As the boom in property development and tourism in Dubai continues we foresee Hotel Strata Title Schemes becoming increasingly prominent modes of property development.
Typically a property owner would develop his property by constructing a hotel on the property and thereafter either selling or leasing the hotel suites to individual purchasers or lessees.
This article commences with an examination of the various legal concepts related to Hotel Strata Title and thereafter briefly discusses leasehold and other types of unit title ownership.
The term "Hotel Strata Title Scheme" refers to those building(s) whose suites ("Strata Units") are individually owned but are collectively marketed and operated as a hotel. The building(s) usually have a front desk, house cleaning and in some cases food and beverage facilities or room services. Often these hotels are marketed with sophisticated sales packaging and large incentives for purchasers to purchase the Strata Units.
Some of the building(s) may have multilayers of rental managers, Strata Unit owners and a residential/commercial mix. There is an inter-relationship between the strata management company, the rental management company, the developer and the Strata Unit owners. It is a complex arrangement but the goal is the same for everyone - maximize revenues and reduce costs.
What is Strata Title?
Each Strata Unit owner owns a specific hotel apartment or unit called a "Strata Unit".
If this scheme is introduced in Dubai in a development wherein foreign freehold ownership was permitted, the scheme would work as follows:
Article 1188 of Federal Law No. 5 (1985) deals with ownership of floors and apartments and provides that:
"(1) "if there are several owners of storeys in a building or of different apartments, they shall be deemed to be co-owners of the land and of the parts of the building intended for common use by them all or any other part registered under such description for which, by the nature of the building, must be in common ownership, including in particular the following:
(a) foundations and structural walls;
party walls, walls of entrances, and walls supporting the roof;
(c) ventilation ducts for amenities;
(d) roof supports, gangways, entrances, yards, ceilings, stairs and stairwells, corridors and passages, floor supports, lifts, and porters' rooms; and
(e) heating and cooling appliances and other pipes, nozzles, drains, and installations and extensions used in common such as lighting and water appliances and appurtenances, and all that forms part of the building save those parts inside any particular floor or apartment.
(2) All the above shall apply in the absence of any contrary provision in the title deeds or the law."
Thus Strata Unit owners also collectively own the "Common Property". Common Property typically includes the hallways, stairs, underground parking areas, gardens and recreational areas. The Strata Unit may also have attached to it a parcel of "limited use Common Property" - such as a balcony, parking space or storage locker which is not owned by the Strata Unit owner but which the Strata Unit owner has the right to use on an exclusive use basis subject to certain restrictions.
Article 1189 of Federal Law No. 5 (1985) deals with the division of the Common Parts of the building(s) and the owners share thereof and provides that "the common parts of the building(s) provided for in Article 1188 cannot be divided up, and the share of each owner in them shall be in proportion to his share in the building, and no owner may dispose of his share independently from the other."
An owners enjoyment and use of the Common Parts of the building(s) is dealt with in Article 1191 of Federal Law No. 5 (1985) which provides that "each owner may enjoy the use of the common parts for the purpose for which they were intended provided that such use does not interfere with the exercise by the remaining co-owners of their rights."
A strata plan will be prepared, which describes the building and its associated land. On this plan the building is divided into Strata Units (each of which has a strata title) and Common Property. The strata plan will be registered at the Lands Department and each owner will be issued with a Certificate of Ownership in respect of his individual Strata Unit.
Although there are various provisions in Federal Law No. 5 (1985) related to ownership of floors and apartments there is no detailed strata or condominium law one usually finds in other jurisdictions. However, as our property law develops over time, a strata or condominium law will develop along with development of the property market and strata concepts.
What is the Association of Owners?
If the Hotel Strata Title Scheme is adopted an Association of Owners will be formed for the Scheme. The Association of Owners is the body made up of all the owners in the Hotel Strata Title Scheme pursuant to the provisions of Article 1197 of Federal Law No. 5 (1985). Article 1197 (1) provides that "whenever there is coownership of real property divided into floors or flats, the owners may form an association between them for the management thereof and to ensure proper enjoyment thereof." Each Strata Unit owner becomes a member of the Association of Owners and has the right to participate in the Association's decisionmaking. At first the Association will be made up of the developer and the first Strata Unit owner but as each person buys into the scheme the Association of Owners gains more members.
The Association may also adopt rules and regulations binding upon all Strata Unit owners regulating the use of a Strata Unit, recreational facilities and Common Property. The Association will delegate the management and rental functions to a hotel strata management company.
There are also various provisions in Federal Law No. 5 (1985) which impose restrictions or responsibilities on Strata Unit owners, such as Article 1193 which provides that, "No owner may make any alteration in the common parts without the consent of all the owners even when the building is being renewed unless the alteration he makes is such as to increase the benefit of such parts and is not such as will alter its purpose or cause any prejudice to the other owners."
What sort of expenditure would Levies be used for?
Each Strata Unit owner will be required to pay levies for the repair, maintenance and administration of the building(s) and other matters related to the running of the Hotel Strata Title Scheme. Article 1192 of Federal Law No 5 (1985) provides that "each owner shall share in the costs of preserving, maintaining and managing the common parts, and his share of the costs shall be in proportion to the value of the property that he owns unless there is a contrary provision in the rules for the management of the building, and any owner who causes an increase in the expenses of the building shall be responsible therefore. An owner may not dispose of his share in the common parts in order to avoid paying his share of the expenses."
These are the levies payable in respect of the Common Property of the Hotel Strata Title Scheme and examples of these levies will include payment of the following common expenses: water and electricity charges, building and public liability insurance, repairs and maintenance of furniture and the building(s) and workers' compensation insurance.
Usually an administrative fund and a sinking fund will be established. The dministrative fund is for the day to day operation of the scheme such as paying the gardener, the insurance provisions, photocopying, stationery, stamps and light bulbs for common areas.
The sinking fund is for necessary long term future expenditure such as painting and replacement of air-conditioning units, refurbishment. The idea of the sinking fund is to have enough money available when the job needs doing rather than an Association of Owners imposing a large sudden levy on Strata Unit owners when the time comes. The Association of Owners (or their duly appointed strata management company) are required to plan and estimate their long-term expenditure. Contributions made by Strata Unit owners to the sinking fund are not refundable by the Association of Owners should the person later move out of the strata scheme involved, even if the money has not yet been spent on the item the levies were contributed for. Usually in practice Strata Unit owners negotiate with their buyers for a proportionate reimbursement of these contributions.
Buying off Plan
Sometimes Strata Units are advertised for sale even before the hotel has been constructed. The design of the hotel and the sketches of its final appearance may be included in advertising material well before occupation is possible. Purchasing a Strata Unit under these circumstances is commonly known as "buying off plan". Usually a contract to purchase is signed but the date of completion of the contract will not be until the hotel is completed and a strata plan is registered. The purchaser usually pays the purchase price over installments and the balance is usually paid on the hotel's completion.
There are a number of issues that people need to be aware of when buying off plan as purchasers may effectively be entering into contractual arrangements without the customary benefit of being able to view and have access to the finished product. We have dealt with the legalities of this issue in more detail in our May 2004, Issue 158 edition of Law Update (see: Consumer Protection For Off-Plan
Condominium Sales). This article is available on request.
Freehold or Leasehold?
In most Hotel Strata Title Schemes the owners of a Strata Unit also own an interest in the land. The interest is considered "Freehold". But in some developments the Association of Owners lease the land. Leases may last for 50 to 99 years. During the lease term Strata Unit "owners" sublease the Strata Units from the Association of Owners and unless the land lease has been prepaid, the Strata Unit "owners" typically pay a monthly lease payment in addition to the monthly maintenance fees. When the lease ends "ownership" of the property (including all of the units built on the land) reverts back to the holder of the lease and the sub-lease agreements are terminated. This can decrease the value of the
property particularly as the expiration date of the term of the lease nears.
In the case of a Freehold interest the Strata Unit owner is issued with a Certificate of Ownership in espect of his Strata Unit. The Strata Unit owner's ownership of his Strata Unit is perpetual. However, in the case of a lease, the Strata Unit "owner" derives his rights and obligations from his lease, and his rights in relation to the Strata Unit are for the duration of the term of the lease. A Certificate of Ownership will not be issued to the lessee Strata Unit "owner".
In conclusion
Although there is no specific strata law at present, we see from the Articles cited from Federal Law No 5 (1985) that the strata concept is entrenched in our UAE Civil Code and will develop in more detail over time.
Until such time that the law in this field develops, global strata concepts will be incorporated in the drafting of the strata documents and strata rules and regulations pertaining to a Hotel Strata Title Scheme with a view to protecting the rights of the developer and Strata Unit owners and regulating the marketing, administration and management of a Hotel Strata Title Scheme.
Investors intending to invest in the property market and tap into the tourism boom will be attracted to the Hotel Strata Title Scheme because of its benefits of collective marketing and management which reduces costs and the object of the scheme is aimed at maximizing revenues for Strata Unit owners.
© Al Tamimi & Company 2005
