Strata law in an evolving market

Without clearly defined regulations, ownership of single units in an office building can be problematic / Image Credit: ShutterstockWithout clearly defined regulations, ownership of single units in an office building can be problematic / Image Credit: Shutterstock

Enacted in 2007 following the introduction of freehold ownership in 2006, Dubai’s Strata Law has been one of the defining developments in the emirate’s real estate sector. The provision for both jointly owned and privately owned property under the Strata Law has dramatically changed Dubai’s real estate landscape, even as it continues to evolve today.

Under this law, UAE nationals and expatriates and corporate entities can own units in a building and share ownership of the remaining areas. There are 25 designated areas in the emirate that have been approved for foreign ownership.

The Strata Law has been one of the cornerstones of the legal framework governing the real estate market in the UAE, according to Diana Bayzakova, Partner, Merritz Law Firm. “Undoubtedly, the period between 2006 and 2016 saw dramatic changes in the real estate market’s regulatory environment,” says Bayzakova. “These legislative developments in the real estate sector have underpinned the growth of foreign investment in the UAE.”

Bayzakova says the introduction of the law has made homeownership more accessible to a much bigger chunk of the population. “When a building has a large number of strata title holders and each strata title holder shares the cost of maintenance of common areas and [utilities] such as electricity, gas and water, this contributes to the reduction of the overall cost and the property’s purchase price,” says Bayzakova.

In Dubai, the Real Estate Regulatory Agency (Rera) sets guidelines and legislation for jointly owned property, defined as “the whole or part of a building or land, divided into units intended for separate ownership”.

Empowering owners

“The fundamental premise of the 2007 Dubai Strata Law was to provide legal standing to owners’ associations (OAs),” points out Bayzakova. The law also allows OAs to choose a company to maintain shared areas of the building, such as lifts, swimming pools and gardens, which was previously the responsibility of the building developer. This set-up helps reduce the cost of living in the property.

The law has been instrumental in the transformation of Dubai’s urban landscape, with developments such as Downtown Dubai and Al Wasl Residences. “The urban lifestyle, exemplified in projects such as Downtown Dubai, did not really exist in this part of the world before,” says David Godchaux, CEO of Core, the UAE associate of Savills. “It was very much dominated by Jumeirah or the Springs. This urban lifestyle is relatively new, [which] appeals to a certain type of buyer — younger ex-pats and Emiratis - who is also looking at appreciation.

“In some centrally located projects expat investors can only buy strata. People don’t buy strata just because it is strata, but because it allows you to be in a place where you can be sure that prices will keep growing.”

Strata property has been very attracted to investors around the world. “In some other mature markets, such as Sydney, strata ownership accounts for more than half of all residential sales and leases due to its attractiveness and popularity with investors,” says Bayzakova. “The UAE is no exception when it comes to realising the benefits of strata and embedding the world’s best practices in the UAE’s regulatory framework.”

Who do they protect?

Before the law was introduced, only certain strata-related matters were covered by the UAE Civil Code, which was then silent on many technical and administrative issues related to joint ownership. Some of these concerns were underlined when developers sold off-plan office units to investors without specifying the ownership of common areas. This affected tenants, particularly larger organisations with interests in multiple units, who needed to negotiate with owners of each unit. A well-defined strata law, therefore, provides security of tenure for potential investors.

Bayzokova says several measures have been taken to protect investors and tenants in Dubai, especially after the 2008-09 economic turmoil. Apart from the establishment of Rera in 2007, these measures include the introduction of the Escrow Law in 2007 and the Interim Registry, which requires off-plan sale contracts to be registered with the Dubai Land Department (DLD). Furthermore, the DLD also stepped in to settle disputes and even terminate contracts between buyers and developers.

“There was a lot of controversy over the powers of the DLD to terminate contracts between buyers of off-plan units and the developers pursuant to Law No. 9 of 2009 and Executive Council Resolution No. 6 of 2010,” says Bayzokova. “This has been, however, further clarified by the Dubai Court of Cassation, which held that the DLD’s decision to authorise termination of the contracts between the investors and the developers is not conclusive and is subject to judicial review.”

In 2010, the DLD issued implementing regulations to the Strata Law. “Prior to that, the Strata Law allowed loosening the grip on the developers after they handed over properties to the end users. The Strata Law was set to prevent arbitrary management charges, which the residents were forced to pay, and to enable strata holders to select service providers,” says Bayzokova.

To address issues related to licensing and the legal standing of the OA, including its ability to enter into contracts and maintain bank accounts, further changes were enacted. “In 2014 the DLD issued Circulars No. 1 and No. 2 of 2014 to further regulate matters related to the service fee claims and the establishment of the OA.”

In Dubai, Bayzakova says a number of arbitration centres that are empowered to resolve off-plan disputes have opened, with the Dubai International Arbitration Centre being at the forefront of providing alternative dispute resolution methods.

“Arbitration is a dispute-resolution mechanism alternative to conventional court litigation, where parties can choose the language of the proceedings different from Arabic, nominate the judge and choose the timing and venue for the hearings and written submissions,” says Bayzakova. “The outcome of arbitration is the decision of an arbitrator, which, contrary to popular misconception in the UAE, is final and binding on the parties.”

Source: Shalini Seth, Special to Property Weekly PW

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