Dubai's Strata Law: Still Coming

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.

The immediate changes

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.

Apart from the impact on developers, there is also likely to be an impact on the broader facilities management sector. One aspect of this impact is likely to be positive. As developer related facilities management services come under pressure from owners, there will be opportunities for new business for this broader sector.

However, the owners will be looking for a leaner, more focused and transparent solution than many of the current arrangements. While some owners’ associations will be content with engaging an FM company to arrange and supervise (i.e. sub-contract) building and community services, others will want to contract direct with suppliers of goods and services to avoid the mark-up that applies to the more co-ordinated approach. The direct-contract approach will see owners’ associations having separate contracts with such suppliers as pool cleaners, landscape contractors, security services and fire-safety services.

Sub-contracting arrangements are likely to come under scrutiny from both RERA and owners’ associations. Arrangements where one related company supplies to another related company while making a margin or profit are likely to disappear over time. The content of FM contracts is also at risk of being regulated, if not in the short term, then certainly in the medium term.

One may well ask: Why will all this happen? The answer lies partly in the inherent distrust that usually exists between owners and developers, and partly in the commercial practices that have evolved in Dubai over the preceding decade.

Under these practices, some developers have sought, directly or indirectly, to use their ongoing role in the maintenance and management of projects as a means of making unreasonable profits at the expense of owners who had no prior notice of the arrangements being put in place. This has motivated, and will further motivate, owners to try to dismantle uncommercial or unfair contractual arrangements.

Owners’ Association management

In Dubai there is an emerging owners’ association management services sector, largely led by industry professionals from Australia. In foreign jurisdictions this sector provides accounting, compliance and administrative services to owners’ associations. In some jurisdictions it also provides quasi-FM services in the form of FM services contract administration. It is relatively unusual for owners’ association managers to provide mainstream FM services to owners’ associations.

These services are usually outsourced, and the owners’ association manager administers, on behalf of the board, the FM contract.

In Dubai it is unlikely that owners’ association management and FM services will be undertaken by the same entity. This is because:
• The facilities manager reports to the owners’ association manager and, if they are the same entity, there will be conflict;
• The skill sets of each manager is different (e.g. the owners’ association manager has to deal on a daily basis with owners and a board, thus requiring good political, people and communication skills);
• Owners will likely demand independence and transparency between the two roles;
• The contract maximum terms are different (3 and 5 years); and
• The licensing requirements will be different.

The exception is likely to be a company with separate divisions staffed and operating independently from each other, or two related companies, each specialising in an aspect.

Apartment and villa owners are likely to greet the law with relief and enthusiasm. Developers are likely to be more cautious. However, given time, developers will also see the benefits that the law offers not only to them, but more importantly, to the future of the Dubai real-estate market.

About the author

Gary Bugden is an Australian lawyer and strata law specialist. He is also the executive chairman of PRDnationwide Middle East Real Estate LLC. He was the consultant to the Dubai Land Department on the formulation of the Jointly Owned Property Law and its draft implementing regulations.