As the Land Department and the Real Estate Regulatory Authority (RERA) put the final touches on the implementing regulations to be issued under Law No. (27) of 2007 On Ownership of Jointly Owned Properties in the Emirate of Dubai (the Strata Law), it seems an opportune time to reflect on the key features and advantages that a fully operational strata title regime will bring to the Dubai property market.
Although the introduction of the Strata Law has received a reasonable amount of media attention, and many people are now aware of its importance with respect to apartment ownership, further education of owners and those in the development industry is necessary to ensure that the full benefit of the Strata Law is obtained.
The enactment of the Strata Law by His Highness Sheikh Mohammed Bin Rashid Al Maktoum, Vice President and Prime Minister of the UAE and Ruler of Dubai is an extremely important step in the evolution of the Dubai property market for a number of reasons. Dubai is currently leading the world with respect to constructing large mixed-use development on a scale and sophistication rarely seen.
Whilst the Federal Law No.5 of 1985 (as amended) in respect of Civil Transactions for the United Arab Emirates recognises co-ownership of apartments and establishes some rights and obligations on co-owners, this law has not been sufficient to deal with the nature and sophistication of the development that has occurred in Dubai over the last fifteen years.
The introduction of Law No. (7) of 2006 Concerning Real Property Registration in the Emirate of Dubai (the Registration Law) was the first step in attempting to bridge the gap between the growth in development and the sophistication of the property law system governing such development by introducing a system of ownership registration to bring it in line with other established world markets.
The introduction of the Strata Law is the next step in the growth of the property law system as it incorporates apartment ownership (and the ownership of other jointly owned property) within the registration system.
The current climate
Whilst the Strata Law came into effect on 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 (Regulations) are still to be finalised by the Lands Department and RERA.
Although industry experts recognise the necessity of having a fully operational Strata Law, there has been much lobbying of the Land Department and RERA by industry players seeking to influence the final form of the Regulations in an attempt to minimise the impact of the Strata Law upon their current business model.
As such, developers, owners and their legal advisers eagerly await the finalisation and passing of the Regulations to fully assess how the Strata Law is to operate and the procedures necessary to effect the registration of a strata scheme with the Land Department and formation of an owners’ association.
What is Strata Title?
In simple terms, strata title is a titling system that enables the subdivision of a building both horizontally and vertically allowing for the creation of separate titles for each defined area of cubic airspace. As such, under a strata title system, a building that has multiple-ownership may be subdivided into defined “units” and “common areas” and a title issued to the owner of each unit.
Prior to the introduction of strata title systems, the subdivision of land was generally restricted to subdivision on a horizontal plane. Therefore it was possible to subdivide a larger parcel of land into a number of smaller parcels to enable different owners to own the separate parcels such as in a villa development. It was not however possible to subdivide a parcel of land vertically to enable different owners to own distinct layers of such land either below or above ground level as defined on both the vertical and horizontal planes.
In addition, the traditional form of subdivision did not allow for the ownership of a portion of the land to remain owned jointly in common with all owners such as shared lobbies, hallways, swimming pools and gyms. Nor was there any titling structure to deal with the management and maintenance of such commonly owned areas.
The introduction of the Strata Law overcomes these inadequacies and enables the creation and registration of separate titles evidencing ownership of defined units within a building together with a titling structure to deal with the ownership and management of the common areas of the building.
Why is Strata Title important?
As stated above, the implementation of a fully operational strata regime is extremely important to the Dubai property market for a number of reasons. Perhaps the most important of these is that once the Regulations are passed and the registration procedures finalised, the Strata Law will enable a building to be legally subdivided into units and common areas and for owners to register their apartment ownership with the Lands Department.
Currently in Dubai, generally an owner’s right to its apartment 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 apartment on the basis of such contractual relationship.
In some instances, following the production of a no-objection letter from the developer, the Land Department has issued “titles” to owners that record the ownership interest in the apartment notwithstanding the developer still remaining the registered owner of the land upon which the building has been constructed.
In practice the middle-eastern market has accepted and afforded a level of comfort to such ownership structure which has enabled the sale of apartments to be transacted and apartments used as security by owners for borrowings.
The introduction of the Strata Law will provide a clear method for subdividing a building and for the granting of title to owners that is consistent with other leading world markets.
The formation of an “owners’ association”
A key feature of the Strata Law, is the formation of an “owners’ association” for the building upon the registration of the first transfer of a unit to a purchaser. The owners’ association is simply an association of all the owners within the strata scheme with each owner being a member of the association whilst they own a unit in the strata scheme. The role of the owners’ association will be to manage the operation, repair and maintenance of the common areas within the building (or part of the building covered by the strata scheme) to ensure that the building operates and is repaired and maintained to an appropriately high standard and that the owners’ collective interest is protected at all times.
It is expected that the owners’ association will be required to appoint a licensed “association manager” who will assist the owners’ association with day to day administration and management of the building including supervising the performance of the other service providers contracted by the owners’ association to provide services to the building.
It is expected that under the Strata Law the owners’ association will have “legal standing” in so far as it shall be considered to be an entity capable of suing and being sued. This is an important feature as it will assist the owners in being able to enforce their rights against third parties (including the developer) and against owners that are not complying with the constitutional documents or have not paid their service charges. If the majority of the owners agree to commence proceedings, it is expected that the owners’ association shall be able to do so on behalf of the owners. Similarly however, it is expected that third parties will be able to commence proceedings against the owners’ association if they consider that the association has breached its contractual obligations.
Owners’ participation in management
Historically in Dubai, owners have had relatively passive involvement in the management of their apartment buildings. Developers have normally sought to retain all management rights by requiring owners to appoint the developer as the owners’ association manager and delegating all powers of the association to the developer for an extended term.
Whilst there appears to be an imbalance in these arrangements, until recently, the property market has seen owners and investors substantially better off and therefore accepting such management arrangements. Many purchasers were not concerned with the proposed management structure for the building as often they did not intend to be the end user of the apartment. Given the high demand for property during these boom years even those purchasers intending to be the end users (who were perhaps more concerned with the future management of the building) were accepting of the management structure being imposed upon the building as they had little choice if they wanted to enter the market.
These management arrangements are however largely inconsistent with the operation of multiply-owned buildings around the world (especially where strata title regimes have been introduced) where the management of the building is firmly in the collective hands of the owners. As the market has moved from that of a speculative investment driven market to an end user market, owners now want more involvement and a say in how their buildings are being operated and managed.
Notably, owners are actively questioning management arrangements and are demanding greater transparency with respect to service charges to ensure that they are receiving appropriate levels of service and value for money.
The Strata Law introduces a structure to deal with the management and maintenance of the common areas within the apartment building and is expected to correct this perceived imbalance by supporting and promoting owner participation in the management of the building. Although the Regulations are yet to be finalised, it appears likely that some form of restriction will be placed on developers attempting to retain the full control and management of buildings following completion of construction and that any management contracts entered into by the owners’ association (or the developer on behalf of the owners’ association) will be limited in duration.
Mixed Use Buildings – Volumetric subdivision
It is extremely common in Dubai that a building contains more than one use. Most prominent developments are considered to be “mixed use” in so far as they contain more that one type of use. Often buildings contain both residential, retail and commercial uses within the same structure and in some instances also contain hotels and public areas. Also, given Dubai’s low water table, many large developments are constructed on a “podium” base with a number of towers sitting on a shared podium structure (above and below ground level) that provides car parking and shared facilities for the towers.
Although the various “components” within the development may share certain areas and facilities within the building structure, each component of the development may operate and be managed largely independently of the remaining components.
It is expected that the Strata Law shall allow for the volumetric subdivision of large building structures into components. This will allow for complicated mixed use developments to be subdivided in a manner so as 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. The operation and management (and cost allocation) of the shared areas and facilities within the development that are utilised by more than one component will be governed by a “building management statement” that shall be required to be registered with the Land Department together with the plan of volumetric subdivision.
Given the number of prominent mixed use and podium style developments in Dubai, it is expected that volumetric subdivision will feature in many developments.
Disclosure Regulations
Although the Strata Law’s primary role is to incorporate apartment ownership (and the ownership of other jointly owned property) within the property law registration system introduced by the Registration Law and to govern the management of multiply-owned buildings, it appears that the Strata Law will also be used as a tool to regulate developers further by imposing disclosure obligations and warranties with respect to their developments.
Until recently, although the booming Dubai property market has largely provided great returns for owners and investors alike, not all of the consumers’ experiences have been positive. There are many stories of consumers receiving properties substantially less than what they believed to have been promoted to them and, in some cases, developers making substantial changes to their developments after going to market.
In some instances developers have moved at a pace too great and gone to market before fully assessing construction issues and the financial viability of the development. As the design and construction progresses and issues are fleshed out, some developers have found themselves needing or wanting to change the nature of the development from that which has been promoted to purchasers.
In other world markets, overriding legislation has been introduced to govern activities by corporations in their dealings with the public that prohibits corporations from engaging in misleading or deceptive behavior and gives consumers rights in the event that a corporation has misled or deceived the consumer. Such legislation extends to misleading and deceptive conduct in relation to the promotion and advertising of developments.
The Dubai Government has recognised that, if the Dubai property market is to maintain its position and attract foreign investment, the development industry needs to be better regulated to align more with other world markets in order to maintain and, in some areas, restore consumer confidence.
The enactment of Law No. (85) of 2006 Regulation of Real Estate Brokers Register and Law No. (8) of 2007 Concerning Real Estate Development Trust Accounts were the first important steps in regulating the development industry. It appears that the next important step will flow from the Regulations issued under the Strata Law.
The Disclosure Statement
It is expected that the Regulations will include consumer protection provisions dealing with developer disclosure which will give consumers greater comfort in their dealings with developers. A key feature anticipated is the introduction of a requirement that the developer provide purchasers with a “disclosure statement” containing detailed information of the building or development prior to the entering into of the sale and purchase agreement.
It is expected that the disclosure statement will be required to contain certain information including:
- a full description of the building or development of which the apartment will be part of, including the intended use (e.g. residential), the common facilities and the furniture and furnishings that the developer will provide in the common areas;
- a copy of the proposed constitutional documents;
- a schedule of finishes for both the apartment and common areas;
- details of the proposed supply agreements and utility services to be provided;
- a budget for the operation of the building and an estimate of the service charges;
- a construction program; and
- a reasonable estimate of the date by which the development will be completed and settlement of the sale is expected.
The obligation on the developer to provide the purchaser with a disclosure statement is an important step towards consumer protection as it enables the consumer to be better informed at the time of purchase and hopefully ensures that the developer has fully considered these issues. Presumably a purchaser will be entitled to withdraw from the sale and purchase agreement and receive a full refund of any moneys paid to the developer and some from of compensation if a disclosure statement is not provided.
The Warranty
In addition to the developer being required to provide the disclosure statement, we expect the Regulations to provide that the developer is deemed to have “warranted” or promised that the information in the statement is correct despite any provision contained in the sale and purchase agreement seeking to avoid such warranty.
We expect that the Regulations will further state that the developer will be liable to pay the purchaser compensation if the information contained in the disclosure statement proves to be inaccurate or incomplete in a material way.
Although the final details of the developer’s warranty will not be known until such time as the Regulations are issued, it is expected that developers will be more reluctant to change the design and purchasers better placed to claim compensation should developers do so in a manner that is detrimental and inconsistent with the information that has been provided in the disclosure statement.
Transition from old to new
Whilst the Strata Law currently focuses more on new developments that contain jointly owned property such as apartment buildings, the Regulations will contain transitional provisions with respect to the incorporation of existing multiply-owned buildings within the Strata Law regime.
Although it is expected that the transition of all existing multiply-owned buildings into the strata regime will be mandatory, even if this is not the case, it is likely that owners of apartments in existing buildings will wish to benefit from the Registration Law to remove any uncertainty with respect to their ownership by converting their apartment building to comply with and be governed by the Strata Law.
In addition, owners who are dissatisfied with the management of their apartment building may wish to convert their apartment building to avail themselves of any rights that the Strata Law provides to restructure the management of the building.
It is unclear at this time as how the transitional provisions shall operate and many developers and owners eagerly await the issuing of the Regulations to determine their rights and obligations with respect to their existing developments.
Summary
It is a new world for developers and owners. Owners should take comfort that the registration of their apartment ownership with the Lands Department is near and increased involvement in the management of their buildings in some form is likely.
Developers will need to take steps to comply with the Strata Law and may need to reassess how they structure their developments. Some developers may need to consider whether retaining such a high level of involvement with the management of their developments post-construction is desirable given the restrictions that may be imposed under the Strata Law.
Should the consumer protection provisions be retained in the final Regulations, the Strata Law will provide purchasers a level of protection when purchasing properties in multiply-owned developments not currently enjoyed.
Developers will need to fully consider all aspects of the development including its marketability prior to going to market to ensure that it accurately discloses to purchasers what is to be constructed.
It is an exciting and challenging time for the Dubai property market and a fully operational strata regime will assist in bringing the market more in line with other leading world markets and help restore and maintain consumer confidence.
For enquiries relating to this article please contact stephen.kelly@clydeco.ae or alexis.waller@clydeco.ae