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  1. CONDOMINIUM SALES Issues of concern for Buyers and Sellers In terms of the Apartment Ownership Act of Sri Lanka

  2. Types of sales transactions • Pre-construction condominium sales • Newly constructed condominium sales • Re-sale condominiums

  3. PRE-CONSTUCTION CONDOMINIUMSPrior to registration of Provisional Condominium PropertyIssues for Buyers: • Can an advance be recovered if project is not completed? – Advisable not to enter into any transaction as the element of risk is high. • - But if buyer wants to do so, execute Reservation Agreement between Buyer and Developer with a right of termination and deposit advance with a neutral third party as an Escrow Agent (who may be a party to the Agreement). - The third party can be the lender / bank / provider of funds to the prospective purchaser. • Is the project registered? - Request for copy of registered Provisional Deed of Declaration. • Will the project have the basic amenities? – Request for copy of Provisional Condominium Plan • Will the construction be completed? ?????

  4. PRE-CONSTUCTION CONDOMINUIMSPrior to registration of Provisional Condominium PropertyIssues for Seller / Developer: • How to raise funds for completion? By mortgaging land, Developer’s / Joint Venture partner’s contribution to the project • How to secure buyers for condominiums? Enter into Reservation Agreements rather than Sales Agreements • How to get necessary approvals, including CMA Certificate as early as possible? - Forward to the CMA for approval the Provisional Condominium Plan - Ensure building has the requisite Common Elements as stipulated in the Apartment Ownership Act (Sec. 26 of Act No. 11 of 1973 as amended)

  5. PRE-CONSTUCTION CONDOMINIUMSUpon registration of Provisional Condominium PropertyIssues for Buyers: • Can an advance be recovered if project is not completed? – Enter into notarialy attested Sale & Purchase Agreement. Ideally the deposit should be placed with a neutral Escrow Agent till sufficient completion of the project (Agreement should be registered) • Is the condominium unit of the size and description given in promotional documents? – Check copy of registered Deed of Declaration and connected Plan of subdivision (with Developer / at Land Registry) • When will the condominium project be completed? – Tentative date to be given by Developer and inserted in S & P Agreement. • How can a prospective purchaser check on the progress? – Check with Developer. Progress Reports are to be filed by the Developer with the CMA under Sec.9( c) of the Common Amenities Board Act No. 24 of 2003

  6. PRE-CONSTUCTION CONDOMINUIMSUpon registration of Provisional Condominium PropertyIssues for Seller / Developer: • Are Buyers honoring commitments under S & P Agreements? – Monitor S & P Agreements and enforce conditions, if necessary. • Will the condominium units be completed on the scheduled dates? – Monitor Agreement with Contractor and claim from Performance Bond if necessary. - Pre-selling of condominiums require compliance with Sec.4 of Act No. 39 of 2003 (i.e. if sale is before completion, project to be registered within 18 months of the agreement to sell or within 3 months of completion of building) • Who is liable for risks? – Ensure risks are covered during construction stage by Contractor’s Insurance Cover. • Does the Contractor’s Warranty period correspond with the Warranty given by the Developer to prospective unit owners for their individual condominiums? – Ideally Contractor’s Warranty period should extend beyond one year in multi-storey buildings. • If not, obtain adequate Insurance Cover to be effective as soon as the Contractor’s Warranty on the building expires.

  7. Newly completed condominiumsCondominium Property not registeredIssues for Buyers • Can S & P Agreements be signed with the Developer? – Since the condominium property is not registered, the subject matter of each S & P Agreement will be a non-existing Condominium. Thus the absence of subject matter will make such agreements void. • If the Agreement is registered, it will be registered against the main land. • Therefore, ideally parties should enter into a Reservation Agreement and place Deposit with a neutral Escrow Agent until Condominium Property is registered. • Does the condominium fit the description given in the promotional documents? – Check plan of subdivision prepared for the building, which should be registered with the CMA. • Is the condominium property and each condominium within the Warranty period?- Check from the Developer the Warranty period on the condominiums and check date of COC. • Is the condominium property insured against fire and other common risks? – Check from the Developer the insurance covers obtained for the building, especially fire insurance. • What is the share value assigned to the unit? – Check plan of subdivision and Deed of Declaration for share values and percentages assigned to each unit.

  8. Newly completed condominiumsCondominium Property not registeredIssues for Seller / Developer • Can S & P Agreements signed with prospective purchasers be validly enforced? – Until the property is registered as a subdivided condominium property (provisional, semi or completed) there are no separate individual condominium units. The S & P agreements are void due to the absence of a subject matter. (Couturier v Hastie (1856) . Retaining money paid as Deposit for a subject matter which is not in existence may amount to unjust enrichment. • Ideal solution is to enter into Reservation Agreements, and place deposit with a neutral Escrow Agent. • Can Deeds of Transfer be executed? – Same answer as above. • Who are liable for risks? – Risk does not pass to buyers if there are no existing condominium units. Hence, the risk will remain with the Developer, who should have adequate insurance cover for all risks that the building may be exposed to upon taking over of the project from the Contractor. • Is the Contractor’s Warranty still applicable for condominium units? – Usually the Warranty is for one year from the date of take over of project. (i.e. COC) But this is based on the Agreement between Contractor and Developer. Ideally it should be for a longer period more for multi storey buildings.

  9. Newly completed condominiumsCondominium Property registeredas Provisional / Semi / completedIssues for Buyers • Can S & P Agreements be signed with prospective buyers be validly enforced? • – S & P Agreements can be signed with prospective buyers as the condominium property is registered and separate units have been created. These therefore, can be enforced in the event of a breach. • Can Deeds of Transfer be executed? • – In the case of a registered Provisional Condominium Property, Deeds of Transfer cannot be signed till the property is re-registered as a completed Condominium Property. • This requires the Certificate of Conformity issued by the UDA or other similar authority.

  10. Who is liable for risks in respect of a registered condominium property and individual units? • – Risk passes to the buyer upon execution of a Deed of Transfer, transferring title to the property from Developer to the prospective purchaser. • Therefore, the buyer should have adequate insurance cover for all risks upon taking over of the condominium unit from the Developer. • Is the Contractor’s Warranty still applicable for condominium units? • – The buyer should check on the Warranty period. • the buyer should seek adequate Warranty for construction defects from the Developer.

  11. What are the share values assigned for the Condominium unit? • – Check from plan of subdivision and Deed of Declaration. • Voting strength at meetings and distribution of residue property in the event of a destruction to the building is based on the share value. • Is there a Budget for the 1st year of operations? What is the Contribution that would be levied by the MC? – Check from the Developer for the Budget for the 1st year of operations of the MC. This would indicate the Contribution per share value fixed for the 1st year. • Is there a Sinking Fund for future capital replacements and major repairs or has provision been made for such a fund? – same as above. If there is no provision for a Sinking Fund, there is a possibility for Contributions to be increased to create a Sinking Fund in the future.

  12. Is the Developer continuing to be the Managing Agent? How long will the said Agreement be in force? – Request for a copy of the Agreement with the Managing Agent. • What are the encumbrances on the land and building? Have these been released?- Check on encumbrances on the property and on each unit from the respective Condominium Register at the Land Registry. If there are mortgages, these will be registered against each condominium unit. • What are the parking arrangements? Is the parking area an accessory unit? If so, will the unit owner have to pay Contribution for such area? – Check the parking area against the listed Common Elements of the plan of subdivision. If it is part of the CE, the unit owner cannot be charged Contribution for such area. • Are there maintenance agreements in place for lifts, escalators and other engineering equipment? – Check from the Developer for maintenance agreements. • What are the House Rules / By-laws of the condominium complex?– Request for a copy of the House Rules, if it has not yet been given. Check the Constitution of the MC.

  13. Does the completed condominium unit have the same area as given in the S & P Agreement? – Have the area measured and if there is a discrepancy negotiate for a reduction in price if the unit price is based on the area. • Has the first AGM of the Management Corporation been held? Who are the Council members? – Obtain confirmation from the Developer. • Has the condominium property been adequately insured? Condominium property insurance is the responsibility of the MC. Request copies of Insurance Policies. Especially check on insurance cover for common areas and whether residents too are covered for injuries. • Insurance of the subdivided building against fire is the responsibility of the MC.

  14. Newly completed condominiumsCondominium Property registeredas Provisional / Semi / completedIssues for Developer / Seller • Can Transfer Deeds be signed? – Transfer Deeds can be signed only in respect of semi or completed condominium properties. • After obtaining the COC, a provisional condominium property will have to be registered as a semi or completed condominium property. • If there is a discrepancy in the area of units? – Sale price should be adjusted accordingly if price is based on the area of the unit. • Has the Management Corporation been properly set up? The MC comes into existence with the registration of the Deed of Declaration. • But it is the responsibility of the Developer to set up the operations of the MC, to convene meetings to elect Council Members and to give guide lines for such other matters, as necessary. • Appointment of the Managing Agent is one such task. • Have all architectural plans, Certificates, etc, been handed over to the MC? – Upon setting up of the MC, these should be handed over to the custody of Council of the MC. • Have steps been taken to ensure that the rights and obligations of both parties (MC and unit owners) will be safeguarded? • Arrange the execution of Deeds of Mutual Covenants.

  15. Re-sale condominiumsIssues for Buyers • Is the financial position of the Management Corporation sound? Are there built up arrears of Contributions due to the MC? – Check the audited accounts of the MC for the previous year. These can be obtained from the owner of the unit, as each unit owner is entitled to Audited Accounts along with the notice of the AGM. • What is the credit balance of the Sinking Fund? – same as above. • Is there sound governance of the Management Corporation? Are meetings properly held and are accounts audited? – Can be checked from other unit owners and also from owner of the unit. • Is there a Managing Agent for management of common elements? – Check from owner of unit and seek copy of Agreement released to unit owners. • Are all mechanical, electrical and other fixtures and fittings forming part of the Common Elements in sound order and have these been properly maintained? – The assistance of an Engineer / Architect should be obtained to check on the Common Elements and also on the engineering and mechanical items found within the unit. • Is the title to the property good? Check from the Land Registry by obtaining a copy of the title deeds from the current owner.

  16. Are there any arrears owed by the current owner to the MC / are there any other financial obligations that have not been discharged by the current owner? • Prospective buyer can insist from the current owner for a Certificate issued by the MC under Sec. 20 (H)(4) of Act No. 39 of 2003 which provides information on the above.

  17. Re-sale condominiumsIssues for Sellers • Obtaining the Certificate under Sec.20 (H)(4) of the Apartment Ownership Act. • Upon conclusion of sale, inform the Management Corporation in writing particulars of the new owner of the unit so that the MC can change the Register of Members. • Assist the new owner in the transfer of telephone, electricity, cable tv, and such other utilities.

  18. END