Tag: Real Estate

While Dubai is already home to numerous hotels, the Dubai Department of Tourism and Commerce Marketing (DTCM) estimates approximately 45,000 new hotel rooms will need to be constructed by 2020. With foreign hotel project investors and operators seeking to capitalize on the numerous opportunities, an overview of the legal aspects concerning hotels within the emirate of Dubai is provided in this publication.

A multi-jurisdictional guide on liquidation of cancelled real estate projects in Dubai.

Shahram Safai, a partner at Afridi & Angell, provides multi-jurisdictional professional advice on the collection of service charges.

The Q&A gives a high-level overview of the corporate real estate market trends; real estate investment structures, including REITs; legislation; title and public registers of title; confidential information; state guarantee of title; tenure; sale of real estate; seller’s liability; due diligence; warranties; cost; taxes and mitigation, including VAT and stamp duty/transfer tax; climate change targets; third party outsourcing; restrictions on foreign ownership or occupation; finance; leases; planning law and consents; and proposals for reform.

This month, Lawyer Monthly takes a look at the state of the Real Estate market in the UAE and the issues that potential investors should be aware of.  To this end, we benefit from an exclusive piece from Shahram Safai, Partner at the Dubai office of law firm Afridi & Angell.

Shahram Safai provides his professional insight into the UAE Real Estate market and how the construction wave has influenced the investors approach.

Getting it off the ground: the Jointly Owned Property Law in Dubai

 

Shahram Safai, Arsalan Shaikh, Andrew Yule and Ronnie Dabbasi, Afridi & Angell

 

Resource type: Articles: know-how

Status: Law stated as at 01-Sep-2012

Jurisdiction: United Arab Emirates  

Abstract for internet version:

 

Over the past few years Dubai has implemented various laws that seek to transfer responsibility for the management and maintenance of common areas in developments from the developer to the owners of the individual units within the development, most notably Law No. 27 of 2007 and its Directions issued in 2010 (jointly owned property law) (JOP Law).

 

There have been some difficulties in achieving the aims of the JOP Law, particularly in relation to the recovery of service charges. This article introduces the JOP Law and its aims and goes on to highlight the difficulties that are being encountered with implementation. The article concludes by discussing how these issues have led to adaptations in the market and suggests potential longer term solutions.

 

Over the past few years Dubai has implemented various laws that seek to transfer responsibility for the management and maintenance of common areas in developments from the developer to the owners of the individual units within the development, most notably Law No. 27 of 2007 and its Directions issued in 2010 (jointly owned property law) (JOP Law).

 

Collection of service charge is a key part of this relationship as it ensures that funds are available to carry out ongoing repairs to the development after it has been handed over by the developer. Given the extreme climate and desert conditions of Dubai, carrying out repairs and maintenance is extremely important to ensure that developments have a long lifespan.

 

There have been some difficulties in achieving the aims of the JOP Law, particularly in relation to the recovery of service charges. Some of these issues flow from the social

l and cultural norms of the Middle East region. This article:

• Introduces the JOP Law and its aims.
• Highlights the difficulties that are being encountered with implementation, particularly regarding owners’ associations and investigates some possible reasons for these problems.
• Discusses how these issues have led to adaptations in the market and suggests potential longer term solutions.

 

 

Real estate in Dubai

 

Market structure

 

In Dubai, real estate is generally divided into a series of master communities, each managed by a master developer. The master developer divides the master community into various plots, and then sells each plot to a smaller developer, who will carry out the construction on the plot and sell the individual units to purchasers.

 

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The JOP Law

Aims of the JOP Law

 

The JOP Law put in place the framework for the development and subdivision of land or buildings into units and areas designated for common use (common areas) by unit owners and occupiers. Such a subdivision is known as jointly owned property. An owners’ association comprising all of the owners in the jointly owned property is responsible for the management, operation and maintenance of the common areas.

 

Before the JOP Law, the developer would often insert clauses in its unit sale contracts so that the unit purchaser was obliged to accept that, even after all the units had been sold, the developer would continue to manage and maintain the common areas. This left purchasers obliged to contribute to the developer’s costs, but without any power to challenge its decisions. This often led to purchasers claiming that the developer was abusing this power as a money-making exercise (with the developer perhaps outsourcing the necessary work to its associated companies), and that the purchasers could have arranged works at a higher quality or lower cost.

 

The JOP Law seeks to address these concerns and requires the transfer of management and maintenance of common areas of a development to the unit owners through the formation of an owners’ association (see below, Owners’ associations under the JOP Law).

 

Documentation required by the JOP Law

 

The JOP Law requires that the developer of each development must file a jointly owned property declaration (JOPD) at the Dubai Land Department. The JOPD sets out all the property information relating to the development, including:

 

• A site plan of any common areas.
• A description of each of the units.
• A list of the community rules which will apply in the development.

 

The developer must file the JOPD when the application for registration of the first sale of a unit in the development is made.

 

 

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Owners’ associations under the JOP Law

Transfer of control to owners’ associations

 

The application to file the JOPD must be accompanied by an application for the formation of the owners’ association. The owners’ associations are constituted in accordance with the prescribed constitution that applies to all owners’ associations. The constitution sets out, among other things, rules for:

 

• The appointment of a board for the association.
• Voting at general meetings of the association.
• Insurance that the association must maintain.

 

When the owners’ association has been formed, the developer must hand over management of the common areas to the association. The handover procedure is detailed in the JOP Law.

 

Key powers of owners’ associations

 

The key powers granted by the JOP Law to owners’ associations to assist in the recovery of service charge include:

 

• Financial penalties. The owners’ association can serve a “community rules enforcement notice” whenever a unit owner (or the occupier of a unit) breaches a provision of the rules governing the common areas. This includes a failure to pay the service charge. If the default is not remedied within the period detailed in the enforcement notice, the owners’ association may serve a further notice imposing a monetary penalty of up to AED2,000 (as at 1 September 2012, US$1 was about AED3.7).

 

This monetary penalty is recoverable by the owners’ association as a debt. The owners’ association is also entitled to claim any costs incurred in recovering the arrears from the unit owner.

 

If the service charge arrears remain outstanding for more than one month following the service of the notice, the owners’ association may impose interest (calculated on a daily basis at the annual rate of 12%) on the arrears.

 

• Non-financial penalties. If the unit owner continues to fail to pay the service charge despite service of a community rules enforcement notice, then the threat of further financial penalties may be insufficient to encourage payment of the arrears. The owners’ association, though, does have additional powers, including preventing a unit owner that is in arrears, from casting his vote at the owners’ association’s general meeting.
• Lien. The owners’ association has a lien on every unit in respect of unpaid service charge. The lien applies to the unit (as opposed to the unit owner). This means that the lien remains in place over the unit even if the original defaulting unit owner sells the unit to a third party.

 

The JOP Law does not expressly set out the effects of the lien. However, the position generally taken in Dubai is that the owners’ association’s lien would (after the necessary legal procedure is followed) entitle the owners’ association to have the unit sold at public auction, with the service charge arrears deducted from the selling price (see below, Problems of implementing the JOP Law, Difficulties of enforcing a lien). It is suggested that, after the costs of the sale are also deducted from the sale price, any excess would be returned to the unit owner.

 

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Problems of implementing the JOP Law

 

Non-payment of service charge across various developments in Dubai has received significant press coverage throughout 2011 and 2012 and tensions between unit owners, developers and owners’ associations have increased. The JOP Law contains various powers under which the owners’ associations can recover service charge arrears (see above, Key powers of owners’ associations), but concerns have been raised that the low recovery rates demonstrate that further powers are required.

 

There are various reasons why recovery of service charge is problematic, discussed in the following sections.

 

Cultural considerations

 

The concept of having to make ongoing service charge payments is well-established in many jurisdictions. However, in many Middle Eastern countries, the idea that, after the purchase price has been paid in full by a real estate purchaser, the purchaser might have additional ongoing payment obligations is less usual. Perhaps in part due to this cultural issue, the recovery rates for service charge in Dubai have been comparatively low.

 

Difficulties of enforcing a lien

 

The idea that a unit owner can lose his property as a result of non-payment of a debt (be it a mortgage or service charge) is a highly sensitive issue in Dubai. This links back to general principles of UAE law (and of the UAE Constitution and Sharia Law) that establish the importance of a person’s home and that someone should not be deprived of it without due process. There is genuine uncertainty whether a Dubai court would enforce a lien under which a unit owner’s home is sold to cover unpaid service charges.

 

There is a parallel situation to that of Dubai’s Mortgage Law (Law No. 14 of 2008). The press often report on banks in Dubai foreclosing or repossessing properties if the borrower fails to make necessary mortgage repayments, but this language distorts the true situation. The Mortgage Law does not actually permit the lender to seize and re-sell the debtor’s property; self-help is not permitted in Dubai. Instead the lender must go through a lengthy procedure in the courts, after which, if the court grants consent, the debtor’s property is sold by the Land Department at public auction.

 

Lenders have been slow to use their rights under the Mortgage Law. Generally this is because:

 

• It remains unclear how the courts will react to requests by lenders to enforce their mortgages, especially because of the general principles of UAE law mentioned above.
• Sale by public auction leads to an uncertain sale price, which may be lower than the price that could be achieved by private sale.
• The procedure under the Mortgage Law is complex and time-consuming and involves fees payable to the courts and the Land Department.

To avoid these issues, many lenders may instead seek to:

 

• Identify their own third party buyer for the debtor’s property.
• Reach a tri-partite agreement with the third party buyer and the debtors for the sale of the property. This has the added advantage that the sale price will be kept private.

 

Delays in the formation of owners’ associations

 

The formation of owners’ associations has not taken place as quickly as may have been originally intended. Many developers have submitted applications to the Dubai Real Estate Regulatory Agency (RERA), but generally RERA has yet to complete the process.

 

This has left developers in a difficult position. Their unit owners will be keen to assume control of common areas, and by submitting the JOPD with RERA, the developer has performed the necessary actions to permit the handover to take place. However, until the formation of the owners’ association is approved by RERA, the owners’ association does not formally exist and cannot carry out its functions. In the interim period, the developers and unit owners are encouraged by RERA to create an interim owners’ association. RERA’s apparent intention is that the interim association will perform the functions of the owners’ association (that is, it will manage and maintain the common areas) and will enjoy all the powers of the owners’ association.

 

Problems with interim owners’ associations

 

Under the JOP Law, an interim owners’ association is not a recognised body. Therefore, its legal status and powers are uncertain, and if an interim association levied a service charge demand, there is a risk that a unit owner may challenge the validity of the demand.

 

Without approval from RERA that would lead to the formation of an owners’ association, interim associations are unable to open bank accounts. This means that even if the developer and unit owners unite to form an interim owners’ association, ultimately the developer is left in control of the common areas, as it is the only entity able to open and operate a Dubai bank account, and therefore levy and collect service charge. This, on occasion, gives rise to the familiar complaint from unit owners that developers are trying to retain control over common areas and use them as profit-generating enterprises.

 

Generally, developers, unit owners and interim owners’ associations are very conscious that, unless the interim association starts to issue service charge demands and recover the necessary payments, the development will start to suffer. Therefore, interim associations are proceeding on the basis that they are entitled to exercise the rights and powers of an owners’ association as detailed in the JOP Law.

 

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The JOP Law going forward

 

It is unclear whether owners’ association’s will be able to use the rights granted to them under the JOP Law quickly enough (and at a low-enough cost) to make them effective tools in recovering service charges. Due to this uncertainty, there are many voices in the marketplace arguing that the JOP Law should be amended to grant additional powers to the owners’ associations, to help ensure that developments are properly maintained and to help preserve the status held by Dubai as a high quality real estate centre.

 

Restriction of services

 

Until changes to the JOP Law are made, various methods are being used to coerce unit owners into paying their service charge, including restriction of services.

 

In any development, each unit owner receives services from the owners’ association that relate to the common areas (for example, the use of the shared swimming pool, collection of rubbish from the units, security services and lighting of the corridors). In late 2011 and throughout 2012, across certain developments, owners in service charge arrears have had some of these services restricted or cut-off entirely. This issue has perhaps received most media coverage at the Nakheel development (the Shoreline Apartments on Palm Jumeirah) where there has been a long-running dispute about levels of service charge. A full analysis of the legality (and indeed the desirability) of this action is beyond the scope of this article. Every case will turn on its own facts.

 

By their nature, some services are more crucial than others. For example, the supply of electricity and water to the unit is more important than the right to use a shared squash court. If the service charge that is demanded is properly payable, and the unit owner has been given all necessary notices demanding payment and explaining the consequences of non-payment, the restriction of a non-essential service is more likely to be deemed legal than the restriction of an essential service. In addition, if the arrears are merely a few hundred dirhams (as opposed to thousands of dirhams) and the arrears have not been outstanding for long, it is harder to justify the restriction of services.

 

Any service restriction by the owners’ association should only affect the unit whose owner is in arrears. By their nature, some services (for example, landscaping maintenance) cannot be restricted to the detriment of just one owner.

 

The JOP Law does not give owners’ associations any express right to restrict any services. However, owners’ associations are granted quite extensive implied powers under the JOP Law, and it is apparent that service restriction is being carried out in practice. The question then becomes what is permissible and what is not. The uncertainty that exists at present is generating tension between the various stakeholders and it is suggested that some clarification from the authorities on exactly how far (if at all) owners’ associations are permitted to use self-help to recover service charges would be useful.

 

Leasing matters

 

Especially as compared with other real estate markets, a large percentage of Dubai’s villas and apartments are not occupied by the unit owner, and are instead leased to third party tenants. If the unit owner lives elsewhere, he may be less concerned about keeping the common areas in the appropriate condition, and therefore less inclined to pay service charge.

 

If a unit is leased by the unit owner to a third party, the unit owner is treating the unit as an investment and intends to make money through the rent. If a unit is less attractive to potential tenants, demand will drop and the unit owner would receive a lower rent. A unit would be less attractive if the tenant knows there is a chance that services would be withheld due to service charge arrears (see above, Restriction of services).

 

While the obligation under the JOP Law is for the unit owner to pay the service charge, some owners’ associations are starting to send demands for service charge arrears not only to the unit owner, but also to the unit. With the tenant aware of the arrears (and the potential consequences that can follow) the tenant may be able to pressure the unit owner. There is some anecdotal evidence from the market that tenants are starting to reach agreement with their unit owner landlords that the tenant will pay the service charge, and the sum is then deducted from the next rent payment.

 

Proactive tenants

 

Tenants are becoming increasingly aware of the potential disruption that can be caused by service charge arrears, and so, before signing the lease, a potential tenant may ask the landlord for evidence that the service charge is fully paid. RERA has indicated that it is considering making it mandatory for the unit owner to provide a disclosure statement detailing service charge payments before a lease is entered into.

 

It should be borne in mind, that rent in Dubai is frequently paid in one instalment on the day the tenant signs the lease for the property. If such a payment is made and no disclosure statement is provided by the unit owner, there must be some doubt whether the tenant would have the time and money to go to court to get his rent back and have the lease terminated. Instead, or in addition, RERA may find it more effective to undertake a programme to help educate tenants to request a service charge disclosure statement before the lease is signed.

 

Nakheel, the developer of many developments across Dubai, offers a service whereby prospective tenants at the Shoreline Apartments project can enquire whether the service charge for the specific unit they wish to lease is fully paid.

 

Flexibility from the owners’ association

 

Some owners’ associations are introducing flexible payment schemes, rather than insisting that the service charge is paid in a series of large payments.

 

A more controversial scheme that has been suggested could see owners’ associations offer discounts to unit owners who make prompt payments. However, if all unit owners made such payments, there would inevitably be a shortfall in the owners’ association’s funds. Therefore, the owners’ association’s annual budget would need to be initially artificially inflated to take account of the likely resultant discounts.

 

Name and shame

 

Some developers have taken the step of publishing lists of the names of the units for which there are service charge arrears (or even publishing the names of unit owners who are in service charge arrears). This is potentially illegal in Dubai under local laws regarding privacy, and developers generally shy away from this action.

 

Construction defects and service charge arrears

 

If all service charges are paid, the intention is that a development will endure for its full term. However, failure to pay all service charges will lead to the development not being maintained to the appropriate standard which can reduce its lifespan, with construction defects becoming apparent sooner than would otherwise have been the case. It is therefore clear that owners’ associations’ powers to collect service charges are key to ensuring a long lifespan for Dubai developments.

 

Issues with construction defects can be magnified due to the weather in Dubai. With the extreme heat and desert sand, developments age more rapidly than in cooler countries. The natural water table level below ground is above basement level in many projects, making waterproofing of foundations crucial. These issues in combination mean that any defects in construction are more likely to become evident earlier into a development’s lifespan.

 

In a normal tower development, the common areas include the lifts, stairs, foundations and structure of the tower. It quickly becomes apparent that there could be a substantial cost for unit owners for additional repair work to these items.

 

Claims by the unit owner and/or the owners’ association against the developer

 

Under the JOP Law, the developer passes control and management of the common areas to the owners’ association. However, even after handover, the developer has not relinquished liability entirely. The unit owners and the owners’ association may still be able to take legal action against the developer in relation to defects in the development.

 

A developer remains liable for ten years from the date of the development’s completion certificate to repair and cure any defects in the structural elements of the development that are notified to the developer by the owners’ association or a unit owner (Article 26, JOP Law). In addition, the developer remains liable for one year from the date of the development’s completion certificate to repair or replace defective installations in the project. This expressly includes mechanical and electrical works and sanitary and plumbing installations.

 

If there is conflict between a unit owner’s purchase contract with the developer and the JOP Law, (for example if the contract tried to reduce either of the above time periods) the JOP Law supersedes the contract. It is therefore advisable for the owners’ association and the unit owners to take active steps to identify any relevant defects that may exist before the expiry of the above liability periods.

 

Claims by the unit owner and/or the owners’ association against the contractor

 

The concept of latent defects is introduced by Article 544 of the UAE Civil Code. Depending on the wording of the construction contract between the developer and the contractor, the owners’ association and the unit owners may be able to argue that they are entitled to take direct action against the contractor who built the development for breaches of the contractor’s obligations under the construction contract.

 

The unit owner should also carefully review its unit purchase contract with the developer as there may be warranties and other promises about the nature of the project on which the unit owner can rely when taking action against the developer.

 

Claims by the developer against the contractor

 

Under the UAE Civil Code, the developer has a claim against the contractor and the supervising architect for ten years from the date of delivery of the work if either:

 

• The building suffers total or partial collapse.
• There is a defect that threatens the stability or safety of the building.

 

The contractor/supervising architect cannot contract out of this liability and is strictly liable if they occur.

 

The developer’s remedy is compensation. Crucially the obligation to compensate applies even if the building collapse/defect arises from a defect in the land or the developer consented to the construction of the defective building.

 

In Dubai, this concept of strict liability may be increasingly important in the coming years as during the global economic crisis, some developments were started but then temporarily suspended. The growing economic recovery has led some of these developments to be restarted, however, the intervening years of exposure to the elements may have degraded the construction to an extent that remedial works are required even before the construction proper can resume.

 

Actions by unit owners

 

Identifying certain defects requires the involvement of specialists and advanced equipment (for example to identify whether water is seeping through concrete and corroding the steel rebar within the concrete). Unit owners will need to engage professional assistance on such issues.

 

However, at a time when some unit owners are failing to pay their service charges, there must be a doubt whether funds are available for the surveys necessary to allow claims to be filed within the necessary time frames. Some unit owners take the view that by the time any major defects become obvious, the unit owners will have sold the property and moved on, and as such there is no merit in incurring the extra costs at the outset.

 

Going forward

 

Dubai does not have the oil reserves of Abu Dhabi or the gas reserves of Qatar. Instead it has positioned itself as the transport, commerce and tourism hub of the Middle East, bridging the gap between Europe and the US on one side and India and China on the other.

 

For Dubai to continue to thrive it must retain a strong real estate market. Dubai exceeded the other markets in the region when it introduced the detailed JOP Law. The lag in the implementation and enforcement of all aspects of the JOP Law can, to a degree, be explained by the fact that it is a new concept for the Middle East.

 

To help ensure that Dubai’s developments, from the high-end to the less expensive areas, are maintained to a standard that will continue to attract business and tourists alike, the authorities are encouraged to carry out an ongoing system of education to all real estate stakeholders, from developers down to unit owners and tenants to ensure that the importance of the JOP Law, and each parties’ rights and obligations are understood.

 

There is a degree of uncertainty as to the powers of owners’ associations in recovering service charge and it would be welcomed were this to be clarified so all parties are certain of what is permitted and what is required of them.

 

Recent transactions

 

• Acting for a regional developer on an AED4 billion residential, retail, leisure and tourism city development including the preparation of jointly owned property documentation under Law No. 27 of 2007 and strategic advice regarding utilities infrastructure and building sales and leases.
• Acting for a regional developer in preparation of strata title documentation under the DIFC’s Strata Title Law for a prestigious AED3 billion residential and retail development in the DIFC and an iconic AED3 billion multi-purpose high-rise tower in the DIFC.
• Acting for a regional developer in the purchase of a prime plot near to Burj Khalifa, and providing advice on its development into an AED250 million hotel project.