Nothing sets my teeth on edge like a real estate hoarding screaming ‘Buy Now, Pay Later’. If one were to apply such signs in actual terms, I wonder whether the next hoarding that will knock my teeth off will read ‘Buy One, Get One Free’. One of the key issues faced by investors in sale and purchase of off-plan properties is that buyers are not entirely sure if the apartment or unit purchased will, in fact, turn out to what was exactly agreed.
Speaking purely and entirely on concerns, one of the key issues that homeowners generally face is in the area of i) management and operation of property upon handover, ii) maintenance fee and service charges that will have to be paid and rights and; iii) interests of owners, and occupiers in the common areas. The concept of strata is where an individual or entity has the right and interest in the ownership of cubic air space within an allocated area.
In other words, strata law means the subdivision of a developed building property or the gated community into different layers. Each layer is then subdivided into one or more units along with common areas which form the part of the property.
The real estate industry has been expecting new property laws in the Emirate of Abu Dhabi in order to expand growth and expecting a measured response over the impact of the potential oil output freeze. Further, every law enacted gives hope to people that it would bring a positive change in safeguarding their rights. Real estate industry involves a comparatively higher stake and one clearly cannot assume that he/she is fully aware of the regulatory landscape. The Emirate of Abu Dhabi recently enacted Law Number (3) of 2015 concerning the Regulation of the Real Estate Sector in the Emirate of Abu Dhabi (the New Law). This was a long-awaited legislation which primarily aimed at regulating the real estate industry in the Emirate of Abu Dhabi. It is expected that it will give impetus to real estate industry as the provisions of the New Law provides additional clarity and legal certainty. The enactment of the Real Estate Law represents a watershed in the Abu Dhabi real estate industry, particularly in the investment areas where the absence of a real estate law has been keenly felt.
Demand and supply inequity can have significant repercussions on real estate industry and new law aims at addressing this concern by placing a higher degree of responsibility on property developers in Abu Dhabi. Expat residents are more likely to invest long-term in the market and non-resident customers are expected to buy peace of mind from the New Law. The New Law will also lessen the impact of potential cyclical economic factors such as the effect of oil price movements on the real estate prices which would create a less volatile environment in order to enhance the investment and growth in the sector.
The New Law has elevated the level of consistency in the disclosure statements and consumer protections in the Emirates of Abu Dhabi and Dubai. Further, there is no substantial difference in the matters which are mandated to be disclosed by the parties. Therefore, the developer is liable to pay damages regarding any irregularity in the contents of the disclosure statement for a period of two years from the date the unit is transferred to a purchaser.
Further, the New Law has considerably aligned the developer’s liability for defects in both the emirates of Dubai and Abu Dhabi. Therefore, the developer would be liable for structural defects in the building for 10 years from the date of receiving a completion certificate. For defective building installations, the liability period of the developer for replacing or repairing the defect is for a period of one year. Whilst the requirements to constitute an owners’ association between the two jurisdictions is very similar, Abu Dhabi has gone a step further with the inception and implementation creation of a new concept. The New Law has provided that the administrator of the owners’ association is the developer or another person who is appointed by the Chairman of the Department of Municipal Affairs (the Department) to carry out the owners’ association’s operations. Further, the administrator would bear the responsibility for the affairs of the owners’ association including the responsibility for its management and operation of the common areas, public services, and service facilities.
The New Law has also implemented another provision which has no direct nexus to the strata law in Dubai[i]. Although we don’t yet have any clear guidance as to its intention or implementation, we do think there are potential opportunities for creative developers. In Abu Dhabi, the owners’ association has the right to own stocks and shares in service companies related to their own strata plan and to grant exclusive rights over common areas.
The new Strata Law introduces a number of key new features to the laws regulating multiple-owned developments, including:
- The determination of surveyors’ directions to standardise the area measurement methodology used by developers;
- Provisions for the formation of owners associations which can hold title to common property within multiply owned developments and be responsible for its repair and maintenance. In Dubai, each owners association have a prescribed form of constitution, and an owners association may itself be a member of a higher owners association, thereby permitting the registration of layered strata schemes;
- Provisions for sub-division of the title into units and common areas. In Dubai, the Strata Law contemplates the ‘volumetric’ subdivision of a building into designated components. This is particularly important for mixed-use developments that include a hotel as hotel operators wish to avoid being part of an owner’s association structure;
- new requirements for the sale and marketing of off-plan units, including the developer’s ownership and development rights over the project land, establishment of an escrow account, registration and approval of the key development plans from the Department. Given the restrictions on withdrawals from escrow, the developer will effectively have to self-fund (or obtain loan finance) to enable the project to reach 20% completion of construction works;
- providing off-plan purchasers with express termination rights in cases of ‘substantial prejudice to their rights’. Although certain examples have been provided as to what constitutes ‘substantial prejudice’, this list is not exhaustive. We, therefore, recommend the developers to provide maximum disclosure to the purchasers in order to avoid any potential claims by the latter as to any substantial prejudice;
- similar to the position in Dubai, there will be a general requirement for a ‘disclosure statement’ to be attached to the sale and purchase agreement which provides the prescribed information. The form of this disclosure statement will be set out in the regulations although it is expected that this will be similar to the form prescribed in Dubai;
- provisions for the automatic imposition of a lien to be placed on a real estate unit in the case of unpaid service charges. Dubai has a similar lien although the enforcement of this lien has proved to be difficult, so it will be interesting to see whether the same develops in Abu Dhabi; and
- the developer now has an express decennial (10-year) liability for the structural integrity of the building, with a one-year defect liability period. This is similar to the position in Dubai.
[i] Please refer Court Uncourt, March 2015 for Dubai Strata Law available online at https://www.stalawfirm.com/en/blogs/view/dubai-property-law-strata-law-explained.html