Strata Title and the Nigerian Real Estate Sector

Strata title is a hybrid property ownership scheme that combines individual and communal interest in land and improvements thereon in a clearly severable manner. It takes the form of land and buildings subdivided into units/lots which are held individually, whilst the adjourning or common areas and shared facilities are held jointly by the group of individual owners (“Unit Owners”).

The strata title system was introduced in the early 1960s as a means of addressing the difficulty of severing individual interests within the existing forms of co-ownership structures[1] which would typically limit the ability of Unit Owners to transfer or leverage their interest in the unit on account of not having a clearly distinguishable interest separate from the common title held collectively by an Owners Corporation.[2]

Given the clear delineation of individual interests under strata title system, it has become the preferred mode of holding joint interests in land and the globally accepted form of property ownership with countries such as Australia, Canada, India, South Africa, Malaysia, Indonesia, Macau, the Philippines, Singapore, the USA and more recently, the United Arab Emirates having their own Strata Title Laws and Systems.

The real estate market in Nigeria continues to record phenomenal growth both in local investments and capital import, resulting in the emergence of diverse asset classes (including retail and hospitality) as well as more sophisticated forms of multi–unit developments – condominiums, apartment blocks, shopping malls,  high rise commercial developments amongst others. The common feature of such property types is that they are sub–divided into multiple units which are held and exclusively used by Unit Owners.

The growing popularity of these forms of multi–unit developments (“Strata Developments”) makes it imperative for stakeholders in the Nigerian Real Estate Sector to begin to consider the adoption of the Strata Title System to bring the country’s real estate market to par with global practices.

The Land Use Act Cap L5, LFN 2004 (“LUA”) provides the framework of land ownership, use and management in Nigeria. The LUA does not distinguish between a right or interest in or over land as separate from the interest in the improvements on the land as both are seen to go hand in hand – Cuius est solum,eius est usque ad coelum et ad inferos[3]. The LUA regrettably did not anticipate the emergence and popularity of Strata Developments and therefore does not permit Unit Owners in such multi–unit developments to have a recognisable legal or beneficial interest over the land on which their unit is situate. More often than not, developers of these Strata Developments retain legal title over the land and only grant the unit owners a lease over their units for a period which is at least one day less than the tenure of their interest over the land.

The major disincentive to these unit owners is that their interests do not run concurrently with the interest over the land and they may be unable to benefit from a renewal right which remains the exclusive reserve of the registered holder of the land. They also do not have a recognisable interest over any shared facilities or common areas. They are at best granted easement rights or rights of use. Finally, on account of the interest over such units being subject to a superior interest over the land, it may not be a first choice of collateral or security for lenders and therefore may not be easily leveraged.

In jurisdictions where the strata title system has been adopted, it is customary for the country to adopt a general legal framework to regulate the rights and obligations of the Unit Owners as well as to prescribe the procedure for the management of the Strata Development and registration of the interests over the Units and the common areas.

Highlighted below are some of the key legal and regulatory features of Strata Title Laws.

In Strata jurisdictions, the relevant strata title legislation recognises the interests of Unit Owners as a registrable unit of interest which on account of its divisible nature, is capable of being transferred, charged, leased or mortgaged.  On the other hand, the shared facilities and common areas in the Strata Development are recognised as being jointly owned by all the Unit Owners.

An integral feature of any strata title system is the Strata Corporation. This is a corporation set up to hold legal title in and over the shared facilities and common areas in the Strata Development for an on behalf of all Unit Owners. Each Unit Owner automatically becomes a member/shareholder of the Strata Corporation.

The Corporation operates like a business; it raises money by way of levies and contributions from Unit Owners (“collection funds”) towards the maintenance of the Strata Development and the provision of services to the Unit Owners[4] or in some cases, third parties. The Corporation also makes rules to regulate the conduct of the Unit Owners[5] to ensure peaceful enjoyment and avoidance of nuisance.  The Corporation which is managed by its Board or a committee appointed jointly by the Unit Owners will be primarily responsible for the following duties:

Under the Strata Laws, each Strata Development is required to have a strata plan – a registered survey plan which maps out each unit capable of individual ownership from the common areas. Each unit is delineated from the next with strata boundaries in the form of walls, partitions or other forms of demarcation. The boundaries of each unit help its owner define the scope and extent of its interest in the Strata Scheme.

The ability to clearly distinguish the interests of one Unit Owner from the others is an important feature of any Strata Development. It affords each Unit Owner the freedom to deal with their independent portions in the manner they deem fit. In addition, it makes them solely accountable for any act or omission, which in the exercise of their rights over their unit, jeopardizes the collective interest of the other Unit Owners.

The major difference between the strata title system and other forms of co–ownership schemes is the ability of a Unit Owner to pledge or charge its interest over the unit. Prior to the introduction of the strata system, multi-unit developments were owned by an Owners’ Corporation whilst the unit owners are granted an exclusive right to use the unit. To this end, there existed more restrictive lending criteria for unit owners under the Owners Corporation.  Under a strata title system on the other hand, a Strata Unit Owner having a clearly severable and recognisable interest is able to create a security interest over its title.

It should be noted however that in creating such security interest, prior notification[6] of the Strata Corporation is required. The Corporation would note the interest of the lender in the form of a charge over the Unit Owners shares in the Corporation and keep a record of same in the Strata Register. The Corporation would also assist in the enforcement of the security interest in the event of a default.

Strata Corporations under a strata title system have the authority to make bye-laws[7] in relation to the, management, administration, health and safety, use or enjoyment of the common areas or of a unit.  These bye-laws are drafted in accordance with the provisions of the strata title law in the Jurisdiction. To ensure compliance; the bye-law would also prescribe penalties for any breaches by Unit Owners[8]. Where a Unit Owner is in contravention of the bye–laws the Strata Corporation may implement any legal remedies permissible by the law including institution of legal action in court or arbitral proceedings.

The primary source of funding for the Strata Corporation is levies and contributions from the Strata Unit Owners. They are collectively responsible all financial obligations incidental to the management of the Strata Development and the preservation of their collective interest in and over the common areas. The Strata Corporation is primarily responsible for allocation of financial obligations to the individual Unit Owners and the management of the Strata Account into which all collections are paid.

The funds in the Strata Account are utilized primarily for the management of the common areas and shared facilities, payment for utilities and services, insurance amongst others. The Corporation in each year will prepare an annual budget on which basis levies are apportioned to the Unit Owners. In certain jurisdictions, the laws require longer term financial planning; the Corporation is required to mandatorily put aside a reserve pool of funds (“sinking funds”) to meet long term expenses. The Corporation at the end of each year is expected to audit its financial statements and render accounts to the Unit Owners.

Given that the Strata Corporation runs a common expense system, it is essential for it to enforce the payment of the contributions levied on each Unit Owner as non–payment could jeopardize the common interests of the Unit Owners, the structural integrity of the building[9] or the continued enjoyment of utilities, services or the shared facilities. To deter or minimise the incidences of non–payment, the Corporation is usually statutorily empowered to charge penal interests on unpaid monies due or to institute legal action for recovery on behalf of the co–owners.

Nigeria is the fastest growing investment hub in Sub-Saharan Africa where many foreign investors are looking to expand their investments. The recent rebasing of Nigeria’s economy has ranked it Africa’s largest economy with a GDP[10] of over $510 billion. On the other hand, Nigeria has the largest housing infrastructure deficit which is currently placed at about 20 Million with the housing and construction sector, accounting for a meagre 3.1% of the rebased GDP.

The introduction of a strata title system will not only stimulate investor appetite in the Real Estate and Construction Sector but will also support a more efficient Land utilization system that encourages multi-level superstructure developments in both the commercial and residential real estate sectors; resulting in significant reduction in the development costs and property acquisition in general.

Further, lenders are reluctant to grant mortgages to holders of sub-leases in multi–unit developments on account of the existence of a superior title over the land. This challenge is easily surmountable, under the strata title regime where the title over individual units in the Strata Development is bankable.

The introduction of a strata title regime would give Nigeria the boost needed to keep up with growing trends in modern real estate markets. A distinct, recognisable and freely transferable title is the expectation of any purchaser of real estate and an inability to meet this expectation will be a disincentive to purchasers of real estate, developers and funders alike. The enactment of strata title laws in Nigeria would therefore serve as a catalyst to attract more investment into the real estate sector, incentivise developers to invest in world class developments as well as give comfort to financial institutions to finance the acquisition of strata units.

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