Legal_Landscape

A commentary on law and current affairs

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

Protect your property from land scams

PROTECT YOUR PROPERTY FROM LAND SCAMS

This slide presentation highlights the emerging problem of land scams in Sri Lanka. It draws attention of buyers, owners, notaries and authorities to what should be done to stop land scams and gives tips to safeguard the rights of buyers and owners of properties.

March 20, 2014 Posted by | Land & Properties, land fraud, Law & Governance, sri lanka | , , , , , , , , , , | 4 Comments

Condominium Properties in Sri Lanka – Slide presentation with more examples..

Condominium Properties in Sri Lanka – Issues of concern for buyers and sellers  – This slide presentation is from the lecture given at the Real Estate Conference organized by the Centre for Banking Studies of the Central Bank of Sri Lanka, Urban Development Authority and the Institute of Real Estate and Valuers, held on 6 & 7 October 2011 in Colombo.

 

November 12, 2011 Posted by | Condominium properties Sri Lanka, Land & Properties, Law & Governance, sri lanka | 2 Comments

Condominium properties – Issues of concern for buyers

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[1]. 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[2].

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 in the presence of a Notary[3]. 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 which 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[4]. Thus, 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 No. 39 of 2003 giving recognition to condominium units reflected in the plan of subdivision as individual immovable property. However, in Mallika Fernando vs Nagesh Fernando[5] it was held that non registration of a condominium property will not invalidate a legally binding Deed 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.

A buyer of a properly registered condominium unit whilst acquiring total ownership, possession and control of the respective unit, also acquires joint ownership of the Common Elements of the subdivided building with the other condominium owners based on the “share value” assigned to their respective units.

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, if the building is constructed in a Province or Administrative District where the said Registration of Title Act is enforced.

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 Sale and Purchase Agreement (Sales Agreement) in the absence of a properly registered Deed of Declaration subdividing the building into condominium units. 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 or future 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:

  1. It does not result in a transfer of title but remains a conditional sale. Therefore, the prospective purchaser will not acquire ownership of his / her condominium unit even if he/she has paid the sale price in full.
  2. 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.
  3. 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.
  4. 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[6]. 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 lack of a 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 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 price, under the threat of losing their condominium unit if the installments are not paid on the due dates. The full amount has thus been paid benefiting the Developer/ Vendor, whilst the prospective purchaser has got 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 issue and has made it mandatory for the Developer/ Vendor to transfer title to the property as stipulated in Sec. 3(2) of the said Act.

This statutory provision 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 sale or the agreement to sell 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, it appears 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.


[1] In Gustavus Couterier vs Robert Hastie (1856) Int. Com L.R. 06/26, the existence of a subject matter was considered vital for a binding contract. In this case relating to the shipment of a cargo of corn brought before the House of Lords in 1856, it was pointed out that if the subject of the sale ceased to exist when the sale took place, there is nothing whatsoever on which the contract could attach.

[2] Pothier in Contracts of Sale (translated from French by L.S. Cushing: The Law Book Exchange Ltd. 1999) the following example is given: if one sells a house which at that time has been destroyed by fire, then the contract is null and void since the house which was the subject matter of the contract did not exist.

[3] Upon registration of the Condominium plan or semi Condominium Plan, each building or partly completed building depicted in the Condominium  Property or Semi Condominium Property shall be deemed to be divided into units and identified therein and thereupon the common elements shall be held by the owners of all the condominium parcels as tenants in common proportionate to their respective share parcels and for the same term and tenure as their respective condominium parcels are held by them (Sec. 9(1) of the Apartment Ownership Law No. 11( as amended by Acts No. 45 of 1982, 4 of 1999, 27 of 2002 and 39 of 2003)

[4] In terms of Roman Dutch Law that applies to immovable property in Sri Lanka, the owner of a building is the owner of the land upon which the building is constructed. (i.e. ‘building goes with the land’). This concept changed after the enactment of the Apartment Ownership Law, which for the first time recognized horizontal layers of a building, registered under its provisions, as a class of property on its own giving the right of separate ownership for such subdivisions

[5] C.A. 979/79 DC Colombo 16894/L : March 26, 2001

[6] Sec. 20(B) of the Apartment Ownership Act No. 39 of 2003 provides that the owners of units (parcels) by virtue of law, upon the registration of the Condominium Plan or Semi Condominium Plan shall be a body corporate with perpetual succession with a Common Seal and be called the Management Corporation.

July 10, 2010 Posted by | Condominium properties Sri Lanka, Land & Properties, Law & Governance, sri lanka | 2 Comments