Legal_Landscape

This is from the revised edition of my book “Understanding the Concept of Condominiums” (revised February 2020)

WHAT NEEDS TO BE DONE…………….

The Apartment Ownership Law No. 11 of 1973 is the principle enactment which embodies the law governing apartment ownership in Sri Lanka. This was subsequently amended by Act No. 45 of 1982, Act No. 4 of 1999, Act No. 27 of 2002, Act No. 39 of 2003 and Act No. 23 of 2018.

The Apartment Ownership (Special Provisions) Act No. 23 of 2018 (ceases to be effective in August 2023), is solely to facilitate the registration of subdivided buildings owned by the State or by State Agencies as condominium properties. This is similar to the previous Apartment Ownership (Special Provisions) Act No. 4 of 1999 and Apartment Ownership (Special Provisions) Act No. 27 of 2002, which too were only for a limited period and ceased to be effective on 31 December 2003.

Since the last major amendment to the law in 2003, there has been a significant development and increase in condominium properties in Sri Lanka and correspondingly problems faced by purchasers and developers too have increased; the former more than the latter.

Problems arise and remain in limbo when the applicable law is not sufficient to address such problems. During the past several years, due to the absence of specific provisions in the Apartment Ownership Law, the following problems were noted –

In some instances, pre-sales agreements are signed without the Developer being issued with an approved Building Plan[1].

There is no mandatory requirement for a Developer to register a Provisional Condominium Property (i.e. a proposed condominium construction or one which is under construction), resulting in Developers entering into pre-sales agreements without a registered Deed of Declaration and a Provisional Condominium Plan. The absence of a legally acceptable ‘subject matter’ has made lenders and financial institutions tread with caution in giving loans to prospective buyers as there is no security that can be taken on a mortgage bond. This is one of the main reasons for the slow development in this sector. Further, there is no government backed insurance scheme to protect lenders of such condominium construction projects in the event of a failure of the project. This has resulted in lenders executing Tripartite Agreements with the Developer and the prospective purchaser, requiring the lender to step into the shoes of the purchaser, if the purchaser defaults. This gives no better protection to a lender than that granted to a purchaser of such an unregistered condominium property. Due to this uncertainty of the existence of the proposed unit and the absence of various clearances, lenders are compelled to deal in an area with inherent risks but without any possibility to obtain insurance to cover such risks.

Sales Agreements sometimes do not address concerns of prospective Purchaser (i.e. no assurance of owner’s title to the land, no estimated completion date; no indication what relief can be provided to the prospective buyer if there is an unreasonable extension of the estimated completion date, no indication of specific fixtures and fittings provided with the apartment; no indication when Deeds of Transfer can be executed, no arbitration clause to resolve disputes, no indication of the estimated service charge that each unit owner will have to pay to the Management Corporation, etc)[2].

Prospective buyers rely on marketing brochures in deciding on a condominium purchase while these do not guarantee the actual final product which eventually will become the property of the buyer.

There is no non-litigious dispute resolving method which is expeditious and less costly for the number of disputes that have arisen between buyers, developers and also among unit owners.

The allocation of share values to each unit is based only on the floor area of the unit whereas the difference in sales price or values of condominium units, the location of the unit, etc. are not taken into account. This has given an unfair advantage to certain unit owners over others thus entitling them to the same undivided residue (the land), in the event there is a demolition of the condominium building. Sometimes accessory parcels, forming part of the Common Elements, are added in determining the share value, without a formula to give effect that such accessory parcels are not part of the freehold property of the unit owner.

Delays in getting the Certificate of Conformity (COC) upon completion of the building due to various bureaucratic issues lead to delays in registering the condominium property and executing Deeds of Transfer.

Developers continuing as Managing Agents of condominium properties long after completion of the project and taking total control of the Management Corporation without allowing the unit owners to manage their affairs.

The condominium industry in Sri Lanka can have a healthy growth with prospective buyers having confidence to invest in this sector, if some or all of the abovementioned problems are addressed through legislation by amending the present Apartment Ownership Law and through Regulations to the Act, where ever it is possible to do so.

The following suggestions are based on the legal provisions adopted in countries where the condominium industry is in a highly developed state where laws have kept abreast with the need to safeguard the rights of buyers while the developers, who comply with strict legal provisions, are confident presales of units will be financed by lenders[3].

a. Mandatory registration as a Provisional Condominium Property:

The registration of the proposed condominium project as a Provisional Condominium Property should be made mandatory with a registered draft condominium plan after obtaining approval for the Building Plan from the UDA or the respective municipal authority and clearance from the Condominium Management Authority. Significant conditions that have to be complied with should be resolved by the Developer and his team of advisors at a pre-registration stage so that when units are offered to the public, an innocent and unsuspecting buyer is protected against risks that he / she may not get to know. Obviously, this would require a number of clearances, letters to be obtained from various authorities with clarifications to be provided by the Developer to satisfy their concerns.

If all the relevant clearances are obtained and a Provisional Condominium Property registered with a condominium plan, a lender can confidently enter the scene to provide financial assistance to prospective purchasers as it is possible for such lenders to get insurance cover for the mortgaged unit which has an ‘insurable interest’ based on the registered Provisional Condominium Property.

Registration of a Condominium Information Statement:

Prior to the pre-sale of units in a proposed condominium property, the registration of a ‘Condominium Information Statement’ with the Condominium Management Authority should be made mandatory. This is prepared by a professional (i.e. lawyer, accountant, architect, etc) giving the following information as it not only safeguards the rights of buyers but also helps the Developer to give publicity to the legal status of the project. The Condominium Information Statement should disclose :

the name and principal address of the declarant and of the condominium property;

whether it is has been registered as a Provisional Condominium Property; If the condominium property is not a phased condominium construction – a general description of the condominium property including the type of units whether residential or commercial, the number of buildings, the number of condominium parcels in each building, the floor area of the condominium parcels, the number of bedrooms and bathrooms in each condominium parcel, the total number of units and the number of car park allocations.

If the condominium property is a phased condominium construction – Apart from the above mentioned information, the maximum number of buildings that may be contained within the condominium property and the probable dates of completion of each phase or building, the maximum number of units that may be added to the condominium property through each phase, the respective floor area in each building and the number of car park allocations.

A general description of the fixtures and fittings that the developer has agreed to provide for the condominium unit.

(5) A brief narrative description of any development rights reserved by the Developer and of any conditions relating to or limitations upon the exercise of development rights;

A description of the common facilities provided for the use and enjoyment of the owners, such as a swimming pool, its location, approximate size and depths, and description of such other facilities and whether such facilities form part of the common elements of the subdivided building and the fees (if any) payable by users of such facilities, the year in which each facility will be available for use.

A statement of whether the developer’s plan includes a program of leasing units rather than selling them, or leasing units and selling them subject to such leases in a commercial context.

If the project is a residential condominium property, the limitations imposed on unit owners to lease units to third parties, such as the term of the lease. If there is no such restriction, the condominium property should be categorized as a commercial venture.

the name of the Managing Agent and a copy of the contract proposed to be signed between the said Managing Agent and the Developer / Management Corporation for management and administration of the common elements of the condominium property.

the proposed constitution of the Management Corporation (incorporating the statutory constitution), the by-laws, any rules of the association, and amendments thereto and specimen sales agreement and connected documents other than loan documents, that are required by the Developer to be signed by prospective purchasers at closing;

a projected budget prepared by an Accountant for the Management Corporation that applies for the first fiscal year following the date of the first conveyance to a purchaser, with the projected monthly common expenses and a statement of the amount included or a statement that no amount is included in the budget as a reserve; a statement of the budget’s assumptions including projected income from contributions and depreciation of capital items; current or expected contribution or service charges to be paid by condominium unit owners for the maintenance and management of the common elements and other facilities related to the condominium property with a schedule giving the share values assigned to the condominium units and the corresponding estimated contributions / service charges;

general description of each lien, lease, or encumbrance on or affecting the title of the condominium property and the proposed encumbrances that may be attached to the condominium property prior to its completion;

description of the warranties provided by the declarant on the structure, condominium unit and the fixtures and fittings provided within the unit;

a general description of the insurance cover of the condominium property;

Any other information which the Declarant considers necessary to give a true and fair picture of the proposed condominium property.

Classification of Must Be Built Common Elements:

In a condominium property of more than four (04) units to make it mandatory to have “Must be built Common Elements” which are necessary for the proper administration, maintenance and management of the Condominium property and for the common use and enjoyment of owners of condominium parcels within the subdivided building, which shall constitute but shall not be limited to: community hall, office of the management corporation, recreation area for owners of condominium parcels, reception area, roof top with water proofing and insulation against heat, etc.

d. Mandatory clauses in a pre-sale agreement:

In pre-sale of condominium parcelsto make it mandatory for the Developer to provide in the Sales Agreement (a) estimated completion date (b) interest at a stipulated rate to be paid by the Developer on the sum advanced by the buyer as part of the Sale Price if the Certificate of Conformity / Certificate of Occupation for the condominium property has not been obtained by the Developer on the scheduled date of completion and the delay has extended beyond a stipulated period (i.e. four (04) to six (06) months.) (c) the estimated Service Charge payable by the unit owner (d) Owner’s guarantee on the title of the land (e ) method of resolving disputes by a neutral Arbitrator (f) the right of the unit owner to conduct a joint survey with the Developer on the floor area of the unit (f) the instalments that should be payable corresponding to the stages of construction and interest at a stipulated rate to be payable by the purchaser on delayed payment of instalments.

Advance payments to be deposited in an Escrow Account:

The advances paid by the purchaser to be credited to an Escrow Account till the building is constructed up to a stipulated minimum level (i.e. the third (3^rd) floor) with the Developer’s Banker and a lawyer/ accountant appointed as Joint Escrow Agents with the funds in the Escrow Account released to the Developer only upon confirmation by his Project Consultant / Civil Engineer that the building has been constructed up to the required level (i.e third (3^rd) floor) in accordance with the approved Building Plan.

Determining Share Value :

In determining the Share Value assigned to a condominium unit to take into consideration (i) the floor area of the unit (ii) the sale price of the unit (iii) the floor on which the unit is located (iv) the location of the unit (whether next to a commercial area or a residential area), all suitably incorporated into a formula.

Mandatory Procedure at the First Annual General Meeting (AGM):

At the first AGM, to be held within thee (03) months of the registration of the condominium property, with the appointment of the new Council, the Developer should handover to the Council all original documents pertaining to the condominium property, such as, but not limited to; original registered Deed of Declaration and original approved Condominium Plan, original title deeds and original plan relating to the land upon which the condominium property is situated, all original insurance policies, all original warranties and guarantees of equipment, apparatus, devices and machinery installed within and upon the condominium property including the Developer’s Warranties in respect of the structure, building, electrical and mechanical fixtures and fittings, list of owners of condominium parcels along with the share values assigned to the said condominium parcels, and all other documents affecting the condominium property which are necessary for the proper management, maintenance and administration of the condominium property. The Developer shall keep the Council informed in writing of any changes to the list of condominium parcel owners consequent to the execution of new conveyances of condominium parcels.

Members of the Council:

To make it mandatory that fifty percent (50%) of the Council of a Management Corporation should constitute of persons who are not connected to the Developer or controlled or influenced by the Developer as a family member or as an agent, subsidiary or associated company of the Developer.

Restriction on the term of the Developer’s Managing Agent :

A Managing Agent appointed by the Developer shall not hold office for more than two (02) years from the date of the first AGM, unless the members at a general meeting approve by ordinary resolution the extension of such contract and thereafter approve its extension at each successive Annual General Meeting.

j. Mandatory requirement to prepare a Budget before calling for contributions from unit owners:

The Developer / Management Corporation to adopt a budget for each financial year and collect contributions from unit owners for common expenses during such financial year based on the budget approved at the Annual General Meeting held prior to the commencement of the respective financial year. The Budget shall include, but shall not be limited to the following –

(a) common expenses of the corporation;

(b) particulars of the type, frequency and level of the services to be provided;

(c) projected monthly contribution or service charge from each type of condominium parcel based on the respective share value.

(d) portion of the common expenses to be paid into a Sinking fund;

(e) allocations for depreciation of capital items

(f) all current or expected fees, charges, rents or other revenue to be paid to or by the Management Corporation or by any of the owners for the use of the common elements or other facilities related to the condominium property.

Declaration of interest by Council Members:

A member of the Council who has, directly or indirectly, an interest in a contract or transaction to which the Management Corporation is a party or a proposed contract or transaction to which the Management Corporation will be a party, shall disclose in writing to the Council the nature and extent of the interest at the meeting of the Council at which the contract or transaction or the proposed contract or transaction is first considered. If the Council Member becomes interested in the contract or transaction after it is entered into by the Management Corporation, the disclosure should be made at the first meeting of the Council Members held after he or she becomes so interested. Such Council Member shall not be present during the discussion at a meeting, vote or be counted in the quorum on a vote with respect to the contract or transaction in which he/she is interested.

l. Arbitration of condominium related disputes:

Disputes between condominium owners, Management Corporation and condominium owners or non-condominium owners, in which the matter in controversy has either no specific monetary value or a value of Rupees One Million or less, other than the levying and collection of assessments, or arising out of violations of the bylaws or rules and regulations of the Management Corporation, shall be submitted for arbitration to a panel of three arbitrators, two appointed respectively by the parties to the dispute and the third arbitrator appointed by the said two previously appointed arbitrators at a neutral venue or at the premises of the condominium property. The costs of arbitration to be borne by the parties to arbitration. The arbitrators to decide on the rules applicable for the arbitration and to take all necessary steps to conclude the arbitration within three (03) months from the date the dispute was referred to arbitration. In the event it cannot be concluded during such stipulated period, the arbitration to be terminated and the parties to the dispute should have the liberty to seek remedies at any other forum.

m. implied warranty to be given by the developer and contractor:

The Developer shall be deemed to have granted to the purchaser of each condominium parcel and to his/her successor an implied warranty of fitness for purpose and merchantable quality as follows:

(i) As to each condominium parcel, at least a warranty for one (01) year commencing with the completion of the subdivided building with the issuance of the Certificate of Conformity by the relevant Authority and an affirmation that the condominium parcel is free from defective materials and that it has been constructed in accordance with the applicable law, rules and regulations, according to sound engineering and construction standards and in a workmanlike manner.

(ii) As to the roof and structural components of the subdivided building a warranty for a period commencing with the issuance of the Certificate of Conformity and continuing for six (06) years thereafter.

(iii) As to the mechanical, electrical, and plumbing elements, a warranty for a period commencing with the issuance of the Certificate of Conformity and continuing for three (03) years thereafter.

(2) The Contractor, all sub-contractors and suppliers shall be deemed to have granted to the Developer and to the purchaser of each condominium parcel and to his/her successor an implied warranty of fitness for purpose and of merchantable quality as to the work performed or materials supplied by them commencing from the date of issuance of the Certificate of Conformity and continuing at least for a period of one (01) year thereafter.

It is hoped that the Authorities would take note of the urgent need to amend the law and provide regulations to address the concerns highlighted.

[1] The Canadian law on condominium properties have stringent rules that have to be complied by Developers making registration with clearances a must. Ref. Ontario Condominium Act 1998 and A Planners’ and Municipalities’ Guide to the Condominium Act (2005) by Craig Robson etc.,

[2] In Thailand the Condominium Act of 1976 was amended by the addition of sub clause 6(2). This provision requires contracts between purchasers and developers to follow a standard form prescribed by the Ministry of Interior identified as Form O.C.22, which is a standardized sales contract that provides consumer protection clauses to safeguard the rights of the purchaser.

[3] There are stringent criteria to be met by Developers by Fannie Mae and Freddie Mac which are two US government-sponsored entities. These entities have laid down minimum standards for Developer’s to observe in order to allow mortgages against such units categorized as “warrantable condos”. Some of the suggestions given here are based on such standards.