When regulations concerning Dubai's jointly owned properties take effect, developers and buyers will finally know where they stand. Rupert Wright asks a legal specialist to explain.
Coming to grips with Dubai's Strata Law
As the world watched the fireworks exploding around the Burj Khalifa and other prominent developments were handed over to owners and investors in Dubai, the focus was shifting to considering how these complicated mixed-use developments would be operated and managed.
Law No. 27 of 2007 On Ownership of Jointly Owned Properties in the Emirate of Dubai (the Strata Law) was enacted by Sheikh Mohammed bin Rashid, Vice President of the UAE and Ruler of Dubai, to establish the subdivision requirements for buildings with multiple ownership and provide a mechanism to govern their management. Stephen Kelly, a leading strata title specialist with the international law firm Clyde and Co, discusses the implementation of the Strata Law and how a fully operational strata regime will benefit the property market.
What exactly is strata title? Strata title is a system that enables the subdivision of a building that has multiple ownership into clearly defined "units" and "common areas". The units are separately owned by the owners and the common areas are owned collectively by all owners within the building [or part of the building that has multiple ownership]. Under the traditional method of subdivision, it is not possible to subdivide land into different "layers" to allow for parcels to sit above or below other parcels, such as in an apartment building. The traditional form of subdivision also does not allow for a portion of the land to remain collectively owned, such as shared lobbies, hallways, swimming pools and gyms. A strata title system overcomes these inadequacies.
Why is the implementation of the Strata Law important to the property market? The implementation of a fully operational strata regime in Dubai is extremely important to the property market for a number of reasons. The most important of these is that, once fully operational, the Strata Law will provide a legal framework that enables a building with multiple ownership to be subdivided into units and common areas in a way that is consistent with other leading world markets.
This includes providing a consistent method for the measurement of units, ensuring that owners and investors can compare "apples with apples" when deciding between units within different developments. In addition, the Strata Law provides a further unique benefit in that it introduces a structure to deal with the management and maintenance of the common areas to ensure that the owners' interests are protected at all times.
Where are we with the implementation of the Strata Law? While Dubai's Strata Law was enacted in November 2007, and was intended to take effect from April 1, 2008, the strata title regime has yet to become fully operational as the implementing regulations are still to be finalised by the Dubai Land Department and the Real Estate Regulatory Agency (RERA). Owners and the development industry are awaiting the issuing of the regulations to provide direction as to how the plans and constitutional documents required to be registered with the Land Department are to be prepared under the Strata Law. This uncertainty appears to have resulted in something of a standstill period, with many developers simply delaying the strata implementation process or holding back on certain aspects of this process in the hope that the regulations will be issued shortly to clarify the requirements.
Until the strata regulations have been issued, how are owners protected? In the absence of a fully operational Strata Law, it is generally considered that an owner's right to its unit is a contractual right arising from the sale and purchase agreement entered into with the developer. Provided the owner has satisfied its obligations under the sale and purchase agreement, the owner is considered to be the owner of the unit and the Land Department will issue a title that records the owner's interest in the unit. To date, and in the absence of any alternative, the Middle Eastern market has accepted and afforded a level of comfort to such ownership structure that has enabled the sale of apartments and offices to be transacted and for such units to be used as security for borrowing.
Is the way buildings are managed likely to change under the Strata Law? Historically, owners have not been actively involved in the management of their buildings, as developers have normally sought to retain management for extended terms under the sale and purchase agreement. Many owners are now actively questioning these management arrangements and it appears likely that the implementation regulations will place some form of restriction on developers attempting to retain the management rights, with management contracts entered into by the developers likely to be limited in duration or otherwise restricted.
Once the regulations have been issued, it is expected that the owners, through their association, will take on a greater role in managing their buildings. However, until the regulations that govern and restrict management arrangements have been issued, developers are likely to continue to manage buildings on behalf of the owners. Are service charges likely to be further regulated under the Strata Law?
There has been much attention of late directed at the service charge regime in Dubai, with many owners and investors actively questioning the management arrangements and demanding greater transparency from developers with respect to service charges. RERA has provided owners with invaluable support by requiring developers to have service charges approved by the agency. This has resulted in a substantial reduction in the service charges being levied on owners.
It is, however, expected that RERA's involvement in regulating service charges is an interim measure that should not be necessary once the Strata Law becomes fully operational. As the owners' association will be the body largely responsible for operating and maintaining the common areas and for setting the budget for the building [once the building becomes fully operational under the Strata Law], it is expected that the service charges for each year will be determined by the majority of the owners and therefore largely be within the control of the owners.
How is the Strata Law relevant to mixed-use buildings such as the Burj Khalifa? Burj Khalifa is like many other developments in Dubai in so far as it comprises more than one dominant use. In addition to the Armani Hotel, Burj Khalifa contains commercial offices, retail suites, residential apartments and a variety of other facilities. While these different components within the building may share certain areas, facilities, car parking and essential services, and will have a collective desire to ensure that the building is maintained to the highest standard, the owners within the individual components may desire the ability to determine, to an extent, how their components will be operated and managed. For instance, it is unlikely that the owner of the hotel will want owners of other units in the building having a say in how the hotel operates unless its operation affects the use and enjoyment of their components.
An important consideration with mixed-use buildings is how the cost of maintaining the shared areas and facilities is to be shared among the various component and unit owners in the building, and which owners are to be responsible for ensuring that such areas and facilities are operated and maintained to an appropriately high standard. This involves undertaking a detailed assessment of the building to identify all the shared areas and facilities, determine which components use such areas and facilities, and determine the fair apportionment of costs between the components that utilise them.
Once the Strata Law is fully operational, it is expected that it will provide the framework for the structuring and subdividing of mixed-use buildings to ensure that the interests of all component and unit owners are protected, and that the buildings are managed well. And for the future? Although Dubai is facing challenges caused by the downturn, the implementation of a fully operational Strata Law will assist in accelerating its recovery by providing foreign and institutional investors clear title for their properties, similar to the titles granted for properties in buildings with multiple ownership in other leading world markets. The Strata Law and its implementation will provide developers, owners and investors with the final piece of the puzzle.