Service charges and what owners need to know
Service charges and what owners need to know
Money matters can be a difficult task for any owners’ association, but homebuyers also need to be vigilant
The owners’ association (OA) is the heart of a jointly owned property (strata). In addition to enforcing the rules and regulations, its main function is to manage, operate and maintain the common areas of the property. The primary means to accomplish this is through the collection of service charges from unit owners. In Dubai, this is no easy task. Some owners do not understand the necessity of paying the charges and some simply do not have the funds to pay in a timely manner. Yet, service charges serve a very important purpose.
Types of funds
Dubai’s Real Estate Regulatory Agency (Rera) requires all OAs to establish two funds — an administrative (general) fund and a reserve (sinking) fund. The general fund is for daily common area maintenance, utilities, management, insurance premiums, master community charges and other recurring expenses.
Reserve funds are for capital expenditures; those that do not occur on a regular basis. Reserve funds cover repair, renovation or replacement of the roof, windows, balconies, parking areas, elevator equipment, fire-safety systems, mechanical equipment, A/C systems, pools, gym equipment, lobbies, stairwells and other common elements of the property.
Reserve funds
The law requires OAs to prepare a yearly budget, with the general fund for a one-year period, and the reserve fund for a minimum of 10 years. The reserve fund should be based on an independent, third-party reserve study of the costs to renew or replace the common elements. However, the recommendations of these reserve studies are not always implemented.
There is well-founded concern that many OAs of buildings constructed during the real estate boom do not have adequate reserve funds for major maintenance and repairs necessary in the next five to 10 years. To cover required repairs that were not budgeted for, it may become necessary to levy a “special service charge” against owners. This fee could be in the order of a few thousand dirhams and may have to be paid in one lump sum to resolve the issues.
Owners should address this issue with the OA or developer to ensure that adequate reserves are in place.
Unpaid service charges
What happens when an owner does not pay service charges? As per the Jointly Owned Property Law, an OA may file a lawsuit against the unit owner for the balance of the unpaid service charges, and impose a penalty of 12 per cent per year calculated on a daily basis, until the outstanding amount is paid in full. It is, however, illegal for utility services to be disconnected due to service charge arrears. If it does occur, a police report should be filed. If the occupant of the unit is a tenant, a claim may also be registered at the Rental Disputes Centre.
As most OAs have yet to be officially registered through the Dubai Land Department (DLD), many developers continue to manage the collection of services charges. In recent years, there have been several legally questionable incidents where developers have disconnected utilities due to unpaid balances. Many of those affected were unit owners who had just purchased the unit. They were informed that the A/C was disconnected due to service charges that had not been paid by the previous owner. The current owners questioned their liability for charges incurred prior to their ownership. Under the law, service charge arrears create a lien (charge) that attaches to the unit itself, and not to the individual unit owner, thereby putting the pressure on the buyer to settle the outstanding fees.
As is standard in Dubai, a no-objection certificate (NOC) must be obtained from the developer, stating that there are no outstanding amounts owed by the seller, prior to the property title transfer to the buyer. However, there are times when unpaid amounts go unnoticed by the developer. If this is the case, the current owner may be liable to pay those balances. Therefore, it is extremely important for buyers to conduct due diligence before the transfer takes place.
Buyer due diligence
When purchasing a property, a buyer may check a project’s service charges on the Service Charge Index section of the DLD website. When a community or project is entered, the index displays the total amount of service charges per square foot, as well as a breakdown of how the money is allocated.
See also:
How to buy a property in Dubai
