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Singapore – Extracting Value From Underutilised Common Property.

3 July, 2014

 

Legal News & Analysis – Asia Pacific – Singapore –  Construction & Real Estate

 

The smarter use of common property areas in strata subdivided buildings can create a win-win situation for both the Management Corporation and an enterprising strata owner with an asset management portfolio. As operating costs continue to rise, Management Corporations are considering other sources of income to operate their building assets and to keep maintenance increases and assessments to a minimum. An exclusive use By-Law, which is sanctioned by the Building Maintenance and Strata Management Act (Cap. 30C of Singapore) (“BMSMA“), has emerged as a valuable tool to the Management Corporation to monetise poorly utilised common property areas.

 

An exclusive use By-Law, is an innovative instrument which allows a strata owner (“SP“) to obtain a long term use of particular common property and to generate revenues from such common property. The SP can let or licence out such common property, generate advertising revenue, or even amalgamate such common property with their own strata lots to create more functional retail or F&B space.

 

The SP will pay an agreed By-law fee to the Management Corporation, which can be used to offset the amount of maintenance charges payable by all the strata owners. In general, the By-Law scheme affords both the Management Corporation and the SP the opportunity for additional income from areas which are largely non-revenue generating or poorly utilised. In most cases, the SP will also offer to retrofit or refurnish the common property at its own cost in order to attract better value in letting out these areas, so all the strata owners ultimately benefit from the upgrading of their common property and facilities.

 

In order to confer on the SP the exclusive use or special privileges in respect of all or part of the common property for a period exceeding 3 years, the Management Corporation has to pass a 90% resolution to approve the By-Law spelling out such exclusive use or privileges. Short term By-Laws not exceeding 3 years are possible under the BMSMA (requiring only either ordinary or special resolutions by the Management Corporation) but unusual in practice since the most valuable aspect of the By-Law is the ability of the SP to secure the long term use of the common property in order to implement its upgrading initiatives and investment strategy.

 

There is a common misconception that a By-Law operates exactly like a tenancy. However, there are some material differences between a By-law and a tenancy which renders the By-Law an attractive option. For instance, it will be possible for an SP holding more than 10% share value to practically secure permanent use of particular common property under a By-Law as the By-Law will require another 90% resolution to overturn. In contrast, a tenancy agreement cannot exist for an indeterminate term and will terminate on expiry or on the occurrence of stipulated events of defaults by the tenant.

 

The By-law also offers an option to the SP to choose whether or not to take on the duties of the Management Corporation in maintaining the common property covered by the By-Law. In a tenancy agreement, the SP is usually bound by tenants’ covenants to maintain and to keep the property in repair, and to insure and indemnify the landlord for losses or damage arising from occurrences on the property. 

 
The By-law can be seen as a valuable statutory instrument which allows the Management Corporation to offset part of the maintenance fees while enjoying the benefit of a more vibrant or enhanced common property areas. The SP on the other hand has the opportunity to monetise poorly utilised common areas, or to use such common areas to supplement the use of their existing strata lots.

 

ATMD Bird & Bird

 

For further information, please contact:

 

Sandra Seah, Partner, ATMD Bird & Bird

sandra.seah@twobirds.com

 

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