Caught by a Dramatic Increase in Maintenance Charges before JMB formed

Posted on 30 Mar 2020
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stressed

Contributed by Mary Lau

heartofproperty@gmail.com

 

Sarah was very pleased when the sales attendant informed her that the maintenance charges of a high-end development that she was planning to purchase would be “X” sen per sq ft. The rate was very attractive, and she was further assured if there were a change, it would not be significantly more. As part of the incentive to boost sales, the developer paid the maintenance charges and sinking fund contribution for one year from the date of vacant possession.

Unwanted surprise

Under the Strata Management Act 2013 (SMA), the developer has to convene the first annual general meeting (AGM) not later than 12 months from the delivery of vacant possession (Sec 18, 17(1b)). For properties where vacant possession was given before the commencement of the SMA, the 12 months run from the date of commencement of the SMA (Sec 17(1a)). Any developer who fails to do so, on conviction, shall be liable to a fine not exceeding RM250,000 or imprisonment for a term not exceeding three years or to both (Sec 18 (2)).

If the developer does not do this within the specified period, the Commissioner of Buildings (COB) can appoint any person to convene the first AGM at the developer’s expense (Sec 18 (5)).  

In this case, the first AGM was held late about 13 ½ months from the date of vacant possession. The owners filed a complaint to the authorities when the deadline passed. A meeting ensued between the owners and the developer’s representative in the presence of COB officers. A date for the AGM was fixed.

About the same time, after the expiration of the one-year free maintenance period, the developer issued invoices to the owners. They were taken aback by the sharp 80% spike in the maintenance charges. 

 A breakdown of the expenses was not provided with the invoice, and no prior notice was given that there would be a drastic change. Furthermore, owners had to pay up three months in advance as the billing was planned to be on a quarterly basis. 

The owners were informed that they had to pay the charges and sinking fund contribution in full for the three months, failing which they could only observe at the AGM. 

Pursuant to provision 21 of the 2nd Schedule of the Act, owners do need to fulfil the requirement set out by management concerning payment of dues to be eligible to vote at the AGM. In some condominiums, they do not impose the full three-month payment. Instead, owners need only pay up to a certain period before the AGM. Dues have to be paid by the seventh day before the date of the meeting.

The owners lodged another complaint to the authorities, objecting the new rate. The SMA provides that any purchaser who is not satisfied with the charges determined by the developer may apply to the COB for a review. The COB can instruct the developer to appoint, at the developer’s cost and expense, a registered property manager to recommend the charges payable. 

After this is done, the developer needs to submit a copy of the report to the COB. Upon receiving the report, the COB can determine the rate as it believes to be just and reasonable. ( SMA Sec 12 (7a,b) (8)) 

In this case, as the AGM was round the corner, the authorities advised the owners to resolve the matter there. An owner then submitted a motion to reduce the charge to a lower rate. This motion was voted through at the AGM. 

The developer cooperated and supported the motion as well. During the discussion on the motion, all agreed to give the joint management committee (JMC) a period to study the expenses before implementing the approved rate. Note that the JMC is the management committee of the joint management body (JMB). So the JMC would be the ones to study the rates. 

The lower rate was implemented three months after the AGM. During that three-month period, they used the higher rate as determined by the developer.

group

Powers of the Developer to increase Charges 

During the developer-managed period, the SMA empowers the developer to determine and impose the maintenance charges and sinking fund contribution (SMA Sec 9 (2a, 2b)).

For residential strata properties including landed strata and SOHO (Small-Office-Home-Office), this authority is further reflected in the standard Sale and Purchase agreement under the revised Schedule H of the Housing Development Act effective June 2015. Under the section “Payment of Charges, and Contribution to Sinking Fund”, the following paragraph states:

“Every written notice from the Developer to the Purchaser requesting for the payment of charges shall be supported by a charge statement issued by the Developer in the form annexed in the Fifth Schedule and full particulars of any increase in the charges shall be reflected in the subsequent charge statement.”

If you are wondering what the Fifth Schedule is, it contains the Form of Service Charge Statement which shows a list and description of expenses for the computation of the rate and amount of service charge. It also includes the formula to calculate the rate, which is the total expenses divided by the total number of allocated share units.

In the sale and purchase agreement (SPA) of one commercial strata property, it provides the same entitlement as Schedule H, although worded differently and with the addition of a time frame of fourteen days notice to be given before the maintenance charge can be changed. But there is no annexure of the Form of Service Charge Statement nor any list showing the breakdown of items of expenditure in this SPA. 

In the SMA, section 10 (4c) lists the details of what the maintenance account can be used for during the developer period. Essentially it is the same as JMB (Sec 23 (3)) and MC (Sec 50 (3)) period, which is solely to meet the actual or expected general or regular expenditure. If the SPA does not provide the list, the details provided in the SMA can be used as a guide.

On a side note, the terms and conditions in SPAs of commercial strata properties are not regulated, and there is no standard format such as Schedule H. A legal opinion would be advisable if there is doubt concerning any term and condition. 

Bill

Does it matter?

A significant increase would be a financial burden for owners, especially landlords who haven’t secured tenants for their units yet. In this development, there are many big units of about 3,000 sq ft. Imagine having to pay almost double up to RM2,000 a month including sinking fund contribution. That makes a dent in one’s financial coffers.

What is the remedy if the authorities decide not to fix the rate and that it is better to resolve at the AGM? Increasing maintenance charges is within the rights of a developer as afforded by the Act and further agreed upon in the SPA. 

In this case, given the timing, which was about a month-and-a-half from the AGM, a more practical recourse would be to submit a motion to approve a lower rate and make sure that it would get passed.

But if this happened shortly after delivery of vacant possession and the rate is unreasonably high, dissatisfied owners would need to stress the matter to the COB for their intervention since the Act provides a straightforward recourse to deal with this issue.

let_it_be

Let it be

Developers do not get to keep the money. The SMA lays out in detail the duties of the developer in relation to proper keeping of accounts and funds, and handling over all the balances of such to the JMB ( Sec 14, 15), failing which and upon conviction, the same repercussion of fines and imprisonment as mentioned earlier applies. 

An alternative is to wait till JMB is formed  and let JMC look into the rate when they take over - if you trust the developer and the incoming joint management committee. Given that the JMC will only be elected at the first AGM, it is important to have a ready team of reliable owners to serve in the JMC. This is because the JMC represents all the owners of the JMB. The funds will be passed to the JMB and the JMC, which will be in charge by then.

If the development is able to deliver strata titles, and fulfill the minimum threshold of 25% transfer of the titles to owners before the 1st AGM of the JMB, then the management corporation takes over without having to go through the JMB period. The committee members of the MC will then be ones to determine the rates. This is usually done with the help of their appointed property managers. 

In the worst-case scenario, when all amicable measures fail, owners could consider seeking the assistance of the court.


 

Mary_Lau_picture

Mary Lau is an ordinary citizen who has a passion for strata matters. She holds a BSc in Land Management from the University of Reading, UK (1991) and is a licensed valuer with the Board of Valuers, Appraisers, Estate Agents and Property Managers Malaysia. Her early career was mainly in valuation and feasibility studies. She handled numerous disputes for owners affected by compulsory acquisition and was appointed high court assessor in Sarawak for compensation cases. In 2007, she began her own work in real estate and other ventures. In her free time, she likes to write and share her experiences with others.


Disclaimer

This article is intended to convey general information only. It does not constitute advice for your specific needs. This article cannot disclose all of the risks and other factors necessary to evaluate a particular situation.

Any interested party should study each situation carefully. You should seek and obtain independent professional advice for your specific needs and situation.

Want to contribute articles to StarProperty.my? Email: editor@starproperty.my
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