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1 February, 2018
Myanmar alert
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.
Condominium Law 2016: A Recap
Since its enactment in January 2016, the Condo Law prescribed a broad framework for condominium investment in Myanmar. This framework included:
- Criteria to determine which developments are eligible under the Condo Law, based on:
- A definition of "condominium": being a building of at least 6 stories, constructed on collectively owned land and registered under the Condo Law; and
- Land criteria: of a type permitted for residential development, transferable into 'collective ownership', and at least 20,000 square feet;
- Introduction of condominium certificates evidencing ownership in individual apartments and broad recognition of the concept of a 'share value' interest in the condominium development as a whole, relative to the individual unit owner's proportional ownership rights (similar to strata-title rights in certain neighbouring jurisdictions);
- Recognition of foreign ownership rights: foreigners can buy "units constituting no more than 40% of a condominium", and can transfer, lease and mortgage their ownership rights; and
- A condominium management and governance regime: with a view to sustaining proportional maintenance and other decisions related to the condominium and its upkeep.
While the Condo Law was generally praised 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
Eligibility of developments on state-owned land
Since the enactment of the Condo Law, a pressing question has been whether developments on state-owned land are eligible for conversion into 'collectively owned land', 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, it would appear 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 state-owned land may be registered as condominium land. This is all welcome news, in particular for the owners of the many developments currently being built under BOT projects.
Procedures for conversion and registration of land
The Condo Rules also set out certain procedural requirements for developers, including the requirements to convert and register land as condominium land. 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.
Clarification in respect of foreign ownership
The Condo Law recognised in broad terms that foreigners can buy "units constituting no more than 40% of the condominium". The Condo Rules have now given further clarity around this: the 40% threshold relates to 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 Registrar 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", which we interpret as meaning that condominium title must always be subject to any restrictions in underlying title – and indeed such a restriction would in any case (and by operation of law) apply to all condominium owners regardless of nationality.
Unfortunately the Condo Law does not 'carve out' or repeal the prohibition on foreign ownership pursuant to the Transfer of Immovable Property Restriction Act 1987 to the extent that it applies to condominiums. Given the Condo Law's express recognition of foreign ownership rights, it can be assumed that this prevails over the Transfer of Immovable Property Restriction Act in the case of condominiums, but it would have been preferable for the legislation to have expressly addressed this inconsistency, to remove any ambiguity or conflict. In addition, the Condo Rules do not provide any express guidance as to whether foreign companies can purchase condominium units – or whether the foreign ownership rights are limited to natural persons.
Investor protection mechanisms
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 and provide an increased level of investor protection.
Certain restrictions are applicable on the sale of condominium units, including a provision in the Condo Rules stipulating that no more than 25% of the units in a condominium may be registered in one person's name. Such a restriction seeks to prevent monopolistic behaviour and developers hoarding units. 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 ability for an owner to mortgage its condominium is also addressed in the Condo Rules. An investor may use its condominium registration certificate as security for the purposes of procuring a bank loan (rule 41 of the Condo Rules). The express recognition of an owner's ability to leverage the condominium asset as security is certainly encouraging in the context of the current retail lending market, as immoveable property has traditionally been a challenging asset to leverage in Myanmar.
Administrative clarity on condominium ownership and subsequent transfer
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 Registrar (rule 41 of the Condo Rules). Any transfer of ownership must be registered with the Condominium Registrar 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. Less clear is the position with respect to the underlying land. The Condo Law anticipates a process of transfer of land to 'collective owners'. While a framework is provided for the transfer of 'apartment certificates' upon the sale of the condominium by the original purchaser, there is not yet any workable framework to transfer the mirror interests in the underlying title to the development land.
Maintenance of the condominium
The Condo Rules additionally provide the 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 do assist in providing developers and investors with further clarity on certain licensing and procedural matters as well as certain more robust investor protection mechanisms, certain queries remain. In particular, the Condo Rules do not address the wider concerns surrounding an individual unit holder's title to the underlying development land.
The new Condo Law regime is entirely dependent upon the establishment of state and regional management committees, under the responsibility of the Ministry of Construction, charged with the administration of condominiums, including registering and regulating condominium developers and developments. At the date of writing this article we are still awaiting establishment of these committees. 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.
For further information, please contact:
Tom Platts, Partner, Stephenson Harwood
tom.platts@shlegal.com
