08 Jun 2010

NEW STRATA LEGAL OBLIGATIONS FOR DEVELOPERS

Authored by: Brent Baldwin

NEW STRATA LEGAL OBLIGATIONS FOR DEVELOPERS

A number of “Directions” have now been issued which provide greater clarity and certainty for developers and owners in terms of achieving compliance with the Jointly Owned Properties Law in Dubai. Brent Baldwin provides further detail regarding the new Directions and analyses the implications of the new disclosure requirements for developers.
 
In brief:

  • Developers must comply with new guidelines that cover:
    • timeframes set for the registration of Jointly Owned Property Declarations for completed developments
    • restrictions on entering into Supply Agreements on behalf of Owners’ Associations
    • provisions relating to the financial management of Owners’ Associations
    • the extent to which costs can be on-charged by a developer
    • the protection of purchasers through the issuance of Disclosure Statements.


   
Law No.27 of 2007 concerning Ownership of Jointly Owned Properties in the Emirate of Dubai (JOP Law) was issued on 10 December 2007. The lack of implementing regulations to the JOP Law has until now created a degree of uncertainty about how the JOP Law will impact owners and developers.
 
A number of “Directions” have now been issued which provide greater clarity and certainty for developers and owners in terms of achieving compliance with the JOP Law.
 
In the first of a series of articles analysing the new Directions, Hadef & Partners highlights areas of specific interest to developers, owners and anyone else with an interest in jointly owned property. In this article, we provide further detail regarding the new Directions and analyse the implications of the new disclosure requirements for developers.
 
What are the new Directions?
 
Three Directions have been issued. These comprise:

  1. Direction for Jointly Owned Property Declarations. This sets out the information a developer is required to include in a Jointly Owned Property Declaration and requires that it be filed with the Dubai Lands Department (DLD). This Direction requires developers to register Jointly Owned Property Declarations in respect of completed projects by 12 October 2010.
  2. Direction for Association Constitution. This sets out a standard form constitution for Owners’ Associations which will replace all existing constitutions.
  3. Direction for General Regulation (General Regulation). The General Regulation establishes a developer disclosure regime, sets out procedures relating to financing, places limits on supply agreements and addresses various other matters. The disclosure regime is analysed in further detail below.

It is also expected that a Survey Direction will be issued shortly dealing with matters such as the registration and duties of surveyors and the manner of preparation of survey plans.
 
What is the legal status of the Directions and when do they commence?
 
Although there continues to be some question marks over the legal status of the Directions, Article 32 of the JOP Law allows the chairman of the DLD to issue regulations and make decisions necessary for the implementation of the JOP Law.
 
The Directions refer to separate regulations as do the RERA JOP Law explanatory materials and accordingly, it appears at this stage that formal legal regulations pursuant to Article 32 may still be intended. We suggest however the Directions will either form the basis of any regulations or themselves be the regulations and therefore law pursuant to Article 32. Accordingly, owners and developers should comply with the Directions in order to ensure future compliance with the JOP Law and associated regulations.
 
What are the main implications for developers?
 
The Directions have a number of implications for developers. In particular there are clear timeframes set for the registration of Jointly Owned Property Declarations for completed developments, restrictions on entering into Supply Agreements on behalf of Owners’ Associations and a number of provisions relating to the financial management of Owners’ Associations. In addition, the Directions deal with the costs that can be on-charged by a developer and a number of rules relating to the protection of purchasers through the issuance of Disclosure Statements. We provide further information on Disclosure Statements below.
 
What is meant by disclosure?
 
Chapter Two of the General Regulation creates onerous obligations for developers to disclose a number of matters to purchasers.
 
Before a purchaser signs a sale and purchase agreement for a proposed or under construction unit, or a completed unit where title has not yet been issued, the developer must give the purchaser a written statement setting out a number of items of information regarding the development.
 
What kinds of information must a Disclosure Statement contain?

 
The Disclosure Statement must include a description of the building or project, including a number of specific details such as:
the intended land uses within the building or project. For example, residential, furnished, hotel apartments, retail, offices etc.
any features in the building or project that contribute to ecological sustainable development
any special uses that apply to the unit being purchased
any facilities on proposed common areas that are available for use by owners and occupiers as of right
the details of any commercial facilities in the building or project.
The above details must be included in an “Interim Disclosure Statement”, which is discussed further below.
 
In addition to the matters covered by an Interim Disclosure Statement, the following matters must be covered in a “Full Form Disclosure Statement”:
copies of any Jointly Owned Property Declaration and Building Management Statement
a schedule of material and finishes for the unit and its measurements
copies of any agreements relating to the supply of goods and services (including utility services) to an Owners’ Association
a budget for both the general fund and the reserve fund and an estimate of service charges, for the first two years financial operation of the Owners’ Association
details of any proposed arrangements for the supply of utility services to the unit
the details and costs of any utilities being supplied by a non-government entity
details of supply arrangements where an Owners’ Association is on-selling utility services to owners
the estimated dates for completion of construction and the date the unit will be handed over to the purchaser
a statement concerning the purchaser’s obligation to register their sale and purchase agreement in the interim or final property registers.


What happens if a Disclosure Statement is incomplete or inaccurate?
 
The sale and purchase agreement will be void and of no effect if a developer fails to provide a purchaser with a Disclosure Statement. Obviously this requirement is of critical importance and it remains to be seen how the courts will apply this in practice.
 
In addition, the General Regulation implies a warranty from a developer that the information contained in a Disclosure Statement is true and correct. If within two years of the date on which the unit is transferred from the developer the Disclosure Statement is found to be materially inaccurate or incomplete, the developer will be liable for damages.
 
Please note it appears this warranty does not only apply to purchasers who buy directly from the developer. Purchasers who on-sell their units to third parties are also required give the new purchaser a copy of the Disclosure Statement received from the developer and the developer can also be liable to third party purchasers for breach of that warranty.
 
When does a developer need to commence handing out Disclosure Statements?
 
The disclosure obligations are calculated from the date the directions became effective, being 13 April 2010 (Effective Date). For certain existing projects, during the first three month period from the Effective Date (i.e. up until 12 July 2010 (the First Period)), a developer is only required to attach a notice (in the approved RERA form) (Notice) to a sale and purchase agreement before it is signed by a purchaser. This obligation also applies to purchasers who are on-selling an off-plan unit. If that notice is not attached, the subsequent sale and purchase agreement will be void. Additionally, it will be critical for developers to closely monitor any on-sales to ensure any subsequent purchaser also receives that notice before they agree to cancel the initial sale.
 
For existing projects, during the six month period following expiry of the First Period (i.e. up until 12 January 2011 (the Second Period), a developer must supply the purchaser with an Interim Disclosure Statement as well as attach the Notice to the sale and purchase agreement. Again, this obligation also applies to purchasers who are on-selling and the failure to comply with this will make the subsequent sale and purchase agreement void.
 
From 13 January 2011, full disclosure requirements will apply to existing projects and developers will need to provide purchasers with a Full Form Disclosure Statement.
 
What about sale and purchase agreements that have already been signed?
 
The obligation to make disclosure arises before a purchaser signs a sale and purchase agreement for a unit that is under construction, where construction has not yet commenced, or in a completed project where titles have not yet issued. Arguably therefore, sale and purchase agreements that were signed before the Effective Date do not require disclosure.
 
What is less clear however is whether an on-sale by an existing purchaser to a third party, which involves signing a new sale and purchase agreement, will attract disclosure obligations. It appears that in those cases the new sale and purchase agreement will only need to have a Notice attached but the purchaser will not be required to attach an Interim Disclosure Statement unless the developer was required to provide one when the original sale and purchase agreement was signed.
 
What else do I need to know?
 
This Hadef & Partners article sets out a broad overview of some of the issues associated with the Directions and the disclosure requirements in particular but as always, you should take specific legal advice to determine exactly how you will be affected by the Directions.
 
There are also a number of other issues raised by the Directions that are of significance not only to developers but also Owners’ Associations, hotel operators, owners and managers. Hadef & Partners will be issuing further analysis of the Directions and how they are being implemented over the coming weeks.
 
Hadef & Partners assists in all matters relating to the JOP Law including the structuring of jointly owned property developments, preparation of Building Management Statements and Jointly Owned Property Declarations, the establishment of Owners’ Associations, negotiation and preparation of Supply Agreements and all associated matters.