As we pass the second anniversary of the enactment of Law No. (27) of 2007 On Ownership of Jointly Owned Properties in the Emirate of Dubai by His Highness Sheikh Mohammed Bin Rashid Al Maktoum, Vice President and Prime Minister of the UAE and Ruler of Dubai (the Strata Law), it seems an appropriate time to reflect on where things are currently at with the Strata Law and consider what developments 2010 may bring in this area of the law.
The Importance of the Strata Title
The implementation of a fully operational strata regime in Dubai and elsewhere in the region is extremely important to the property market for a number of reasons. The most important of these is that once introduced (or in the case of Dubai, fully operational), the Strata Law will provide a legal framework that enables a building with multiple-ownership to be subdivided into units and common areas and for owners to register their unit ownership with their respective land registry departments.
Whilst the Federal Law No.5 of 1985 (as amended) in respect of Civil Transactions for the United Arab Emirates (the Civil Code) recognises and establishes some rights and obligations with respect to the co-ownership of buildings, the Civil Code has not been sufficient to deal with the nature and sophistication of the development that has occurred in the UAE. Most importantly, the Civil Code does not provide any significant framework or direction as to how a building with multiple-ownership is to be subdivided or managed.
In light of this fact, each Emirate is tasked with introducing its own strata law and providing developers and owners direction as to how the law is to be implemented. The Emirates are at varying stages of this process with the implementing strata regulations expected to be issued in Dubai shortly and a new strata law enacted in Abu Dhabi in the near future.
Pre-Strata Law Registration
In the absence of a fully operational Strata Law to provide the legal framework for the subdivision of buildings with multiple-ownership, it is generally considered that an owner’s right to its unit is only a contractual right arising from the sale and purchase agreement entered into with the developer. Provided the owner has satisfied its obligations under the sale and purchase agreement, the owner is considered to be the owner of the unit on the basis of such contractual relationship.
In some instances, following the production of a no-objection letter from the developer, the Land Department in Dubai has issued titles to owners that record the ownership interest in the unit notwithstanding the fact that the developer still remains the registered owner of the land upon which the building has been constructed (and in some instances, the master developer still owning the land that comprises the whole master community).
To date, and in the absence of any alternative, the middle-eastern market has accepted and afforded a level of comfort to such ownership structure which has enabled the sale of apartments and offices to be transacted and used as security for borrowings.
The introduction of the Strata Law is however intended to provide a clear method for subdividing a building with multiple-ownership and for the granting of title to owners that is consistent with other leading world markets. Accordingly developers, owners, investors and mortgage lenders eagerly await its implementation.
This is especially evident with respect to the subdivision of buildings that comprise more than one dominant use. Most of the iconic and prominent developments in the region are “mixed-use” and often contain residential, retail and commercial uses within the same building structure and, in some instances, also contain hotels and public areas.
It is expected that the Strata Law shall allow for the "volumetric subdivision" of mixed-use buildings into designated components to allow the various component owners (including owners’ associations if a component has been further strata subdivided into units) to manage their own components within the development whilst participating in, and contributing to, the management of the shared facilities and areas within the building.
In the absence of a fully operational Strata Law, uncertainty remains as to the process for subdividing a mixed-use building as it is currently unclear what form the plans and constitutional documents governing the management of buildings of this nature must take.
The Transitional Period
Whilst Dubai's Strata Law was enacted in November 2007 and intended to take effect from 1 April 2008, the strata title regime is yet to become operational as the implementing regulations necessary to give direction as to the operation of the Strata Law (the Regulations) are still to be finalised by the Lands Department and the Real Estate Regulatory Authority (RERA).
Developers and owners are currently awaiting the issuing of the Regulations to provide direction as to the preparation of the necessary plans and constitutional documents required to be registered with the Land Department.
Although developers may currently be able to lodge plans in a "pre-Strata Law format", some developers are concerned that, if this approach is adopted, additional costs may be incurred if these plans need to be amended to comply with the methodologies adopted in the Regulations once issued.
In addition, developers are unable to finalise the constitutional documents that govern the management of the building that are required to be registered with the Land Department as the form and substance of these documents is still to be clarified in the Regulations.
This uncertainty appears to have resulted in somewhat of a standstill period with many developers simply delaying the strata implementation process or holding back on certain aspects of this process in the hope that the Regulations will be issued to clarify the requirements.
Building Management
Although the Strata Law is essentially a titling system for the subdivision of buildings with multiple-ownership, the Strata Law provides a further unique benefit in that it also introduces a structure to deal with the management and maintenance of the common areas within the buildings.
To date, owners have had relatively passive involvement in the management of their buildings and developers have normally sought to retain the management of their buildings under the sale and purchase agreement for an extended term.
Notably, many owners are now actively questioning these management arrangements and, with the invaluable support of RERA, are demanding greater transparency with respect to service charges levied by developers to ensure that they are receiving appropriate levels of service and value for money.
Whilst it appears likely that the Regulations will place some form of restriction on developers attempting to retain the management rights (and that management contracts entered into by the developers may be limited in duration or otherwise restricted), until such time as the Regulations are issued that govern these arrangements, developers have generally continued to carry on managing their buildings on behalf of the owners.
Without the support of the Regulations, even those developers that do not necessarily wish to be involved in the ongoing management of their buildings post-handover have experienced difficulty in exiting their developments and passing the reins to the owners. This is mainly due to the uncertainties with respect to the formation of owners' associations and an association's ability to conduct business on behalf of the owners including the ability to appoint a manager to assist them in doing so.
Can an Owners' Association be Formed in the Absence of the Regulations?
A key feature of the Strata Law, is the formation of an “owners’ association” for the building. An owners’ association is simply an association of all the owners of units within the building (or part of the building that has multiple-ownership). The role of the owners’ association is to manage the operation, repair and maintenance of the common areas within the building to ensure that the building operates and is repaired and maintained to an appropriately high standard.
Recently, speculation has arisen as to whether a developer or the owners within a building are able to form an owners' association without the support of the Regulations. There has been some indication from RERA that it considers that this may be possible notwithstanding the Regulations have not issued although this remains unclear and, if possible, what the process is to achieve registration will be.
- Owners' Association formation - Article 17 of the Strata Law
Article 17 of the Strata Law provides that An Owners' Association shall be legally formed upon the registration of the first sale of a Unit in a Jointly Owned Property in the Register.
"Jointly Owned Property" is further defined in the Strata Law as being the whole or part of a building or land, or both, divided into Units intended for separate ownership where part of such building or land has been designated as Common Areas.
If the registration of a transfer of a unit with the Land Department under the pre-strata law registration system constitutes a registration of the first sale of a Unit in a Jointly Owned Property, then there is some support for the proposition that an owners' association can be formed in the absence of the Regulations in respect of existing buildings where titles have been issued by the Land Department.
One requirement to register an owners' association is, however, the lodgment of the relevant plans and constitutional documents for the building with the Land Department and RERA under the Mollak Strata Management System. It is only once the plans and constitutional documents are registered with the Land Department and RERA that a registration certificate will be issued for the owners' association.
The difficulty that developers or owners may face in seeking registration under the Mollak Strata Management System is that they are unable to finalise the relevant plans and constitutional documents for the building without the issuing of the Regulations to provide clear direction as to their required form and substance.
Whilst some developers have prepared draft plans and constitutional documents for their buildings based on the draft Regulations currently in circulation, until such time as the Regulations are issued by the Land Department, developers are unable to finalise and lodge these plans and constitutional documents for registration.
Given the requirement to lodge strata compliant plans and constitutional documents to achieve registration of an owners' association under the Mollak Strata Management System, it remains unclear as to whether it is currently possible to achieve registration in the absence of the Regulations.
- If registered, what authority would an Owners' Association have to conduct business?
Should formation and registration of an owners' association be possible in the absence of the Regulations, Article 18(1) of the Strata Law provides that the Owners' Association is a legal entity not for profit and has a separate legal existence from its members, has the right to sue in its capacity and to own movable assets.
Accordingly, whilst there may be practical issues that an owners' association may face in seeking to operate a building in the absence of the Regulations, Article 18(1) of the Strata Law gives a registered owners' association statutory legal capacity to conduct business and operate the building on behalf of its owners.
- Owners' Association management
A number of practical issues may arise with respect to the owners' association's ability to operate the building without the support of the Regulations. Article 18(2) of the Strata Law provides that the Owners' Association shall be subject to the provisions and terms of this Law, the provisions of the Master Community Declaration (now known as a "Jointly Owned Property Declaration") and the Association Constitution and shall be represented before the Courts or other authorities by its Manager.
The first issue that a newly formed owners' association may face without the support of the Regulations is that there may be no registered association constitution, Jointly Owned Property Declaration or community rules to govern how the association is to conduct itself and to set out the process that the association must go through to make and implement the decisions of the owners.
It is anticipated that the Regulations will prescribe a form of "association constitution" that must be adopted by the owners which mandates how the association is to operate and the procedures that it must follow in doing so.
In addition to the association constitution, the Strata Law provides that a Master Community Declaration (now known as a "Jointly Owned Property Declaration") must be registered in respect of the strata scheme. It is anticipated that there will be more flexibility in respect of the form of the Jointly Owned Property Declaration and that this document may be tailored to the individual building and contain "community rules" that are relevant to the operation of the individual building.
Where the strata scheme comprises only part of a mixed-use building, a further document called a “building management statement” shall need to be prepared and registered with the Land Department that governs the operation and management (and cost allocation) of the shared areas and facilities in respect of the entire building.
As stated above, until such time as the Regulations are issued, developers and owners are unable to finalise and register these constitutional documents which shall govern the management of the building. Should constitutional documents be prepared and adopted by the association prior to the issuing of the Regulations, the proposed management arrangements set out in the constitutional documents may contradict the Regulations once issued and be considered void or unenforceable.
Accordingly, until the Regulations are issued and the constitutional documents able to be finalised and registered, questions may be asked as to whether the association is appropriately empowered by the owners to operate the building and enter into contractual arrangements with third parties on their behalf.
- The ability of an Owners' Association to engage an Association Manager
A further difficulty that a newly formed owners' association may face without the support of the Regulations is its ability to formally engage an "association manager".
Article 18(2) states that the owners' association shall be represented before the Courts or other authorities by its Manager. It is expected that under the Regulations the owners’ association will be required to appoint a licensed association manager to assist the association with the day to day administration and management of the building including supervising the performance of the other service providers engaged by the association to provide services to the building.
At this time, a regime is not in place for the licensing of association managers and therefore, in the absence of the Regulations, a newly formed owners' association may not be able to engage an association manager or formally authorise the manager to operate the building or represent the association in its dealings with authorities or third parties.
- Recognition by authorities, banks and third party contractors.
Given the uncertainties that may exist in the absence of the Regulations, a newly formed owners' association may face difficulties in achieving legal recognition from authorities, banks and third parties and therefore have difficulty in operating the building.
Whilst RERA may be able to provide an owners' association with a certificate of registration under the Mollak Strata Management System evidencing registration, authorities, banks and third parties may still question whether the association has been appropriately empowered by the owners to enter into contractual arrangements and, in the case of a bank, hold funds on behalf of the owners.
Although the licensing of association managers may assist in helping overcome some of these contracting and banking issues, it is likely that those parties dealing with owners' associations will want to sight evidence that the association is not only registered but also that the owners have authorised the association (or it appointed manager) to enter into the contractual arrangements. This may be difficult for the association to achieve without the support of the Regulations to provide the legal framework that governs and legitimises the actions of the association.
An Interim Solution?
There has been some speculation that an interim solution may be sought to deal solely with the formation and recognition of an owners' association prior to the release of the full Regulations. Presumably, this would involve issuing separate regulations that only address these issues and other matters that impact upon the management of the building including the conduct of the association and its manager.
Although this may assist in enabling the formation and recognition of an owners' association and provide some clarity as to how buildings are to be managed under the strata regime, such an interim solution may further delay the issuing of the full Regulations that address the subdivision of the building which are equally important, if not more so, as these regulations will provide the legal framework for the issuing of titles under the under Strata Law.
Summary
Although Dubai and the region generally are facing challenges caused by the economic downturn, the implementation of a fully operational Strata Law will only assist in accelerating their recovery by providing foreign and institutional investors clear title for their properties similar to the titles granted for properties within buildings with multiple-ownership in other leading world markets.
Although it may be technically possible for an owners' association to be formed in the absence of the Regulations, or for an interim solution to be adopted to deal solely with the formation and management of associations, a fully operational Strata Law is essential to deal with the complicated issues faced by developers and owners when subdividing and managing buildings with multiple-ownership.
Developers, investors and owners are anxious to be governed by fully operational strata law. The Strata Law and its implementation provide the final piece of the puzzle.