What are Service Charges in Dubai and how do they work?
Becoming a property owner in Dubai is a huge milestone that comes with multiple responsibilities. Whether you decide to be an end owner or lease your place, you will be required to contribute with a monetary payment requested by the Owners Association management agency. In the industry, this is known as a Service Charge.
Total budget ÷ Sellable area = Service Charge rate
How is a Service Charge collected?
After the Common Properties Law No.6 was reformed by Dubai Land Department (DLD) in 2019, property owners became liable for invoicing and collecting the service charges, exempting the property developers from this responsibility. However, the Owners Association is also permitted to delegate this task to the management agency appointed by the Dubai Real Estate Regulatory Agency (RERA). To provide the homeowners with transparency and records that indicate where the collected funds are allocated, DLD created the electronic system: Mollak.
What is a Service Charge and how is it determined?
It consists of multiple fees allocated for the building’s maintenance and the upkeep of the common areas. The Service Charge may vary, depending on multiple factors such as the level of service, the amount of security, cleaning and landscaping staff. Naturally, a luxurious building will require a higher fee than one that offers less lavish services and/or amenities. However, other variables come into play when calculating a service charge. To correctly determine the fee an owner will pay, the developer must calculate it using the following formula:
An estimated Service Charge is calculated at the beginning of each financial year, taking into account the expenditures allocated within the general fund, along with contingencies for unforeseen circumstances allocated to the reserve fund. The ideal management agency will optimize the building to reduce the Service Charge. If the objective is met and the expenditures are less than the estimated figure at the end of the financial year, the owner will be awarded with credit for the following year. If more is spent than what was estimated, additional funds must be collected.
However, we must bear in mind the additional costs that must be taken into account when setting a fixed rate, such as the ones previously mentioned, that will secure the Service Charge rate for the proper maintenance and upkeep of the building. It is important to note that every development is different, and that the service charge will be highly affected by the level of service, this is then reflected in the final fee the owner is charged. For example, a shared number of small apartments with lavish and luxurious common areas, will pay more than a shared number of large apartments with regular amenities within the building.
The funds are collected in 7 approved banks, a breakdown of the Service Charge is shared with the owners to provide clarity and transparency as to how the different fees impact the maintenance and upkeep of the building.
What happens if the Service Charge is not paid?
In case any of the members in the Owner Association fails to comply with their duty and pay the Service Charge, two significant consequences may happen.
Firstly, we must remember that funds are allocated in the general and reserve fund, both are used for the upkeep and maintenance of the property. Outstanding payment leads to insufficient funds, resulting in the ceasing of services, insurance and repairs the building may require at the moment.These will be discontinued until sufficient funds are made available.
Secondly, the Service Charge is a legal obligation, as stipulated by DLD. If the owner surpasses the deadline indicated in the invoice, it is likely that they’ll receive reminder notices by the management agency, requesting payment. If the outstanding balance is still pending, RERA issues a legal notice stating the consequences in case the Service Charge remains unpaid.
Why is a Service Charge important?
Its importance goes beyond the maintenance and upkeep of the property’s amenities, the collected funds ultimately lead to the management agency’s ability to fully optimize the building’s common areas and deliver a pleasant living experience for all residents, whilst simultaneously contributing to the developer’s vision and legacy.