Tim Elliot: Welcome to Lawgical, wherever you are listening. It’s the regular weekly podcast from the Dubai-based law firm, HPL Yamalova & Plewka, still the Gulf Region’s first and only legal podcast. I’m Tim Elliot, with the Managing Partner, Ludmila Yamalova. Good to see you.
Ludmila Yamalova: Excellent to see you too, Tim. Thank you for coming.
Tim Elliot: Lawgical is a weekly chance to consider legal questions particular to the U.A.E. Of course, you’re always welcome to get in touch if you want a legal answer to something that is bothering you that is Emirate centric. The best way to find us is via LYLawyers.com. In this edition: Property and the new law on service charges, more specifically, the new Common Properties Law #6 of 2019 here in Dubai. Ludmila, first of all, let’s just run through an overview of the new law.
Ludmila Yamalova: Okay. This is the law that in particular applies to the emirate of Dubai. This is the law that was issued in September of this year, in particular September 24, 2019. The law relates to the management of common properties or jointly owned properties. The law specifically replaces a previous law that was in existence since 2007 which was called Law #27 of 2007 regarding jointly owned properties. That law had been on the books until the introduction of this law. Now with this law, the formal title is Common Properties Law #6 of 2019. This law now fully replaces the previous law and it will become effective as of January 2020.
Tim Elliot: Who does the law apply to specifically?
Ludmila Yamalova: Specifically, the law applies to all forms of jointly owned properties, now for Dubai or the U.A.E. in general, but in particular what that means is that it applies to the majority of the real estate market and the particular real estate that is freehold, and that is where expats have the right to own properties. Most of the freehold communities were developed in such a way where there is always some kind of a common element to them, be it, for example, a community where you have a common pool, a common gym, gardens, and roads, and such, or it could be apartment complexes, or it could just be a building. In the building, even if it is a stand-alone building, there are a number of common properties and facilities that are owned by nobody in particular, and therefore, would be jointly owned. For Dubai, this means the majority of the real estate market and in particular, obviously all the owners of real estate that are located in a community of one type of another. Even if it is not a gated community, and there are a number of neighborhoods like that in Dubai, even in those communities you have certain regulations that apply to a particular community, for example, Meadows Lakes. Even if they are not fully gated, you have roads that are common, you have common facilities and such, basically any real estate that has some common element to it is now subject to this law.
Tim Elliot: Which means it affects a great number of people living in the U.A.E. Let’s drop down slightly. What does Common Properties Law #6 set out and what does the law demand?
Ludmila Yamalova: In relevant terms, we can break it down to three specific provisions that it not so much introduces but clarifies. Most of them were a carryover from the previous law, and they are either now amended or perhaps revamped.
- The law establishes a managing body which is in charge of maintaining and managing jointly owned properties and collecting service charges, amongst other things. That is called the Managing Body. That is one concept.
- The other one is that it also establishes what is called the Owners’ Committee. That is away from the Owners’ Association. It is called the Owners’ Committee. It is more akin to a board of the owners’ association. The Owners’ Committee is the body that has the authority to manage common property and oversee certain actions of the Managing Body. One concept is the Managing Body. The other one is the Owners’ Committee.
- The third concept that is clearly spelled out in this law is regarding service charges, and that is how the services charges will be collected, how to calculate it, and how they are regulated.
Now, the issue of service charges existed in the previous law and the same with the Owners’ Association. Those concepts were addressed in the previous laws, but here the law specifically replaces Owners’ Associations with what is called the Owners’ Committee. The concept of the Managing Body is a new concept.
Those are effectively the three important announcements and three important elements that the law establishes. Once again, it is the Managing Body, the Owners Committee, and the services charges.
Tim Elliot: Can I just clarify something? I’m looking at the law here. The Dubai Land Department will prepare a register for all jointly owned real estate properties in the emirate. That register will have all the information with regards to land owned by developers and real estate units meant for independent ownership. It will also have the names of the owners, members of the Committee of Owners, building management charts, maintenance and procedures in accordance with the laws and regulations of the Land Department. That is a law that demands transparency in terms of shared management costs, who the facility management company responsible for managing those common areas is, and in terms of information about the developers and operators of the project. That information will be, I guess, gathered and managed by the DLD, the Dubai Land Department.
Ludmila Yamalova: That is the theory of it, and that’s the goal. Under the previous law, again, all the jointly owned properties were managed by or at least were under supervision of the Land Department and RERA, being the real estate regulatory authority. In that way, there will be a continuation of supervision by the same authorities. With regard to the registry of all the commonly owned properties, that in fact would be a new development. In the past, RERA and the Land Department, at least in theory, had their own internal records and a database of all the commonly owned properties, and that was part of keeping a registry or keeping a database of all the homeowners’ associations. Those files or that information would have resident with RERA or DLD at the time. Now with the introduction of this law, the expectation is that now that database, whatever the database that perhaps previously was an internal database, will now be at least to some extent shared with the public. It will be some kind of a publicly available registry of jointly owned properties with a certain level of detail available to the public, and based on there law there is some indication that it is information that will become available to the public, for example, the names of the Owners’ Committee, the name of the management body, and the services charges that are attached to the particular property. In theory, that information would be helpful for any prospective investors and prospective owners because they will have access to not just that one property, but to all of the properties that are registered in this database and therefore will have a better perspective of the real estate market and perhaps a better benchmark for their own comparative analysis in terms of investment.
Tim Elliot: Let me just point to services charges for a moment. The law effectively means that property developers are barred from collecting services charges from property owners.
Ludmila Yamalova: Yes. Now with the introduction of this new law, there will be a new system, and in fact, that system is already at least partially available to the public, and it is called the Mollak system. This is, at least as of now, the system that is available through an app that is once again under the supervision of RERA and the Land Department. It is through this Mollak system that all the jointly owned property communities will now have their own Mollak system or Mollak account where all the service charges for the community and individual units will be available and all the invoicing and presumably payment will also be done through this Mollak system. Because this Mollak system will be under the supervision of RERA, versus the developer, at least in theory it gives the owner some assurances of neutrality, or objectivity, and also control of the service charges because one of the complaints over the years has been that the developers are the ones that have been collecting the services charges and owners have had very little accountability as to how those service charges were spent, although even under the previous law in practice all the service charges had to be approved by RERA and RERA would issue a notification for every project as to what those charges were, and so therefore, there was some control and some visibility to the owners and the investors as to what legally the developers were allowed to charge in terms of the service charges, but the fact still remained that developers were the ones who were collecting those service charges and depositing them into their own accounts. How they were spent, the owners and the owners’ associations never had visibility to, and often many of the communities did not even get an accounting or audits from the developers as to the spending of the service charges. This is a big improvement for the system, and since it will be managed and supervised by a government authority the presumption is that it will be better controlled and it will be more transparent and will allow owners some better visibility and control of what the services charges are and how they are being spent. Interestingly enough, and this is quite critical as many owners in Dubai will find this a huge improvement in the law, and that is, there is a specific provision in this new law that now expressly disallows for any party that collects the service charges and/or has any kind of control over the community, be it the developer or the management body or anyone else, to deny or to cut any services of the owners to the property on account of service charges either not being paid or being paid late. In the past, and this has caused a lot of grievances in the communities, that some owners would, for example, withhold payment of service charges, perhaps because they were unhappy with how certain parts of elements of the property were managed or perhaps because the audited accounts which they were expecting to see form the developers were never presented to them or for whatever other reason, and in many cases the owners believe that they have legitimate reasons to withhold payments of the service charges. In that case, or in the past, the developers would cut services to all those homeowners who, for example, had not paid their service charges. There have been many examples, public examples, where the developers would deactivate access, parking access for example, to the owners of the properties. In some cases we have heard developers have deactivated elevator access in high rises for the elevators that require access cards or they would cut off electricity or other utilities, and so on and so forth, or access cards to use common facilities, like a pool, gym, beach, and gardens. There have been numerous examples where developers have used this effective control, physical control over the property as leverage to force owners to pay service charges, and yet the owners did not have any leverage over the developers in terms of accountability or even transparency in understanding (1) how the service charges are spent and also (2) improvement of common facilities. At least in theory, the presumption is in this case with this new law and, in particular this clause, parties will no longer be allowed to do this because the law clearly makes it illegal. That should bring much better balance into the community. This, for sure, will be very positively received by many, many owners out there.
Tim Elliot: Another aspect of the law is it would also seek to clearly define common areas and amenities as well in buildings.
Ludmila Yamalova: Yes. That is something that is actually a much bigger undertaking than some may expect. This is because there are so many types of jointly owned properties here. For years, it wasn’t necessarily clear as to which parts and which facilities of these jointly owned communities were owned by whom. For example, let’s say if you have a building. It is a little easier to identify just a stand-alone building but a high-right building, for example, that has many individual owners, yet it has elevators, landings, a reception, a lobby, and all of the internal infrastructure, obviously all that has some common element to it. Yet, it is still just one single building. In that case, it is still easy to identify who owns what. The owners own the individual units and then everything else is owned jointly and in proportion to their interest I the building. That is an easier case.
But what if you have a closed-off community where you have apartments, villas, a hotel, a pool, gardens, a gym, a restaurant, landings, or an outdoor space. The question there is who owns all of that? Who owns the restaurant, for example? Do the individual owners have an interest in that restaurant? What about the hotel? Does the hotel have any kind of interest in the restaurant or the pool? And so on and so forth. The ownership of these commonly owned properties or even identifying what is common and what was not has been a work in progress and that’s because Dubai obviously grew very fast and perhaps few anticipated this great success for it and as a result a lot of these elements were not properly squared away. I will tell you, even if you look back at the original contracts and sales and purchase agreements, most of them would refer also to annexes, for the master planned community, this declaration of the community. They would refer to an annexes, but those annexes were often not attached, and that is because even as of that time it was not quite clarified as to the respective rights and interests in the various aspects of a jointly owned association or a community or a property. With the introduction of this law, the expectation is that at this point now in the hopefully foreseeable future all of these communities will have a better plan, a blueprint of what’s what, who owns what, and what interest is perhaps is owned by whom. Yes, that’s an extremely important element. It’s nothing that is necessarily new to this law, but the expectation now is that the licensing authorities have enough data to have processed it and that now all the parties and all the stakeholders will in fact be forced to come forward and come together and finally finalize all the loose ends of the master communities.
Tim Elliot: It is a move that effectively and clearly defines a developer’s role in common properties which, as you pointed out, has historically been something of a gray area in some ways, so it is a real – excuse the pun – concrete development, Ludmila, because it puts RERA in charge, doesn’t it? If I can quote for a second, “the Real Estate Regulatory Agency will regulate the management of joint ownership, oversee real estate developers, and conduct inspections on the operation, management, maintenance, and repair of jointly owned properties and their common areas and facilities.” It really clears the way.
Ludmila Yamalova: Indeed. Although in the past RERA and its related entity, DLD, the Dubai Land Department, they were involved with jointly owned properties in the sense of at least setting and regulating service charges, they were not in charge. They were involved but they were not in charge of regulating and managing these communities or overseeing the management of these communities. Effectively the parties that were in charge, as you rightfully said, were developers. Even though the law had a different provision in place, but in practice it was the developers. So now by the introduction of this law, that control is being taken away from the developers and given to RERA, which obviously is a government authority so the presumption is that they will be a neutral and objective body that is obviously very experienced because it’s very essence is controlling and managing real estate. It will be neutral, and it will be an experienced body that will from now on manage the jointly owned properties. In particular, it will also, in addition to the service charges, for example, and managing the Mollak account or the service charge account, it will also license the management bodies. These are the management bodies that are now replacing homeowners’ associations. RERA, once again, will be responsible for licensing and management of those entities.
Tim Elliot: I have also read that the law implicitly states that real estate developers are responsible for damage to the property for the first 10 yeas of a development as well. That’s not a new concept, of course. That was clearly already here, but it is akin to I suppose a builder’s guarantee, isn’t it, legally speaking?
Ludmila Yamalova: For sure. In other terms, it could be called a construction defect statute of limitation. The fact that that provision is mentioned in this law is very helpful. As you said, there are other federal laws that have always addressed that as a requirement for developers, but it wasn’t so specifically stated in the real estate law. Now, the fact that it’s here and it’s accessible and it’s very easy for any investors to refer back to this one body of law versus trying to piecemeal different laws to try to prove to the developers that they are responsible for certain construction defects, this would be very helpful for many because as is often the case with new properties and this is perhaps why this law exists, not only here, but in other countries, and that is that there are all sorts of growing pains when a building is first released in the market. There is now a clear provision that makes it an obligation for the developers to continue to be responsible for any construction defects or structural problems with the properties for the next 10 years after handover.
Tim Elliot: Can I ask you to speculate for a moment? I hate doing this with you, but your perspective is uniquely U.A.E. real estate and local, particularly Dubai, but what of the impact on the property market? The market is down just now. What kind of effect might a law like this have, would you say?
Ludmila Yamalova: There are different angles to it. One angle I can foresee, a positive angel, and that is that there have been many grievances over the last many years that the buildings have not been improved or certain facilities are being dated. Obviously, as time goes on, there is the normal wear and tear, but yet, the service fees have historically been considered to be quite high in a lot of developments, residences and owners believe that the quality of the upkeep and the quality of the management maintenance did not correspond with the amount of service fees that they paid, and there was not much they could do about it in terms of calling the developers to task and having some visibility to the books and the accounting as to why the service charges were what they were and why were they not being reflected in the way that investors or owners expected. With the introduction of this Mollak system, I could see where now owners will no longer have to worry about withholding the service charges, for example, being abused or used against them by developers by cutting off their services. Now I can see that there is a better system for owners to pay into where they do not need to necessarily question the use of these funds because they no longer will be going to the developers’ account. They will be held in a specialized account so I can see how many owners may have better comfort in terms of paying service fees, and obviously if everybody pays service fees timely then the management body will have better funding and more timely funding to address the various concerns with the property. That was also one of the complaints that developers have had. Because when owners don’t pay the service charges, the developers don’t have enough money to carry on the upkeep. It is a double-edged sword. I can see how with this Mollak system, owners might be more forthcoming to pay the service charges and also because of that, ironically enough, I think that many of them now know they will not necessarily be penalized for withholding the payment of service charges, they may not want to withhold only because they now know it goes into a more neutral account. I think that is very helpful.
- With regard to RERA now taking control over the jointly owned communities, I think that’s helpful because it’s now taking developers out of the equation.
- At least in theory appointing a more neutral body supervising and managing, I can see how that also perhaps would give investors more confidence.
- Then the visibility of the registry of all the jointly owned properties and all the details that will be at least in the future available to the greater community about all the properties that are on the market and the respective service charges. I think also one of the other elements in the database will be listing out of all the facilities that these jointly owned properties will have and clarity as to which part of those communities is owned by whom I think also will give a lot more clarity and therefore confidence.
Overall, I think it certainly is a huge improvement and a very positive development. As time goes on, I can see the many positive effects as a result of this law.
Tim Elliot: Ludmila Yamalova is the Managing Partner of the Dubai-based law firm, Yamalova & Plewka. As ever, Ludmila, I really appreciate your time.
Ludmila Yamalova: Always a pleasure, Tim. Thank you very much.
Tim Elliot: That’s another episode of Lawgical, this time considering the Common Properties Law #6 of 2019. We can’t cover every aspect of the U.A.E.’s legal framework in each episode of his podcast, but if there’s a legal issue you would like an answer to get in touch via Lylawyers.com or via any of the social channels. We’ll try to answer it for you in a future episode. For a legal consultation, hit Contact at Lylawyers.com or WhatsApp direct, 0097 152 525 1611.