Condominium Properties in Sri Lanka

Issues of concern for buyers and sellers of CondominiumsAjithaa Edirimane LLB (Col) MLB (Hamburg)

Attorney-at-Law & Notary Public

Condominium properties or multi storey buildings are an important feature of real property development.

Especially in urban areas where land is limited but there is a rising 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 and sellers can be minimized.

Issues of concern for Buyers and Sellers

1. Title to the condominium unit & condominium property registration

2. Potential risks & insurance cover

3. Administration, maintenance and management of the condominium property

Introduction – concept of ‘condominium properties’

In Sri Lanka, Roman Dutch Law applies to land.

A principle of Roman Dutch Law - ‘Anything attached to the land goes with the land’ – supeficies solo cedit

- the owner of the land owns anything built on it. - Vertical ownership : from the bowels of the earth to the heaven

above

Statute created a new concept of ownership of immovable property – Ownership of horizontal layers of land Important requirement is registration under the provisions of the Act

Condominium Property Act No. 12 of 1970 – repealed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 legislation:

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

Legislation

Dual ownership

CONDOMINIUM - INDIVIDUAL OWNERSHIP Designed for independent use In a building of more than one storey Divided into one or more rooms

Sometimes with Accessory Units Direct exit to a road or to a common area leading to a

road

COMMON ELEMENTS - JOINT OWNERSHIP All areas which do not form part of any condominium unit

in a Condominium Property Which are described as Common Elements and shown in a

Plan of subdivision

Management Corporation

Sec. 20B of Act No. 45 of 1982

Upon the registration of the Deed of Declaration and the plan of the subdivided property at the respective Land Registry, a body corporate referred to as a Management Corporation comes into existence

having its own common seal and the power to sue and be sued under its name.

All owners of condominium parcels become a body corporate with perpetual succession under the provisions of the Apartment Ownership Law.

Three-fold Unity

Joint or common ownership of common

elements

Individual ownership of condominium

Membership of Management Corporation

Owner’s Bundle of Rights

% joint ownership of Common elements based on share values

Determined by Developer - Sec.13(3) of Act No.39 of 2003

Determined byDeveloper

& MunicipalRegulations

- Sec 7 of Act No. 45 of 1982

(Dominant &Servient holders)

Sec.13 of the Principle enactment

No. 11 of 1973

ServitudesAccessoryunits

CONDOMINIUMUNIT

Constitution & By-laws

Statutory Constitution – 1st Schedule of the Apartment Ownership Act No. 45 of 1982

Statutory By-laws – 2nd Schedule of the Act

Additional provisions – adopted by a Special Resolution of the MC

- To safeguard the rights of each individual owner in the community referred to as a “Condominium Property” - To maintain, manage and administer the Condominium Property

Issues of concern for Buyers and Sellers

1. Title to the Condominium unit & condominium property registration

2. Potential risks & insurance cover

3. Administration, maintenance and management of the condominium property

1. Title to the Condominium unit & condominium property registration

A condominium property comes into existence with the registration of the Deed of Declaration signed by the owner of the land annexing a Plan of Subdivision of the building (i.e. Condominium Plan), attested by a Notary.

Thus only upon registration, will the vertical ownership of land gets transformed into a property with owners in horizontal layers of a building.

Issues of concern for buyers - Title1. Entering into Sales Agreements and paying a significant

part of the purchase price when the building has not been registered as a Provisional Condominium property for pre-selling of units or as a Semi Condominium or fully completed Condominium Property.

2. Making the entire the entire payment only on the basis of a Sales Agreement, which is not a title deed. Subject matter of the sale, (i.e. Condominium) not in existence.

3. Examples: Many condominium properties in Wellawatte have not been registered. Several hundred unit owners are in occupation without title deeds. Developers have collected funds and cannot be contacted.

4. These units cannot be sold or mortgaged as the occupier is NOT the owner.

Precautions -

Check whether the project is registered as a Provisional Condominium Property under Act No. 39 of 2003

(Registration ConP/….)

Deposit the purchase consideration with an Escrow Agent, a neutral third party till a significant portion of the building is completed. Success depends on the negotiating ability of the buyer and the market demand for condominiums, as there is no legal requirement to deposit funds in an escrow a/c under our law.

Issues of concern for Sellers / Developers –Registration of the condominium

property

Difficulty in registering Provisional Condominium Properties or even completed or Semi Condominium Properties. Due to inability to obtain CMA Certificate

• Construction issue or Common Elements / facilities not adequately provided

Difficulty in completing the project or completing it in phases. Lack of funds or difficulty in raising funds from potential buyers when provisional condominium plan cannot be registered or when the real property market is

down.

Difficulty in raising funds when there is a defect in the title of the land upon which the building is constructed.

Title Registration :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 Registration of Title Act applies. (Sec. 44 of Act No. 39 of 2003)In 2007 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, there is now a mandatory requirement to register all condominium properties under the RTA. But Title Registries are yet to be established in most of the areas coming under the Gazette Notice. (e.g. Colombo)

2. Potential risks and Insurance cover- concerns both buyers and sellers

Potential Risks – Fire (i.e. defective wiring of the building, fire

inside a unit due to unit owner’s negligence)

Poor workmanship (i.e. leaking taps, water seeping through defective constructions, water leakages in bathrooms)

Damages caused by adjoining unit owner (i.e. damages from construction work carried out in the apartment, water seepage, etc.)

Injuries to unit owners / visitors while using the Common Elements (i.e. slippery floors, injuries or even death while using common facilities)

Precautions For Buyer –

Doing a proper survey of the building, checking on its history from people residing in the building, seeking advice from an engineer regarding the structure, electrical and other features of the building before moving in.

In a re-sale of a condominium, requesting the Certificate that a Management Corporation is obligated to provide indicating whether there are any accumulated arrears of dues from the said unit. (Sec.20(H)(4) of Act No. 39 of 2003)

Checking on the reputation of the Contractor and Developer. In Sri Lanka there is no statutory requirement for the Developer to have a license unlike in Singapore.

Checking whether there is adequate insurance to cover all risks for the building including fire.

Getting an insurance cover for the movable assets within the unit owner’s apartment.

For Seller (Developer) – Getting adequate Insurance Cover :

Fire Insurance for the building Public Liability Insurance for the Common Elements and

common facilities

Getting the insurance cover for the building before taking over the

project from the Contractor. Using warning signs in parking areas, in places where

possible injuries can occur.

Having a contingency plan for emergencies, training staff, conducting fire drills, etc. educating unit owners.

Taking prompt action when an emergency occurs or when an injury or an accident is reported within the building including following the proper method in making a claim.

3. Administration, maintenance and Management of the Condominium Property

Mainly concerns buyers The key to happy and contented living

within a condominium property is the administration, maintenance and management according to its by-laws and based on sound and ethical principles.

There are many cases where condominium living has become a nightmare for inhabitants due to the absence of proper maintenance, inefficient management or non-implementation of by-laws.

Some examples:

In one particular condominium property (name withheld), there are complaints from unit owners of serious defects in construction, some even having seen floor tiles come off and cracks appearing on its wall.

• The Council does not have the funds to attend to its repairs and blames the Developer for the defects. Since title deeds have been issued to all its unit owners, the Developer is not unduly concerned.

In some condominium properties, there are no proper by-laws or house rules for management and administration apart from the few statutory by-laws listed in Act No. 45 of 1982 and Act No. 39 of 2003.

• Therefore, the Council seems to be powerless even to stop parking of vehicles blocking entrances and fire hydrants.

In another condominium property (name withheld) part of the Common area including the main entrance have been leased out to a third party by the Developer without the consent or knowledge of the unit owners. The Common areas are jointly owned by all unit owners and therefore their consent is absolutely necessary to lease or alienate their joint ownership rights.

• Though the Council understands the law and wants it to be rectified, the Developer controls or influences the Council preventing the rectification of this situation.

Another condominium property (name withheld) which was originally registered as a ‘residential condominium property’ has a Developer who has retained a large number of units which he uses to let or lease to third parties, effectively making it a hotel with a constant turn over of occupants. This causes disturbances to other unit owners, excessive use of common facilities depriving the rights of legitimate unit owners.

• Once again here, the Council is powerless as the Developer controls the Council.

Example – The most common deception used by some Developers is

to get the prospective buyers to sign a Sales Agreement giving them virtual control as Managing Agent of the condominium property, without any right of termination for the unit owners.

This enables the Developer to earn an income even after all the units are sold. The arrangement is consolidated by adding a clause in the Sales Agreement requiring the unit owner to vote in favor of their appointment at a meeting of the Management Corporation.

Such provisions in Sales Agreements between prospective unit owner and Developer is not binding on the MC since it is not a party to the arrangement.

Precautions - How can a prospective buyer have its rights safeguarded? The first important requirement is for prospective buyers to be well informed of their rights and obligations before entering into sales agreements with Condominium property Developers. (Condominium

Management Authority need to do more in this area).

Buyers should not rely on external appearances or be taken in by colorful brochures issued by Developers, but should do their own investigations with proper legal advice aided by inspections of the soundness and quality of work of the building from engineers.

Read the By-laws and Constitution that applies to the condominium property. Check the history of the condominium property, if the unit is a re-sale condominium. (i.e. is there a sinking fund for major

repairs? how is the building managed? Is there a Managing Agent?)

After becoming a unit owner, work with the other unit owners to strengthen the Association by proposing amendments to the By- laws if the current By-laws are inadequate to safeguard the rights of unit owners.

Conclusion Condominiums are a necessary feature of urban housing.

These fulfill the need for housing for thousands of urban dwellers where land is limited or prices exorbitant. There are also investors who seek out up market condominiums for investment and future re-sales for profit.

Both buyers and sellers are faced with many issues of concern when dealing with condominium properties. Condominiums will be an attractive housing option and be of high value if such issues of concern are minimized.

The need of the hour is to educate both sellers and buyers on their respective rights and obligations. This will result in unit owners taking an active interest in the management of the condominium property.

It is also necessary to have quick resolution of disputes, especially in the collection of service charges, and other matters relating to maintenance of the building.

Thank you for your attention!