Proposed Changes to the New Condominium Rules

The Ministry of Construction released the long anticipated Condominium Rules in December (the “Rules”) which clarifies much of the ambiguity left by the Condominium Law 2016 (the “Law”). Since December, various stakeholders have provided feedback on the rules to the Department of Urban Housing and Development (“DUHD”), and the DUHD has proposed several amendments to the new Rules.

Summary of Proposed Amendments

While some of the amendments are purely for practical purposes, including removing references to the ORD and allowing banks to hold original registration documents for security over loans, other amendments will have a more profound effect on the implementation of the Law.

Consumer Protections

The current Rules provide some level of consumer protection to those purchasing condominium units. The requirement that a developer must deposit 20% of the total project costs in a separate bank account up front gives comfort to consumers that the developer has access to the funds required for the project. In addition, pre-sales of units can only commence once 30% of the foundation work of the project is completed, confirming to investors that the project has already secured the funds to get off the ground.

DUHD has proposed removal of both of these protections, leaving consumers vulnerable to purchasing units ‘off the plan’, and paying deposits to developers who may never secure the funding to complete the condominium project. In the event the developer becomes insolvent, those who have already made payments for units have no security and may not see their money returned.

This change provides the opportunity for financially secure developers to differentiate themselves from the market by providing their own consumer guarantees. This could be in the form of taking deposits only to trust accounts, guaranteeing that if the developer becomes insolvent or experiences financial difficulties, the investor’s deposit remains secure and as it is not released to the developer until completion.

Foreign Ownership Changes

Two of the proposed amendments relate to foreign ownership of condominiums. Firstly, the DUHD proposes to change the cap on sales from 40% of ‘saleable floor area’ to 40% of units. This change is not in line with similar provisions in other jurisdictions. While it appears the DUHD intends to allow sales of 40% of the ‘average’ unit to foreigners, there is the potential that 40% of units could be equal to a much higher percentage of saleable floor space, leaving only much smaller units available to local buyers.

The other amendment is the removal of Rule 36, which caused uncertainty for foreign investors. This change will remove ambiguity by giving both foreign and local buyers equal title in the units.

Conclusion

It is positive to see the DUHD taking on board feedback from the industry and other stakeholders around the Rules. However, while the proposed amendments will attract additional potential developers, it is possible that this is at the cost of consumer protection and may be to the detriment of the overall aim of the Law.