The New Law & Common Ownership
Further to our last legal update on Bahrain's new development law, Law Number 27 of 2017 (New Law), we now turn our attention to one of the main features of the New Law: the regulations for common ownership.
Common ownership was previously governed by sections of the Civil Code, which was limited in terms of its interpretation and scope. These provisions are likely to have made sense at the time they were drafted, where common ownership would have largely only applied to small residential apartment blocks. However, as developments evolved, became larger and included a number of varying uses, the provisions of the Civil Code could no longer be used to properly regulate common ownership. It simply did not make sense for modern master developments.
One of the most encouraging aspects of the New Law is the fact that it recognises the complexities of modern developments and acknowledges that one size does not fit all. Under the New Law, a set of regulations must be drafted for each development to regulate the ownership and management of that development's common areas (Main Regulations).
Even more encouraging is that the Main Regulations, along with the articles of association of the Owners' Association (discussed below), will form an integral part of the title deeds for both the development and individual units. The original of the Main Regulations will be deposited with the Survey and Land Registration Bureau (SLRB). The New Law (Article 51) states that the owners and occupants of units shall have mutual obligations to comply with the provision of the Main Regulations and the articles of association.
What this means is that:
- developers and Owners' Associations will no longer be tied to out of date legislation when structuring the ownership and management of common areas;
- the contractual commitments of owners to comply with the rules and regulations that are integral to the effective governance of developments will be enshrined in law; and
- importantly all future owners of units will take transfer of their unit subject to the rules set out in the development specific Main Regulations and the Articles of Association of the Owners' Association.
The New Law also directs that an Owners' Association (OA) must be established to manage, operate and maintain common parts. The concept of establishing an OA is not new, as the Civil Code provided for the establishment of an OA in certain circumstances. But what is significant is the additional detail given in the New Law in respect to its establishment and structure. For instance:
- the OA is formed when the sale of the first unit on the development is registered;
- the members of the OA include all owners of the units and where units remain unsold the developer/sub-developer must become members;
- the OA is a non-profit organisation which shall have a corporate character and legal capacity (i.e. it can sue or be sued in its own right);
- owners shall have votes in proportion to their shares in the common parts;
- a Code of Governance for OAs will be issued which will include regulations protecting minority owners;
- all members must pay an annual levy to cover the expenses of the common parts;
- no owner may waive his share in the common parts to avoid payment of the annual levy;
- the OA shall have the right to a lien over those units which have defaulted in payment and this will remain in place even if the property is transferred; and
- an OA may delegate its work to any person licenced to carry out property management services.
Multiple Owners Associations
Probably the most significant provision of the New Law as it applies to OAs is that it allows for one or more OAs to be created for a development project. It accepts that there may be a need for a central OA together with a group of building specific OAs. For many years we have been advising our clients of the benefit of such structuring and have prepared numerous bespoke contractual arrangements to reflect it. The New Law's recognition of this type of structuring is significant. It gives developers more flexibility to create sensible and fit for purpose common ownership structures for their development. We believe this will go a long way towards ensuring workable and sustainable common ownership structures.
Who Owns the Common Areas?
Under the New Law, the owner of each unit (and, where units remain unsold, the developer) shall have shared ownership of the common parts in accordance with the percentage specified in the Main Regulation. These percentages are not restricted to the size of the unit compared to the total size of the common property only, but can be based on various other factors such as the nature of the use of the units in the development as well as any other criteria provided for in the Main Regulations.
This inclusion in the New Law is very welcome and very much needed. It now allows Main Regulations to be structured in a fairer and more fit for purpose way, allowing for flexibility in the distribution of ownership rights. As a consequence, it should also allow a fairer distribution of service charges based on need and consumption of services and amenities.
As we have seen elsewhere, flexibility such as this allows developers to create developments with a large variety of unit types and users categories, such as social and private housing, retail, office and hospitality uses, with amenities and services relevant to each.
Is It All Good News?
We believe that the New Law has taken major steps towards tackling the issue of common ownership and has included within its provisions a much needed change in approach. However, there is still a lot to be done. As mentioned in our last legal update, there are many references to decisions of the board of directors (Board) of the(yet to be established) real estate regulator that are needed to perfect the regulation of the area. The need for further Board decisions can be seen in the context of OAs and gated communities. It is essential that detailed supporting decisions are published as soon as possible to allow developers to give full practical effect to the New Law.