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

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)

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.