Recently the Land Department issued a press release stating that it has issued "guidelines" implementing Dubai's Strata Law (Law No. 27 of 2007). The press release states that the guidelines are based on "four enabling regulations" to be issued being the General Regulation, the Jointly Owned Property Declaration Regulation, the Constitution Regulation and the Survey Regulation. It is expected that these enabling regulations are to be issued by the Land Department in the coming weeks.

Clyde & Co has been provided with a copy of the guidelines from the Land Department. The guidelines provide commentary and direction as to the intent and substance of the enabling regulations. Although the full extent and impact the regulations will have on owners, operators, developers and the various sectors of the development industry will only be determined when the enabling regulations are made available, the guidelines highlight some key features that will be covered in the regulations.

Disclosure Statements

It is clear from the guidelines that a strong focus has been placed on consumer protection especially in relation to the sale of units 'off plan'. The regulations aim to substantially increase the level of disclosure required from developers to consumers prior to the entering into of sale and purchase agreements. We expect that this is largely in response to the degree of variation that has often occurred between the promotion and delivery of units with many consumers unhappy with the variation to their delivered units.

Although it may be said that the previously speculative nature of the market was such that many purchasers did not concern themselves with the completed product, the market has moved on substantially since this time and the focus is now firmly upon ensuring that units will be delivered substantially in accordance with the manner and the timeframe as promoted.

The disclosure regime will centre on the delivery of a 'disclosure statement' by the developer to the purchaser prior to the entering into of a sale and purchase agreement. The disclosure statement must disclose the key features of the development and include detailed information such as a copy of the unit plan (including unit area calculated in accordance with the regulations), a schedule of materials and finishes, a copy of the estimated budget (including estimated service charges), the construction commencement date and the estimated date of handover. In addition, the disclosure statement must attach copies of the draft constitutional documents intended to be registered and provide details of utility and other supply agreements intended to be entered into.

There is to be a relatively short relief period for 'existing projects' being projects that are in existence or about to be released to the market within three months from the date of the regulations. For the first three months after the release of the regulations (the 'first period') the developer need only attach a disclosure 'notice' to the sale and purchase agreement for existing projects in the form prescribed by the Land Department (still to be released).

After the first period, for the following six months (the 'second period'), in addition to attaching the disclosure notice, the developer must provide the purchaser with an 'interim disclosure statement'. This statement must contain substantially the same information as the full disclosure statement with the exception that it need not attach copies of the constitutional documents or provide detailed information regarding budgeting, service charges and the utility providers.

After the expiration of the second period (or if the project is not an 'existing project') the developer must prepare and provide the purchaser with a full disclosure statement that contains all the pertinent information.

Should the developer (or any purchaser looking to on-sell the unit) fail to comply with the disclosure requirements, it appears that the sale and purchase agreement will be voidable (presumably at the election of the purchaser) and the agreement liable to be set aside.

Furthermore, developers are deemed to have warranted that the information in the disclosure statement is complete and accurate in all material respects and will be liable to pay purchasers (or subsequent purchasers) damages arising from any loss that may be suffered as a result of any incompleteness or inaccuracy.

Developers will need to invest time in ensuring that their developments are structured appropriately and that their disclosure statements fully comply with the regulations to avoid future liability.

Supply Agreements

It is also clear that RERA and the Land Department have a strong focus on regulating 'supply agreements' that are entered into by owners' associations, especially agreements entered into by developers on behalf of the owners' associations prior to their formation.

The guidelines provide that a regulated supply agreement will be any supply agreement that exceeds one year including any agreement for the supply of utility services to the building. No supply agreement may be longer than three (3) years (notwithstanding previous suggestions of a five year maximum term) and all supply agreements must be at competitive market rates.

Any supply agreement entered into by the owners' association (or the developer on its behalf) may be set aside by the majority of owners at the first annual general assembly of the association if such agreement was entered into whilst the owners (other than the developer) held less than two thirds of the 'entitlements' in the building. An owner's entitlement is effectively the proportion of the common areas of the building attributable to the owner's unit based on area and the extent that the unit draws on the resources of the association.

Interestingly, the guidelines state that any service contractor entering into a supply agreement with an owners' association must perform all of the services that are the subject of the agreement and may not sub-contract any part of the services to third parties. Although this may have been intended to prevent an overlapping of management roles and costs between the association manager and an appointed facilities manager, this restriction has the potential to impact professional facilities management firms that are able to pass savings on to owners from their ability to bulk purchase services from third party sub-contractors.

It is still to be clarified if the restrictions to be placed on supply agreements under the regulations will impact upon arrangements entered into by hotel operators with respect to the operation and management of branded residences and buildings that contain hotels.

Service Charges

Services Charges have been a contentious issue in Dubai for some time with many owners questioning the levels of service charges and the value and quality of services they receive from service providers.

Although RERA has assumed the responsibility of approving service charges in an attempt to curb certain practices and reduce the overall level of service charges, it seems clear from the guidelines that RERA's role will be formalised in the regulations and that all service charges will continue to be approved by RERA before they may be collected by developers or owners' associations.

The guidelines state that the regulations shall provide relief to owners' associations where owners do not pay their service charges or do not comply with the association rules. In addition to being able to impose monetary penalties on defaulting owners, owners' associations shall have a statutory 'lien' over the owner's unit in respect of outstanding service charges and costs. Although it may be inherently difficult for an owners' association to obtain an order from the court forcing the sale of the unit in the case of unpaid service charges, the creation of a lien will put an owners' association in a position whereby it may commence proceedings against defaulting owners seeking an order to this effect.

Mixed-use Developments

As the guidelines concentrate more on the establishment and management of single strata schemes (such as an entire residential building), it will be necessary to look more closely at the enabling regulations once issued to determine the full impact they will have on mixed-use developments that comprise more than one use.

Generally in mixed-use developments there will need to be at least two layers of management. The upper layer of management would represent the various 'component owners' and deal with the operation and management of the parts of the development that are shared or otherwise impact upon the development as a whole. Below this upper management level, if a component within the building has multiple-ownership (such as a residential or office component), such component will require a second level of management to deal with the operation and management of the common areas within such component that are shared by the owners.

It was expected that under the regulations there would be two methods by which a mixed-use building could be subdivided. The first method (referred to as a 'layered scheme') involves the strata subdivision of the building and the creation of an owners' association at both levels of management. Accordingly, there would be a 'principal association' and 'principal common area' at the upper management level and 'sub-associations' and 'sub-association common area' for each component of the building that has multiple-ownership.

The second method of subdivision does not involve the creation of an association at both levels but instead involves the volumetric subdivision of the building and the creation of a 'building management group' to manage the building at the upper level. Although these methods of subdivisions have similarities, it is generally considered that the second method is more appropriate for truly mixed-use buildings as it provides a greater degree of flexibility as to how the building may be structured including flexibility as to how shared areas are managed and costs are allocated between the benefiting component owners.

Although there is some suggestion in the guidelines that all mixed-use developments would be required to be managed under a layered scheme and have a principal association, RERA has advised that it may, in appropriate situations, not require the formation of a principal association and allow the building to operate under a building management group.

Although it is clear that RERA favours the layered scheme approach and will be looking closely at any structure that follows the building management group approach to ensure that all component owners are being fairly treated, the following are possible criteria that may be considered by RERA in approving a building management group structure:

  • There is no (or limited) principal common property
  • The volumetric components operate largely independently of each other and there is limited integration between components
  • There are specific ownership and licensing requirements that restrict the creation of principal common areas
  • The development contains unique features (such as being a tourist attraction or has unique security issues)

Master Communities

It appears from the guidelines that master communities are intended to be governed by the Strata Law. Accordingly, master developers may be required to transition their communities into the strata regime to comply with the law during the transitional period. This may involve the formation of a 'community association' comprising the owners of the villas or buildings in each community. This community association will effectively step into the shoes of the master developer and assume the responsibility of operating and maintaining the master community common areas and facilities.

The full extent to which the Strata Law is to impact upon master communities under the regulations is still to be clarified.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.