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The fire in Dubai’s Torch Tower has reminded us all that insurance is one of the essential aspects of property ownership and occupation that no owners’ association (OA), landlord, tenant or occupier can afford to be without. It is vital that every property transaction provides for the subject matter to be protected to some extent and that the parties understand exactly their obligations and who will be liable in various situations.
It has been reported that only 6 per cent of the UAE’s residents have home contents insurance compared with 76 per cent of residents in the UK. In part, this has been attributed to a common misconception among occupiers of jointly owned property that the building insurance taken out by the OA will cover occupiers’ losses.
Here’s a checklist of some of the key building and contents insurance considerations in relation to jointly owned property in Dubai.
Who is responsible?
Dubai Law No. 27 of 2007 requires OAs to maintain comprehensive building insurance coverage equal to the repair or replacement value of the jointly owned property in case of its destruction for any reason. In addition, the OA is required to procure insurance against liability for damage to property or bodily injury to owners and occupiers.
An owner will be responsible for insuring a unit’s contents, including internal fixtures, fittings and equipment in the property. If an owner lets a unit to a tenant, the lease agreement should make the insurance obligations of each party clear. Typically a tenant will be responsible for insuring against damage to personal contents, i.e. taking out a home contents insurance policy. An exception could be if the unit is leased out fully furnished with expensive fittings and white goods among other articles. In such circumstance the landlord may prefer to be in control of the home contents insurance and seek to recover the cost from the tenant either by adding an amount to the rent or charging separately for the cost of insurance in the lease.
Name of the insured
The OA will be the beneficiary of the building insurance for jointly owned property. As the insurance covers multiple properties, it will not be practical to have all the unit owners noted on the policy. Depending on the arrangements under a lease, the landlord and tenant will usually take out home contents insurance in their own name. There could be obligations in the lease for a party to provide evidence of insurance where, for example, the other party has an interest in ensuring that it is in place and does not lapse during the term.
Who pays the premiums?
Each unit owner will pay the premiums for the building insurance through the annual service fees paid to the OA. The lease between a landlord and tenant could include provisions for the reimbursement of building insurance payments through an insurance rent. The premium for the contents insurance will be paid in accordance with the lease terms.
What items are covered?
The building insurance must cover the structural elements or estate comprising the jointly owned property, including all common fixtures and fittings, such as air conditioning and elevators, necessary for the occupiers’ use and enjoyment.
What risks are covered?
The building insurance policy should contain a complete list of all the different risks that will be insured against, e.g. fire and explosion, most of which are fairly standard. The OA should make sure that this list is appropriate. If damage is caused by something that is not on the list, the OA could be held liable for the cost of reinstatement.
What should be the value of the insurance?
The OA needs to ensure that the jointly owned property is insured for the full reinstatement value so that it has sufficient funds to replace the building if it is destroyed. The value needs to include all costs of reinstatement, including site clearance and professional fees. Typically the OA will get professional valuation advice on the sum insured. It is critical that the value is accurate as, depending on the terms of the Master Community Declaration, the liability for any shortfall could be on the unit owners in respect of reinstatement of their units.
Suspension of rent and other charges
A unit owner or tenant forced to vacate damaged property will want to know whether he or she is entitled to a reduction or suspension of service charges or in a tenant’s case, the rent, if it is damaged or destroyed by an insured risk, and it is no longer possible to occupy or use the property. The OA would still have to provide services to other unit owners, so it is unlikely that an affected unit owner would be released from service charge payments, unless the entire jointly owned property was vacated due to the damage.
A tenant could seek to include an entitlement to suspension of rent in a longterm lease. It is not common for such provisions to be included in short-term residential leases in Dubai, although a tenant could claim a suspension of rent under the Civil Code if it is no longer possible to enjoy the property. A tenant needs to ensure that any rent suspension applies not only in cases when the unit is damaged or destroyed, but also if some other part of the jointly owned property is affected and would prevent occupiers from using the property.
The rent suspension generally only applies when the damage is caused by an insured risk, which is why a tenant should verify the building insurance cover prior to entering into a lease. A tenant with a long-term lease can also negotiate an option to terminate it in the event the property has not been reinstated by the end of the period of the rent suspension.
Who is responsible for reinstating the property?
Where the policy is in the name of the OA and damage is caused by an insured risk, the insurance monies will be paid out to the OA. The obligation to use the money to reinstate the jointly owned property to an equivalent size and a suitable standard should be expressly set out in the Master Community Declaration or a similar attestation. Nonetheless, it is more likely that a court would require an OA to use the insurance monies in this way if challenged. The situation is complicated by the delay in forming and registering OAs in Dubai, which has given rise to the existence of interim OAs. They lack legal character and it is uncertain to what extent they can function to hold insurance policies and claim reinstatement monies without the involvement of the developer.
As Dubai deals with the aftermath of the Torch Tower fire, it is imperative that developers, OAs, unit owners and tenants are clear on their insurance obligations from the outset to aid timely resolution in the event of damage or destruction to jointly owned property.
Source: Sean Cope, Special to Property Weekly
The author is a Legal Consultant at DLA Piper.