A search for answers to service fee mystery

A long-awaited property law in Dubai ought to mean homeowners are in more control of communal charges - but most are still very much in the dark.

Property owners in Dubai want to see audits of service charges so they can be sure service charges have been used appropriately. Bloomberg News

In 2007 it was clear Dubai had a vision for the emirate to implement world-class standards in respect of service charges for jointly owned property.

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However, nearly five years later, many investors are still wondering what has become of the promise of Law Number 27 of 2007 on Jointly Owned Property (the JOP law), and many remain in the dark as to what the service charges they pay are used for.

While the JOP law deals with many issues, a brief outline of how it relates to service charges is: all owners have an undivided share in the common areas (Article 9); all owners must pay their share of the costs of maintenance, operation and repair of the common areas (Article 22); and the collection and use of service charges is not for profit (Article 18).

In 2010 Dubai's Real Estate Regulatory Authority (Rera) released the much awaited "directions" touted as regulations for the full implementation of the JOP law, providing more guidance on these issues in line with the expectations set by the legislation.

Further, Circular Number 1 of 2010 issued by Rera set out allowances for developments where the developer had failed to implement the requirements of the JOP law. The circular made the following two issues very clear: service charges must be calculated in the manner stipulated by the JOP law and the JOP directions (ie not for profit) and they must be approved by Rera; and 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 owners are still, in large quantities, scratching their heads - not aware of, or at odds with developers over, what is common property and 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 were limited. However, a regulator must enforce and this sometimes means it may have to get its 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 does not happen soon owners might start to lose confidence in these promising laws and regulations.

So what is it owners want to see happen this year? They want to see homeowners associations registered as legal entities so they can open bank accounts - he who has the money has control. At present this is the developer and consequently there has not been full implementation of the JOP law. Owners recognise this, which may be part of the reason we see so many defaulters at the moment.

Owners want to see audits of service charges from previous years so they can be sure service charges have been used for appropriate matters. Once owners are comfortable that service charges have not been misused then many concerns triggering non payment should disappear.

Owners who are paying want to see those that are not paying suffer the consequences. There are many arguments as to why some owners do not pay, but these generally relate to their distrust of or dispute with a developer. Some claim they do not have an obligation to pay. But these are all arguments related to the developer and the public policy justification for payment of service charges outweighs any owner's dispute with a developer. If the owner really thinks he or she has a case then they should go to court with the developer and settle it that way. Punishing their fellow owners by not paying is not the answer.

This is the main issue occupying the thoughts of many interim owners association boards at the moment. So what can they do?

The constitution direction of the JOP law provides some guidance; the withdrawal of votes at a general assembly; penalties at a rate of 12 per cent 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 hollow threats from non-legal entities. Then there are the legal remedies. These include claims through the courts against the owner. But the most interesting and motivating of the lot for a defaulter is a statutory lien over the owner's property.

Article 25(2) of the JOP law grants the homeowners 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, it can be all the motivation needed to get them to pay.

The tools are there, so why are they not being used? The short answer is probably the uncertainty associated with them. Owners associations are not legal yet and therefore they are not confident enough to try and use the laws. Rera is not yet active enough with enforcement and the master developers wield a lot of power and they generally don't seem too keen to hand over control to owners.

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 flood of money into the service charge coffers to plug the gaping hole these defaulters are leaving.

Michael Lunjevich is a partner and head of property at Hadef & Partners

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