UK: Passing Of Condominium Regulations

In December 2017, the Ministry of Construction passed the much anticipated Condominium Rules under notification No. 267/2017 (the "Condo Rules"), almost two years following the enactment of the Condominium Law (2016) (the "Condo Law"). With investment in Myanmar's condominium market slowing considerably over the last year, the introduction of the Condo Rules reflects the Myanmar government's continued recognition of the need for a robust framework in the sector to encourage continued foreign and domestic investment and has been the source of much discussion in the real estate sector in Myanmar.

Condo Law: A recap

With its enactment in January 2016, the Condo Law prescribed a broad framework for condominium investment in Myanmar. This framework included:

 While the Condo Law was generally praised at the time as being progressive legislation, particularly given its recognition of foreign ownership rights, a practical implementation of the law has not yet been possible. Particular obstacles were the lack of clarity surrounding certain eligibility criteria (including how the 40% foreign ownership cap would be calculated) and gaps in certain registration processes. 

The recently passed Condo Rules, providing detailed implementation provisions, are therefore a welcome development in paving the path towards facilitating investment in condominiums in Myanmar. With the passing of the Condo Rules, it is hoped that developers will be able to convert and register condominium land.

Clarification provided by the Condo Rules

1. Developments on state-owned land are eligible to be designated as condominiums 

Since the enactment of the Condo Law, a pressing question has been whether developments on state-owned land are eligible under the Condo Law, and in particular whether the many build operate and transfer ("BOT") arrangements under long-term leases from government entities and other leasehold and grant land arrangements may qualify. While the Condo Law provides that a developer is permitted to  develop a condominium on land which is state-owned or under the control of a government department or organisation with the relevant governmental authority's approval (section 15(c) of the Condo Law), confusion is caused by the stipulation that land registered as condominium land "shall not be owned by any department, organisation or person in its personal name, but shall exist as condominium land to which all co-owners are entitled" (section 17 of the Condo Law). 

It is unclear what this latter provision is intended to address. Nevertheless, we believe that it is fair to conclude from section 15(c) of the Condo Law, read together with certain express references in the Condo Rules to the ability to convert state-owned land into condominium land (rules 20 and 21 of the Condo Rules), that it is possible in principle to register state-owned land as condominium land and develop a condominium on it under the Condo Law. This is all welcome news, in particular for the owners of the many developments currently being built under BOT projects.

2. Procedures to convert and register land as condominium land in certain situations are provided

The Condo Rules also set out certain crucial procedural requirements for developers, including the requirements to convert and register land as condominium land, which is a pre-requisite to be designated as a condominium under the Condo Law. However, the Condo Rules only address the conversion process for limited situations, namely: where the owner of the underlying land is co-developing with the developer; and where there is an outright sale of the underlying land to the developer. 

The Condo Rules are silent on the procedure for converting state-owned land (save for mentioning that the land shall be converted at the condominium registration office, with the approval of the management committee) and other scenarios such as where the underlying land owner provides a long-term lease.

3. Some clarification regarding foreigner ownership of condominium units is provided 

Building on the Condo Law's express recognition that foreigners can buy "units constituting no more than 40% of the condominium", the Condo Rules clarify that this is to be interpreted as meaning that foreigners can buy up to 40% of the "saleable floor area" of a condominium building, which is defined as the total area less the common areas (rule 14(d) of the Condo Rules). Prior to any sale or transfer of a condominium unit, the transferor must check with the [condominium] registration office and may only proceed if the transfer would not result in the 40% foreign ownership threshold being exceeded (rule 34 of the Condo Rules). 

The Condo Rules additionally stipulate that foreigners will have the same rights and obligations as [Myanmar citizen] condominium unit owners (rule 46 of the Condo Rules). There is however a certain ambiguity in that Rule 36 states that a foreigner may only be the owner of a condominium unit "for the tenure of the condominium". On the face of this wording, this could be interpreted as potentially restricting the ability of a foreigner to purchase a condominium unit in a condominium built on freehold land (which has no tenure) or, where the relevant condominium is built on leased land, to benefit from any renewal of the underlying lease. Official clarification as to whether foreigners are permitted to own units in condominiums built on freehold land would be welcome. Moreover, while it is assumed that, in the case of condominiums, the Condo Law's express recognition of foreign ownership rights should prevail over the restrictions on foreign ownership in the Transfer of Immovable Property Restrictions Law (1987), it would be preferable for the legislators to expressly address this (and 'carve out' foreign ownership of condominium units from the Transfer of Immovable Property Restrictions Law (1987)), to remove any ambiguity or perceived conflict. It is also still unclear whether foreign companies can purchase condominium units - or whether the foreign ownership rights are limited to foreign individuals.

4. Various investor protection mechanisms are provided

The Condo Rules provide various investor protection mechanisms against errant developers. In addition to a general condominium developer licence, the developer requires a separate licence for each particular condominium development, for which the Condo Rules prescribe extensive qualification requirements. Pre-sale of condominium units is only permitted once 30% of the foundations have been completed. The developer must set up a designated bank account for each development into which it must deposit 20% of the estimated development costs (or such other percentage as stipulated by the management committee), and must send the management committee quarterly bank statements. In addition, the developer has various management obligations and is responsible for the maintenance of the project throughout its construction and for one year following completion of the project. It is hoped that this combination of qualifying requirements and ongoing obligations for developers, including ongoing reporting to the relevant authorities, will help sieve out errant developers.

The Condo Rules provide certain restrictions on the sale of condominium units, including that no more than 25% of the units in a condominium may be registered in one person's name. Such a restriction may afford better protection for minority unit holders. There is also a restriction that at least 25% of the units in the condominium shall be sold to 'buyers in the market'. However, the meaning of this phrase is unclear.

The Condo Rules provide additional comfort to an investor in expressly clarifying that the condominium registration certificate may be used as a security for purposes of procuring a bank loan (rule 41 of the Condo Rules).

5. Legal mechanisms for ascertaining condominium unit ownership and transferring such ownership are provided

The Condo Rules clarify the legal mechanisms for ascertaining ownership of a condominium unit as well as for transferring ownership to subsequent owners. The 'legal owner' is the person whose name is on the condominium registration certificate issued by the [condominium] registration office (rule 41 of the Condo Rules). Any transfer of ownership must be registered with the [condominium] registration office within 30 days, and the transfer must be notified to the condominium association's executive committee (see below) within 7 days of the transfer (section 20 of the Condo Law and rules 42 and 54(g) of the Condo Rules). These registration requirements are in addition to applicable requirements under the Registration Act (1909). 

The Condo Rules stipulate how the individual condominium unit owner's 'share value' interest in the condominium development as a whole, is calculated. Although not expressly stated in the Condo Law or the Condo Rules, logically upon transfer of ownership of the condominium registration certificate, ownership of the corresponding 'share value' interest in the condominium development as a whole is also transferred from the transferor to the transferee. The process to transfer legal title in the ownership of a condominium unit and, logically and impliedly also, the corresponding 'share value' interest in the condominium development as a whole, is clear. What is unfortunately not addressed is whether a transfer in the ownership of the condominium unit will automatically transfer the corresponding 'share value' interest in the underlying land on which the development is built. On the face of certain of the legislative provisions, this should rationally automatically follow. For example, "condominium land" is defined as land belonging to all condominium unit owners. This becomes particularly relevant where, for example, the condominium development is destroyed and the remaining value lies solely in the unit owner's 'share value' interest in the underlying land. Could, for instance, a foreign owner of a condominium unit thus acquire an ownership interest in the underlying land?

6. Provision of additional legal framework for the maintenance of the condominium

The Condo Rules provide additional legal framework for the establishment of an association of the condominium unit owners in each condominium, with an executive committee, tasked with the management and governance of the condominium, based on the requirements set out in the Condo Rules. The condominium association has the right to sue (and be sued) in its own name, so has the ability to take legal action to protect the collective interests of the condominium unit owners. The Condo Rules require condominium unit owners to pay various service fees and maintenance fund contributions, to be managed by the executive committee in accordance with the Condo Rules' stipulations, including maintenance of proper records and accounts. This provides a legal framework to support the maintenance of the condominium as a whole, in an accountable and transparent manner.

Investor outlook

While the Condo Rules provide developers and purchasers with clarity on certain licensing and procedural matters as well as certain more robust investor protection mechanisms, including a framework for enhanced condominium management and governance with reporting to the authorities, certain queries remain. Of particular relevance for potential purchasers of condominium units are the remaining broader questions surrounding the workability of condominium title and common ownership in practice – and how this is to be reconciled with the traditional framework for property ownership in Myanmar. While purchasers may take some comfort from the increased clarity and protections, investors would still require certainty as to their rights in the underlying land on which the condominiums are built.

The new system under the Condo Law is dependent upon the establishment of state and regional management committees, under the responsibility of the Ministry of Construction, charged with its implementation, including registering and regulating condominium developers and developments. Until such time as these committees are established, it will not be possible for developers to register land as condominium land under the Condo Law – and there will be no eligible condominiums in which investors are permitted to invest. It is hoped that the management committees will be established soon, in particular in key locations such as Yangon and Mandalay, so that developers can 'test the waters' and take advantage of the new benefits provided by the Condo Law – primarily, the ability to unlock foreign capital in the real estate market. Until such time, the extent to which the Condo Law will 'revitalise' the residential condominium sector, including the many current developments under construction which could potentially be 'converted' so as to qualify under the Condo Law, remains to be seen.

Footnote

1 As there are currently no official English language versions of the Condo Law and the Condo Rules, there may be slight differences in the translations of certain terms - in this instance, "condominium land" has been referred to as "collectively owned land" in some commentaries.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.