Legislation has been introduced over the past few years to regulate the ownership of property in Dubai to protect purchaser’s rights in relation to off-plan sales and to address the tensions and conflicts that have ensued between developers, investors and financiers, especially after the economic downturn in Dubai in late 2008.
Ownership of Freehold Property to Foreigners
In 2006 Law No (7) of 2006 Concerning Real Property Registration in the Emirate of Dubai was published permitting foreigners to own real estate in certain areas of Dubai as approved by the Ruler. Regulation No (3) of 2006 listed the first twenty-three so-called “designated areas” and subsequent Regulations have been published over the years increasing the number of “designated areas”.
Creation of RERA
In 2007 we saw the creation of the Dubai Real Estate Regulatory Authority (“RERA“), which is a specialist arm of the Dubai government’s Land Department which regulates the real estate market in Dubai and can mediate disputes referred to it between developers and purchasers.
Introduction of Escrow
Also in 2007 we saw the implementation of Law No (8) of 2007 Concerning Guarantee Accounts of Real Estate Developments in the Emirate of Dubai, often referred to as the ‘Escrow Law’. The main aim of this Law was to provide protection for purchasers’ money invested through off-plan sales in developments under construction in Dubai. Very important, Law No 8 introduced a requirement for all developers to register both themselves and their projects with RERA and to establish an escrow account for each project for the receipt of purchasers’ money, to be used solely towards the development costs of the project.
Jointly Owned Property
As many of the properties sold off plan were jointly owned properties, we saw the publication of Law No (27) of 2007 on Ownership of Jointly Owned Properties in the Emirate of Dubai, which regulates the implementation of compliant strata schemes and establishment of Owners’ Associations. The implementing regulations to this Law were issued as Directions in April 2010, and amongst other things, the Law and its Directions empower property owners to jointly manage their communities and buildings. Along with self-management comes transparency and fairness on issues such as service charge levels, contracting with service providers, and the use of common areas and facilities.
Registration on the Interim Real Estate Register
Prior to the introduction of Law No (13) of 2008 Regulating the Interim Real Estate Register in the Emirate of Dubai, each developer maintained its own records or ‘property register’ in relation to all off- plan sales. The aim of Law No 13 was to provide protection of purchasers’ rights pursuant to off-plan
sale contracts by the registration of such contracts on a newly established Interim Real Estate Register maintained by the Dubai Land Department.
Law No (14) of 2008 Concerning Mortgages in the Emirate of Dubai established a legislative framework for the registration of lenders’ pre-mortgage interests on the Interim Real Estate Register, as well as mortgages on the main Real Estate Register, together with mechanisms for the enforcement of the same through to eventual mortgagee sale of a property by public auction.
Disputes between Developers, Investors and Financiers
All of the aforementioned laws and regulations were published over time in conjunction with the development and maturing of the Dubai property sector and were aimed at protecting off-plan purchaser’s rights, regulating the purchase and financing of properties in Dubai and bringing about fairness between parties in a rapidly developing property industry.
During the last quarter of 2008 we saw the effects of the world economic downturn on the property market in Dubai – project and purchaser financing was effected, purchasers were not able to comply with their payment obligations and developers were not able to fund their construction activities. During this period many purchasers sought to use developers’ failure to construct as a basis to claim breach of contract and termination of their sale agreement.
The Dubai Government introduced legislation to address the disputes that were developing between developers, investors and financiers.
Law No (13) of 2008 was published at a time when there was an escalation of off-plan property prices and was aimed at introducing measures to discourage developers from terminating sale contracts in order to re-sell units at a higher price to new investors. Article 11 of Law No (13) of 2008 established a process for a developer to adhere to when terminating an off-plan sales contract in the event of a purchaser’s default of its payment obligations. Once a sale contract was terminated, Article 11 required a developer to refund to the defaulting purchaser all money paid by him after deduction of an amount not exceeding 30 per cent of such money.
Subsequent to the economic downturn in late 2008 Dubai Government introduced legislation in terms whereof the measure of compensation that a developer would be entitled to is directly related to his own progress towards completion of the project and fulfillment of the sale contract. Law No. (9) of 2009 amending Law No. (13) of 2008 amended, amongst other things, Article 11, and provided, for example, that if a developer has commenced construction but not reached 60%, the developer may terminate the sales contract and forfeit not more than 25% of the purchase price.
These provisions were confirmed by Executive Council Resolution No (6) of 2010, which provides, for example, that where the developer has completed at least 80% of construction, the developer may retain all amounts paid by the purchaser and sell the property by way of public auction to recover the balance amounts payable to the developer or deduct 40% maximum of the purchase price and terminate the sale contract; and where the developer has completed at least 60% of construction, the developer may terminate the contract and retain 40% maximum of the purchase price; and where the construction has not reached 60% the developer may terminate the contract and retain 25% maximum of the purchase price.
Executive Council Resolution No (6) of 2010 also provides that where the payments in possession of the developer are less than the respective percentages set out above, the developer may apply to Court to award the developer a judgment in accordance with the above percentages.
Executive Council Resolution No (6) of 2010 went further by also establishing grounds upon which a purchaser could seek termination of a sale contract due to the developer’s breach. In particular, Article 20 provides that a purchaser may apply to a competent court to terminate the contractual relationship between the purchaser and a developer in any of the following events:
- If the developer refuses without good reason acceptable to the Dubai Land Department to deliver the final sale agreement of the property to the purchaser;
- If the developer declines to link the payments to the construction milestones as proposed by RERA;
- If the developer materially changes the agreed specifications;
- If, upon the handover of the property, it is established that the property is not fit for use due to material construction defects;
- Any other events that may require terminating the sale agreement in accordance with general statutory rules.
The Resolution also introduced the grounds upon which RERA could take action to cancel a development project and the process to be followed after such cancellation.
In addition to the development of legislation to regulate the Dubai property market, Dubai Government has also developed a comprehensive property dispute resolution forum which deals with all types of property disputes and bounced cheques. In this regard you are referred to our article “Discussion on Dispute Resolution Forums in Dubai” for a more detailed discussion thereof.
For more information about this article, please contact Ashraf El Motei at firstname.lastname@example.org