Dubai: Service charges on freehold property in Dubai are unlikely to see any sharp increases this year as a new law takes full effect. Property owners may also have something to look forward to – what they are paying out on maintenance and other works could even drop next year.
That’s because the Real Estate Regulatory Agency (RERA) has taken complete control in the auditing of property maintenance costs and how service charges are set. There are 19 authorised audit firms chosen by RERA to do this work for owner associations and the companies representing homeowner interests.
“Before the Law, an OA/developer could appoint XYZ company to do the audit and that was submitted to RERA and approved,” said Saeed Al Fahim, CEO of Stratum Owner Association, which oversees a portfolio of more than 10,000 units in Dubai. “Now, they can’t do that – RERA has appointed its own external auditors to go over the books and come up with their own decisions.
“Effectively, RERA is setting the budget and the service charges. And RERA is unlikely to be swayed by requests to raise service charges immediately if an OA or developer had been operating on a lower charge for two or three years.”
It was in November last that the new Law - —on “Jointly Owned Property” – was rolled out and effectively empowered homeowner associations to be responsible for the upkeep of their assets.
The Law also placed RERA right in the centre of overseeing that all the changes are carried out in full.
Now, all financial audits of the previous must be submitted to RERA by January 30. By March 15, the budget reviews need to be done with. (Earlier, there was no set timeline.)
The JOP Law does pack quite a punch. Here are two key takeaways from it:
- A developer must file documents that would set up an owners association within 60 days of receiving a completion certificate for that project. A further extension of 30 days could be granted. But there would be no leeway for any developer to keep postponing the step.
- The developer cannot have a direct role in setting up budget to operate and manage the building post-handover.
“The spirit of the Law is not only to arrest the upward 'creep' of service charges, but to increase transparency, the collections from property owners, and enforcement such that overall service charges reduce,” said Sameer Lakhani, Managing Director at Global Capital Partners.
Arresting upward creep
“This, however, will take some time to have an effect. There will be some relief for property owners, that’s for sure.
“There will be an onus on OA companies to ramp up procedures and due diligence, which will require an increase in their overhead costs. This will exert pressure on smaller OA companies — we can expect a number of consolidations to occur.”
Pay up… or else
What Lakhani says about service charge collections — or the missing part of it — is valid.
Stratum’s Al Fahim says that nonpayment from property owners among the 12,000 units the company handles is about 40 per cent. Other industry sources say they also face similar payment holds in their service charge collections.
It could be because most of these units are leased, and with the owners abroad. The thinking until now has been that while OAs and OA management companies can make a lot of noise, there was little they could do to actually get people to pay up.
But the new JOP Law provides for a remedy… a strong one. “Within one month of non-payment, a legal notice can be issued to the owner,” said Al Fahim. “Then they can go to the Rental Dispute Committee (under Dubai Land Department) and get the unit blocked… and if need be, put up for auction.
“The Law is clear – each building will have its own budget to operate on. If all property owners are not paying up, the whole thing collapses. By empowering OA management firms, property owners who do not pay their service charges are not going to have it easy.”
Tightening up ‘sinking’ charges
Under the Law, from the fees collected, 15 per cent will have to be set aside for “sinking costs”, which relate to maintenance or repair work that needs to be done at a building as it ages. The other 85 per cent will be used for sundry work required within that calendar year.
All of the funds thus collected will be kept in escrow, with the sinking fund reserve maintained separately.
“OAs will no longer be able to tap into the sinking fund as and when they please,” said Al Fahim.
“RERA and their auditors will need to given due reasons for any use of the sinking fund. Everything related to property upkeep is becoming more transparent by the day… the Law has accelerated the process.”
RERA will also need to sign off on each OA committees, and this too marks a major improvement from the past. “End-users living in their properties will be given preference in the committees, not investor-landlords,” said Al Fahim. “RERA will issue emails inviting submissions to be on the OA committees.
“Those with a direct interest in the building now have the edge – the Law has clearly done away with all the gaps that were there in the past.”
It will ultimately be the homeowners who benefit the most from this approach.