are sufficient funds available to meet anticipated costs, then investors within the development have a financially sound asset. However, if the bank account is low or empty, then the reverse is true.
The importance of accurate planning and collection of service charges to cover the costs of repair and maintenance of common areas cannot be over-emphasised. The amount required will vary between developments and so each budget should reflect the individual needs of its development.
Two types of funds
All service charges contribute towards two types of funds, the General Fund which covers the amount required for the annual operation or regular expenses of the OA, and the Reserve Fund, which is used for long-term repairs and maintenance or expenditures of the OA, for example replacement of the lift or repainting the common areas.
Both these funds are under the OA's control and must be kept in a bank account under its name, with a bank or other financial institution approved by the Real Estate Regulatory Agency (Rera). The funds must also be accounted for and reported on separately in order to maintain proper governance and compliance. There is an additional type of service charge called the Special Service Charge, which may be imposed by the board in case of an emergency for unexpected expenses where no funds were allocated. As a rule, under the ‘Directions for Association Constitution' from the Land Department, Special Service Charges cannot exceed 15 per cent of the previous annual service charge and where funds in excess of this limit are required, a General Assembly would have to be called to approve the amendment to the budget.
It's a fact that no owner likes to be faced with a notification to contribute additional funds for a Special Charge, so it's important to be aware that, eventually, shared facilities will need repairing and/or replacing and, if the OA maintenance fund hasn't raised enough money along the way, Special Service Charges will be required.
Fee calculation
Service charges are calculated with regard to the annual budget and are collected quarterly, unless an owner elects to pay in one instalment. The association manager must prepare and the board must approve a budget for each financial year and submit that budget, including full details of the proposed Annual Service Charge, for approval by the owners at the annual general assembly.
All the owners can vote to either accept or reject the proposed budget, which takes into account actual and expected expenditure, as well as the OA's existing financial status. The budget for the general fund must be for a one-year period, while the budget for the Reserve Fund must be based on a study of the costs of renewing and replacing the Common Areas and Assets over a minimum ten year period. Such a study must be carried out in accordance with any directions issued by the Land Department.
Each owner will contribute towards the service charge as determined pro-rata to the owner's share of the common areas. This is based on the entitlement for each unit within the development. Unit entitlements are calculated on the basis of the area the unit forms as a percentage of the total area of units making up the development. This may also be subject to the extent the unit draws on the resources of the OA. Essentially, this means that the larger the unit entitlement, the greater the portion of the aggregate service charge that will be paid by the respective owner. All property owners have the right at the General Assembly to approve the service charge budget. It should be noted that this right is subject to the OA's statutory obligations to appropriately manage the development, for example the OA cannot neglect comprehensive building insurance. It is important to note that during the "control period" (Article 14 of the Direction of the General Regulation commences upon registration of the Owners Association and ends when the combined entitlements of owners, other than the developer, equal or exceed two thirds of the aggregate entitlements.)
Developers are in control of the JOP development pending setting up, registration and licensing of the OA. All service charges or other sums levied by the developer must be approved by Rera.
Repercussions of unpaid service charges
All unit owners have an obligation to pay service charges assessed against their unit. The law and supporting regulations will be quite firm on payment compliance and failure to pay service charges will enable the OA to take action against the unit owner.
Firstly, unit owners who have levies outstanding will have no voting power at the General Assembly, and secondly, the OA will have a lien over the owner's unit for unpaid service charges. The unpaid levy may also attract a penalty interest charge which is imposed by the OA on the defaulting owner(s) which is calculated on a daily basis at the rate of 12 per cent simple interest per annum.
However, the practical reality of recovering the unpaid service charge can be a lengthy process but in due course, the OA will get all that it's owed including, any costs incurred through recovery action.
The writer is the commercial director of Stratum Owners Association Management
