Revolutionary ownership changes for Dubai freehold communities
Posted on 30 June 2010 with 2 comments from readers
The new Dubai strata law governing the ownership of freehold communities takes control away from the developers and vests it in new owners associations.
The legal structure of these new associations is precisely defined in the law, and their modus operandi. Everything is covered by the law, from the appointment of the key association manager to the letting of contracts and collection of unpaid service fees. This is largely an adaptation of Australian best practice for Dubai.
However, the multicultural society of Dubai, with its many nationalities and national minority, is going to have to adapt to a system that heralds from a very different culture. The owners associations require a level of participation and responsibility from owners that has no precedent, and indeed will be a nuisance to those holding many freehold titles scattered across the city.
Developers out
But the law is quite explicit. Developers will not be allowed to continue running community services and collecting fees. They have to assist in the setting up of owners associations which will then appoint an association manager – generally a company specialized in this field, like the recently established Essential Community Management company.
Could the developer in practice take on this job? ArabianMoney posed this question at the seminar organized by property lawyers Al Tamimi today. In practice it is possible where the developer holds multiple trade licenses, for it is a requirement that separate community functions be individually tendered and not let as a package to a facilities management company.
This is nothing short of a revolution for Dubai freehold property communities – and the same law applies for villa communities as well as high-rise apartment blocks. For developers will be able to walk away from their projects once the owners association is properly constituted. Basically the owners of the property then fully own their community and bare that responsibility. In practice this is a matter of appointing the right association management company and retaining a decent legal firm as an advisor.
Reputational risk
The best developers are treating this as a challenge and a chance to establish a structure that will protect their reputation as a developer of quality projects. Developing a beautiful building and allowing it to fall apart in a few years through bad maintenance is not good for corporate reputations, and the work of setting up a proper owners association is clearly laid out by the new law and the developers have to pay for it.
But the problem will surely be with negligent developers who think they can carry on as before, and ignore this process or try to execute it to suit their short-term cash flow interests. That will certainly create an additional headache for the unfortunate owners in these projects, quite apart from building quality issues and late delivery. However, the new law does offer them a solution. They can force a bad developer out and take control of a building entirely. Indeed, with the new law as it stands it is mandatory for the developer to give up its rights to collect and administer community services.
Therefore, while the new law may not be strong enough to prevent a determined developer messing things up, it is powerful enough in providing legal means of redress to the owners of the units within a development. Legally the whole community belongs to them and not the developer any longer.
Property value implications
What does this mean for property values in Dubai? Al Tamimi’s Lisa Dale argues that this has to be good for securing long-term property value as previously the position on community ownership was not clear. It is also a tried and tested system in other countries and introducing international best practice to an emerging market like Dubai usually adds value.
Nonetheless, in practical terms properties with the most reputable developers are likely to gain the most in value because the scheme will be effectively implemented. And in the event that there are problems with the owners association these developers will feel obliged to step back in, if only to protect their own business reputation. More fly-by-night operators will wash their hands of the development and blame the ownership association if they appoint the wrong association management company and watch their community deteriorate, and property values suffer.
So in practice the new strata law is probably going to increase the value placed on a property from a reputable developer, and accentuate the differentiation from one with more short-term interests. For a law whose aim is to establish a level playing field that is perhaps not quite what was intended.
Right move
On the other hand, it has to be said that Dubai is doing absolutely the right thing in getting this matter sorted out now. It may well be that in the implementation of the law a few modifications have to be made. This has not been tried before in Dubai and it would be astonishing if such a revolution could be introduced without a rethink on a few issues.
Indeed, nobody knows if owners associations will actually work in practice. What if nobody can be bothered to attend meetings? This sort of elementary property based democracy is alien to the command tradition of the country. Most people are happy to pay reasonable community service fees but they really don’t want to have the responsibility of running the community thrust upon them.
Besides where owners have multiple properties spread across the city is it reasonable to expect them to pay attention to multiple owners associations? It is easy enough to pay an annual fee but keeping up with dozens of individual owners associations is another matter.
Of course, the good thing about adopting a law that has worked well in other countries is that it really ought to be possible to make it happen in Dubai too.
2 Comments posted by readers:
Peter – Good article on a very important issue.
But this statement is a little strange:
“…an indeed will be a nuisance to those holding many freehold titles scattered across the city.”
What anymore than having onerous and inflating fees dictated to them by an unscrupulous unity of a developer and his FM company in a time where rents are falling like a stone?
A competent property manager should be able to handle this admin issue for you….??
The key component of the Strata Law is the separation of powers between the
Owners Association (a board elected by and for the owners) and
the Facilities Management Company ( usually a subsidiary of the developer).
For far too long in Dubai this has been a combined role that created a massive conflict of interest where the person setting the service & fees, collecting the money and spending that money were the same person!
How can you act for the owners (lean service & fees) when you have a commercial interest in high “service” & fees? Impossible.
There has been no recourse for owners to dispute fees/service other than non-payment or negative media campaign.
There are also owners who feel they don’t need to pay their fees for whatever reason and this is equally harmful as the other owners are either subsidizing these folks or living with reduced services as a result. Strata Law address this – quite forcefully with a sale of property in the event of continued non-payment!
This law is going to have a much needed shake-out of the FM industry and service charge costs that have been able to escalate ludicrously in the face of declining values and rents – all because of the “monopolistic” nature of the relationship above.
When Owners (or OA Manages – who there are a few good ones + a few duds) get in the driving seat with defining the Service Scopes, Competitive Tendering, Utilities Reduction -I’m sure we will see a big reduction in the “normal” rates paid for Service Charges in Dubai.
Property value implications
This is going to go 2 ways as mentioned above but for an additional reason. With older jointly owned properties developers have been collecting service charges for many years. In theory these are made up of a General Fund (day-to-day costs) and a Reserve Fund (capital replacement items, mechanical equip, lifts, facades, etc)
The big question for owners & buyers – What is the status of the Reserve Fund ? Is it all there, is it enough or has it all been spent (or worse) by the developer? If not enough then this will result in “special levies” to make the Fund whole or replace items when they fail. Think about a new lift divided by the number of units – a big hit!!!
This will but a major hole in the income & value of the unit. This is going to happen and buyers/owners should immediately demand an audit of the RF to see if they are exposed.
As you stated there will be the good-the bad -and the ugly – as an owner/buyer I would do the due diligence early to work out the exposure/risk and act accordingly.
This new strata law is meant to be the answer to property owners complaints that they are being over-charged by developers for a poor service, yet why is there so little enthusiasm from property owners to participate in their Owners Associations.
We have registered our Kingfield OA management company, and passed the RERA exams but had to engage significant effort to persuade both developers of the need to commence the process of registering OAs as well as inviting owners to attend meetings.
Property owners really should be aware that their selection of service providers is an important decision to make which can go along way to maximise the rental and resale value of their property. Given the difficulties in the property market either for rental or resale, unit owners can derive significant value from working with organisations that understand how to serve their property.
Ed Note: Home owners in Dubai tend to be very busy working and don’t want other responsibilities, and what if you own 10 properties? They just want to pay to get the job done!