Strata Leasing of Resort Villas in the Maldives: What the Purchaser Acquires

Introduction

The Regulation on Long-Term Leasing of Villas or Rooms under Strata Model (Regulation No: 2023/R-154) allows villas and rooms in tourist resorts to be leased to individual purchasers on a long-term basis. The regulation sets out who may grant a strata lease, which villas may be leased, how the property and the purchaser's interest are registered, and the rights which the purchaser holds during the term.

A strata lease is often described as the purchase of a villa. This is not an accurate description of the interest under Maldivian law. This article explains how a strata lease is created and what the purchaser acquires under it.

Who may grant a strata lease

Section 2(b)(1) of the regulation permits a party that holds a valid lease from the government over an island or lagoon, granted for the development of a tourist resort under the Maldives Tourism Act (Law No: 2/99), to grant long-term strata leases. In practice this is the resort owner, which holds the head lease from the government and acts as lessor under each strata lease.

Section 2(b) also permits the following parties to grant a long-term strata lease:

• a sublessee of a tourist resort (Section 2(b)(2));
• a lessee of an integrated tourist resort (Section 2(b)(3));
• a sublessee of an integrated tourist resort (Section 2(b)(4)); and
• a lessee of a tourist resort within an integrated tourist resort (Section 2(b)(5)).

Section 2(a) permits the strata leasing of villas, rooms or apartments located within the site plan of a tourist resort or an integrated tourist resort. The lease may cover the fixtures, fittings, furniture and contents of the villa.

Villas that may be leased

Not every villa in a resort may be leased under the strata model. Section 6 of the regulation sets the standards that a villa must meet. The villa must:

• be secluded from other resort infrastructure;
• have more than one bedroom, each with ensuite facilities;
• include a separate living area; and
• be constructed in accordance with the development standards and permits of the Ministry of Tourism.

Registration

The regulation provides for registration at two levels. The villa must be registered first. The interest of each purchaser is registered afterwards.

Under Section 3, a villa or room must be registered with the Ministry of Tourism before it is offered for lease under the strata model. The application must include:

• the prescribed application form;
• the site plan identifying the boundary of the villa;
• a no-objection letter from any mortgagee of the resort and, where applicable, from the sublessor; and
• copies of the lease agreement and the management agreement required under Sections 15 to 17.

A registration fee of MVR 5,000 is payable to the Maldives Inland Revenue Authority. The ministry then issues a registration certificate under Section 3(f) containing the particulars listed in Section 4. Registration takes effect only when the certificate is issued.

The purchaser's interest is registered under Section 19. The signed lease agreement and management agreement must be submitted together with the identity documents of the purchaser. This is a passport or national identity card for an individual, and a company registry extract for a company. The ministry maintains a registry of these interests under Section 20.

The issuing of the registration certificate is the step that perfects the strata interest. A strata lease over a villa that has not been registered under Section 3 is not validly granted under the regulation, and a purchaser or a mortgagee cannot safely rely on it against third parties.

What the purchaser acquires

The purchaser does not acquire ownership of the land, the building or any fixed structure. Section 26 of the regulation defines the long-term leasing of villas or rooms under the strata model as the right to use a villa or room for a long term "without ownership over the land and building attached to the room or villa".

What the purchaser acquires is a leasehold interest, together with the rights set out in Chapter 3 of the regulation. These are:

• the right of entry to and exit from the resort (Section 10);
• the right to unobstructed use and enjoyment of the villa in accordance with the lease agreement (Section 11);
• the right to mortgage the leasehold interest to obtain a loan (Section 12); and
• the right to basic utility services (Section 14).

These rights are given by the regulation and not only by the lease agreement. This is of practical importance. The purchaser's access to the villa and to basic services does not depend only on the contractual goodwill of the resort operator.

Limits on the purchaser's interest

Three provisions limit the interest of the purchaser.

First, Section 15(b) provides that the term of a strata lease cannot exceed the remaining term of the head lease. A strata lease granted in the later years of a head lease will be short, whatever the parties agree.

Secondly, under Section 16(b) no provision of a strata lease agreement may conflict with the terms of the head lease. A conflicting provision is void. The purchaser therefore takes the villa subject to the terms agreed between the resort owner and the government.

Thirdly, Section 13(a) prohibits the purchaser from subleasing the villa directly to a third party. Section 13(b) permits the villa to be let commercially to tourists, but only through a management agreement with the resort operator. This is consistent with Section 17, which makes the management agreement mandatory.

Comment

A strata lease is a derivative interest. Its length and its content are both controlled by the head lease. A purchaser should therefore review the head lease, and in particular its remaining term, before committing to a purchase. The purchaser should also ask for the registration certificate issued under Section 3. Without it, the villa cannot validly be leased under the strata model.

A purchaser who expects rental income should give the management agreement the same attention as the lease agreement. Under the regulation the villa can be let to tourists only through the resort operator, so the return to the purchaser depends on the terms of that agreement.

For more information, please contact:

Mr. Ahmed Murad, Senior Partner

Email: [email protected]