10 Jan 2012

THE GREAT SERVICE CHARGE MYSTERY EXPLAINED

Authored by: Michael Lunjevich

THE GREAT SERVICE CHARGE MYSTERY EXPLAINED

In 2007 it was clear that His Highness Mohammed bin Rashid Al Maktoum, the Ruler of Dubai and Vice President of the UAE, had a vision for Dubai to implement world class standards in respect of service charges for jointly owned property.
 
However, nearly five years later, many investors are still wondering what has become of the great promise of Law No. 27 of 2007 on Jointly Owned Property (“JOP Law”), and many remain in the dark as to what the service charges they pay are used for.
 
Whilst the JOP Law deals with many issues, the brief highlights as they relate to service charges are:
 
(a)           All owners have an undivided share in the common areas (Article 9);
 
(b)           All owners must pay their share of the costs of maintenance, operation and repair of the common areas (Article 22); and
 
(c)           The collection and use of service charges is not for profit (Article 18).
 
In 2010 RERA released the much awaited “directions” touted as regulations for the full implementation of the JOP Law (“JOP Directions”), providing more guidance on these issues in line with the expectations set by the JOP Law.
 
Further, Circular No.1 of 2010 issued by RERA (the “Circular”) set out allowances for developments where the developer has failed to implement the requirements of the JOP Law. The Circular made the following two issues very clear:
 
(1)           Service charges must be calculated in the manner stipulated by the JOP Law and the JOP Directions (i.e. not for profit) and they must be approved by RERA; and
 
(2)           The developer must submit an audit report by an approved auditor to verify all amounts collected.
 
The above all seems very clear and therefore it really is a mystery as to why we have so much confusion. Owners are, in large numbers, scratching their heads not aware of or at odds with developers over what is common property and in some cases with very little idea where their service charges go, and in many cases with audit reports nowhere to be seen.
 
A recent newspaper article stated RERA was a regulatory agency and not a law-enforcement body and therefore its powers are limited. However, a regulator must enforce and this sometimes means they have to get their hands dirty. Fining a few of the developers and forcing compliance with the JOP Law might be a little messy in the short term, but the long term gains cannot be disputed. Unfortunately, if this doesn’t happen soon owners might start to lose confidence in these promising laws and regulations.
 
Looking forward into 2012 what is it that the owners want to see happen? The answer is as simple as one, two, three:
 
(1)           Owners want to see Owners Associations actually registered as legal entities so they can open bank accounts. It's simple; he who has the money has control. At present this is the developer and consequently we don’t see full implementation of the JOP Law. Owners recognise this and this may be part of the reason we see so many defaulters at the moment.
 
(2)           Owners want to see audits of service charges from previous years so they can be sure service charges have been used appropriately. Once owners are comfortable that service charges have not been misused then many concerns triggering non payment should disappear.
 
(3)           Owners that are paying want to see those that aren’t paying suffer the consequences. There are many arguments as to why some owners don’t pay, but these generally relate to their distrust or dispute with the developer. Some claim their SPA does not contain an obligation to pay, however, these are all arguments related to the developer and the public policy justification for payment of service charges outweighs an owner’s dispute with the developer. If the owner really thinks they have a case then they should go to court against the developer and settle it that way. Punishing their fellow owners by not paying is not the answer. 
 
Item 3 above is the one occupying the thoughts of many Interim Owners Association Boards at present. Developers, in some instances don’t seem too concerned by non-payment as it in effect enables them to lend money into the project at inflated interest rates (i.e. 8 + %) which is far more than they can make anywhere else at the moment. Owners, on the other hand are footing the bill and they are very concerned. So what can they do?
 
The Constitution Direction of the JOP Law provides some guidance on what can be done, for instance the withdrawal of votes at a General Assembly, penalties at a rate of 12% per annum, along with the ability to claim from the owner. These are all good in theory but the defaulters are not paying anyway, so they are not concerned by what they may perceive to be hollow threats from non-legal entities. There are also practical issues to be considered such as reducing service levels, cutting costs, “name and shame” campaigns which some have already resorted to but which carry potential defamation risks, or denying access to services and facilities which might be slightly more effective but difficult to implement. 
 
Then there are the legal remedies. These include claims through the courts against the owner based on a personal right but the most interesting and motivating for a defaulter is the possibility of a statutory lien over the owner’s property pursuant to Article 25 of the JOP Law.
 
Article 25(2) grants the Association Manager the right to provide the defaulting owner with notice through the Notary Public. If the default is not remedied within three months then the matter may be taken directly to enforcement through the Execution Court. When an owner is faced with either paying up, fighting lengthy court battles or losing their property, this can be very motivating for payment.
 
The tools are there and they are so tantalisingly close that it is obvious we should be using them, so why aren’t they being used? There are many reasons, but the short answer is probably the uncertainty associated with them. Owners' Associations aren’t legal yet and therefore they aren’t confident enough to try and use the laws. RERA has not yet been highly active with enforcement and the master developers wield a lot of power and generally don’t seem too keen to hand over control to owners. However, this need not deter Interim Owners' Associations pushing the developers and RERA to support them with strong leadership and enforcement.
 
It will just take one bold group who are forceful enough to push for payment through these legal means. One forced sale of a property will serve as a warning to all the other defaulters out there. This won’t necessarily mean a flood of litigation but it could very well mean a surge of money into the service charge coffers to plug the gaping hole these defaulters are leaving.