Service Charges: a tug of war between management companies and property owners

Introduction

Dubai Law No. 6 of 2019 with respect to Ownership of Jointly Owned Properties in the Emirate of Dubai (the “Law”) was introduced in September 2019,which repealed in full Law No. 27 of 2007 (the previous jointly owned property law hereafter referred to as the “Old Law”). The Law was issued to regulate the operation and management of jointly owned property developments (“JOPDs”) and real estate development projects in Dubai including those in free zones. The rationale for the introduction of the Law was to streamline payment of service charges in Dubai and impose a platform for easier recovery of unpaid service charges.

Service charge disputes have escalated during the Covid-19 pandemic. The measures undertaken by the UAE government to reduce the spread of Covid-19 resulted in the closure of common facilities of JOPDs. JOPDs are defined under the Law as buildings or developments (residential, commercial or a mixture) intended to deliver separate title to each unit and often share common facilities such as swimming pool, gym, elevators and common reception area. Many property owners defaulted on service charge obligations as a result of the Covid-19 pandemic as their personal income was impacted. Other property owners have “chosen” to default on payment as they felt there was little benefit paying service charges where common facilities were closed or left unused for most of the year. Communities in the UAE reported over 50% shortfalls in their maintenance funds last year which if continued will undoubtedly lead to a deterioration of properties. On the one hand owners want better control of services and setting of service charge levels, on the other hand property management companies want service charges to be paid in order to maintain properties and communities. This classic situation of a tug of war has grown more contentious over the last year.

More than one year on from implementation of the Law, we try to assess (i) whether the Law has succeeded in streamlining payment of service charges and (ii) whether recovery of service charges has been made easier for developers/management companies.

Service charges and categories of JOPDs under the Law

Article 25 of the Law clearly sets out an owner’s obligation to pay service charges to the management entity. Service charges cover expenses of management, operation and maintenance and repair of common parts, and are generally calculated by reference to (i) the location of the JOPD, and (ii) the standard of services provided. The level of service charges will need to be approved by the Dubai Real Estate Regulatory Agency (“RERA”). The developer is obliged to pay service charges for any unsold unit in the JOPD.

Article 18 of the Law divides JOPDs into three categories for the purpose of management of common parts as follows:

1. Major Projects – Whilst the Law does not give examples of what Major Projects constitute, we are of the view that this includes a project involving more than one building capable of separate ownership and containing, as examples, residential, leisure and office elements. The developer is responsible for management, repair, operating and maintenance of common parts and facilities.
2. Hotel Projects – The Law does not specifically define what Hotel Projects constitute. Will any development with a hotel fall under this category or could any development which includes a hotel be classed as a Major Project? The project developer shall entrust management of common parts thereof to a hotel project management company.
3. Real Property Projects – This includes projects other than Major Projects and Hotel Projects and, in our view, constitutes normal residential buildings or communities with ancillary retail units. Specialised management companies will manage the common parts of these projects.

Mollak

With the increase of regulated JOPDs in Dubai, the online platform Mollak (Arabic for owners), was introduced in order to regulate, govern and support parties dealing with JOPDs. The platform requires developers and management companies to provide accurate information regarding services provided to JOPDs. Management companies must be approved and authorised by RERA. The platform allows (i) RERA to assess and approve the level of service charges and (ii) management companies to issue invoices, which are approved by the government, to owners in a more streamlined and centralised format leading to greater transparency for individual owners. While there are currently some minor issues with Mollak, it is hoped that with time this platform will increase investor/owner confidence and streamline the service charge collection process.

The pull and push factors

The Law sets out various protections for owners which can be summarised as follows:

1. Article 21 – no amendments shall be made to the terms and conditions governing the development and operation of JOPDs and their common property without obtaining RERA’s approval or consent.
2. Article 27 – RERA’s prior written consent is required for all fees in relation to the management, operation, maintenance and repair of common parts or facilities.
3. Article 30 – Service charges collected by the management company are deposited separately in a bank account in the name of the management company for each JOPD. The funds may not be seized in favour of creditors of the management company.

Many owners have voiced concerns with the level of service charges during the Covid-19 pandemic and have continued to “push” RERA to scrutinise, assist and understand how management companies are spending service charges collected. Certain owners have demanded a decrease in service charges similar to rental decreases which was rejected by many management companies. The long-term effect of reduction in level of service charges will ultimately have a negative impact on the ability of the management company to operate, manage and repair a JOPD at a sufficient level.

Management companies simply wish for service charges to be paid on time in order to avoid deterioration of properties and communities. As management companies continue to “pull” back and remind owners of their obligations, many have expressed frustration as owners expect a decrease in rent to coincide with a decrease in the levels of service charges. This is an ill-informed argument presented by owners - when rent is booming does that mean that owners want service charges to increase too?

Owners’ Committees

The Old Law referred to an owners’ committee being formed which includes individuals owning the communal property forming part of the JOPD. Whilst the Old Law was clear and transparent regarding such committees, it was rare to see these committees being formally established in practice for various reasons. The Law makes it clear that an owners’ committee will be put in place and it will be interesting to see whether the owners’ committee will be accepted by management committees and whether such committees will prove useful.

The Road to Collection

Management companies who are unable to collect service charges from defaulting owners are under an obligation to (i) notify RERA; and (ii) serve the defaulting owner with a written notice demanding payment of outstanding service charges within 30 days of receiving the notice. Failure to pay will result in RERA becoming involved to try and settle matters amicably between the owner and management company. Legal action may be undertaken by the management company against the defaulting owner where matters remain unresolved. Defaulting on payment of service charges can lead to greater restrictions on an owner including the inability to renew a lease/ Ejari and in extreme cases a judgement being issued by the urgent matters courts to sell the defaulting property via a public auction. We are not aware of any case brought by owners or management companies to date, but once the Law continues to evolve, we expect to see such cases increase especially where service charges have remained outstanding for a number of years.

Where are we now?

We understand that since the introduction of the Law service charge collection levels have decreased by 15% in comparison to the levels of collection received under the Old Law and pre-Mollak. This may be due to implementation issues associated with Mollak but undoubtedly also due to the ongoing Covid-19 pandemic. There is no doubt that when Mollak and the Law become more established and the tools for enforcement and recovery become more well known the levels of service charge recovery will increase. It will be interesting to see who wins the ongoing tug of war and how far will owners continue to push for greater control of their developments.