Mortgage, Transfer and Off-Plan Sale of Strata Villas in the Maldives

Introduction

The Regulation on Long-Term Leasing of Villas or Rooms under Strata Model (Regulation No: 2023/R-154) allows a strata lessee to mortgage and to transfer the leasehold interest in a resort villa. It also allows a resort developer to enter into strata lease agreements before the resort is built. Each of these is subject to a procedure before the Ministry of Tourism.

This article sets out those procedures. They are relevant to banks that finance purchasers, to purchasers who intend to resell, and to developers who intend to sell villas during construction.

Mortgage of the strata lease

Section 12(a) of the regulation provides that a strata lessee "shall have the right to obtain a loan by mortgaging the rights related to the said villa or room". The procedure is governed by Section 12(b) and Section 23. Under these provisions:

• the approval of the ministry must be obtained before the mortgage agreement is signed;
• the application must be supported by the registration certificate, the loan agreement and the mortgage agreement;
• where an existing mortgage is being refinanced, a no-objection letter from the existing mortgagee is required; and
• the mortgage must be registered with the ministry within five government working days of signing.

This procedure gives the financing bank a security interest that is registrable and is recognised by the ministry. The security is taken over the purchaser's leasehold interest only. It is separate from the resort owner's interest under the head lease, and the resort itself does not need to be charged in favour of the purchaser's bank.

The reverse also applies. The resort owner may mortgage its own interest in the resort. Where it has done so, Section 3(c)(2) requires a no-objection letter from the mortgagee of the resort before a villa can be registered for strata leasing. A bank financing a purchaser should confirm that this letter was obtained.

The bank should also consider the limits of the asset. Under Section 15(b) the term of a strata lease cannot exceed the remaining term of the head lease. Under Section 16(b) any provision of the strata lease agreement that conflicts with the head lease is void. The value of the security therefore depends on the head lease, and a review of the head lease should be a condition of the financing.

Transfer of the strata lease

A strata leasehold interest is transferable under Section 22 of the regulation. Where the interest is mortgaged, a no-objection letter from the mortgagee must be obtained before the transfer. The transfer must then be registered with the ministry within five days of taking effect, under Section 22(b) read with the registration provisions of Section 19(b).

The right to transfer should be distinguished from subleasing. Section 13(a) prohibits a strata lessee from granting a direct sublease of the villa to a third party. This does not prevent the lessee from selling or assigning the leasehold interest itself, which is permitted subject to Section 22.

Sales before or during construction

Section 5(d) of the regulation permits the parties, before or during construction of the resort, to enter into an agreement for the long-term strata lease of a villa that is designated to be built within the resort. The lessor may receive payment in consideration of the lease, where the conditions and procedures of the regulation have been met.

Section 5(d) must be read with Section 3. Section 3 requires a villa to be registered with the ministry before it is offered for lease under the strata model, and registration takes effect only when the ministry issues the registration certificate.

In our view, the result is that a developer should not collect lease rent, or any payment described as rent for the use or occupation of a villa, until the registration requirements have been met and the strata lease can lawfully be entered into. Section 5(d) allows early contracting. It does not remove the requirement to register.

Advance payments

The regulation does not restrict the collection of payments other than lease rent before the villa is registered under Section 3. A payment that is not lease rent may therefore be collected in connection with such a transaction, and is not prohibited under the regulation.

Comment

The regulation gives a purchaser's bank a workable security. The head lease, the registration certificate for the villa and any no-objection letter from the mortgagee of the resort should all be reviewed.

An agreement under which money is received should clearly identify what each payment relates to, as payments of lease rent are permitted by Section 5(d) subject to registration under Section 3.

For more information, please contact:

Mr. Ahmed Murad, Senior Partner

Email: [email protected]