Dubai real estate updater

Summer 2009

Introduction

During the first half of 2009, there have been some significant developments in Dubai’s real estate laws. However, whilst helpful in providing greater certainty as to the legal and regulatory position, written laws cannot be understood in isolation. Any interpretation must be coupled with the paradigm shift in Dubai’s real estate sector.

We have discussed the market and legal developments with key personnel at the Dubai Real Estate Regulatory Authority (RERA) in order to fully understand the intention behind the legislative changes and how these will impact on the finely balanced interests of the major stakeholders in the Dubai market. We explain below those aspects which will be of the greatest interest to real estate developers, investors and those providing finance in relation to properties in the Emirate of Dubai.

Law No. 9 of 2009

Following the uncertainty introduced by the enactment of Law No. 13 of 2008, Regulating the Interim Real Estate Register in the Emirate of Dubai (Law No. 13), many developers and investors breathed a sigh of relief when Law No. 9 of 2009 (Law No. 9) was introduced to clarify the provisions of Article 11 of Law No. 13.

Law No. 9 has assisted in providing certainty to developers and investors as to the amount of the purchase price which can be retained on termination for a default by a unit purchaser.

Article 2 of Law No. 9 provides that, following service of a notice of default by the Land Department containing a 30-day cure period, if the unit purchaser has not fulfilled its contractual obligations the sums which the developer may retain are limited as follows:

• If the developer has completed at least 80% of the project, the developer may keep all amounts paid and request that the purchaser settles the remaining amount of the contract price. If the purchaser cannot pay such amount, the developer may request that the property is auctioned in order that it can recover sums from the auction proceeds.
• If the developer has completed 60% to 80% of the project, the developer may cancel the contract and retain up to 40% of the purchase price.
• If construction has commenced, but the level of completion is less than 60%, then the developer may cancel the contract and retain up to 25% of the purchase price.
• Where construction had not commenced when the contract was terminated, for reasons beyond the developer’s control and without any negligence or omission by the developer, the developer may cancel the contract and retain up to 30% of the total amount paid by the purchaser.

We understand that the extent of completion of the project will be determined independently by the Land Department at which point the amount which a developer may retain is determined.

Although undoubtedly helpful in providing clarification to a confused market, Law No. 9 is only a partial solution and there are gaps which remain to be filled. For instance, it is still unclear as to how Law No. 13 and Law No. 9 relate to plots and when a plot would be considered to be “off-plan”.

Furthermore, Law No. 9 introduces a right for RERA to cancel projects but full details of how this will work have yet to be made available to the public.

New regulations to Law No. 9 to be issued by RERA

RERA is due to introduce new regulations shortly. These regulations are likely to further clarify the position in relation to default and termination of real estate contracts in Dubai.

We understand that the eagerly-anticipated new regulations will deal with issues including the following:

• Letter to developers of February 2009 governing the maximum percentage payments which a developer may take from a purchaser prior to commencing construction on site, and the linking of payment schedules to construction milestones.
• RERA’s powers to cancel a project (as referred to in Article 5 of Law No. 9).

During detailed discussions with Emad Eldin Farouq, Senior Legal Advisor to Dubai Land Department, we have clarified the current position and obtained information as to the likely position following the publication of the awaited regulations.

Letter to developers - February 2009

RERA wrote to a number of developers in February 2009 , specifying that the developer can collect a maximum of 30 per cent of the unit purchase price prior to the commencement of construction and, following this, payments must be linked to construction milestones.

Mr Farouq confirmed that this letter is currently a guideline but that these provisions will be enacted as part of the new regulations. We discussed this further with a key member of the Land Department who has responsibility for compliance with the Escrow Law. Going forward, developers will only be able to collect a maximum of 30 per cent of the unit purchase price before construction commences and following this, payments must be linked to construction milestones. RERA will enforce this strictly.

Cancellation of unit SPAs

Mr Farouq also confirmed that no project or SPA can be effectively cancelled without Land Department approval. In the case of cancellation of an SPA, if a developer wishes to cancel the SPA for non-payment by the purchaser, but the purchaser has failed to pay due to delays in construction; failure to commence construction; or postponement of construction, then the Land Department would not look favourably on the request for cancellation by the developer.

Cancellation of real estate projects

Article 5 of Law No. 9 refers to a power of RERA to cancel real estate projects. We discussed with Mr Farouq whether RERA has exercised its power to cancel any projects as yet. It was explained that the mechanism for cancellation will be outlined in detail in the new regulations. Therefore RERA will actively pursue cancellation once the new regulations to Law No. 9 are enacted, as these set out in more detail the grounds for cancellation and the actions to be followed on cancellation.

If construction has started but then ceased, and there is no realistic chance of the project being completed by the developer because, for instance, there are no funds remaining in Escrow, then RERA would consider cancelling the project for being unviable. In these circumstances, the plot would be auctioned and the profits distributed between all purchasers. If there are insufficient profits to distribute, a proportionate amount would be distributed to all purchasers (thus apportioning the losses proportionately).

We understand that RERA has prepared a list of unviable projects, although none have yet been cancelled. The list has not been made available to the public. Mr Farouq stated that part of the reason why no projects have yet been cancelled is that cancellation is both a legal issue and a technical issue and technical reports have to be prepared justifying the cancellation.

Sub-selling of units by sub-developers

We also explored with Mr Farouq the sub-selling of units by sub-developers. Mr Farouq confirmed that a sub-developer must have fully paid the master developer for its plot before it can start sub-selling, and must also have obtained the title deed.

This is interesting because the sub-developer may need the payments from investors in order to be able to pay for its plot. If this is to be enforced, the sub-developer will need to consider using any profits from its other developments once released from escrow, or bank finance, both of which are not necessarily readily available. Alternatively, the sub-developer will have to consider other structures such as joint-venturing with the master developer and / or building contractor in order to make the development viable.

It was also confirmed that the master developer must give a no-objection certificate to sub-selling and RERA would wish to see the certificate before registering the plot sale on the Interim Real Estate Register (the IRER). There is no prescribed form of NOC and any format will be acceptable to the Land Department provided that it has the mark of the Master Developer on it. The plot must be registered on the IRER before sub-sales can take place.

Law No. 14 of 2008 concerning mortgages in the Emirate of Dubai (Law No. 14)

Our real estate updater of August 2008 discussed Law No. 14 in detail. One aspect of Law No. 14 which has caused confusion is the auction of the mortgaged property following a default. It is not clear how a contract, such as a sale and purchase agreement for off-plan property, can be auctioned. We asked Mr Farouq whether any off-plan SPA has been auctioned pursuant to Law No. 14 of 2008, and whether it is possible to auction an off-plan SPA.

Mr Farouq explained that as an SPA is a contract with value and documents a right to a property, it may be sold on. However, often an SPA will limit a purchaser’s right to on-sell without consent; so it follows that in such circumstances a developer will need to approve the winning purchaser. In any event, we assume that, in reality, the right to purchase would be auctioned, and following this the existing SPA would be cancelled and a new SPA would be issued in the winning bidder’s name.

So far, no SPAs have been auctioned. However, RERA is currently in discussions with several banks who would like to procure the carrying out of such auctions under the supervision of the Land Department.

The real estate updater on Law No. 14 from August 2008 can be accessed here

Conclusions

The new regulations to be issued by RERA are eagerly anticipated by practitioners, developers and investors alike, as it is hoped that they will give further clarity to the Dubai real estate framework.

Dubai should take every opportunity to continue to strive towards legal certainty and transparency in these difficult times so that when the green shoots of recovery appear, investors are not deterred from the UAE market by legal risks that could, by careful legislation and clear dissemination of information, be eliminated. A repeat of the uncertainties surrounding the implementation and interpretation of Law No 13 of 2008 and its subsequent amendment by Law No 9 of 2009 must be avoided in the future.