Legal_Landscape

A commentary on law and current affairs

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.

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

Preventing Land Fraud

Land fraud is a topic generating much discussion in the local scene. Owners, especially those who have been living abroad for long periods of time upon their return home, find to their utter dismay properties held by them for decades fraudulently sold to third parties!

One may ask, how can this be possible? It is possible through the involvement of unscrupulous people who have access to the owner’s land records, either at the Land Registry or at the local government office (i.e. Pradeshiya Sabha). Unless there is a secure registration and document preservation system in place, where only authorized persons have access to official records, land fraud is bound to take place.

It should also be the duty of all Notaries to check the back ground of a seller seeking full disclosure, before taking upon an assignment to execute and notarize a transaction.

Till measures to protect land title are put in place by the Authorities, owners need to take steps to safeguard their ownership of properties. Following are some steps that may help in this process –

1. If you are an owner living abroad and your house remains closed and land unattended, periodically have your lawyer check the registration status of your land at the relevant Land Registry. Has someone already fraudulently acquired the land? The registration details will reveal this. If so, immediately have it reported to the police and to the relevant Land Registrar.

2. A method that could alert you of any unauthorized transaction relating to your property is to register a Caveat on your land. A Caveat is a notice registered at the relevant Land Registry which has a record of your land. As long as the Caveat is in place, the Land Registrar is duty bound to inform the person who registers the Caveat when he receives any document for registration referring to the said land. This can be a sale, mortgage, lease, etc.

But unfortunately, a Caveat cannot prevent the registration of a document relating to your land if it appears to be genuine. In the event a fraudster impersonates your signature in a sales transaction and the Registrar accepts it for registration, since you failed to object as the actual owner in spite of the notice served on you or your registered representative based on the Caveat, then the only remedy left would be to file action to invalidate the fraudulent land transaction through the courts of law.

3. It is in the interest of owners to periodically check their unoccupied land and keep it in a properly maintained condition. Neglected land, especially of owners living abroad, tend to be the target of fraudsters.

December 9, 2009 Posted by | land fraud | , , , | 1 Comment

Sub prime mortgage crisis and data governance

Sub prime mortgage crisis

The sub prime mortgage crisis in the USA resulted in the loss of billions of dollars for banks, caused hundreds and thousands of foreclosures, rendered millions homeless and in short, caused a severe economic downturn in the USA. The ripple effect of the crisis is felt all over the globe as all major banks and financial institutions have branches world wide and since the US Dollar is the main currency for trade in many international markets.

In a traditional mortgage, there is a direct involvement of the bank in checking the data submitted by the borrower and on the valuation of the house mortgaged to the bank, as the objective is to be risk averse. There is no such involvement of the bank in a sub prime mortgage, where the bank’s objective is not risk averseness in lending but the increase of revenue through investments. The statutes enacted in the USA during the 70’s and 80’s[1] liberalizing regulations in lending operations expanded the mortgage portfolio of lenders and induced them to engage in riskier operations such as the sub prime model. Under this method, checks and assessments in the lending process is performed by independent individuals rather than the lender itself.

Mortgage Brokers, securing borrowers for Banks acting in an independent capacity, are motivated by the Commission from the transaction and collect data to meet their targeted objective. Such a process, without bank supervision, has a lot of room for errors.

In a de-regularized environment, the lender focuses in lending its excess funds as much as possible and would not take the trouble to comb through loan applications in search of errors. This includes lending to all types of borrowers – prime borrowers (i.e. those who have the capacity to pay back the loan and who may give a deposit for the loan apart from the house mortgaged as collateral) and sub prime borrowers (i.e. those who cannot substantiate through documents their ability repay the loan and who do not have any funds to deposit as an advance against repayment.) In the case of sub-prime borrowers, the collateral of the mortgaged house is the only asset the bank can rely on if the borrower defaults. In bank parlance, this is called a “bad mortgage”. The bank thus has both good mortgages and bad mortgages in its portfolio.

Borrowers who cannot show proof of their ability to repay the loan, such as low income sub-prime borrowers, are considered “high risk” and the interest payable on their loans are fixed according to a risk based pricing method[2]. Generally a low fixed interest rate of 8% for 2 to 3 years and thereafter a ballooning interest rate going up to as much as 40%.  In the sub-prime crisis, most sub-prime borrowers were not aware of their exposure to excessive interest rates. Sub prime borrowers also pay other banking charges, which made this category of borrowers the generators of an attractive return for the lender.

Ballooning interest rates on loans after the initial fixed interest period and the ability to transfer sub prime risk by selling both good and bad mortgages packaged together as asset backed or collateralized documents, seems to have been two significant factors which prompted lenders to enter into the sub prime model of lending. The increasing housing prices corresponding with the rising demand for real estate, lulled the lenders to give scant attention to the aspect of risk.

These asset backed securities (ABS) or collateralized debt obligations (CDO) are rated by independent rating agencies, based on historical data and the ability of the issuing Bank to honor interest payments and not by considering the risk embedded within them. The “high risk” element of the bad mortgages are thus, not visible to the buyer investing in bonds. When sub prime borrowers could not meet their loan obligations and Banks started on foreclosures, the interest payments assured on the bonds could not be delivered by the Banks, leading to investors’ lack of confidence in the secondary bond market.

Culture on data governance at the time of the sub prime crisis

An interesting revelation is the culture on data governance that existed in banks at the time of the sub-prime crisis which may have lead to some of the causes highlighted. There was no doubt about strict controls as the Sarbanes Oxley and Basel II imposed tighter control and greater disclosure requirements on banks. But the focus of banks seems to have been more on data breaches[3] as the most serious threat to banking. The TJX breach, where data of millions of bank customers were lost, is a case in point. Banks therefore had a greater bias towards tightening controls to prevent data breaches from hackers, viruses, loss of laptops, etc., rather than maintaining the quality and integrity of data.

Another reason for the lack of focus on data quality was the increasing levels of electronic transactions and business complexity which lead to higher volumes and duplication of data. When the same bank opens in different geographical locations, data on similar matters are viewed in a manner distinct to that location. All of these issues caused ‘duplicative and inconsistent data, spilling over to associate business processes’[4].

Taking into account the banking models and the culture which prevailed, we can identify the following as causes for the sub-prime mortgage crisis:

  1. Statutory and federal regulations broad basing home ownership without stressing on systems of control.
  2. Banks’ failure to self-regulate.
  3. Inadequate implementation of Data Governance Programs or the failure to constantly monitor and update policies, guidelines, rules and procedures to meet the changing needs of the organization.
  4. External independent processes without bank supervision.
  5. Entering of inconsistent and low quality data into the banking system undetected.
  6. Increase in electronic transactions and duplication of data.
  7. Rating agencies considering the liquidity and stability of the service provider rather than the quality of the product sold for rating purposes (i.e. Rating of Bonds by only assessing the issuer of the Bonds rather than the Bond per se)

The above is an extract from my e-book “Preventing a sub-prime mortgage crisis” http://www.lulu.com/content/5279040

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[1] The Community Reinvestment Act of 1977, Tax Reform Act of 1986, Deregulation and Monetary Control Act of 1980

[2] Risk-based mortgage pricing has expanded the types of mortgages lenders offer and increased the number of borrowers that can generally qualify for a mortgage. Alt-A and subprime mortgages, the types of mortgages generally subject to risk-based pricing, are frequently sold by the mortgage originator into the secondary mortgage market, where they typically become part of collateralized mortgage obligations (CMO), asset backed securities (ABS) and collateralized debt obligations (CDO). Risk-based pricing plays a large part in the structuring of CMO, ABS and CDO, enhancing their overall credit rating and making them attractive to wide range of investors (Investopedia)

[3] In 2007, 30% of banks reported data breaches (2007 Deloitte and Touche Tomatsu Global Financial Security Industry Geographical Survey)

[4] Data Governance: Banks bid for Organic Growth (Guillermo Kopp-Tower Group June2006)

December 7, 2009 Posted by | data governance | , , , , , , , | Leave a comment

Sri Lanka, law & governance

December 7, 2009 Posted by | Law & Governance | , , , , , | Leave a comment

Drafting Agreements

December 5, 2009 Posted by | Legal drafting | , , , , | 2 Comments

Condominiums in Sri Lanka

Book : Understanding the concept of Condominiums

CONDOMINIUM_Book_cover.doc

Author: Ajithaa Edirimane
Publisher: [Colombo : Ajithaa Edirimane], 2006.
Edition/Format: Book : English : 1st ed
ISBN: 9559985205 9789559985204
OCLC Number: 80914113
Description: ix, 201 p. ; 22 cm.

Finding libraries that hold this item…

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Ithaca, NY 14850 United States

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4. LIBRARY OF CONGRESS ; CRS

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Haus Unter den Linden

Staatsbibliothek zu Berlin
Unter den Linden 8
D-10117 Berlin, Germany

http://www.gbv.de/dms/spk/sbb/recht/toc/578166933.pdf [Inhaltsverzeichnis; 2008-12-18]

AVAILABLE IN SRI LANKA –

Vijitha Yapa Bookshops, 99, S de S Jayasinghe Mawatha, Kohuwala, Sri Lanka

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Tel: +94 11 2810714

December 5, 2009 Posted by | Land & Properties | , , , , , , | Leave a comment

Sri Lanka & condominium properties

Before you put down your hard earned money for a luxury condominium, please check the following:

1) Has the building been “registered” as a ‘condominium property’? If its not, you are not dealing with a unit which can be bought or sold!
2) Has the building been issued with a ‘Certificate of Conformity’? This is the most important requirement. If a COC has not been issued, you may even put your life at risk. There can be defective wiring, plumbing, and other defects that remain hidden.
3) Have you consulted an engineer? Only the trained eye of an engineer will be able to detect anything that is not quite right, even though the building outwardly appears ok.
4) Have you consulted a lawyer regarding the title of your condominium property?

These are some of the basic issues you should check before moving into a building attracted by its location, beauty of the facade or the luxury of its internal fixtures and fittings. Its better to be safe than sorry later on!

December 3, 2009 Posted by | Land & Properties | 5 Comments

Sri Lanka and condominium properties

Condominium properties, in the scale that we see currently in Sri Lanka, are rather recent additions to the local property landscape. There are no mandatory disclosures required from Developers. Buyers thus decide on such investments making assumptions based on the exterior facade and the aesthetics of a building rather than on its engineering features.

The lack of knowledge of buyers have, on many occasions, been exploited by Developers of condominium properties. Units are even sold and the full purchase price obtained when the building is not even issued with a Certificate of Conformity. There are ‘good Developers’ and ‘bad Developers’. But how does the unwary purchaser distinguish between these two?

This situation needs urgent attention of the local Authorities. In my book titled “Understanding the concept of condominiums” based on the Sri Lankan Apartment Ownership Law,  “would be buyers” are cautioned against rushing into a sales agreements without checking on certain important elements of the condominium property.


December 2, 2009 Posted by | Land & Properties | , , , | 5 Comments

Profile

Ajithaa Edirimane.

Ajithaa Edirimane has over 25 years of experience in the dual roles of corporate lawyer cum company secretary of commercial establishments dealing in merchant banking, shipping and manufacturing to property development having headed the Legal Departments of the companies in which she served in Sri Lanka. She was a Visiting Lecturer at the Sri Lanka Law College on conveyancing and drafting of commercial contracts and at the Open University on Mercantile Law.  Currently, Ajithaa has her own legal practice.

A book authored by her titled “Understanding the Concepts of Condominiums” is a comprehensive literature on the application of the law relating to condominium properties in Sri Lanka and it is referred by both students and practitioners. She also participates in workshops and seminars as a resource person on this subject.

Her advice is sought by Developers of condominium properties, Management Corporations and owners of condominiums on matters ranging from registering the condominium property to management issues of common elements. These include Trillium Residencies, Crescat Residencies, Monarch at Crescat City, Emperor at Crescat City, Empire, Fairfield Residencies, Ascon Residencies, Havelock City condominiums, Kings Court MC, Liberty Plaza MC, Unity Plaza MC, Premier Pacific MC, Realty Plaza MC, Hedges Court Residencies and several others. She undertook the registration of the 36 st0rey World Trade Center, Colombo as a condominium property, which was the first registration of a major commercial condominium property in Sri Lanka.

She is a life member of the Bar Association of Sri Lanka (BASL) and served as a member of the Editorial Committee of the BASL Law Journal. She is a founder member of the Sri Lanka Alumni Association of the International Development Law Organization (IDLO) based in Rome, Italy and functioned as an Intellectual Property (IP) Resource Person of IDLO in Sri Lanka. She was also a member of the Committee on Title Registration of property appointed by the Minister of Justice & Law Reforms. She was also a member of the sub-committee of the Law Commission appointed in 2013 to revise the condominium property law of Sri Lanka.

 

Mobile  (+94) 777 716 776

December 1, 2009 Posted by | Ajithaa Edirimane Profile | 2 Comments