Legal_Landscape

A commentary on law and current affairs

Focusing on the issue of Title in Condominium Properties

Presentation at the International Public Seminar titled
“Property Development & Real Estate Investment in Sri Lanka”
held at the BMICH, Colombo on 25 April 2014
organized by the Institute of Valuers of Sri Lanka

 

 

FOCUSING ON THE ISSUE OF TITLE IN CONDOMINIUM PROPERTIES

Condominium properties or multi storey buildings are an important feature of Real Property development. Especially in urban areas where land is limited with inadequate housing for the increasing population, multi storey buildings subdivided as condominiums have been the solution for urban housing. In an emerging economy, condominium living can be an attractive housing option if issues of concern faced by buyers can be minimized.
The main issues of concern are connected to the following areas:
1. Title of the condominium unit & registration of the condominium property.
2. Administration, maintenance and management of the condominium property.

Introduction – concept of ‘condominiums’
In Sri Lanka, Roman Dutch Law applies to Real Property. In terms of the principle supeficies solo cedit, which literally means – ‘anything attached to land goes with the land’ – the owner of a land would own anything built upon it. Thus we have a ‘vertical ownership’ over land from the deepest bowels of the earth to the heavens above.
The vertical ownership related to land was amended by statute, initially by the Condominium Property Act No. 12 of 1970 which was repealed and replaced by Apartment Ownership Law No. 11 of 1973. The said statute created a new concept of ownership of Real Property, that is, ownership of horizontal layers of a building. The important requirement for such ownership to come into existence is the registration of the subdivided building under the provisions of the statute.
The legislation which created this new concept of Real Property can be listed as follows –
• Condominium Property Act No. 12 of 1970 (repealed)
• The Apartment Ownership Law No. 11 of 1973 (Principle enactment) This Act was subsequently amended by the following statutes:
• Apartment Ownership (Amendment) Act No. 45 of 1982
• Apartment Ownership (Special Provisions) Act No. 4 of 1999 & Apartment Ownership (Special Provisions) Act No. 27 of 2002
• Apartment Ownership (Amendment) Act No. 39 of 2003

Dual ownership
Registration of a subdivided building as shown on a plan of subdivision (i.e. provisional condominium plan, semi-condominium plan or a condominium plan) according to the Apartment Ownership Act leads to the creation of several apartments or units depicted in the plan as separate ‘freehold property’. Each such unit referred to as a “condominium” is located within a building of more than one storey, enabling individual ownership of the unit designed for independent use (which can be divided into one of more rooms) with direct exit to a road or to a common area leading to a road.

A condominium unit owner would also have joint ownership of the Common Elements (i.e. all areas which do not form part of any condominium unit in a Condominium Property and which are described as Common Elements in a Plan of subdivision). The joint ownership is based on the ‘Share Values’ assigned to each unit. Currently, the Act does not indicate how share values are to be assigned to units, except providing in Sec. 13(3) of Act No. 39 of 2003 that share values are assigned according to the ‘use of the said condominium, whether residential or commercial, as the case may be’. This definition is not clear and does not indicate whether there should be a higher share value for commercial condominium units or vice versa. Though this appears to be an area where comparably less attention had been given by the drafters of the law, it is however, a feature which can make a significant impact for condominium dwellers as share values determine the amount of service charges that should be paid by individual unit owners, their respective voting rights at meetings of the Management Corporation and also the allocation of residual property in the event of a destruction of the subdivided building.

Another interesting feature is the creation of a Management Corporation with all unit owners as ‘Members’ of the said corporation upon the registration of the subdivided building as a condominium property. It has a Constitution and By-laws and can sue and be sued like any other corporate body. This concept, with the individual ownership of the condominium unit, joint ownership of common elements and membership of Management Corporation has sometimes been referred to as a ‘three fold unity’ of condominium properties. One entitlement cannot exist or be considered separately from another, as a unit owner will automatically be entitled to all three elements. Having thus briefly considered the concept of ‘condominium properties’ we can now explore the issues that concern buyers and sellers of this type of Real Properties.

1. Title to the condominium unit and registration of the condominium property –
A major issue that confronts condominium buyers is the ‘title’ to the condominium unit. This is linked to the existence of the ‘subject matter’ in a Real Property transaction.

The ‘subject matter of sale’ is an important element in the sale of a property. In the absence of a subject matter there cannot be a legally binding transfer, even if there is unanimity between parties to the transaction. Thus in a sale of immovable property, the subject matter of the transaction should be in existence for title to pass to a buyer upon payment of valuable consideration. If one enters into a sales agreement for the sale of land X without knowing that there is no such block of land in existence or indicated in a survey plan, then the sales agreement will be void due to the absence of the ‘subject matter’.

A condominium property comes into existence with the registration of the Deed of Declaration along with the Condominium Plan describing the individual condominium units and the common elements of the building, duly executed under the hand of the owner/s of the land, attested by a Notary. The Deed of Declaration embodies a vast amount of information as contained in a number of documents attached to the Declaration, the principle one of the said documents is the plan of subdivision. This is referred to as a ‘Condominium Plan’ in respect of a completed building, a ‘Semi Condominium Plan’ in respect of a partially constructed building and a ‘Provisional Condominium Plan’, in the case of a building which is yet to be constructed.

Only upon the registration of the Deed of Declaration and the corresponding plan of subdivision dividing the building into separate units, will such condominium units be considered separate from the land to which the building is attached to and constitute immovable property that can be the subject matter in a condominium property transaction. Therefore, title cannot pass to a buyer of a condominium unit unless and until the subdivided building has been registered in terms of the Apartment Ownership Act giving recognition to condominium units reflected in the plan of subdivision as individual immovable property.

Deeds can be executed relating to segments of a building which have not been registered as a subdivided unit. But in the absence of registration of the same as subdivided freehold units, title that vests with the transferee will only be a co-ownership of the building. In Mallika Fernando vs Nagesh Fernando (C.A. 979/79 DC Colombo 16894/L : March 26, 2001) it was held that non registration of a condominium property will not invalidate a legally binding Deed of conveyance under which sections of a building had been gifted to different parties. In this case, the plaintiff and defendant had both signed and accepted a Deed of Gift of the Donor whereby sections of a building, which were not properly subdivided under a registered condominium plan, had been gifted to the donees. They were thus considered to be co-owners of the building and not as owners of individual units.

Consequences of acquiring unregistered ‘condominium units’:
Let us consider a situation where a conditional sale of a ‘condominium unit’ takes place with a mere reference to the unit in the Sales Agreement, which incidentally, is not a title deed. This is the general practice of Property Developers in Sri Lanka if there are impediments or delays to the registration of the Deed of Declaration and Plan of subdivision. In order to comply with Sec. 2 of the Prevention of Frauds Ordinance, which requires a sale of immovable property to be in writing and signed in the presence of a licensed Notary and two or more witnesses, the Sales Agreement attested by a Notary is thus registered under the main land upon which the building is constructed. The consequences of this registration can be given as follows:

i. It does not result in a transfer of title but remains a conditional sale as it is merely an ‘agreement’ between parties. Therefore, the prospective purchaser will not acquire ownership of his / her condominium unit even if he/she has paid the sale price in full.

ii. In the event the project fails, recovery of payments made by the prospective purchaser will be difficult as the land upon which the sale transaction is registered would be mortgaged to financiers as collateral.

iii. In the event the building is destroyed or damaged, the insurance proceeds will be released to the owner of the land or to the financiers to whom the property is mortgaged and the prospective purchaser/s of the building under Sales Agreements will have no right or title to claim compensation.

iv. In the absence of registration, the prospective purchasers occupying units within the building will not constitute a body corporate referred to as a Management Corporation that normally comes into existence upon the registration of the condominium property. The prospective purchasers hold no right or authority over the common elements of the building and accordingly, are not entitled to an undivided portion of the common elements due to the absence of valid title to a condominium unit within the building. On the other hand, this is also disadvantages to the Developer or the Owner of the building as he has no statutory right or authority to charge fees for the use of the maintenance of common areas without the sanction and approval of the occupants of the building in the absence of a legally constituted body corporate, similar to a Management Corporation.

It has come to light that many occupants of condominium units of completed projects have only a Sales Agreement even after one year of occupation preventing them from claiming ownership over the condominium unit for which millions of Rupees have been paid as full settlement of the sale price. In most cases, the prospective buyers have been compelled to pay the full sales price, under the threat of losing their condominium unit if the installments are not paid on the due dates. The full amount is thus paid benefiting the Developer/ Vendor, whilst the prospective purchaser gets only a possessory right over his/ her unit. It needs to be mentioned here that the Apartment Ownership Act No. 39 of 2003 has addressed this type of issues and has made it mandatory for the Developer/ Vendor to transfer title of the property as stipulated in Sec. 3(2) of the said Act.

Sec. 3(2) compels the Developer or the owner of a land upon which there is a completed building capable of being subdivided, to register the property as a subdivided property if he has entered into a transaction to sell any part of the said building as a subdivided unit. The application for registration should be submitted within 18 months from the date of the first sales agreement or within 3 months of completion of the building, whichever occurs first. In the event, the sale occurs after the completion of the building, the application for registration should be submitted within 6 months from the date of completion of the building. Any person who contravenes the provisions of the Act is guilty of an offence under Sec. 3(2) and 3(3) of the Act and is liable on conviction after summary trial before a Magistrate to a fine not exceeding Rs.50,000/- and a further fine of Rs.1000/- per day for each day the offence continues to be committed. Considering that no attempts have been made by many occupiers in condominium properties who are yet to receive their title deeds to take action in terms of Sec.3(2), it is apparent that there is still a lack of awareness among condominium dwellers as to their rights both prior to and after the purchase of a condominium.

The Apartment Ownership Law has not stipulated criteria to be fulfilled by Developers who engage in pre-selling. It can be said that the lacuna in the law as well as the ignorance of prospective purchasers have paved the way for unscrupulous Developers to exploit this situation to their advantage. It is common to see pre-selling of condominiums even without obtaining vital regulatory clearances. Some are never registered as the Developers who are also the owners of the land, have left the country. An amendment to the Act should impose conditions to be observed by Developers prior to pre-selling of units, such as Disclosures relating to important conditions stipulated in Sales Agreements, deposit of advance payments in Escrow Accounts till the building is completed up to a certain minimum level, rights of termination of a Sales Agreement and refund of funds, proposed project completion date, facilities provided to unit owners, proposed by-laws of the condominium property, etc., Without such transparency in multistory property development projects, there will be many innocent purchasers who would repent after parting with their hard earned money.

Another statutory requirement for the proper transfer of title is the need to register all condominium units under the Registration of Title Act No. 21 of 1998, (RTA) if the building is constructed in a Province or Administrative District where the said Registration of Title Act is enforced. (i.e. Sec. 44 and 45 of the Apartment Ownership Act No. 39 of 2003). By Gazette No. 1508/20 dated 1 August 2007, application of the RTA was extended to all provinces except the North and the East. Therefore, in terms of Sec. 44 and 45, currently there is a mandatory requirement to register all condominium properties under the RTA (except in the North and East). But since Title Registries are yet to be established in all areas to which the Gazette Notice applies, the statutory provision requiring registration of subdivided buildings under the RTA has now become a pointless mandatory requirement in Districts where there are no Title Registries. (e.g. Colombo). One could therefore question the validity of registration of a subdivided building solely under the Registration of Documents Ordinance considering the above mentioned application of Gazette No.1508/20.

2. Administration, maintenance and management of the condominium property
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 by Developers 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.

Freehold title of unit and joint ownership of common elements should be assessed as ‘one entity’ –
As pointed out earlier, when one purchases a condominium property, it is not only the freehold ownership of the subdivided unit that one acquires but also the joint ownership of the common elements of the entire property. The freehold title of the unit along with the common rights over the jointly owned common elements should therefore be assessed as ‘one entity’. Not only are some Developers ignorant of that fact, but owners of condominium units are also in general, unaware of the extent of their ownership. This situation is exploited by Developers who, even after selling all the units, continue to have a hold over the condominium property by controlling the management of common elements and in certain instances, even crediting the service charge / maintenance fee to their own private accounts.

There are currently several registered condominium properties which do not have an operational or fully functioning Management Corporation, though it comes in to existence with the registration of the subdivided building. Since Sec. 27(3) of Act No. 39 of 2003, provides that the Condominium Management Authority (CMA) shall convene the 1st AGM, some Developers intentionally continue with the management of the common elements blaming the statutory body for its failure to convene the AGM. In my view, the holding of the 1st AGM and the appointment of the Council is an internal matter to be handled by the members of the Management Corporation. The Act needs to be amended to make it mandatory for the Management Corporation (and/or the Developer who holds all the units immediately upon the creation of the MC) to convene the 1st AGM within 3 months of its establishment. A failure of this important requirement should be a punishable offence.

The concept of ‘time share’ for investment in condominium properties –
Time share condominiums are generally used for vacation purposes by retirees and semi-retirees who wish to regularly visit a particular country or place for a short period during a certain time of the year. This is a method adopted in recent times in developed countries where there are applicable laws to address the issue of ownership, limited property rights and liabilities for maintenance fees as applicable to ‘time share’ condominiums.

In Sri Lanka, there are no specific provisions in the Apartment Ownership Law and its amendments addressing the ‘time share’ aspect of ownership of condominiums. Under such circumstances, in the absence of statutory provisions, a Developer embarking on a condominium project to offer potential purchasers a unit on a ‘time share’ basis, would have to necessarily work within the prevailing statutory and legal provisions to ensure that the project achieves its desired goals.

For example, to grant several unit owners limited rights of ownership of a unit (either the same or a different one in the condominium property), all unit owners should only be co-owners of an undivided share of the entirety of the units. A unit owner who has an absolute freehold title can prevent others from using his unit during his absence. On the other hand, if all are merely co-owners of an undivided share of the condominium property, by entering into an agreement they can decide on the manner in which a unit can be used by each person, the time and duration of use and the share of maintenance fees that should be taken up by each individual co-owner. Accordingly, the title deeds issued to a ‘time share’ owner would reflect his entitlement to the condominium property as a ‘co-owner’ of a specific undivided percentage of all the units described in the Schedule of the Deed and the Rules subject to which his co-ownership rights can be exercised. For the ‘time share’ concept to succeed in Sri Lanka, there should also be a fully operational Council of the Management Corporation consisting of representatives of the ‘time share’ owners or a Managing Agent who would be answerable to the Council. When the law is silent, Developers need to be guided by proper legal advice when adopting new concepts such as ‘time share’ ownership.

In developed countries, there are stringent laws to safeguard the rights of apartment owners which evolve over time addressing new issues as they come up. This is lacking in our country as Act No. 39 of 2003, being the last amendment, is woefully inadequate to address problems of modern times.

Ajithaa Edirimane LLB (Colombo) MLB (Hamburg),
Attorney-at-Law & Notary Public

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April 25, 2014 - Posted by | Condominium properties Sri Lanka, Land & Properties, Law & Governance, Property Title | , , , , , , , ,

2 Comments »

  1. could you please explain how about the ownership of the property when the condominium is dilapidated and re-constructed…
    1. Should the owner repay the construction cost?
    2. Will the same structure to be rebuild (can any design and capacity changes be made??)
    3. What will happen, If some owners has no money to give re construction cost?
    4. To whom the land is owned?
    5. If one owner disagrees the new design, What will happen then?
    6. Suggest, the new building has 110 units where the older one has 8? who will take the profit of selling of 2 units? can it be share among the 8 owners??

    Comment by Geeth Perera | August 28, 2015 | Reply

    • In a condominium property, all areas which do not form part of a unit (common elements) are owned by all unit owners jointly based on the share value assigned to their respective unit. Therefore, all unit owners are equally liable to maintain the condominium property.

      If you are referring to the demolition of an old condominium building and the re-building of a new structure in its place, then all owners of the condominium property would first have to agree to the demolition of the building by passing a unanimous resolution to that effect at a general meeting of the Management Corporation. This is done in terms of Sec. 40 of the Apartment Ownership Act No. 39 of 2003. Once the decision is conveyed to the Registrar of Lands, necessary changes will be made to the relevant Condominium Register and all owners will cease to be owners of their respective units. They will thereafter be only co-owners of the land based on the share value which was allotted to their respective units.

      The next step is the winding up of the Management Corporation, for which a petition has to be submitted to court. After settling all debts, the funds of the Management Corporation will be divided among the unit owners based on their respective share values.

      The co-owners of the land can thereafter convene a meeting and take a decision on re-building,the design of the new building, financing the project, marketing the excess units, (if a new building with more units are to be constructed), distribution of profits realized on the sale of units and other connected matters. The newly constructed building on the land will be registered as a new condominium property under a new condominium plan. The Management Corporation which comes into existence upon registration of the new condominium plan will be a new entity.

      Comment by Ajithaa Edirimane | September 6, 2015 | Reply


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