Law of the land

Dubai's "Strata Law" came into effect with the aim of regulating the Dubai property market and providing consumer protection through control mechanisms, disclosure and the prohibition of restrictive processes allegedly practiced by some developers.

It is intended that purchasers benefit from such measures, through owning an undivided portion of the common areas and having a say in the running of these areas via an Owners Association. However, will developers welcome the new regime?

For developers, particularly of a large-scale mixed-use project with branded residences, the Strata Law, in its current form, is viewed with confusion rather than outright enthusiasm.

This caution is understandable, given that for a developer of a branded development, ultimately the common areas and therefore the reputation of that brand, will be heavily influenced by the management of the project by an Owners Association.

Once 51% of the units have been sold, a developer, which may have years of valuable management experience will be subject to direction by an Owners Association and what experience does an Owners Association necessarily have?

Would unit owners be prepared to face rises in services charges that were once subsidised by a developer? Would unit owners of mixed schemes be equipped to handle insurance issues, such as "who pays the excess" when a claim has to be made?

These are issues which Owners Associations have had to address elsewhere, for example in Australia and Canada, where such legislation has been in place for years.

The obvious answer would be for a developer to try and avoid its development falling within the remit of the Strata Law.

It is arguable that a way of opting out of the Strata Law, would be through the exclusion of certain areas on the Site Plan: Article 7 and Article 8 of the Strata Law provide lists of items that would form the joint parts of a joint property (condominium), a building or each unit, and these Articles also contain the caveat "unless the Site Plan provides otherwise".

However, developers should be warned that we understand that drafters had not intended that a development could be opted out of the Strata Law. Could unit owners in such an event be held liable to pay a service charge for common areas retained by a developer?

According to Article 17 (1) of the Strata Law, the Owners Association is established upon the registration of the first sale of a joint property (condominium) unit in the land register held at the Land Department.

Article 18 (1) of the Strata Law states: "The Unit Owner Association is a non-profit organisation and shall have a legal personality independent from that of its members. In addition, the Association shall have the right to litigate in such capacity and have possession of moveable properties .."

Given the important role that an Owners Association will play, surely the question to pose would be is registration (as per Article 17 of the Strata Law) enough to bring an Owners Association into existence? What form will this not-for-profit organisation take? Will a new Federal Law be required to introduce not-for-profit entities to the U.A.E?

A draft version of the Regulations, designed to bolster the Strata Law, is in circulation and the implemented Regulations were set to come into force with immediate effect on 1 April 2008. The Regulations have yet to be applied. However, it is anticipated that the Regulations will be published shortly.

Although not specifically included in the draft Regulations, we believe it is intended that an Owners Association can appoint a caretaker to manage the facilities and general operation of common areas.

The maximum length of term of such an appointment is three years, however, in "exceptional circumstances" (which are not specified), this term can be extended to 20 years and the Land Department would be responsible for allowing such extensions.

Given that the "managed" brand itself, would have contributed to purchasers wanting to buy their unit in such residences, surely this should be taken into consideration when the Land Department assesses the "exceptional circumstances".

As should the fact that, if restricted to three year terms, there could be potential short-term removals of the "managed" brands and subsequent reductions in property values.

When would these three-year and 20-year terms commence? No doubt until the Owners Association is formed, it is a developer, who would continue to manage a development in this twilight period: would this be an additional period to the three year or 20 year terms or, would such a twilight period be deducted from the term of the management contract?

We will have to wait for the Regulations to be published by RERA, in order to ascertain how the management issue will be handled.

David Sanson, Partner, DLA Piper Middle East LLP, with assistance from Jacqueline Latham, Legal Consultant, DLA Piper Middle East LLP.

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