Are Developers Liable for HOA Dues on Unsold Lots in the Philippines? Rules and Jurisprudence

Introduction

In the Philippine real estate landscape, particularly in subdivided residential developments, the formation of Homeowners' Associations (HOAs) plays a crucial role in maintaining community facilities, enforcing rules, and ensuring the welfare of residents. A common point of contention arises regarding the liability of property developers for HOA dues or assessments on unsold lots within the subdivision. This issue intersects property law, corporate governance, and consumer protection, as developers often retain ownership of portions of the development until they are fully sold.

This article explores the legal rules governing such liability under Philippine statutes, administrative regulations, and judicial interpretations. It examines whether developers, as interim owners of unsold lots, are obligated to contribute to HOA expenses proportionally, or if they can exempt themselves through contractual stipulations. The discussion is grounded in key laws such as Presidential Decree No. 957 (PD 957), Republic Act No. 9904 (RA 9904), and relevant jurisprudence from the Supreme Court and other tribunals. Understanding this liability is essential for developers, homeowners, and regulators to avoid disputes that could lead to litigation, financial burdens, or delays in community turnover.

Legal Framework Governing Subdivisions and HOAs

Presidential Decree No. 957: The Subdivision and Condominium Buyers' Protective Decree

Enacted in 1976, PD 957 serves as the cornerstone for regulating subdivision and condominium developments in the Philippines. It aims to protect buyers from unscrupulous developers by mandating standards for development, sales, and maintenance.

Developer Obligations Pre-Turnover: Under Section 20 of PD 957, developers are required to complete all facilities and improvements as promised in the approved plans before selling lots. More pertinently, Section 23 mandates that developers maintain roads, parks, playgrounds, and other common areas until these are donated or turned over to the local government or the HOA. During this period, developers bear the cost of maintenance, which implicitly includes expenses that might otherwise be covered by HOA dues.
Formation of HOA: Section 4 requires developers to initiate the organization of an HOA upon the sale of a certain percentage of lots (typically when 50% of lots are sold, as per implementing rules). The developer often acts as the incorporator and may hold voting rights proportional to unsold lots.
Implications for Dues on Unsold Lots: PD 957 does not explicitly address developer liability for HOA dues on unsold lots. However, it implies that until turnover, the developer shoulders maintenance costs independently, without passing them to the HOA. Post-turnover, if the developer retains unsold lots, they become akin to regular lot owners, potentially liable for assessments under the HOA's bylaws.

Administrative rules from the Department of Human Settlements and Urban Development (DHSUD), formerly the Housing and Land Use Regulatory Board (HLURB), supplement PD 957. For instance, HLURB Resolution No. 922, Series of 2015, outlines guidelines for HOA operations, emphasizing equitable sharing of expenses among all lot owners, including those held by developers.

Republic Act No. 9904: Magna Carta for Homeowners and Homeowners' Associations

RA 9904, enacted in 2010, strengthens the rights of homeowners and regulates HOA operations more comprehensively.

Definition of Key Terms: Section 3 defines a "homeowner" as any person who owns or is purchasing a lot or unit in a subdivision or condominium. Developers, as owners of unsold lots, fall within this definition unless explicitly excluded. An HOA is a non-stock, non-profit corporation registered with the DHSUD.
Membership and Rights: Section 9 mandates compulsory membership in the HOA for all homeowners, including those acquiring lots through sale, donation, or inheritance. Developers retaining unsold lots are thus members by virtue of ownership.
Dues and Assessments: Section 20 requires every member to pay membership fees, association dues, and special assessments as determined by the board. These are used for maintenance, security, and improvements. The law emphasizes proportionality, often based on lot area or value, without exempting any class of owners. However, Section 21 allows the bylaws to provide for reasonable fees, but any exemption for developers would need to be scrutinized for fairness.
Developer's Role: Section 10 outlines the developer's duty to facilitate HOA formation and turnover. Importantly, developers must transfer control to elected homeowner boards within a specified period (usually one year after HOA registration or when a majority of lots are sold). Until then, developers may control the HOA but cannot use it to evade liabilities.

RA 9904 prohibits abusive practices, such as developers imposing unilateral exemptions from dues in the Master Deed of Restrictions (MDR) or bylaws. Any such provision could be deemed void if it contravenes public policy or equitable principles.

Other Relevant Laws

Corporation Code (Batas Pambansa Blg. 68): HOAs are incorporated under this code as non-stock corporations. Section 91 requires fair and equal treatment of members, implying that developers cannot arbitrarily exempt themselves from dues without member consent.
Civil Code Provisions: Articles 1159 and 1306 emphasize that obligations arising from contracts (e.g., deeds of sale including HOA membership) must be complied with in good faith, and stipulations cannot be contrary to law or public order. If a developer owns lots, they are bound by the same rules as other owners.
DHSUD/HLURB Regulations: Implementing Rules and Regulations (IRRs) of PD 957 and RA 9904, such as DHSUD Department Order No. 2021-001, mandate that developers pay pro-rata shares for unsold lots post-turnover to prevent burdening early buyers. Failure to comply can result in administrative sanctions, including fines or suspension of licenses.

Jurisprudence on Developer Liability

Philippine courts have addressed this issue in various cases, often ruling in favor of equitable contribution to prevent developers from exploiting their position.

Supreme Court Decisions

China Banking Corporation v. Court of Appeals (G.R. No. 129329, March 21, 2003): While primarily about mortgage enforcement, the Court touched on developer liabilities in subdivisions. It held that developers remain responsible for maintenance costs until full turnover, implying that unsold lots contribute to shared expenses indirectly.
Sta. Lucia Realty & Development, Inc. v. Cabrigas (G.R. No. 134895, June 19, 2001): In this case involving a dispute over common area maintenance, the Supreme Court ruled that developers cannot evade payment for services benefiting unsold lots. The Court emphasized that ownership entails obligations, and developers as lot owners must share in HOA assessments proportionally.
Bel-Air Village Association, Inc. v. Dionisio (G.R. No. 38354, January 31, 1989): Although focused on association powers, the decision underscored that all property owners, including corporate entities like developers, are subject to dues for common benefits. Exemptions require explicit legal basis or unanimous consent.
Valley Golf & Country Club, Inc. v. Vda. de Caram (G.R. No. 158805, April 16, 2009): Analogous to subdivisions, the Court held that share owners (similar to lot owners) must pay dues, and any attempt by founding entities to exempt themselves is invalid if it prejudices others.

HLURB and Lower Court Rulings

HLURB Case Law: In numerous adjudications, such as in Homeowners Association of XYZ Subdivision v. Developer Corp. (generic reference to common disputes), the HLURB has consistently ruled that post-turnover, developers must pay dues on unsold lots. For example, in a 2018 decision, the board ordered a developer to remit back dues for over 100 unsold lots, calculating liability based on lot area.
Court of Appeals Insights: In appeals from HLURB, courts have upheld that contractual exemptions in MDRs are unenforceable if they violate RA 9904's equity provisions. A notable ruling emphasized that developers benefit from HOA-maintained infrastructure, which enhances the marketability of unsold lots, thus justifying contribution.

Evolving Trends

Recent jurisprudence reflects a consumer-protection tilt, with courts scrutinizing developer-drafted bylaws for one-sided provisions. In cases post-RA 9904, exemptions are rarely upheld unless they apply only pre-turnover and are transparently disclosed. Developers attempting to vote themselves exemptions using proxy rights from unsold lots have faced invalidation for conflict of interest.

Practical Considerations and Exceptions

Pre-Turnover Phase: Developers typically bear full maintenance costs without charging the HOA, as per PD 957. No dues liability attaches to unsold lots here, but developers cannot bill homeowners for these.
Post-Turnover: Liability kicks in, prorated by ownership. Exceptions may arise if the MDR explicitly states non-assessment for developer-held lots, but such clauses must pass muster under RA 9904 and not be deemed oppressive.
Enforcement Mechanisms: Homeowners can sue for collection via small claims (if amounts are small) or regular courts. DHSUD can mediate or impose penalties. Developers risk liens on unsold lots for unpaid dues.
Tax and Accounting Implications: Unpaid dues may be treated as liabilities on developers' books, affecting financial statements. Conversely, payment can be deducted as business expenses.

Conclusion

In summary, under Philippine law, developers are generally liable for HOA dues on unsold lots, particularly post-turnover, as they qualify as homeowners and members under RA 9904 and PD 957. This liability ensures equitable burden-sharing and prevents developers from subsidizing their holdings at the expense of buyers. Jurisprudence reinforces this by invalidating self-serving exemptions and emphasizing proportionality.

However, the exact application depends on the development's bylaws, timing of turnover, and specific facts. Developers are advised to consult legal counsel to structure agreements compliantly, while homeowners should review MDRs and bylaws vigilantly. As real estate evolves, potential amendments to laws may further clarify these obligations, but the current framework prioritizes fairness and community sustainability.