Jim Underwood owes Nakheel as much as Dh80,000 in service charge arrears. Since 2007 when he moved into his Jumeirah Islands villa, he has been pursuing the developer to address snagging issues in his unit, a demand, he claims, has been ignored. As for his intransigence to pay, he attributes it to Nakheel "not honouring its commitments" in the sales and purchase agreements with homeowners.
"Jumeirah Islands was supposed to host a golf club. This has been removed from the master plan. Also, now residents need to pay a steep fee to avail of facilities in the newly opened clubhouse," Jim says, adding he is also charged Dh300 to Dh400 a month for late payment.
"I'm happy to pay up as long as the developer addresses my concerns," says Jim, adding there's a lack of landscaping and his swimming pool and water pumps often get clogged with sand.
"This was never addressed for two years and I had to pay the landscaping contractors to rectify the issue myself. Also, I can still spot big lumps of material in the lakes, which continue to be a breeding ground for mosquitoes and insects during winter."
However, his villa cannot be listed for sale without a no-objection certificate (NoC) from Nakheel. "They will issue the NoC only after I settle my service fee arrears. It's frustrating."
Nakheel could not be reached for comment up to the time of going to press.
Prompting developers to take action
Across Dubai, owner-occupiers and local investors are increasingly withholding service fee payments to developers to try to bring pressure on them to fulfil contractual obligations. In other instances, they are eschewing paying service charges to prod developers to start registration of owners' associations (OA) with the Real Estate Regulatory Agency (Rera). While a good number of homeowners have genuine concerns to justify this non-compliance, overseas investors looking to flip their units and those with a short-term investment outlook have cited the uncertainty over the Strata Law provisions to cease service fee payments altogether.
"It is evident the majority of defaulters are based overseas and it would seem evident from the loss of contact, in the context of terminated phone numbers and email addresses and failure to respond to letters and returned mail, that a significant proportion of these exhibit the behaviour of speculators," says Gary Adamson, CEO, Stratum Owners' Association Management.
"As the buildings are still administered by developers, the feedback received indicates that default rates are between 25 and 40 per cent, depending upon the development," he adds.
Options available to developers
In strata title buildings with a high percentage of service fee defaulters and significant cash deficits, developers are resorting to one of the following options:
- Continuing to fund the operating costs to retain the project's brand value
- Temporarily withholding utility services
- Restricting tenants from using non-essential amenities
- Unleashing a name-and-shame campaign
The last option typically involves the developer putting up the names of service fee defaulters on a noticeboard in the building lobby. "I understand Emaar has attempted this in some cases. But it is a very hostile act and not recommended. Some owners have some genuine complaints, and to act in this way is confrontational," says Kent O'Brien, CEO, Strata Global, a strata consultancy firm.
When the majority of defaulters are overseas investors, this form of enforcement against non-residents is of little use in addressing the problem. A case in point is a residential tower near Grosvenor House in Dubai Marina, where the developer had allegedly undertaken a name-and-shame campaign to pressurise service fee defaulters to comply.
David Keith, an investor in the tower, says: "The quality of maintenance in the common areas is very poor, and hence, owners [mostly based overseas] were withholding service fees. The campaign aggravated the problem. We have been approaching defaulting unit owners in a more humane way now and this has yielded rewards. A few owners are completely untraceable though."
Another pressure tactic being deployed against defaulters is to restrict either their or their tenants' access to recreational and non-essential facilities. "It is hoped this tactic encourages the tenant to bring pressure on the defaulting owner to recover outstanding service charges," says Gary.
Restricting service amenities to tenants
While a tenant is unlikely to renew his rental lease with a defaulting landlord, during his period of domicile in the unit, there is very little he can do to chase the owner to make service fee payments. "From a practical point of view, the tenants often pay three, six or 12 months ahead, so the withdrawal of rental payments is not a realistic option and the cost of a court action is commercially unrealistic. As a significant proportion of landlords are not resident in Dubai, I do not see any real option for tenants in trying to address the matter unless they are directly affected by the loss of service amenities," says Gary.
While one would expect the quality of maintenance to decline considerably in buildings with a high proportion of service fee defaulters, this may not always be the case. Building standards can also deteriorate owing to OAs that keep service charges unjustifiably low.
"After a decade, you certainly see it in the appearance of the building. To stop this from eventuating, owners should call for an equity position statement on a regular basis to highlight if there is also a deteriorating financial position," warns Kent.
Developers mired in cashflow difficulties and unconcerned about their market branding could also curtail building services.
Mistrust towards developers
The deep mistrust with developer-hired service providers has made several homeowners believe they will see a significant fall in their service charges once self-management commences. An owner-occupier in the Emerald Residence, Dubai Marina, says on condition of anonymity, "Upon handover of responsibility, we will re-tender a lot of the contracts the developer [Vakson Real Estate] signed with service providers. Though we are presented with figures annually, the audit of the service charge payments has not been professionally done to date. Our windows have not been cleaned for the past 18 months and the AC maintenance is done only once annually."
Most industry observers believe service fee defaulters will toe the line once the OAs impose a late payment charge and a lien on the unit. Owner committees could recover service charge dues by putting up the unit for a public auction and deducting it from the sales price.
"I feel once a lien is registered through the notary in Dubai and the Execution Section of the Dubai Court become involved, many owners will see reality and payments will flow in. Once a Writ of Execution is issued in many jurisdictions, defaulting owners pay up," says Kent.
However, a precedent is yet to be established to test the feasibility of this option.
Owners' associations do not need to obtain bank approval before putting up a service fee defaulter's unit for public auction. Regulations stipulate that service charges must be paid in full before the Land Department will allow transfer of title.