Ask-a-lawyer: The strata law

Many developers have implemented Property Management Agreements enabling them to charge what they want without any oversight by the owners. This may be an unfair contractual term and therefore under the Federal Civil Code an argument can be made to force the developer to exercise its powers reasonably. Further, an argument might be made that the developer is temporarily (pending the regulations arrival) standing in the shoes of the Owner's Association and Article 18 of Law 27 clearly states that the Owners Association should be "not for profit". At present there is uncertainty on how this matter should be approached, however, practically the Real Estate Regulatory Agency (RERA) has and will provide input to ensure that the developer charges reasonable service charges. It is unclear how RERA views this responsibility and greater clarity is required.

Abu Dhabi drafts new property laws

Abu Dhabi's Department of Municipal Affairs has drafted a number of laws relating to the city's $155bn property sector, which have been sent to the Executive Council for approval.
The laws relate to five key sectors of the emirate's real estate market, and are specifically designed to tighten regulation in the industry. The proposed legislation covers a strata law, an escrow law, a mortgage law and a clarification of the permits needed by developers prior to launching sales on a project. The fifth proposed legislation covers the creation of a regulatory body to monitor the UAE capital's property market. As Abu Dhabi's real estate market only opened up to foreign investors in 2006, some four years after Dubai's, the emirate has yet to put in place similar regulatory guidelines for asserting control over the industry - although the supply of units onto the market is much more strictly controlled than in other regional cities. The strata law, which would regulate the role of property owners in apartment buildings, and the issuance and monitoring of the necessary developer permits prior to sale, would come under the banner of enforcement of a newly-created Municipality department. Developers would also have to acquire legal possession of the land before selling off-plan properties.
Real estate regulatory body

A separate regulatory body would then cover dealings between developers, investors, end users and property associations. The escrow law would be to monitor the use of investor payments by the developer,

working along the lines of monitored trust accounts, with approved trustees, agreements and regulations for use of the finances. Developers would have to be registered prior to offering units for sale, and the money would only be able to be used for the specified project. The mortgage law would be used to set up precedents for banks and financial providers in the event of payment defaults and eventual foreclosures, as well as specifying those who are allowed to apply for financing. The Department of Municipal Affairs is also compiling a database on the city's real estate sector, including levels of supply and demand, which will help the government to strategise in line with the Plan Abu Dhabi 2030. Plans are also being put in place to facilitate access to financing for end user buyers, and for the city's smaller developers to ensure project continuation. Decisions on visa terms or allowances for property owners would still be legislated at the federal level.

Ask-a-lawyer: Master developers and the strata law

Posted in: Crane Country Posted by: Bradley Hope on June 16, 2009 1:02 PM Tags: ask-a-lawyer", master developers, strata law

We turn again this week to Matthew Hooton, head of the property practice at Ashurst. He writes a very interesting piece about the interactions between developers and master developers. These relationships are under increasing pressure because of the property slowdown. Neither side wants to start building until the other starts - so it can stall with a kind of stalemate sometimes. Mr Hooton writes, "There is an undeniable incentive for the master developer to help their sub developers in recapitalizing to enable completion of the mega projects." He also answers a question from a distraught buyer of a property in Abu Dhabi who isn't really sure what they bought. Mr Hooton says that the arrival of a strata law in the coming months will explain exactly how their 99-year lease or 50-year mustaha will work.

See the answers after the jump ... Question: Are developers still the masters? Matthew Hooton: Investors are still grabbing all the headlines when it comes to the real estate market. Some are speculators, who have been left over exposed as the heat has come out of the real estate market. Their practices contributed to the exponential and unsustainable rise in prices and now some of them are left to reap what they have sown. Other investors were genuine end users. They may have been caught out by the freezing of the debt market or by the questionable practices of their developers. One group that has not really been in the limelight is the well-funded master developers. They are viewed by some individual investors as Goliath to their David. However they too can find themselves in difficulties due to the activity, or more likely, inactivity of others. A master developer will typically hold a plot of land which is too large for it to develop out on its own. Having put together a master plan identifying uses, building densities and other base line parameters, the master developer will retain some plots to develop out itself but sell the majority of the plots to sub developers. These smaller, less capitalized, sub developers will ordinarily be obliged to make staged payments for the land and associated infrastructure to the master developers. They will also be obliged to develop out their plots in accordance with the master plan and to a schedule. When the investors stop paying and the sub developers stop developing there is another party in all of this who is often forgotten; the master developers. Not only would the illiquid sub developer not be able to continue to make the staged payments to the master developer (as it is getting no money from the investors) but, just as significantly, the sub developer is not building out its plot. This can have a highly detrimental effect on the master developers' project. Its amenity value is severely compromised as the areas sounding the master development project remain underdeveloped. These undeveloped areas form wastelands which blight adjoining property. The integrity of the master developers' projects is therefore dependent, to some extent, on the sub developers' ability to complete their projects in accordance with the master plan. Where this is proving difficult master developers may be reluctant to step in to the sub developers' shoes and build out as they too don't wish to be spread too thinly (although this, ultimately, may be the only recourse available). Master developers should be looking at how they may be able to help their sub developers fulfill their contractual obligations; there is a commonality of interest here. In essence what the under performing sub developers need is an injection of liquidity to get the projects back on track. This could come from a variety of sources which the master developer may help the sub developer tap into. Bank finance is the most obvious source but perhaps not the most accessible. Joint venturing, private equity and funds may be more accessible as the greater appetite for risk exhibited by these types of investors may bring them into this market ahead of the banks. There is an undeniable incentive for the master developer to help their sub developers in recapitalizing to enable completion of the mega

projects. Question: Now that I can't resell my unit, can you tell me exactly what I bought? Matthew Hooton: Investors are forever talking about what they have bought (much like us Brits with the weather!). Before October of last year such discussions were held in the manner befitting a prosperous and savvy player in the market. These discussions now take place in darker corners of the room with hushed tones. It is interesting to note that in most property markets people buying a villa or apartment would be called "buyers". Here, due to the speculative nature of the market before the crash, everyone buying property is called an investor. I suppose it is reflective of the fact that most people in the real estate market were buying to make a profit not a home. Investors will usually refer to their acquisitions as "a five bed Villa at Al Raha beach" or "a two bed apartment at Al Reem Island": But if you look at it in any real detail what have they actual paid over their hard earned cash for? Well to start with, at the moment, the actual physical property has not, in most cases, been built. Accordingly, what most investors have is a right for the property to be transferred to them once it has been completed. Let us (with hope in our hearts) move the clock forward a few months. The developer has now completed the building and your apartment is ready to be transferred. If you are a non-GCC foreign national, having bought in an investment zone, what are you going to have transferred to you? The property, yes, but what legal interest in that property ? Freehold is the "best" class of title available. It represents absolute ownership in the land, unlimited in time. This is what you want but is it what you will get? Sadly the answer does not seem to be available right now. Under the current law non-GCC foreign nationals can own, in investment zones, either a 99 year usufruct (which is similar to a lease), a 50 year musataha (similar to a building lease) or a "right to own floors, excluding the land itself" and they "shall be entitled to all interests therein. Implementing regulations or decisions by the Executive Council shall determine the purview, terms and conditions of ownership". No regulations have been issued leaving developers and investors uncertain as to exactly what will be available to investor once the properties have been completed. It is hoped that Abu Dhabi will shortly be introducing a strata law which will deal with this (and other) questions. In essence strata title is a quasi freehold title developed, initially, for multi level apartment buildings. Each strata title owner would, ordinarily, hold a quasi freehold title to their apartment and hold an undivided share in the common parts and fabric of the building. There would be a statement setting out how the common parts would be utilised and paid for by the strata title owners. A similar holding structure can be used for villas forming part of a compound. If strata title comes to Abu Dhabi in a similar format to the one found in Dubai then it is hoped that non-GCC nationals will be able to own a strata title of their properties in the investment zones. A number of developers have set up their developments to operate on such a basis in anticipation of this coming into effect.

If strata title is not in place it is unclear what interest will be given on completion of the properties. A 99year usufruct could be used and could achieve a similar effect to strata title (regarding controls and contributions relating to the fabric of the building and common parts) but the usufruct interest would be a wasting asset. There is currently no absolute right to renew this interest once it expires. This makes it clearly less attractive the investors. Many contracts envisage that the developer will transfer to the investor the best title available at the time of completion. It is hoped that they would upgrade the title if strata title became available subsequently. In the meantime the lawyers, developers and investors all wait to see what law or regulations will be issued to govern non-GCC ownership in Abu Dhabi.

Strata law reveals homeowners groups short of cash

July 12, 2010

Apartment owners could face staggering bills for upkeep of property.

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In scores of apartment buildings across Dubai, property owners have failed to pay required service fees, a fact now coming to light with Dubai s recently enacted strata law, the National reported. The strata law transferred responsibility for property maintenance to homeowners groups, which are now being shown to be drastically short of maintenance fee cash. The default rate on maintenance fees is reportedly as high as 75 percent in some developments, according to the paper. Service fee arrears mean that the new homeowner groups could face big debt bills, just as they begin to assume management responsibilities from developers. Proponents of the strata law hoped it would contribute to declines in what many considered to be excessive management fees being charged by developers at the height of the real estate boom. But the enactment of the new law has revealed that many homeowners were refusing to pay the fees they felt were either excessive or lacking in commensurate service, the National said.

Strata Law Guidelines Published - A welcome development 6 June 2010

The Government of Dubai Land Department (the "Land Department") and The Real Estate Regulatory Agency ("RERA") in Dubai have now published on their website guidelines for the regulation of jointly owned properties and the creation of owners associations (the "Guidelines"), pursuant to Law No. (27) of 2007 Concerning Ownership of Jointly Owned Properties in the Emirate of Dubai (the "Strata Law"). This is a welcome development for Dubai's real estate market, further enhancing the regulatory framework for property transactions and increasing the level of transparency for developers and investors. The Guidelines (which are effective from 13 April 2010) require property developers to place greater emphasis on planning and implementing strata titling and owners association structures for their developments. Introduction The Strata Law was published in Dubai's Official Gazette in early 2008. The Strata Law provides the legal framework for the creation of true freehold strata titles in Dubai, and implements a similar regime for leasehold title structures. The Strata Law is a major step forward in terms of property law in the Emirate of Dubai, although many of the operational aspects, and the practical implications, of the Strata Law are not specifically dealt with in the Strata Law itself. These details will be addressed in regulations supplemental to the Strata Law (the "Regulations"). To facilitate the creation of owners associations until the Regulations are brought into force, the Land Department and RERA have issued the Guidelines, which essentially mirror the anticipated content of the Regulations. Guidelines The Guidelines largely replicate the provisions of the draft regulations supplemental to the Strata Law. The key subject matter of each of the Guidelines can be summarised as follows: 1. Direction for Jointly Owned Property Declaration, which deals with: a. b. the creation and implementation of staged and layered strata title schemes; transitional provisions for developers responsible for what are defined in the Guidelines as "Existing Projects"; and the contents of, and registration process for, 'Jointly Owned Property Declarations';

c. 2.

Direction for General Regulation Concerning Jointly Owned Properties, which deals with: a. b. c. contractual disclosure requirements for 'off plan' sales; the contents of, and registration process for, Building Management Statements; and establishment and registration requirements for owners associations;

3.

Direction for Association Constitution, which outlines: a. the functions, powers and obligations of owners associations; and

b. 4.

procedural matters for the proper running of an owners association; and

Direction Concerning Preparation of Survey Plans, which deals with: a. the nature and form of survey plans for the sub-division of units and common areas within jointly owned properties and volumetric plots; and the process for registering sub-division plans under the Strata Law.

b.

Effect of Guidelines The Guidelines (and the Regulations when enacted) will significantly affect the manner in which real estate development is carried out in Dubai. The following points are particularly important and all developers should be aware of their impact: a. Introduction of disclosure statements This is one of the most important Guidelines. Any buyer of an 'off plan' unit must be given a copy of a disclosure statement compliant with the Guidelines, prior to the buyer signing a sale and purchase agreement for the relevant unit. The disclosure statement must include detailed information in respect of the development and the unit to be acquired. A failure to provide a disclosure statement in accordance with the provisions of the Guidelines will result in the relevant sale and purchase agreement being void. As a result, it is crucial that developers prepare and issue to buyers complete disclosure statements. b. Levying service charges Upon registration at the Land Department of a 'Jointly Owned Property Declaration' and the creation of an owners association, a developer can no longer impose service charges upon individual unit owners, nor may a developer charge an owners association or individual unit owners for any costs and expenses in respect of a plot prior to that plot becoming 'Jointly Owned Property'. Accordingly, a developer cannot require either the relevant owners association or any individual buyer to refund to it the costs incurred by the developer in constructing the infrastructure for the strata scheme in question (for example, district cooling plants). Service charges may be levied by the owners association only. c. Retaining common areas and major infrastructure The ability of developers to retain effective control of common areas and major infrastructure within 'Jointly Owned Properties' has been removed. d. Time limit for creating owners associations Jointly Owned Property Declarations (each a "JOPD") ,and associated documents, are required to be lodged by a developer in respect of an "Existing Project" within six (6) months of the date of commencement of the Jointly Owned Property Declaration Regulation. An "Existing Project" is defined in the Guidelines as a project or part of a project that has been constructed and occupied as at the date of signature of the Regulation by the Chairman of the Land Department or such other project or part of a project that the Land Department assesses as being an existing project. It is likely that all developments which have been divided into individual plots for separate sale and ownership, but linked by common areas, will be caught by this requirement. In other words, this requirement will impact on most residential and mixed-use developments in Dubai. As a result, the developers of such schemes will be

required to lodge a JOPD within the six (6) month period from and after the date on which the Guidelines came in to effect, namely 13 April 2010. The Guidelines impose this obligation on the master developer or sub-developer of the relevant development, and this requirement applies to both freehold and leasehold schemes. If a developer fails to lodge a JOPD within this time period, an owner of a unit within the relevant scheme may lodge a JOPD in respect of the scheme. Important Development Considerations There has been much speculation about the final form of the strata regime in the Emirate of Dubai, with many developers, investors and others with business interests in the real estate market, such as hotel operators, being concerned about the effect that the strata legislation might have on residential and mixed-use developments across the Emirate. In particular, there has been a great deal of concern about the implementation and practicalities of the service charge regime and the ownership of major community infrastructure. These issues will undoubtedly affect the bottom line for the developers of many real estate projects, and developers should be fully aware of the practical implications of the Strata Law when planning large scale developments. Developers will need to place greater emphasis on planning the titling and owners association structure of their schemes. This will result in an increased involvement in the planning phase of a development of professional advisers, including lawyers, owners association managers and qualified strata plan surveyors. Conclusion The publication of the Guidelines, which it is anticipated substantially reflect the Regulations supplemental to the Strata Law, further demonstrates the commitment of the Government of Dubai, the Land Department and RERA to put in place the legal and regulatory framework required to stimulate and sustain the real estate market in the Emirate of Dubai, adopting internationally recognised practices where appropriate to do so. The Guidelines will result in more regulated and transparent practices in the planning and implementation of real estate developments and will increase consumer confidence in Dubai's real estate market.

Strata law and regulation key talking points at Real Estate industry Cityscape Connect event
The Cityscape Connect business breakfast was held ahead of Cityscape Global which will be staged from 4 - 7 October 2010 at the Dubai International Exhibition and Convention Centre. Attended by more than 80 property executives, legal advisers and investors, the business breakfast was called to explore the legislation and regulation of the real estate market.
The impact of the recent Strata law - which sets out a framework for how homeowners can manage jointly owned buildings and developments - presented much debate, especially around the subject of service charges, the practicality of owner associations and the implication of short falls in maintenance funds. The discussion was moderated by Blair Hagkull, chairman, Jones Lang LaSalle MENA, who

said a recent investor sentiment survey conducted, revealed the number one priority for investors, with regards to decision making, across the broader region right now was regulation and legislation. CEO and managing director of Strata Global, Kent O'Brien, said the regulations recently brought in were very good, but added: "Unfortunately what we are seeing at the moment are a number of schemes being thrown together, with residential, retail and commercial components all in one homeowner association - I just hope that some of the developers look at that in a more educated way." Michael Lunjevich, partner, head of commercial and Real Estate, Hadef & Partners, mentioned the importance of the Escrow law - which came into effect in 2007 to regulate the sale of off plan property. He said this was the 'first major step towards regulating a market.' "Lessons that can be learnt from the Escrow law are that when you try and regulate a market, you need to consider the economic issues around the industry." Mr Lunjevich also talked about regulation and how to make people comply. He said: "Over the last three years, we may have learnt that self-regulation doesn't really work that well. Of course, bringing in regulations may not work that well either, because some people don't comply. "In my opinion penalties and deterrence are a way to make people comply. They may not voluntarily comply but if they know there's a stiff penalty of a huge fine or imprisonment of failing to comply that's going to be made publicly knowledgeable then they'll soon come into compliance quickly." Cityscape Global - formally Cityscape Dubai - is one of the world's premier business real estate investment and development platforms. The exhibition is also the flagship event of a brand developed in Dubai that has achieved international recognition and success. Cityscape events are held in Abu Dhabi, Riyadh and Jeddah in Saudi Arabia, Shanghai and Latin America. Cityscape Global attracts regional and international investors, property developers, governmental and development authorities, leading architects, designers, consultants and senior professionals involved in the property industry.