A property investor in Dubai may withhold payment of due installments whilst the developer is in breach of his contractual obligations.

A recent judgment issued by the Dubai courts has confirmed a property investor’s right to refrain from making any further due installments to a developer who is in breach of his contractual obligations.

Facts

The Claimant (investor) has signed a Unit Reservation Form with the Defendant (developer) for the purchase of a property for AED 1,468,178/- payable in installments. The Claimant paid the first installment of AED 367,046/- (representing 25% of the purchase price) at the time of signing the Unit Reservation Form.

Few months later, the Claimant received from the Defendant a sale purchase agreement in which the Claimant noticed that the Defendant is selling leasehold rather than freehold property, contrary to what was agreed upon between the Claimant and the Defendant in the Unit Reservation Form. The Claimant refused to sign the proposed sale purchase agreement.

The Defendant did not start construction and the Claimant filed a claim before the Dubai Court of First Instance requesting the termination of the Unit Reservation Form, refund of the paid amount plus 9% interest.

Rulings

The Court of First Instance ruled in favor of the Defendant and rejected the Claimant’s claim on the grounds that: 1. the Claimant failed to make the due second installment of the purchase price, and 2. the Unit Reservation Form did not include a specific delivery date of the property nor linked the payment of the installments with the construction progress of the project.

The Clamant filed an appeal before the Dubai Court of Appeal and relied on Articles 246 (1) & 247 of the UAE Civil Code which states:

Article 246 (1): ‘The contract must be performed in accordance with its contents, and in a manner consistent with the requirements of good faith.’

Article 247: ‘In contracts which are binding on both parties, if the mutual obligations are due for performance, either party may refrain from performing his obligations, if the other party fails to perform what he has committed to do.’

The Court of Appeal issued a judgment overturning the judgment issued by the Court of First Instance and ordered the termination of the Unit Reservation Form, and the Defendant to pay the Claimant the amount of AED 367,046/- plus 9% from the date of filing the claim until the Claimant is fully paid.

The Court of Appeal found that although the contract did not include a specific handover date, it does not give the Defendant the right in an open ended delivery date. In response to the Defendant’s argument that the Claimant failed to pay the second due installment, the Court stated that the fact the Defendant has completed merely 35% of the construction after six (6) years from the date of the Unit Reservation Form (as confirmed by the expert), is considered as failure on the part of the Defendant to perform his obligations in a manner consistent with the requirements of good faith which entitles the Claimant to withhold any further payments due to the Defendant according to Article 247 of the UAE Civil Code.

The Defendant filed an appeal before the Dubai Court of Cassation which was later rejected.

Execution of the Judgment

The Claimant pursued the execution of the judgment in the amount of AED 550,000/- (original claim amount plus 9% interest plus court and lawyers fees). However, it was discovered that the Defendant was using four different companies that have four similar trade names, through which, the Defendant uses one company to contract with investors, and the other three for receipt of investor’s money -obviously to prevent the execution of court orders.

Finally, Motei & Associates’ litigation team succeeded in attaching one the Defendant’s assets as a security for the execution of the above court judgment.

For any further details on the above case, please contact Ashraf El Motei at: a.motei@motei.com

About the author:

Ashraf heads the dispute resolution practice in M&A. He specializes in civil and commercial litigation and has particular focus on international arbitration. His practice encompasses a broad spectrum of substantive areas with specific focus on all types of real estate disputes including sale and purchase disputes, distressed/ canceled developments, enforcement of judgments and security, employment, professional negligence and health care disputes.

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