In the context of real estate ownership in Dubai, "Freehold" became the buzzword in May 2002 when H.H. General Sheikh Mohammed bin Rashid Al Maktoum, Crown Prince of Dubai and UAE Defence Minister, announced that 100% freehold ownership of certain properties in Dubai was available to all nationalities. But what does "freehold ownership" mean?
Law Update:
In this article we explain the meaning and applications of the three property title concepts most widely used in developed land law jurisdictions, namely Freehold, Commonhold and Leasehold titles, and highlight the differences between them. We conclude with an examination of what “freehold ownership” means in the context of the property developments in Dubai that are currently being marketed to national and foreign investors.
Titles Defined
Freehold
The owner of a freehold title of real estate enjoys the most superior form of private property ownership. A freeholder is considered to be the absolute owner of the land and buildings comprised in his title; he has the right to occupy, use and enjoy his property forever (“in perpetuity”) or until he transfers the title to a new owner, and his heirs are entitled to inherit his title upon his death. Nevertheless, a freeholder does not have total freedom to do what he wishes on his land.
The most obvious form of external curtailment of a freeholder’s ownership are public controls, in other words a freeholder must comply with all applicable laws which combine to control the use of, and activities upon, his property. For example, the use to which land and buildings may be put, and the erection of new buildings on land, is invariably subject to governmental approval procedures (such as the necessity for planning permission and a building permit). Further control is imposed through environmental and “non-nuisance” laws, and so on.
The second form of external curtailment of freehold ownership is of a more private nature and consists of restrictions placed upon the freehold title. For example, neighbours (and in some instances, the general public) may enjoy rights of way over pathways crossing the freeholder’s land. Neighbours may have a right of access onto the land to effect repairs to their own property or they may have a right to run sewers, electricity cables and other service infrastructure under, upon or over the freeholder’s land. The rights that others enjoy over privately owned property are known as easements. Typically, easements are imposed by the original developer when he sells the property to the first purchaser and are designed to ensure that all owners in the community that he has built have the appropriate rights to fully enjoy their own property. A further form of title restriction is the covenant. A covenant may be an obligation to do something (a “positive covenant”), such as an obligation to keep the buildings on the land in a good state of repair or an obligation to make a financial contribution to some shared facility such as a car park or private road. Alternatively, a covenant may take the form of a prohibition (a “restrictive covenant”), such as a prohibition against using the land for commercial purposes or a prohibition against further building on the land. Again, covenants are often imposed by the original developer and are created to maintain a certain standard and character of a community.
Typically, freehold titles relate to land and buildings, and not to parts of buildings (“units”). As far as units are concerned, the closest analogy to freehold title that is most commonly adopted is the “commonhold” concept explained below. This is because the nature of multiple-occupancy buildings requires the respective unit owners to co-operate together to manage and maintain communal property and facilities; the individualistic nature of the freehold title does not provide an appropriate mechanism for such collaboration between individual owners.
Leasehold
A leasehold title is created from a freehold title, in the sense that a freeholder “carves out” a leasehold interest from his freehold estate and transfers the leasehold interest to a third party by way of a lease, who becomes the leaseholder. The main difference between a freehold title and a leasehold title is that the former is perpetual, whereas the latter is restricted to a term of years (for example, we speak of a “long term lease” or a “99 year lease”). The second major difference is that a leasehold title is subject to a superior title, namely the freehold title. The lease creates a contractual relationship of “landlord and tenant” and usually the leaseholder (tenant) is obliged by the provisions of the lease to pay a rent to the freeholder (landlord).
The rent may be payable in installments at regular intervals throughout the lease term. This arrangement is more usual to a short term lease of up to twenty or so years, and does not give the leaseholder any ownership rights in the property. Alternatively, the rent may be payable by way of a single lump sum payment at the commencement of the lease. This payment is more often referred to as a “premium” or “purchase price” and we speak of a “lease at a premium”. This arrangement is most commonly found in long-term leasing arrangements, the intention being to give the leaseholder a proprietary interest in the leased premises for the duration of the term; the leaseholder is usually able to “sell” his leasehold property and his heirs can inherit his leasehold interest upon his death. This long-term leasing arrangement is often used in relation to the sale of units in a building where it is necessary to impose a regime of communal responsibility upon the various owners. For example, a developer may purchase the freehold title to a plot of land, construct an apartment tower on the land and then sell the individual apartments to third parties on a leasehold basis. The lease of each apartment will contain obligations upon the leaseholder (tenant) towards the freeholder (landlord) and all other leaseholders, for example an obligation to provide support and shelter to apartments above or below the leaseholder’s own apartment or an obligation to pay a contribution (often referred to as a “service charge” or “levy”) towards the cost of maintaining and repairing the common parts of the tower block and communal facilities, such as the communal gardens, car parks, roads, lift shafts, reception areas, leisure facilities, service infrastructure and so on (collectively “common property”).
Whilst the leasehold title concept provides a fairly effective solution to the “communal responsibility” problem, when compared with the freehold title regime the leasehold title contains one inherent drawback in the context of property “ownership”, and that is that at the end of the agreed lease period the lease will expire, the property will revert to the freeholder and the leaseholder will own nothing. As the years go by and the expiry date of the lease draws closer, the lease becomes less and less marketable. The renewal of a lease at the end of its term, or the extension of a lease obtained from the freeholder part way through the term, is usually secured only upon payment of a further premium to the freeholder.
Thus, in the case of multi-occupancy buildings where there are a number of independent units as well as common property to manage and maintain, a different form of title ownership is often used. This is the commonhold title, known also as “condominium title” or “sectional title” in various parts of the world. For communal schemes, commonhold titles offer an attractive compromise between the unit owner’s desire to own a property in a permanent and time-unlimited way without the perceived disadvantages of being in a landlord and tenant relationship, and the need for a mechanism to impose collective responsibility for the common property.
Commonhold
A commonhold is a development consisting of two or more separately owned freehold units, which share the same building, services or facilities. In common to all commonhold schemes is the vesting of the management and maintenance of the common property in the respective owners of the units. This is most commonly achieved through the establishment of a residents association to which all unit owners are obliged to be members and to which all unit owners are required to pay service charges. The system is one of self management, in that the unit owners collectively take the responsibility for the common property and there is no distant and disinterested landlord expected to fulfill this function.
How the common property is owned differs between one commonhold scheme and another. For example, in the UK (where commonhold titles were introduced only last year to address the drawbacks associated with leasehold titles), it is the residents association as a separate legal entity that owns the common property, and each unit owner has a shareholding in the residents association. By contrast, the strata title concept in Australia and the sectional title concept in South Africa, for example, provide that an owner will, in addition to owning title to his own unit, also own an undivided share in the common property. In other words the common property is owned jointly by all owners rather than, as in the UK example, by the residents association. The percentage of a unit owner’s share in the common property, often called his “participation quota”, is usually determined by reference to the size of his own unit in relation to all other units. This participation quota not only determines the share of ownership in the common property, but typically also determines the percentage that an owner is required to contribute to communal expenses by way of service charge and his share of the vote at shareholders meetings of the residents association.
Application to Dubai
In the context of the above explanations, we now address the meaning of “freehold title” as available to national and foreign purchasers in respect of certain properties in Dubai. There are currently three main players in the development and sale of such properties, namely Dubai Palm Developers (the two Palm Islands, Jumeirah Islands, etc), Estithmaar Realty (Jumeirah Beach Residence) and Emaar (Arabian Ranches, Dubai Marina, etc). These main projects have their spin-offs, for example developers such as Damac have purchased lands from Emaar and are now constructing property for sale on the open market. The title being offered by these various developers differs according to whether the property being sold is an independent property, such as a villa or office tower, or a unit in a multi-occupancy building, such as an apartment or office suite. Broadly speaking, in the case of the independent unit, the title being offered is Freehold as described above. However, given the private nature of the developments on which these properties are located, there is invariably an obligation upon the purchaser to comply with certain restrictions upon the use and enjoyment of his property and to contribute towards common expenses by way of a service charge. For example, Estithmaar Realty has drawn up a Declaration setting out the method of management, rules of occupancy and service charge obligations binding upon all property owners at Jumeirah Beach Residence. In the case of individual units in a building, the title being offered is described loosely as freehold, but what is actually being offered is a form of commonhold title. For example, both Estithmaar Realty and Emaar have adopted a commonhold scheme in which the individual owners in a multi-occupancy building hold title to their own unit (such as an apartment or shop) together with an undivided share in the common property of the building. This common property is managed by a third party manager appointed by the residents association, and all unit owners are required to be members of such association.
Thus, in summary, the major “open ownership” developments in Dubai over the last couple of years to date have adopted a hybrid Freehold/Commonhold title regime based upon property ownership models established in other well-advanced land law jurisdictions, but adapted to take account of the “private community” nature of these developments and the local legal and commercial environment.
Lisa Dale
© Al Tamimi & Company 2003
