Long Term Leases and Mixed Use Developments Exempt From Conversion To Sectional Units
Background
Pursuant to a notice issued by the Ministry of Lands and Planning (“MOLPP”) on 9th May 2021, long term leases supported by architectural drawings shall no longer be registered with effect from 10th May, 2021.
The Sectional Properties Act, 2020 (“the Act”) requires conversion of all long term leases intended to confer ownership of apartments, flats, maisonettes, town houses, villas and go downs that do not conform with section 54 (5) of the Land Registration Act within tw0 (2) years of commencement of the Act.
The Sectional Properties Regulations 2021 (the “Regulations”) which were enacted pursuant to the Act provides for the process of conversion of long term leases to sectional titles.
Conversion of Long Term Leases to Sectional Titles
Regulation 18 of the Sectional Regulations provide for the process of conversion of long term leases to sectional units. The Sectional Regulations provides that long term leases where all the units have been transferred to the owners and the reversionary interest has been transferred or is intended to be transferred by agreement to the management company to hold in trust for the owners, shall be converted to sectional units.
This means that all the developments where the units were transferred through a sub-lease and the reversionary interest is retained or intended to be retained by the management company as trustee for the owners shall be converted to sectional units in accordance with the Sectional Regulations.
An application for conversion is to be made by either the developer, the management company or the owners.
Long term leases Exempt from Conversion
Regulation 22 of the Sectional Regulations provides that the requirement for conversion of long term leases to sectional units shall not apply to the following long term leases:
- Where the agreement provides that the reversionary interest belongs to the management company as the legal owner and not as trustee for the owners of the units;
- Large mixed used developments or phased developments where it is agreed that the reversion shall be retained by the developer or held by the management company; or
- Projects of strategic national importance, substantial transactions, and special economic zones, which by their nature, renders it impractical to relinquish reversionary interest.
From the reading of Regulation 22 of the Sectional Regulations, it appears that there is no requirement for applying for exemption. The exemption from conversion is automatic if the long term lease falls in any of the three categories above.
Mixed use developments may refer to any building, or series of buildings in a complex or estate, which incorporates both residential and commercial units, often with common or shared facilities. However, what amounts to large mixed use development is not clear. The qualifying factor for the mixed use developments therefore, will be whether the agreements expressly provides that the reversionary interest is to be retained by the developer or management company as the legal owners and not as trustees on behalf of the owners.
Further, there is a blank exemption on all developments where the agreement provides that the reversionary interest will be retained by the management company. This is too wide and it gives room for any developer to opt not to convert their long term leases by indicating in the agreement that the reversionary interest will be retained by the management company.
The long term leases that will not be converted to sectional units will therefore remain as the titles for the units.
When preparing a structure for mixed use developments it is therefore important for the developer to consider whether they wish to exit the development at some point and therefore relinquish the reversionary interest or whether they wish to retain the reversionary interest.
Key Take-away Points
All long term leases that grant ownership of units and which are not exempted by the sectional laws are to be converted to sectional units.
The key determinant on whether the long term leases are exempted from conversion is the legal ownership of the reversionary interest. If it is intended and expressly provided in the agreement for sale that the reversionary interest is to be retained by the developer or management company as legal owners, then the long term leases are exempt from stamp duty.
Long term leases in respect of large mixed use developments are exempted from conversion provided that the agreements indicate that the developer or management company will retain the legal ownership of the reversionary interest.
Obtain professional legal advice, in respect of your development to confirm whether it qualifies for exemption.
Conclusion
We are happy to help with:
- providing legal advisory on the process of conversion of long term leases;
- legal advisory on whether your development qualifies for exemption;
- the process of conversion of your long term leases;
- providing legal guidance on structuring your development to ensure that your objectives are met and the law is complied with; and
- preparing your agreements to ensure your objectives of retaining control of the development or not are well protected.
