Legal_Landscape

A commentary on law and current affairs

Fire Risk in High Rise Buildings

Yesterday’s fire on the 4th floor of a multi-storey building under construction at Braybrook Place, Colombo 2 is a warning for Owners, Managers and Developers to pay attention to the precautions one should take to safeguard the lives of occupants in the event of a fire in such buildings.

According to a News release, the fire had spread to the adjoining building which was in close proximity. When the Fire Brigade had inquired about the number of occupants and their locations, the person in charge of the building was unable to provide an accurate answer. Fortunately the spread of fire was contained and there were no serious injuries. But if this had happened in a high rise building, the ignorance of people managing the building would have seriously impacted on the lives of occupants.

Several high rise buildings are coming up in the City of Colombo. When purchasing condominiums, buyers are mostly attracted to the location and the reputation of the Developer / Contractor and not much heed is paid to the aspect of fire risk. It is of utmost importance to consider the likelihood of a fire in multi storey buildings; especially if there are more than three floors, as the eviction of a building any higher than that becomes correspondingly difficult. Developers also need to pay attention to the available logistics and the operational ability of our local Fire Brigade to handle a high rise building fire.

I am giving below some precautions which are followed to safeguard occupants in multi storey buildings:

Fire Emergencies

In case of fire:

Know the location of alternate means of exit.

Know those procedures posted throughout the building. (Managers of condominium buildings should show directions to exit the building in the event of fire)

Always keep fire doors closed. Keeping them propped open will permit passage of toxic gasses, fumes, and smoke.

Do not obscure vision through fire doors by hanging signs, posters, or notices on fire door windows.

On Discovering a Fire:

Notify persons in the immediate vicinity.

Leave immediately.

Call the Building Management Officer and if possible the Fire Brigade.

Close all doors as you leave.

Do not use elevators.

Vacate the building. Evacuate through fire exit stairways and wait for instructions.

Be prepared to take directions from your building staff, fire and police personnel.

 Evacuation Drills and Precautions:

Evacuation drills should be held to educate and prepare residents to follow safety procedures.

Residents should leave their apartments during emergency drills.

Building Management should maintain a list of all occupants within the building which should be up to date at any given time, especially those residents who are old, invalid or incapable of moving without assistance (i.e. wheelchair bound)

Fire extinguishers should be strategically placed throughout the building and should be in working condition.

There should be fire sprinklers and smoke alarms in apartments in all multi-storey buildings and these should be periodically tested and should be in working condition.

There should be an easily accessible source of water for the fire brigade, ideally at the entrance to the building.

 

 

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September 8, 2018 Posted by | City of Colombo Development, Condominium properties Sri Lanka, Fire in buildings, Safety and Security in condominium properties, sri lanka, Uncategorized | , , , , , | Leave a comment

Parking Regulations

These pages relating to Parking Regulations were extracted from the Colombo City Development Plan (amended in March 2018) released by the Urban Development Authority.

September 8, 2018 Posted by | City of Colombo Development, Condominium properties Sri Lanka, Land & Properties, Parking - Condominium properties, Parking Regulations - Colombo City Development Plan, sri lanka, Uncategorized | Leave a comment

City of Colombo Development Plan – revised version March 2018

City of Colombo Development Plan March 2018

Released by the Urban Development Authority

 

September 7, 2018 Posted by | City of Colombo Development, Land & Properties, Law & Governance, Parking - Condominium properties | Leave a comment

Fire Risk in high rise buildings

Business Times – Sunday 5th August 2018

Fire Risk in high rise buildings

Dr. David Kirkham comments on the Sri Lankan high rise buildings and notes that “there are lots of combustible cladding all over Colombo…. Architects like to make things pretty and the cheapest way of doings that involves plastic”. He further says that “there is lots of fire risk in this town”. Colombo Fire Brigade has only one aerial ladder platform that can reach a maximum of 18 floors..and it can pump water only up to a height of seven floors. Many high rise apartments do not have sprinklers and fire detection. These are matters that the Condominium Management Authority should focus on to develop the industry and to protect apartment owners.

August 11, 2018 Posted by | Condominium properties Sri Lanka, Safety and Security in condominium properties, Uncategorized | | Leave a comment

The need to have an effective Competition Law regime

The need to have an effective Competition Law(1)

May 3, 2018 Posted by | Competition Law, Foreign Direct Investment, Uncategorized | , , , , , , , , , , | Leave a comment

Competition Law and Foreign Direct Investment (FDI)

The need to have an effective Competition Law regime to attract Foreign Direct Investment

  • Ajithaa Edirimane LLB (Colombo) MLB (Hamburg), Attorney-at-Law & N.P

Competition in an economy promotes efficiency and enables goods and services of good quality to be made available to consumers at lower prices. Not only does it protect consumers but it also creates a level playing field for competitors leading to better innovation and opportunities for new competitors to enter the market. Competition law or laws that prohibit anti competitive practices, therefore, is a sine qua non of a market economy.

The focus of competition law is on three main areas:

(1) prohibition of anti competitive agreements among suppliers of goods and services such as: price fixing, collusion and cartels[1] (horizontal agreements) or restrictions on the distributor by the manufacturer (vertical agreements);

(2) prohibition of the abuse of dominant power in goods or services in the relevant market; and

(3) supervision of mergers and alliances that lead to the suppression of consumer rights and the abuse of dominance.

It is also important to note that anti competitive acts can occur in ways other than price fixing and collusion. For example, a business may use ‘predatory pricing’ (i.e. pricing which is below cost of production) to gain a foot hold in a market and thereafter, once the predatory business has gained sufficient market power, drastically increase the price of the product putting the consumers at a disadvantage if they cannot immediately switch over to the product of a competitor. Another method is through standards established for products of dominant businesses. While a standard is granted for products that meet certain quality requirements, such standards established for products of monopolists or cartelists may act as entry barriers for smaller firms preventing them entering the relevant market. This helps to consolidate the market power of a few market leaders who can then fix higher prices for their products using the “standard” as a shield, to the detriment of smaller firms.

Protection of consumer rights has been an essential element of governance going back to the Roman Empire, where tariffs used to control prices and properties of monopolistic trades were confiscated. Competition law, as applicable now, has its roots in the anti trust laws of USA[2], which were then primarily enacted to break up trusts created by powerful corporations to conceal their business arrangements with each other. Governments over the years have been quite wary of businesses in the hands of a few. In the European continent, especially in pre World War II Germany, it is believed that the Nazis were quick to have a hold on the country by bribing and blackmailing the heads of cartels that controlled the economy.

The opponents of competition law fear that its strict enforcement will suppress the development of businesses and hinder the innovative spirit. In the famous United States v Microsoft [3] case, the US Department of Justice (DOJ) and 20 States took action against Microsoft for abusing monopoly power. The issue was over Microsoft bundling its Internet Explorer web browser with the Microsoft Windows operating system. It was alleged that this restricted the market for other web browsers that were slow to download or had to be purchased at a store. In the judgment delivered in 2000, the court ordered the business of Microsoft to be split into two parts, one for operating systems and the other for software components. However, later on appeal, the case was settled with Microsoft agreeing to share its programming interfaces with other third party companies and for a panel to monitor certain areas of its operations. This case demonstrates the conflicts between consumer welfare and protection of industries in the enforcement of competition laws.

 

Enforcement of Competition Law in established competition law regimes

The modern day competition laws that have spread around the globe since the beginning of the 20th century and adopted by over 100 countries in various forms based on their socio economic systems, have in some form or other, taken the US anti trust laws and/or the competition laws of the European Union (EU) as examples.

The EU consisting of 27 member countries was formed primarily to create a Single Market. In order to achieve this objective, a transparent and standardized system of laws, referred to as “EU Competition law” was enacted and implemented through the European Commission, giving it primacy over the national laws of each member state. EU Competition law therefore, crosses various ethnic and cultural barriers and is enforced without fear and favor to achieve a single market. It strives to meet the needs of all consumers within the EU in a fair and rational manner.

In this article, reference is made to the main elements of the EU competition law and the competition laws of India in analyzing whether Sri Lankan competition laws are an effective deterrent against anti-competitive practices.

 – Dealing with anti competitive practices under EU Competition Law

Under EU Competition laws, the main deterrent used by the authorities to prevent competition law violations is the heavy penalty imposed on any undertaking that breaches its provisions. A fine is usually 10% of the turnover of the undertaking, including its world wide turnover, which is too hefty a fine for any business to absorb.

 In one of the cases decided in November 2009, the Commission fined plastic additives producers €173 million (equivalent to about 20 Billion Rupees) for price fixing and market sharing cartels. The Competition Commissioner in a statement published in the EU Competition Commission web site stated These companies must learn the hard way that breaking the law does not pay and that repeat offenders will face stiffer penalties. The companies’ elaborate precautions to cover their tracks did not prevent the Commission from revealing the full extent of their determined efforts to rip-off their customers” The Commission’s investigation began with unannounced inspections in February 2003,[4]

 In a recent news release (July/2010) it was stated that The European Commission has decided to initiate formal antitrust investigations against IBM Corporation in two separate cases of alleged infringements of EU antitrust rules related to the abuse of a dominant market position (Article 102 TFEU). Both cases are related to IBM’s conduct in the market for mainframe computers. The first case follows complaints by emulator software vendors T3 and Turbo Hercules, and focuses on IBM’s alleged tying of mainframe hardware to its mainframe operating system. The second is an investigation begun on the Commission’s own initiative of IBM’s alleged discriminatory behavior towards competing suppliers of mainframe maintenance services.

EU Competition Law rests on three pillars: (1) Article 101 of the TFEU prohibiting restrictive agreements, (2) Article 102 of the TFEU prohibiting the abuse of market power and (3) Merger Regulation 139/2004 (ECMR) for supervision of mergers[5].

Anti competitive acts under Article 101(1) TFEU

 Article 101 (1) prohibits all agreements between undertakings[6], decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the common market, and in particular those which:

(a)  directly or indirectly fix purchase or selling prices or other trading conditions;

(b)  limit or control production, markets, technical development, or investment;

(c)  share markets or sources of supply;

(d) apply dissimilar conditions to similar transactions with other trading parties, thereby placing them at a competitive disadvantage;

(e) make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.”

It is important to note therefore, that the prohibition in Article 101(1) applies only to such agreements and concerted practices which prevents, restricts or distorts competition within the common market and has an “appreciable effect” on member states.

In recent years, as governments have increasingly contracted out services, (i.e. air traffic controllers, ambulances). The argument is that the public service is for all citizens and not solely designed to ‘maximize the economic welfare of citizens’ and hence should be regulated under Art. 101.

 

Exemptions under Article 101(3) TFEU

 Under European Union competition law, an exception can be granted to an anti competitive practice[7], even though there is an infringement of Article 101(1), if the conditions stipulated under Article 101(3) are fulfilled. Any agreement, decision or concerted practice between undertakings or associations of undertakings will not be prohibited, in spite of preventing or restricting competition, if it:

(1) improves the production or distribution of goods or promotes technical or economic progress, (“efficiency gains”);

(2)  allow consumers a fair share of the resulting benefit, (“fair share for consumers”);

(3) does not impose on the undertakings concerned restrictions which are not indispensable to the attainment of the said objectives (“indispensability of the restrictions”) and

(4) does not afford the undertakings the possibility of eliminating competition in respect of a substantial part of the products in question (“Non elimination of competition”).

‘Efficiency gains’ arise when the agreement (notwithstanding its restrictions on competition) contributes to improvement in the production or distribution of goods or promotes technical or economic progress. The effects of efficiency gains are matched against the disadvantages arising from restrictions on competition caused by the agreement.[8] In this cost benefit analysis, the gains should thus outweigh the negative effects of restrictions on competition[9].

As explained in the EC Guidelines, the application of Article 101(3) becomes relevant only when an agreement between undertakings restricts competition within the meaning of Article 101 (1). If a restriction of competition has been proved, Article 101(3) can be brought in as a defense. In terms of Article 2 of Regulation 1/2003 and as decided in several cases[10], the burden of proof is on the undertaking which seeks the exceptions under Article 101(3). These four conditions have a cumulative effect and therefore, even if one condition is not fulfilled, the exemption sought under Article 101 (3) will not be granted.[11] If an agreement or concerted practice is restricting competition under Article 101(1) and is not exempted under Article 101 (3), then such an agreement or concerted practice will be automatically void under Article 101 (2). Such infringements of Article 101(1) are deemed “hard core.” In this regard, cartels are considered as falling within the “hard core” category.

 

Abuse of dominant position and Article 102 TFEU

Article 102 applies when a single undertaking or a group of undertakings in a dominant position has abused the dominant position for anti competitive gains within the common market.

The important feature in this provision is that it does not ban dominance as unacceptable. Only the abuse of dominance is considered unlawful. Article 102 also specifically refers to certain practices which are considered abusive outright. Even though there is a well developed case law in the European Union for the application of Article 101, in respect of Article 102, the decided cases are limited. There is continuing debate whether the application of Article 102 to the operation of industrial giants would hamper their growth and innovation, which would be a loss to society[12].

In ascertaining whether an undertaking has market power a test called The SSNIP test is used. The Hypothetical Monopolist or Small but Significant Non-transitory Increase in Prices (SSNIP) test is used to determine the product market in which one could find a Hypothetical Monopolist.  This test helps to define the relevant market by determining whether a given increase in product prices by a significant percentage (i.e.5% – 10%) would result in consumers switching to other substitutes. If consumers switch to a substitute as a result, the substitute and the product of which the price was increased are both added together as one market. This test would thus continue till at some point, consumers would no longer switch from the products contained as one product category. This would then be identified as the relevant product market of the business under investigation. The market share held by the undertaking in the product market would determine whether the undertaking has a market power.

 

EC Merger Regulations

EC Merger Regulations No. 139/2004 of 20.1.2004 supervises concentrations of undertakings, arising from mergers or acquisitions. The objective is to limit the market power in a ‘relevant market’ arising from mergers or acquisitions which otherwise may affect the interests of consumers. When undertakings merge to take advantage of economies of scale, the reduction of competitors in the market tend to give the merged entity an undue advantage affording it opportunities to limit production or directly increase prices. Pursuant to Article 3(1) and 3(4) of the Merger Regulation:

(1) A concentration[13] is deemed to arise where:

(a) two ore more previously independent undertakings merge, or

(b) one ore more persons already controlling at least one undertaking or – one or more undertakings acquire, whether by purchase of securities or assets, by contract or by any other means, direct or indirect control of the whole or parts of one or more other undertakings.

Article 3 of the Merger Regulation contains provisions concerning control and the acquisition of control. The test in this instance is to ascertain whether the arrangement having a specific “turnover” also has a “community dimension” which gets caught to supervision by the EC authorities. In which case prior to the effective merger, notice need to be given to the EC Merger Registry of the Commission seeking clearance for the proposed merger. Up to October 2009, there have been 203 such notifications[14]. If the undertakings fail to do so, they take the risk of having the resulting entity de-merged if a violation of the Merger Regulations can be established.

In the European Union, the competitive nature of businesses are so intense that even if the authorities fail to pick up the business for a violation of competition laws, there is always a likelihood of the business being reported for anti competitive actions by its rivals in the same market.

– The Competition regime in India

 The Competition Law of India is contained in the Competition Act of 2002 gazetted on 14th January 2003. The Act was implemented in 3 phases and was fully enforced as from 2006. The Act has established the Competition Commission of India as the regulatory body for this purpose, which has the power to summon and enforce the attendance of witnesses, require discovery and production of documents, impose penalties and jail terms for violations of the Act.

The Act applies to:

  1. goods, which includes goods imported into the country
  2. services ‘of any description which is made available to potential users and includes the provision of services in connection with the business of any industrial or commercial matter, such as transport, storage…’
  3. trade, ‘relating to the supply, distribution, storage or control of goods and includes the provision of any services’

The Indian Authorities recognize that an ‘anti competitive agreement’ may result in any of the following ways:

  1. agreement to limit production and/or supply;
    2.    agreement to allocate markets;
    3.    agreement to fix price;
    4.    bid rigging or collusive bidding;
    5.    conditional purchase/ sale (tie-in arrangement);
    6.    exclusive supply / distribution arrangement;
    7.    resale price maintenance; and
    8.    refusal to deal.

The focus of the Act under Sec. 3 is to prevent practices which cause an appreciable adverse effect on competition in India. Mergers and alliances which are referred to as “Combinations” under the Indian Act, are void if such cause an appreciable adverse effect on competition in India. In the event of a failure to comply with an Order of the Commission, a penalty of Indian Rupees One Lakh (Euro 1590/- or SL Rupees 238,500/ ) is imposed for each day during which such failure continues.  The Act also gives the Commission the power to investigate anti competitive agreements, dominant positions or a combination which occurs outside India, if it causes an appreciable adverse effect on competition in India. The Commission has the power to detain any person (including the Directors, Secretary or Officer of a Company which contravenes the Order of the Commission) in civil prison for a term not exceeding one year, in addition to a penalty not exceeding Indian Rupees Ten Lakhs (Euro 15,900/- or SL Rupees 2,385,000/-) .

Up to September 2010, India’s Competition Commission has handled 118 cases and dismissed 24. There were five in the final stage of determination.[15] Currently it is awaiting approval from the Government for a ratification to Sec. 5 of the Act, which provides that an Indian company with a turnover of over Rs.3,000 crore cannot acquire another company without the Commission’s prior approval.

The Consumer Protection Act 1986 of India does not address competition issues. In Lucknow Development Authority v. M.K. Gupta,[16] the Supreme Court observed that even government bodies or development authorities that develop/allot land and/or construct houses for the common man in discharge of their statutory functions render a ‘service’ and, hence, are subject to the provisions of the Consumer Protection Act.

 

Do we have an effective Competition Law regime against anti-competitive practices and cartels in Sri Lanka?

Anti competitive acts and unfair business practices in Sri Lanka

Should not Sri Lanka have a competition regime as tough as the EU Competition law or comparable to that of countries such as India and Singapore, close to us in the region?; It is a question that one needs to explore considering the constant lament of consumers against price increases and numerous unfair business practices and market manipulations by big businesses and service providers.

The worst anti competitive act or abuse of power that currently seems to occur in Sri Lanka appears to affect basically the consumers of our entire nation, as it applies to the rice trade, the staple diet of the people. The existence of which is not a secret and is explicitly described in the following extract of an article[17] posted on the web:

There is a large number of small-sized rice producers scattered around the country. The smallness of their unit of operation precludes the fact that any single producer does not have the power to influence the outcomes of the rice market. On the other hand, the large number of rice consumers also does not individually have the power to influence the market outcomes. According to theory, this situation is best described as a competitive market. In a competitive market, however, the prices should be lower compared to other forms of markets, there should not be shortages of supply, and the quality of the products should be higher. Due to the peculiar nature of rice market, there are various types of anticompetitive activities.

The collection and distribution of rice – the chain linking the producers to the consumers – is comprised by a small number of large traders. This has become the most influential force in the rice market. Though from time to time the governments attempted to make anti-market interventions by creating state monopolistic institutions, the nature and characteristics of the rice market have not changed overtime. The selected intervention led to further distorting the rice market rather than correcting it. According to theory, these middlemen or rice traders are to get their share equal to the cost of their transactions. Even though producers of rice sell their products at very low prices, the consumers pay very high prices compared with the producer price. It is very essential to question as to why there is a huge gap between the producer price and the consumer price of rice in Sri Lanka. The gap should normally be the cost of collection and distribution of rice. But the size of the gap far exceeds the size of the cost that should incur by the traders.

However, this is not the main issue in the rice market. The major source of rice market distortion is related to anticompetitive activities of the rice traders.  These anticompetitive activities of the rice traders include: abuse of dominant positions by the rice traders, trading cartels created by rice traders, discriminatory pricing (such as predatory pricing and dumping), excessive pricing, discriminatory treatment, maintaining resale prices, creating artificial supply shortages, collusive dealings, and reciprocal dealings. The usual higher prices of rice and supply shortages are not due to the higher than normal demand for as rice demand in Sri Lanka is almost stable, but because of the anticompetitive activities of the rice traders. Therefore, the best solution for this kind of situation is not to create a state monopoly institution that further distorts the market but to introduce competition policies and laws to prevent anticompetitive activities in the rice market.

The above narration clearly illustrates the need for an effectively implemented competition policy in Sri Lanka. This however, is not the only anti competitive act and blatant abuse of market power prevailing in our country. There are many such instances; in telecommunications, petroleum, pharmaceuticals, liner shipping[18], etc. The silence of consumers, due to the absence of laws to tackle such situations, lack of knowledge of their legal rights and financial strength to pursue an action to its finality, have been exploited by traders and service providers with impunity.  Needless to say, the prohibition of anti competitive acts and abuse of dominant market power can be a significant contributor of poverty alleviation[19].

 

Fair Trading Commission replaced by the Consumer Affairs Authority

 In Sri Lanka, the first step to effectively prohibit anti competitive acts was taken by enacting the Fair Trading Commission Act No. 1 of 1987 (FTC) , which in its preamble clearly stated that it is “an Act to provide for the establishment of a Fair Trading Commission for the control of monopolies, mergers and anticompetitive practices….”

This Act was however abolished and replaced by the Consumer Affairs Authority Act No. 9 of 2003 (CAA). When one compares the provisions of both, it is clear that the abolished FTC had more far reaching powers for preventing / restraining anti competitive acts and abuses of market dominance than the current CAA which replaced it. The latter appears to focus more on consumer protection than functioning as a legal tool to prevent and restrain anti competitive operations.

In Sec 11 of the abolished FTC it is stated that “The Commission may. either of its own motion or on a complaint made to it by any person, or in the case of a proposed merger, on a request made to it by any person, carry out an investigation with respect to (a) the existence or possible existence of a monopoly situation; (b) the creation or possible creation of a merger situation; and (c) the prevalence of any anti-competitive practice.” This recognized the 3 elements that need to be addressed under competition law. Section 12, 13 and 14 defined respectively a ‘monopoly’, ‘merger’ and ‘anti-competitive practice’ which comes within the ambit of the Act. Sec. 12, gave a wider definition to monopolies by referring to monopolistic activity conducted by ‘members of one and the same group’, meaning cartels. The Act required notice to be given to the FTC of any proposed merger or acquisition at least 30 days prior to the said merger or acquisition.

Sec. 15 of the FTC contained a provision similar to Art.101(3) of EU Competition Law which permits anti competitive practices if the criteria listed therein are fulfilled. In terms of Sec. 15, a monopoly, merger or anti competitive act that does not operate against the public interest would be authorized by the Commission. To ascertain whether the monopoly, merger or anti competitive act is in the ‘interest of the public’, Sec 15 described a test requiring the examination of five areas (i.e. whether it promotes effective competition, promotes the interests of consumers, the use of new techniques, facilitates new entrants to the market, maintains balanced distribution of industrial activity and maintains competitive activity in the export market)[20]. However if the monopoly, merger or anti competitive act fails in the “public interest” test, the Commission under the abolished FTC had the power to order its termination and even impose such draconian measures as dividing or winding up its business. This is similar to the measures adopted by the Anti Trust laws of the US as seen in the US vs Microsoft case.

Even though the provisions of the Fair Trading Commission Act appeared to be quite similar to provisions of Competition laws of developed countries, the powers of the Commission applied only to “prescribed goods” as gazetted. Thus, in the case of Associated Cables Limited’s buyout of Kelani Cables Ltd. even though the market share of the former increased to 70% in the relevant market, FTC could not investigate in to this matter as “Cables” was not gazetted as a ‘prescribed good’.

Furthermore, in Ceylon Oxygen Ltd [21]vs Fair Trading Commission and another, the best known case brought under the provisions of this Act, the Court held that the procedure in conducting the inquiry against Ceylon Oxygen was contrary to the laws of natural justice. In this case, Ceylon Oxygen had entered into horizontal tie-in agreements with buyers requiring them to purchase their entire requirement from the former preventing any competitor from selling its products to the buyers. These were clearly restrictive trade agreements coming within Sec.14 of the Act, but due to an inconsistency in the inquiry procedure where the initial investigation was for predatory pricing, the Court held against the FTC.

Apart from the above, almost all of the cases that have been filed for “Unfair Competition” have been under the provisions of the Intellectual Property Act for IP Rights infringements and not for anti competitive acts under the FTC. The paucity of cases for violations of Competition Law per se, gives an indication of the inability of the Authorities to achieve the objectives set down in the statute due to perhaps changes in the competition policies and also due to lack of sufficient manpower to pursue its mandate.

 

Consumer Affairs Authority Act No. 9 of 2003 (CAA)

 The CAA which replaced the FTC contains similar competition law provisions, but does not however contain provisions prohibiting anti competitive practices of monopolies and mergers and the need to give notice of such mergers as found in the CAA. A Competition Policy needs to address the abuse of dominance that may arise from merged entities which is considered the ‘third pillar’ under EU Competition Law. In contrast, in the EU and US, reporting on a merger which creates a dominant position is mandatory and a failure will result in a heavy fine equivalent to 10% of the worldwide turnover.

In Sec 8, the following are listed as part of the “functions of the Authority”.

 (a) control or eliminate-

(i) restrictive trade agreements among enterprises ; (ii) arrangements amongst enterprises with regard to prices; (iii) abuse of a dominant position with regard to domestic trade or economic development within the market or in a substantial part of the market; or (iv) any restraint of competition adversely affecting domestic or international trade or economic development;

(b)  investigate or inquire into anti-competitive practices and abuse of a dominant position ;

(c)   maintain and promote effective competition between persons supplying goods and  services ;

Even though the functions are praiseworthy, there are only limited instances for prohibition of anti competitive acts under the CAA. The provisions of the CAA is not limited to those goods and services that are gazetted as “prescribed” under the former Act, but the ability of Authority to inquire into anti competitive acts or abuse of monopoly of state institutions has been clearly removed under Sec. 77 of the Act, which states “the provisions of this Act relating to anti-competitive practices shall not apply to the supply of goods or services by any person who is supplying such goods or services under an agreement entered into with the government”.

Sec. 34 (1) provides that “the Authority may either of its own motion or on a complaint or request made to it by any person, any organization of consumers or an association of traders, carry out an investigation with respect to the prevalence of any anti competitive practice”.  Sec. 35 stipulates that an anti competitive act ‘shall be deemed to prevail, where a person in the course of business, pursues a course of conduct which of itself or when taken together with a course of conduct pursued by persons associated with him, has or is intended to have or is likely to have the effect of restricting, distorting or preventing competition in connection with the production, supply or acquisition of goods in Sri Lanka or the supply or securing of services in Sri Lanka.’ It should be noted that there is no reference to goods imported to Sri Lanka, (as found in the Indian Competition Act).

 Sec. 41 empowers the Authority to authorize acts which, even though anti competitive, are in the ‘public interest’. It provides a test similar to that contained in the FTC to determine whether the alleged act is in the interest of the public. CAA also empowers the Authority to terminate an anti competitive act or take such other action that the Authority ‘may consider necessary for the purpose of remedying or preventing the adverse effects of any anti-competitive practice’. Interestingly, reference to dividing businesses and winding up companies acting in an anti competitive or monopolistic manner is missing in the CAA. Thus, it cannot be considered as a punishment as severe as that meted out under Sec. 15 of the abolished FTC. Furthermore, abuse of dominant position in the supply of goods and services and monitoring of mergers that may result in market dominancy, are not even covered in the CAA.

The area which appears to clearly inhibit the powers of the CAA is in investigations. Sec. 20 refers to investigations carried out to gather evidence of unauthorized excessive prices or market manipulations as listed in Sec. 19 based on references made by the Director General. It provides that ‘the Council shall cause such reference to be brought to the notice of such persons, who in the opinion of the Council would have an interest in the proposed investigation to be carried out by it on such reference, and shall further give such persons adequate notice of the date on which the investigation is scheduled to commence.Even though the Act gives adequate power for investigators to enter, inspect and search premises in terms of Sec. 58, the aforementioned provision in Sec. 19 requiring notice to be given to the alleged offender prior to arrival, would undoubtedly allow the offender time to cover up any evidence that can be used against him or his business. It makes such investigations worthless and probably a waste of time and money. In contrast, under the EU investigation process, unannounced investigations called “Dawn Raids” are made on businesses which are suspected of anti competitive operations and cartelistic behavior. Investigators with IT specialists seal such premises and even take away electronic evidence stored in computers by removing the hard drive.

 

 

 

Foreign Direct Investment (FDI)

Foreign Direct Investment (FDI) is the investment of foreign assets into domestic structures, equipment, and organizations including transfer of technology as opposed to investment in shares of local companies by foreign entities. FDI is considered to be more useful and long lasting than foreign investment in shares, which is considered “hot money” that leaves the country at the first sign of ‘trouble’. The ultimate gain of FDI is that it results in an ‘efficiency spillover’ into the domestic market, (i.e. labour trained in the latest technology becomes an asset to local industries, transfer of technology tends to raise the standards of local industries, overall improvement of quality and standards of local products, increased employment opportunities, high wages, R&D and new innovations, etc.). Most benefits of FDI results from establishment of new industries or from the expansion of existing industries, which are called “Greenfield investments”.

 

What attracts FDI to a country?

Governments adopt different policies to attract FDI. Some of which are; tax holidays, low tax regimes, relaxation of existing regulations, lifting of exchange control regulations, bank loans at concessionary rates, etc. Apart from these, some features of a country, such as low cost of labour and an educated labour force, good infrastructure, political stability, population of a country (i.e. the possibility  of a huge customer base) and relative economic stability can be important determinants.

At the same time, the deterrents of FDI are lack of transparency in decision making bodies (e.g in the issuance of licenses, permits, etc), corruption, slow decision making process, protectionism of local industries, irregular enforcement of competition laws or the lack of a proper competition policy. The significance of competition policies to attract FDI is mentioned in an UNCTAD release thus:[22]if FDI inflows lead to, or are associated with, market concentration – allowing restrictive or anticompetitive practices to appear – the positive benefits of FDI may not necessarily follow. Competition policy is thus a critical accompaniment to liberalization in terms of the removal of restrictions and establishment of standards of treatment for foreign firms.’

 

How do Competition policies impact on FDI?

Noland (1999)[23] in a research analyzing Competition policy on FDI states ‘in product markets restrictive business practices can impede FDI connected with production and distribution of goods. In service markets barriers to entry can discourage investment which is essential to service local markets. Firms interacting horizontally (that is with their notional competitors or rivals) can behave in such ways to affect potential entrants’ investment decisions. Horizontal agreements that could affect FDI include price fixing, cartels or market allocation schemes, bid rigging, and refusals to deal and other abuses of incumbent position. Vertical restraints on trade involving buyers and sellers of intermediate input markets and the organization of distribution of final products can also affect FDI. Conventional vertical restraints include such practices as refusals to deal and boycotts, retail price maintenance, exclusive-dealing arrangements, and tie-ins’.  He emphasizes that these practices can affect not only foreign entrants but also local firms operating in the same relevant market.

Sometimes government policies, such as the requirements to obtain licenses and permits can be a hindrance to new entrants to the market. Such policies can weigh unfairly on new entrants who have no local know how or have only few connections. Incumbent firms may use the regulatory requirements to prevent entry to new entrants. Lax competition law enforcements can favor the incumbent firms to the detriment of the new entrant.

These practices can affect both goods trade and investment. FDI, in particular, can be affected in three ways. First, product market impediments may deter complementary investment in distribution, service, product development, and production. Second, service industries intrinsically require a local presence, and impediments in service markets retard this associated investment. Third, impediments to merger and acquisition activity in capital markets can discourage FDI in all sectors[24].

To understand the extent to which a competition law regime have an impact on FDI, we need to look at countries with well established Competition laws to ascertain to what extent these have helped to attract an inflow of FDI.

 

Inward FDI in the EU and in India

 Today, the EU is both the world’s leading host and source of FDI. As a “market leader”, the EU benefits from its openness to the rest of the world, including in the area of investment[25].

The European Union through its policies that strive to maintain the single market status, assures investors that they are able to operate in an open, properly and fairly regulated business environment, both within and across a host country’s borders. In investment negotiations, the European Union relies on the principle of non-discrimination, which is applied through equal treatment of all foreign investors. This has been amply demonstrated in the judgments of the European Court of Justice in cases involving anti-competitive practices and cartels. The EU Competition Commission has ensured strict compliance by all firms to ensure a level playing field for all businesses in the relevant market and with the objective of ensuring benefits to consumers.

Japan is ranked as the fourth largest investor into the EU, with a €4.9 billion FDI inflow in 2005. Japan ranked second in 2005 for outward FDI flows from the EU. The EU Competition Commission considers that the tough enforcement of competition policy in Japan as a key ingredient in creating a healthy modern economy in Japan, where such measures as the increase of surcharges, introduction of a leniency programme, (giving a reduced sentence to wrongdoers who cooperate with the Authorities and reveal information on competition law infringements) and enhanced investigative powers of the Competition Authority through the issuance of search warrants, etc., have increased the benefits accruing to the economy from removing anti-competitive practices. In 1989 cartelization in construction industry prevented any new entrant from establishing in the Japanese market by adopting a bid rigging process whereby the incumbent companies each took turns at bidding in major construction projects, to ensure artificially inflated prices resulting in 16 -30% increase in construction costs in public works projects.

Indian Competition Policy took a great stride forward with the country’s open economic policies in 1999. Dr. Santanu Sarkar, Associate Professor of School of Management and Social Studies, TATA Institute of Social Studies analyzing the Impact of Inward FDI says that the ‘Government in recent times felt that many of the entry barriers had greater justification at the time they were imposed, but with a much stronger and more competitive economy many of these can be removed.’ He further states that entry barriers in any industry must be explicitly justified.

 

 Local Competition policies and its impact on FDI

 The manner in which our Competition policies have had a bearing on inward FDI can be seen from the Telecommunications industry. This is an industry that exhibited intense competition in the early years but has now become anti-competitive. Jayasuriy and Knight-John state that there are several barriers to entry operating in the Sri Lanka telecommunication sector market. These include several legal/regulatory entry barriers and others that also deter new entrants and impede competition[26].

Deregulation of the industry took time, commencing with the entry of two Wireless Loop Operators; Suntel and Lanka Bell in 1996 and the subsequent entry of the mobile operators. SLTL still remains the dominant player with extensive market power in the overall telecommunications market, controlling approximately 60 per cent of the total industry[27]. SLT holds a monopoly position in the fixed assets market and controls the telecommunications industry. For instance, mobile operators have to pay the higher national rate calling charges for calls terminating on SLTL’s network, and full retail charges for international calls originating in their networks[28]; There is also tacit collusion between the WLL operators and SLT in the fixed and wireless call charges as the former seems to be following the SLT as the market leader. As the acts of a government controlled entity does not come within the scope of the Consumer Affairs Authority Act[29], there is absolutely nothing that the Authority can do to prevent such anti competitive behavior.

There is however stiff competition in the mobile telephone market with the 5 players having market shares as follows:  Malaysia’s Dialog Telecom – 46.3% ;  Sri Lanka Telecom’s Mobitel – 24.1%; Dubai’s Etisalat – 17.4%; India’s Bharti Airtel – 9.4% and Hong Kong’s Hutch (Hutchinson Telecom) -2.6% . The stiff competition among these entities was primarily to increase the market share among the present 13 million mobile phone users in Sri Lanka. The price war between competitors resulted in mobile call charges per minute dropping to the lowest in the region and bringing down the profitability of the operators. In this backdrop, Indian Bharti Airtel has alleged that its customers are experiencing “call congestion” when phoning people of other networks. They also allege that the interconnect capacity requested from other operators had not been provided. If these allegations are true, the strategy adopted by the other operators, appear to be a collusive tactic to drive away the new entrant.

Recently the Telecommunications Regulatory Commission introduced a minimum call charge of two Sri Lankan rupees (0.2 US cents) per minute for outgoing calls on mobile networks (applicable to all new subscribers), in response to the mobile phone operators’ complaint that they have incurred a combine loss of 23 Billion Rupees in 2009. This has prompted Bharti Airtel to petition Supreme Court that the minimum price “will only help the market leader and maintain the status quo at the expense of the consumer”. They maintain that unless a new player offered cheaper call rates, “any new comer will not be able to attract customers”.

Giving consumers products and services at cheaper rates is one outcome of healthy competition in the market. But one needs to ascertain whether the reduced price is part of predatory pricing with the objective of taking hold of the market to increase prices later or whether it is a price which would still yield a profit to the service provider, in which case it should be encouraged as being beneficial to consumers. Even though this necessitated a proper investigation by the Consumers Affairs Authority to ascertain the financials and a justification for the minimum price, no such investigation appears to have been held even though it is vested with powers to do so in terms of Sec.34(1). Currently, the focus of the CAA seems more towards price control than the enforcement of competition laws.

 

What needs to be done

When one considers the competition laws that currently apply in Sri Lanka, it goes without saying that a complete overhaul of the system is necessary. The current competition laws, lacks teeth to make any impact. Even the fine for a first time offender limited to a maximum of Rupees Fifty Thousand in the case of an individual and Rupees One Million in the case of a body corporate, is woefully inadequate as a deterrent against anti competitive acts. [Sec. 60(2)]. Fines should be higher and trials should necessarily be before a higher court. The law needs to be amended to cover anti competitive acts of state entities, as in India, EU, Singapore, etc. if the consumers are to really benefit from such laws and for the sake of good governance.

A competition culture needs to be established which would safeguard the interests of consumers and create a competitive environment for businesses enabling more suppliers of goods and services including FDI’s to enter the market and innovations to take place. The Consumer Affairs Authority should either create a separate division or an entity similar to the previously abolished Fair Trading Commission for monitoring market competition and enforcement of competition laws.  Countries in our region have taken giant steps forward in competition laws. There is much that we can learn from such competition regimes that are now well established. The sooner Sri Lanka gives its attention to an area of which the foundation was ironically laid as far back as 1987, the better it would be for the future of its citizen.

 

 

 

…………….

[1] OECD and other organizations estimated the harm caused by cartels in billions of dollars each year. Developing countries are particularly vulnerable. A World Bank paper estimated that in 1977, developing countries imported $8.1 billion worth of goods from industries which witnesses price fixing conspiracies during 1990’s. This represents 6.7% of the imports and 1.2% of the GDP in the developing countries. On average, over-charges are estimated between 20-30% with higher over charges in the case of international cartels. Cartels have variously been described as “highway robbery” and the “supreme evil of anti-trust” – Times News Network, April 13, 2007

[2] Sherman Antitrust Act (July 2, 1890). Clayton Act f 1914 was passed to supplement the Sherman Act

[3] Civil Action No. 98-1232 (CKK)

[4] http://europa.eu/rapid/pressReleasesAction.do?reference=IP/09/1695&format=

[5] With effect from 1 December 2009, Art. 81 and 82 of the EC Treaty have become Art. 101 and 102 respectively of the TFEU. (Treaty on the functioning of the European Union) The two sets of provision are in substance identical. Reference to Art. 101 and 102 TFEU should be understood as references to Art. 81 and 82 of the EC Treaty.

[6] Refers to an economic entity, (i.e. company, association or individual). If the subsidiary has no economic freedom to determine its conduct in the market, then it will be considered as one economic entity along with its parent (independent economic entity).

[7] There is no such comparable exception under the Anti trust laws in the US.

[8] Consten & Grundig (1966) ECJ – During the 1960’s Consten had exclusive rights to Grundig electronic products in France under a specific dealership agreement. Under this agreement, Consten had absolute territorial protection as exports and parallel imports of Grundig products were prohibited. These rights were enforced in France under the GINT trademark of Grundig. When another French company started to sell Grundig products under the UNEF trademark at a cheaper price, Consten filed proceedings for an infringement of its GINT trade mark. UNEF alleged that the dealership agreement between Consten and Grundig breached Art. 85(1) of the Treaty of Rome (now Art. 101(1) of the TFEU

[9] EC Guidelines on Horizontal cooperation agreements (OJ C3 of 6.1.2001) describes the analysis adopted by the Commission in this regard and lists categories of agreements which are deemed to bring benefits to consumers as they fulfill the conditions stipulated in Article 81(3).

[10] Consten and Grundig (1966) ECJ 347; VBVB and VBBB v Commission (1984) ECJ para.52, Matra Hachette (1994) CFI, para 104, FEFC (2002) CFI, para 339

[11] EC Guidelines on the application of Article 81(3), OJ No. C 101 of 27.4.2004

[12] V. Korah, An Introductory Guide to EC Competition Law and Practice 7th Edition, Oxfor, Hart, 2000

[13] The creation of a joint venture performing on a lasting basis all the functions of an autonomous economic entity constitutes a concentration within the meaning of para1(b)

[14] http://ec.europa.eu/competition/mergers/statistics.pdf

[15] Legally India : News for Lawyers

[16] 1994 AIR 787 1994 SCC (1) 243

[17]http://www.groundviews.org/author/cha/

[18] Randolph Perera, Chairman of the Sri Lanka Shippers’ Council (SLSC): “We hope the government will study the recent reforms in Europe and their competition laws and implements similar reforms to prevent shipping lines using anti-competitive practices.” Shippers have long complained that shipping lines formed into cartels known as ‘liner conferences’ fix schedules and prices and also impose surcharges without adequate notice. These practices exploit shippers and ultimately lead to higher prices for goods which consumers end up paying.- Aug. 14, 2009 LBO

 

[19]“Experiences from developing countries have shown that prudent competition policy and law enforcement can assist specific key sectors to accommodate/include more players. Many rural communities in developing countries, who totally depend on the agricultural sector, are classified as poor. Therefore, a competition authority would pay attention to these sectors in order to tackle anti-competitive practices affecting them. Such intervention can directly and/or indirectly contribute to wealth maintenance and creation, which is key to poverty alleviation.”- The effects of anti-competitive business practices on developing countries and their development prospects : Hassan Qaqaya & George Lipimile UN Publication 2008

[20] This is similar to the exemption to an anti competitive act in terms of Art.101(3) of the EU Competition Law.

[21] Ceylon Oxygen Co. Ltd. vs Fair Trading Commission and Another CA 932/94

[22] TAD/INF/2716 – Business Globalization continues to boom : Developing countries gain in importance

[23]Noland M: “Competition Policy and FDI: A Solution in Search of a Problem” – Institute for International Economics Working Paper (1999)

[24] Noland M; ‘Competition Policy and FDI: A solution in search of a problem?’ – Peterson Institute

[25] EU Commission paper titled “Towards a comprehensive European international investment policy” COM (2010) 343 final : Brussels, 7.7.2010

[26] Jayasuriya and Knight-John; Sri-Lanka’s Telecommunication Industry: from Privatization to Anti-Competition – Centre on Regulation and Competition  Working Paper Series : January 2002

[27]  ibid

[28] ibid

[29] Due to the exclusion under Sec. 77 of the CAA Act.

May 3, 2018 Posted by | Competition Law, Foreign Direct Investment, Uncategorized | , , , , , , , , | Leave a comment

Doing business in Dubai

Legal advice to do business in Dubai – businesssetupindubaifreezone-160317081404

dubai

February 12, 2018 Posted by | Doing business in Dubai, Uncategorized | Leave a comment

Emergency Action Plan for fire in high rise buildings

The fire that broke out on New Year’s Eve at the 60 storey Dubai mixed development high rise called ‘Address Downtown’, is an eye opener for Developers and Management Corporations of condominium properties in Sri Lanka to pay more attention towards the risk of fire and the need to have an emergency action plan for such unexpected situations.

Most developers and managers of high rise buildings in Sri Lanka pay little attention to risks of fire and there are few ( if at all) that have emergency action plans.

I have attached for the information of readers a leaflet issued by the National Fire Protection Association of USA, recommending steps that can be taken in office high rise buildings. These can be used as guidelines by Developers, Managers and occupants of local high rise buildings to develop similar emergency action plans.

Don’t let your dreams go up in smoke – practice fire safety.”  ~Author Unknown

EmergencyActionPlanHighRise

 

January 1, 2016 Posted by | Condominium properties Sri Lanka, Uncategorized | , , , , | 1 Comment

Management of Condominium Properties

Living in a condominium property is an entirely different experience, unlike living in a house in one’s divided and defined block of land. A condominium dweller is sharing walls, ceiling and floor with his or her immediate neighbors as well as the common areas with all the other unit owners living in the same condominium property. Therefore, to maintain harmony and safeguard the rights of each and every unit owner, it is necessary to have a set of rules, otherwise known as “by-laws” binding all unit owners within the sub-divided building. There are few statutory by-laws laid down in the 2nd Schedule of the Apartment Ownership Act No. 45 of 1982, which are, by no means adequate to address the numerous problems that would come up within a ‘mini city’ occupied by several house owners and their families.
Some of the issues that impact on ownership and consequently on the value of a condominium property can be broadly categorized as follows –

1. The absence of proper rules or by-laws for management, maintenance and administration of the condominium property.

2. No Sinking Fund or lack of funds for major capital expenditure for maintenance and renovations of the building.

3. Significant number of unit owners defaulting on service charges owing to the Management Corporation.

4. Disinterested Council Members or failure in the performance of their duties leading to unresolved disputes among unit owners and between unit owners and the Management Corporation.

5. Pending court cases against the Council and its Management Corporation leading to an escalation in costs which are eventually borne by unit owners as higher service charges.

6. Construction defects in a new building not addressed by the Developer and not covered by a limited warranty.

7. Inadequate insurance cover for the building or failure to maintain insurance for fire on the reinstatement value of the building, as required by the Act.

In the real estate market it is often heard that “location” is a prerequisite for determining the value of a property, based not only on the geographical location but also on the proximity to schools, supermarkets, main roads and other conveniences. Though this is true even in the case of condominium properties which attract a higher price based on location, the above mentioned factors can, anyhow, have a significant impact on the value of a condominium property in the long run.

SINKING FUND
A building, unless kept well maintained, its value will depreciate as time goes by. This is why, it is essential for Management Corporations to have adequate cash in the Sinking Fund to attend to renovations and major repairs, which will become necessary when the building starts to age. The importance of the Sinking Fund is stressed in Sec. 33(5) of Act No. 39 of 2003 by making it mandatory for the management corporation to open a separate account to ensure that the funds so deposited shall not be withdrawn without a special resolution or without an ordinary resolution with the concurrence of the Condominium Management Authority.

The Sinking Fund and the healthy financial position of a condominium property will be a significant factor to determine whether the building can maintain its property value in the long term. Similarly, if there are frequent arrears in the collection of service charges with several unit owners defaulting, not only will it impact on major renovations but also hinder the day to day maintenance of the building. Poorly maintained buildings causing an adverse impact on the property value, will consequently depress the value of the condominium unit taken as collateral by financial institutions.

INEFFICIENT COUNCIL AND ARBITRARY CONTROL BY DEVELOPERS
A lethargic, disinterested or weak Council or a Council consisting of members acting for their personal interest is, in most cases, the reason for financial problems in condominium properties. Sometimes, the Developer retains control over the Council with the ulterior motive of making money from the condominium property by appointing himself as the Managing Agent. If there is no transparency in such management and no proper accounts of expenses incurred, such a situation will be just as bad as having unit owners defaulting on their dues to the Management Fund.

Many of the problems that are currently faced by condominium dwellers arise over the management of the condominium property, in other words, “management of common elements”. This is an area which has not been adequately addressed in the Apartment Ownership Act leaving room for Developers to continue to operate the building as if the ownership of common elements are vested in them.

Some of the common problems faced by unit owners due to Developers continuing to control and manage the common elements –
i. Use of common areas for their private purposes, (i.e. as office space, storage space or in certain instances, to construct apartments carved out of common areas in the basement)

ii. Use of parking space for their own private commercial operations.

iii. Collecting service charge/maintenance fees from owners of other units but not in respect of the units which are unsold and remains the property of the Developer.

iv. Failure to release to unit owners a budget depicting the proposed income and expenditure relating to the management of the common elements and the Service charge per share value based on such budget. It is not uncommon for Developers to decide on the Service Charge according to their preferences and to credit such sums collected to their own bank accounts, whereas the Act specifically refers to the need to create a Management Fund for day to day operations and a Sinking Fund for capital expenses.

These type of problems are also prevalent in Councils which have members with conflicts of interests, whose main objective in being a member of the Council is to serve their personal interests while holding the reins of governance.

CONSTRUCTION DEFECTS
Construction defects have become a nightmare for some prospective buyers of condominiums. Unscrupulous Developers find ways and means to hide defects till the units are sold. It is rare for a buyer to detect construction defects unless he or she has a background in civil engineering or a specialized knowledge in building works. Even though buyers pay a hefty price to purchase a condominium, they fail to understand that the complex nature of condominium construction and shared ownership of common elements, makes it absolutely essential that they get the opinion of a civil engineer or a knowledgeable person to check the condominium unit and the common areas as a prerequisite before parting with millions of Rupees as sale price.

There have been instances of Developers failing to install heat proof insulation on the roof slab causing excessive heat building up in units immediately below the roof slab when these are kept closed for long periods of time. Sometimes the waterproofing of the roof slab is inadequate causing mildew on the ceiling of units immediately below. Leaks in plumbing within a unit have caused excessive damage in units below. A history of such defects in a condominium property, will invariably depress its property value even if it is located in a good residential area.

INSURANCE
Insurance of condominium properties is not a topic much talked about. Yet, it is one of the key elements that determine how safe it is too live in a condominium property. When a Developer assures a prospective buyer that he has got an insurance cover for the building, it is imperative that one finds out the exact details of the insurance; i.e. the nature of the insurance, whether it is only fire insurance or fire insurance and public liability, which is necessary since the Management Corporation can be sued for injuries that take place in the common areas of the condominium property.

In the case of fire insurance, the Act provides that the building should be insured to the reinstatement value of the property. It is necessary to find out whether the insurance cover obtained refers to an empty unit or whether it covers certain fixtures and fittings given by the Developer at the time of sale. If these are not included the unit owner should have these covered under his or her own personal fire insurance cover.

–  An extract of a lecture delivered by Ajithaa Edirimane at the Workshop on Development and Management of Real Estate conducted by the Institute of Real Estate and Valuation at the University of Sri Jayawardenapura on 12th December 2015

December 13, 2015 Posted by | Condominium properties Sri Lanka, Land & Properties, sri lanka, Uncategorized | , , , | Leave a comment

What ails the condominium industry in Sri Lanka?

WHAT AILS THE CONDOMINIUM INDUSTRY IN SRI LANKA?
By Ajithaa Edirimane

Is condominium living really the ‘dream’ or is it a ‘nightmare’? Are prospective buyers aware of the restrictive nature of condominium living and rules that need to be complied with as a co-owner of common property? Are buyers dealing with honest developers who are transparent in their dealings? Are the problems of condominium dwellers addressed efficiently by the regulator? Is the current law adequate to address the problems of the condominium industry?

Laws governing condominium properties require more teeth
In one particular condominium property there are complaints from unit owners of serious defects in construction, with floor tiles coming off and cracks appearing on the external wall. The council does not have the funds to attend to repairs and blames the developer for the defects. The developer is not unduly concerned since title deeds were issued to all unit owners. In another mixed development condominium property, the unit owners are prohibited from using the main entrance as the developer has leased part of the common areas and the main entrance to a third party, in spite of having no right or authority to do so.

Legality of the agreements
A common practice of developers in pre-selling units is to offer a section of the building depicted as an apartment on a rough sketch and collect advance payments for the so-called ‘condominiums’ more often priced as high as Rs. 20 million. These are merely illustrations seen only on paper and are not legally divided and defined condominiums registered at a Land Registry or at a Title Registry. Such sales agreements are mostly one sided benefitting the developer. The prospective buyer, yearning to acquire one of the beautiful apartments illustrated on a glossy brochure, accepts the terms offered by the developer not wanting to risk losing the apartment.

The Apartment Ownership Law does not have provisions to safeguard the interests of unwary buyers in similar situations. Neither does the law impose mandatory obligations on developers to disclose issues which impact on the prospective buyer’s ownership, such as; the developer’s background, funding for the project, estimated date of completion, whether the project will be expanded with additional units added to the project, the rights of unit owners if expansion takes place, etc. Many are the instances when unsuspecting buyers have got caught to developers who have defrauded buyers more than once and continue to do so with impunity.

On the other hand, the law does not make it easy for developers to implement major multi-storey projects, whether it is mixed development or residential, due to the cumbersome registration process. Sri Lanka has a unique registration system, where a developer is compelled to register a subdivided building at least twice to bring it into the ambit of the law — firstly, to enable pre-sales of units, registration as a Provisional Condominium Property; secondly, upon completion of construction and issuance of the Certificate of Conformity, registration of the subdivided building as a completed Condominium Property. Not only is this procedure cumbersome, it is also costly when a single registration should be adequate. Consequently, a majority of developers refrain from registering the Provisional Condominium Property. Pre-sales of units thus take place without referring to a registered plan and without a legally recognised subject matter. Even banks tend to disregard this important requirement and register tripartite agreements on the main land on which the building is constructed, encumbering all units of the subdivided building in the process.

Regulations and regulator
That there are no regulations to aid the implementation of the law has made matters worse. The Common Amenities Board (Amendment) Act No. 24 of 2003 vested series of powers on the Condominium Management Authority (CMA) to cover condominium properties under Sec. 5(a) to 5(o), but without regulations to enable the implementation of the said powers.
Another grey area, which necessarily should be clarified by regulations, is the procedure to be followed when changes take place within a registered condominium property. Sometimes unit owners wish to expand a common area or amalgamate two units as one. When such changes are contemplated and an application is made to the municipal authority for approval, the practice is to insist on a costly revised Building Plan of the entire condominium property, when a revised condominium plan with details of the area to be changed should suffice, especially since the subdivided building has already been registered as a condominium property and the changes are within the foot print of the constructed and completed condominium property. It is the duty of the CMA as the Regulator to take an informed decision on these matters and simplify the procedure by gazetting relevant regulations.

If the law is silent on the procedural matters, the regulations should fill the void. That has happened neither under the Common Amenities Board (Amendment) Act No. 24 of 2003 nor under the Apartment Ownership Law No. 11 of 1973 and its amendments. The CMA gives its own interpretations to the law, which is not a function of the regulator nor is it provided under the statute.

Conclusion
The condominium industry is no longer in its infancy. The principle enactment came into being in 1973 with two important amendments in 1982 and 2003. But there are still many areas that the law has not addressed. Added to that, no regulations have been issued to date to implement the provisions of the law which have not only caused confusion to unit owners but also made the task of the regulator difficult.
In the meantime, we see a boom in condominium properties, with many developers taking up construction of new subdivided buildings. Similarly, owners of both small and large multi storey buildings are converting them to condominium properties without being fully aware of legal implications. Revising the law, introducing regulations and making the regulator effective with training for its staff, are all crucial for condominium properties to be a good investment option as well as to make them risk free and safe for prospective buyers.

(The writer is an Attorney-at-Law)
http://www.sundaytimes.lk/150308/sunday-times-2/what-ails-the-condominium-industry-in-sri-lanka-139147.html

This is an article which was published in the Sunday Times in March 2015)

April 23, 2015 Posted by | Condominium properties Sri Lanka | , , , , | 2 Comments