For homeowners, after house prices, this year's hottest dinner party conversation is owners' associations (OAs). A product of the recently enacted Strata Law, OAs hand control of a building's communal areas from developer to the owner.

While on the surface, the transfer of power appears straightforward, in reality it entails a minefield of legal and financial complexities which cannot be underestimated. In the next three months we will begin to see OAs take over the full-time running of their buildings.

The real concern is that newly appointed boards, composed of elected residents, may lack the expertise to effectively fulfil their responsibilities. If this proves to be the case, the implications for all residents in the building, not only board members are significant.

The Strata Law has clear potential to reduce costs for owners, with many now actively questioning their existing arrangements with developers. In particular, with the invaluable support of the Real Estate Regulatory Agency (Rera), owners are demanding greater transparency with respect to service charges levied by developers.

With greater control, however, comes greater responsibility. Possessing bank accounts, assets, and governance structures, means that board members are no longer just homeowners — they are stewards and governors.

To meet their fiduciary duty, the board must fully consider a multitude of financial implications. Thankfully, help is at hand.

Auditor

Under the Strata Law, OAs must appoint an auditor at the first AGM. The auditor will evaluate annual financial statements, and can also guide the board during the initial transition phase.

There are three main areas that the newly elected board must be sure to manage effectively — the initial transfer of responsibility, ongoing management of the building, and governance and compliance. The initial transfer of responsibility requires the board to accurately assess and move funds and activities, including cash and bank balances, receivables from owners and deposits, and property, plant and equipment.

Next, and of greatest interest to residents, is the on-going management of the building. The board must understand the nature and extent of the property management services provided by the developer or its subsidiaries. It is the board's responsibility to consider whether the charges are reasonable, and to ensure that all contracts are appropriately approved and legalised.

Financial statements

Governance and compliance is the third key consideration of OAs. The board is responsible for governing and managing the OAs fin-ances, including preparing financial statements.

Service charges are calculated based on the board's proposed annual expenditure budgets, which must be submitted to Rera for approval. The accuracy of budgeting is crucial for the board as owners do not like to be asked to make up shortfalls.

The board has a responsibility to allocate service charges across commercial, retail and residential components in a fair and appropriate manner.

OAs are also required to collect all payments from owners. The Strata Law does not allow for non-payments of service charges to be written off. An issue, therefore, may arise if it is difficult to chase the owner for non-payment.

The Strata Law accounts for this and provides OAs with the power to hold a lien on the property of those who have not paid their respective charges. If homeowners are able to successfully navigate the numerous financial and legal implications of the Strata Law, they have an opportunity to take greater control over the management of their property.

Ultimately, the culmination of these factors will lead to more content owners.

 

Raza Meghji is the partner for audit and assurance and Simi Nehra is a director at Grant Thornton UAE.