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29 March 2024

'50% of developers have not paid service fees'

Until a property unit is registered in the buyer’s name, the developer is supposed to pay a monthly service charge for the unsold or yet-not registered units in a building. (FILE)

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By Parag Deulgaonkar

The Strata Law which governs owners’ associations (OA) and service charges continues to rake up more issues than solve them. The latest development is the charge that developers, whether master or sub, are not disclosing if they are paying their share of service charge for the upkeep of the completed building where OA has not yet been established.

In fact, several strata law experts that this website spoke to alleged that the default rate among developers is as high as 50 per cent on service charge payments.

Until a property unit is registered in the buyer’s name, the developer is supposed to pay a monthly service charge for the unsold or yet-not registered units in a building.

In September, the Real Estate Regulatory Agency issued a circular stating: “A master developer or sub developer must pay the service charge for the units not yet registered in the name of buyer, where the buyer has paid the full selling price of the unit and even though there are other demands or obligations outstanding.”

Graham Yeates, Head of Strata Management, Cluttons, said: “The outstanding service charges are considerable, but collections improve with the formation of the interim owners’ association board, as all owners are part of a team working for the good of the project. Early estimates put the arrears at around 30 to 40 per cent, but vigilance with the collection procedures assists recovery and so the liquidity improves.”

Brent Baldwin, an associate with Hadef & Partners estimates default numbers to be over 50 per cent.
 
“In some rare developments service charges are fully paid up, but in others there may be defaults of well over 50 per cent.  At the moment, however, it is more a case of developers subsidising owners who have not paid service charges because the developer wants to keep the common area facilities running for the benefit of all.  Once an owner’s association (OA) is up and running, the OA will be responsible for running the common facilities and developers will be required to pay service charges for units they still own, until they can sell them.”

Kent O'Brien, CEO, Strata Global, said in some cases the default rate will remain at 100 per cent until disclosed by an audit report.
“It is difficult to say at this time inasmuch as the accounts and collection of service charges are being kept close to their chest in the reregulation period. In situations where the developer will not disclose the full aged debtors list then warning bells should be ringing if the developer holds units in the development. This practice should be caught in the audit if done correctly.”

According to Yeates, developers must pay for unsold properties once the project has been handed over and the service charges are determined.
Once the property is registered with the Land Department, the new owner becomes responsible on a pro-rata basis for the unexpired portion of these service charges.

“The developer is responsible for costs up to that point of registration, but make no mistake - in many circumstances, the developer is certainly paying service charges in full or part for as-yet-unsold units, because the bills have to be paid,” Yeates added. 
 
In some cases where registration has been delayed, but handover has already occurred, Baldwin says developers will be contractually entitled to charge service charges from the date of handover. 

“I suspect many developers will now be caught out if they haven't registered an OA. The requirement to register an OA before service charges can be collected is really an incentive to fully comply with the Jointly Owned Property Law,” he added.