Dubai's Strata Law: Still Coming

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Why have the regulations of Dubai’s Jointly-Owned Property Law been delayed? Strata law specialist Gary Bugden takes a closer look at this many-layered issue.

Dubai’s Jointly Owned Property Law (Law No. 27 of 2007) was issued on 10 December 2007 and gazetted to commence on 31 March 2008. Although the law commenced on that date, it has still not been implemented because of the lack of supporting regulations.

Speculation continues as to why the regulations have been delayed, particularly given the pent-up demand from apartment owners for a greater say in running their buildings, and the potential for this law to add real impetus to the Dubai real-estate market. Whatever the reason for the delay, it is clear from information coming from Dubai’s Real Estate Regulatory Authority (RERA) that the law will indeed be implemented, and that when it is, there will be a substantial change to the property ownership and management regimes in the Emirate.

The purpose of the Law

To fully understand these changes it is necessary to examine the objectives behind the law, which is commonly called the ‘Strata Law’. The main objectives were:
• To provide a world-class title and owners’ association registration system;
• To provide best practice governance and management systems capable of catering for the large and complex projects of Dubai;
• To provide best practice consumer-protection measures, with particular emphasis on protecting off-the-plan purchasers and owners’ associations; and
• To do all of that in a way that does not unduly impact on the innovative developments for which Dubai is famous for around the world.

To achieve these objectives for future real-estate developments is challenging enough, but to seek to achieve them for existing projects is very ambitious indeed—although ambition is not something that is lacking in the Dubai real estate psyche. Despite the ambitious nature of the objective to include existing projects, the initiative actually makes sense. Leaving existing projects outside the law would cause more problems than including them. For example:
• A two-tier market would eventually develop under which properties regulated by the law would be more valuable than those not regulated by the law;
• Owners of apartments and villas that are not under the Law would be left with the governance and management problems that have plagued the Dubai property scene over the past year or so; and
• Government would be forever trying to resolve the ongoing problems of the current system, which is incapable of coping with the complexity of the projects that it seeks to regulate.

The implementation package presently under consideration by the government should ensure that the objectives of the law are substantially met. It should also provide a solid footing to support the recovery of the Dubai real-estate market. However, it will be necessary to keep the law under review, and to make adjustments from time to time. This has certainly been the experience in other jurisdictions with similar laws.

Common-ownership schemes present an ongoing range of problems and challenges for governments, and given the nature of Dubai’s projects and the late introduction of this law, it is a certainty that adjustments will need to be made on a regular basis. However, this should be seen as part of the growth phase of the legal framework rather than any structural problems with the framework itself.

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The first changes that are likely to occur after implementation will involve the formation of owners’ associations and their governing boards. Owners’ associations will appear within a few months of the law being implemented, and boards will be formed very soon after that. Boards will be elected by owners, and there will be little or no prospect of developers retaining control of these boards.

This means that owners will be in a position to determine future budgets and service levels. This will bring a degree of discipline to the budgeting and contracting processes that have not existed previously in Dubai, and this will have implications for all service industries involved in this sector.

A key issue will be the extent to which developers may be able to put contracts with owners’ associations in place before owners gain control of them. Most, if not all, of the existing arrangements are between developers and individual land owners, and they will not transfer, or be allowed to transfer, automatically to owners’ associations. Furthermore, many of those existing arrangements are legally unstable (because of their unfair terms and/or dependence on deeds of adherence) and developers are likely to be keen to utilise the stronger mechanisms available under the law.

For developers, the problem with those mechanisms is the likely limitations on the terms of agreements. RERA has advised on a number of occasions that owners’ association manager contracts will be restricted to a maximum term of three years, and that all other service contracts will be restricted to a maximum term of five years, with some prospect of an extension for the latter of up to 25 years at RERA’s discretion. The terms of the contracts are likely to be scrutinised carefully by RERA as part of any exercise of that discretion. The ultimate outcome will be a change in approach to the provision of ongoing services by developers and their associated companies.

Most long-term contracts to developers or their related companies were destined to be troublesome in any event. Experience around the world has shown that property owners, particularly those who constitute owners’ associations, usually:
• Do not want developers to have an ongoing role in maintaining and managing a project;
• Are very cost-sensitive and suspicious of any profit that the developer may seek to make out of their maintenance or management operations; and
• Become focused on removing any supplier that has been essentially foisted upon them by the developer.
Those developers who fail to recognise these things are likely to be committing themselves to a future of disharmony and confrontation, which has the real potential to seriously damage their brand.

The law will also impact on the ownership and use of common areas of projects. Some developers have sought to keep and maintain substantial portions of common areas in the buildings and communities they develop. They maintain these common areas, charge management and maintenance fees and levy service charges on individual owners, often making a substantial profit in the process. When the law is implemented, these developers will be required to register a jointly-owned property plan over their buildings or relevant portions of their communities. The registration of those plans will lead to the formation of the owners’ association and its board, and the handing over of both ownership and control of the common areas.

The ability of the Land Department to refuse to register plans and issue titles will ensure that common areas are transitioned to owners’ associations. This in itself will restrict developers from controlling and profiting from common areas in buildings and communities.