Tackling the strata regulations

The process has been set in motion to make developers relinquish their carte blanche over managing jointly owned property in Dubai. The recently announced guidelines to the Jointly Owned Property Law (Law No. 27 of 2007) have put the onus on developers to establish interim owner associations (OAs) and elect an interim board for completed property within the next six to nine months.

While the Real Estate Regulatory Agency (Rera) and the Land Department have established a regulatory framework to manage communal real estate, stakeholders are still seeking clarifications on numerous counts. "We think the biggest hurdle will be to get the developer to react to the new laws, i.e. to prepare all documentation, including surveys, leading to the registration of the project, then convening meetings to enable the creation of the OA and so on. Some developers seem entrenched in their manager role, which has now become redundant," says Graham Yeates, strata expert, Cluttons Middle East.

There are also concerns among some developers that entrusting building maintenance to an OA could be to the detriment of their brands.

"The main concern of brand dilution is for developers of hotels or serviced apartments under the jointly owned property regime," says Nima Khanpour, commercial director at Stratum, an OA management company.

"The biggest concern is from an investment perspective. There are not going to be many companies coming here to invest in the development of hotels if the law doesn't allow protection of their rights."

Given that developers have a short time frame to hand over management to an OA, Dubai's strata management companies should see a deluge of enquiries. "Some of the developers are unaware that they are required by law to have all this set up within a six-month period," says Gary Adamson, CEO, Stratum.

"If they don't, the owners can give a 30-day notice and in the event that the developer still doesn't register the interim OA, then the proprietors can take their own action to have it registered and bill the developer for it."

Interim OA boards

While interim OAs have a mandate to prepare members for the transition of power, they are merely consultation committees which will help homeowners identify their liabilities and obligations under the new regime. The directors of interim OAs will take over once the OA is registered and the first annual general assembly is convened. There has to be a minimum of five and a maximum of seven members on the interim board of directors, with three reserves. These owners have to be nominated first, then elected and no one can hold more than one position on the board - a point that restricts the clout of developers still holding substantial stock in a building.

"Once the OA is registered, a developer with unsold units will be rendered as just another owner within the complex," says Gary. "The building and all the services provided within the scope of the OA have to be maintained and every proprietor will be allocated a unit entitlement, which is the proportional liability to contribute towards all the expenses of the property.

"If they don't, they will be subject to the same law as everyone else and a penalty will be imposed. Developers will also need to pay service charges for units that have not been handed over."

Dispute resolution

Rera has also put a mechanism in place to recover service charges from owners who have fallen into arrears (‘delinquents'). Although a penalty of 12 per cent per annum will be initially levied, a public auction of the property would be the last resort.

"The feedback we are getting from developers is that the delinquency rate could be upwards of 50 per cent," says Gary. "There are also some developments with a delinquency rate as low as 7 per cent, where the owners are happy with the way the developers have been running them."

Graham says the guidelines remain silent on dispute resolution. "Ideally, there should be a specialist tribunal that would allow owners to air grievances without the need for protracted legal wranglings that sometimes occur."

There are provisions in the guidelines to restrict developers' ability to enter into supply agreements on behalf of the OAs. "Any contract that has been entered into by the developer can be cancelled at the OA's first annual general assembly," says Gary. "A disclosure clause must now be attached to all property sales and purchase agreements, which outlines how OAs cannot contract with companies unlicensed in Dubai. There will also be different licenses for facilities management companies and OA management firms providing services in jointly owned property."

"The new laws create an owners association as a distinct legal entity. Normally, this would override the pre-existing arrangements and the OA would be able to call tenders for components of their required facilities rather than accepting a blanket cover," says Graham.

Rera will, however, have the power to temporarily administer a development to deal with breach of community rules by owners. "Initially, the developer framed the community rules. Once the OA starts operating, it can change those rules, depending on the specific circumstances relating to that particular development and depending on where they sit in the scheme of things," says Graham.

For homeowners being handed over new properties, the regulations could give them recourse in the event that a developer provides "inadequate" facilities or common areas in a site plan. According to Article 11 of the directives, "The Department may refuse to register a Jointly Owned Property Declaration if (in its opinion) the Developer has withheld areas, services or facilities from the Site Plan or common areas site plan, or has included them within a Unit on the Site Plan, to the extent that the Common Areas are inadequate to cater for the reasonable needs of the Owners and Occupiers of the Unit or it is otherwise unreasonable to have done so."

Mixed-use buildings

Applying the Jointly Owned Property Law to mixed-use buildings is more challenging.

"There will be provisions within the scope of the legislation to determine the service charge levies not only on the basis of square foot, but also as per the usage of the service area," says Nima. "For instance, the seven different volumetric components within the Burj Khalifa can be partly charged on the basis of their use of common facilities, such as lifts, car parks and so on."

With the democratisation of facilities management, many in the industry believe that service charges are likely to decrease on average across all areas in Dubai.

Gary raises the possibility of how a building with a majority of owner-occupiers is likely to have higher service charges than one with long-term investors.

"All the investors are looking to get money out of tenants and if they can keep the cost of maintaining the building down, they will do that," he says. "But at some stage, the building will get to a point where it no longer generates sufficient income and they will have to put money back in to bring it back to a certain standard."

With owners assuming control of building maintenance, service charges may be adjusted upwards or downwards for a number of reasons. "Some of the service contracts were negotiated two years ago. These are fairly high compared to what is being negotiated today," says Nima, adding that variable costs - such as a concierge, marina maintenance and so on - lead to the variance in service fees in most buildings.

As a prerequisite to registration, every jointly owned building will need to present plans identifying common property and individual unit boundaries to the Land Department. The surveyor, in turn, will certify the accuracy of the subdivision and units of entitlement compared with the original design plans. (Units of entitlement determine which units must pay higher fees than others. In some cases, the higher the fees, the more clout the unit owner has in terms of contesting issues.)

For projects under construction, developers must submit drawings to the surveying section in the Land Department. "Land surveyor registration and methodology are fully catered to in the new regulations, but valuers are not. In most cases, the valuer is concerned more about market values and comparison with other properties in the area than mundane OA issues, unless there are well-publicised faults or litigation and so on, in a particular building," says Graham.

Meanwhile, the Land Department's surveying wing will set out rules and guide surveyors when calculating the dimension of units and common area entitlements.

In the meantime, common areas and each unit's floor area in existing buildings will be determined by architectural and engineering plans - something that has created confusion among those who expected all buildings to be subjected to the upcoming surveying regulations. Kent O'Brien, CEO and managing director of Strata Global says, "The current confusion in the market relates to what facilities are common areas and where the measurement of the unit title commences. The title boundaries under the new survey regulations are measured to the centre-line of the wall adjoining common property (including windows and balustrades) and also the centre-line of the wall between units."

Investor confidence

Until the time when the the Jointly Owned Property Law guidelines are outlined in an officially published document, they are unlikely to boost in investor confidence. "More important is the adjustment of price expectations, which, on average, still do not meet investment criteria. More specifically, for most investors, the current and projected yields simply do not justify local property investment," says Jesse Downs, director of research and advisory services, Landmark Advisory. The disclosure of OAs' books and records to prospective buyers may help restore investor confidence. "Prudent investors will be able to access the OA records. If full disclosure is available, intending purchasers will be able to make informed decisions. It is all part of the need for transparency, which can only benefit the property market," adds Graham.

Input from the experts

Jesse downs
Landmark Advisory

"Recent clarification about the implementation of strata law shows some progress; however, we really need to have everything outlined in an officially published document that clarifies the implementation of the law. Generally, progress in the clarification of the owners association laws can help to solidify confidence. However, there are still a number of steps that will need to be taken to significantly boost confidence and improve liquidity."

Kent O'Brien
Strata Global

"Many developers have excised many areas, such as pools and gyms... out of the common areas of the development and added these into title property under the developers' ownership. This has led to disputes with owners who subsequently find they have to pay for membership to use these facilities. Rera has stepped in and will adjudicate on the plan before approving registration of the plan of subdivision."

Graham Yeates
Cluttons Middle East

"Australian experience has shown that a building sold as strata yields a much higher return than a single ownership one. This applies to both residential and commercial. The sum total of the separate strata lots will far exceed the value of a one-owner building. There has been comment about the difficulty of letting a commercial strata building where a tenant requires more than one lot, such as a floor and a half. There's no reason for strata title to impede such occupancy. Rental returns improve in such situations as space in those buildings is taken by this expanding tenant."

Survey regulations

Properties yet to be occupied as of April 13 will need to have their common areas and units determined in accordance with the upcoming survey regulations. Kent O'Brien of Strata Global believes the regulations will be released soon. "However, surveyors are currently lodging plans according to Land Department directives which follow the general directions relating to surveys," he says. "At present the department has been accepting theoretical site plans for existing projects that are complete and occupied based on as-built plans as a transitional arrangement. These will be subject to resurvey within a stipulated period by the owners' association and unit plans must be surveyed at the owners expense when resale occurs."