Escrow Property Law

Background

Dubai Law No 8 of 2007 relating to Escrow Accounts of Real Estate Developments in the Emirate of Dubai (“Escrow Law”) came into effect on 28 June 2007. Prior to the introduction of this law, most buyers of units within developments to be constructed or in the process of construction (“off-plan” developments) had no guarantee that the payment instalments they were making to the developer were being used to construct the development in which they were investing, or that a particular stage of construction would be reached before the next payment was due. Recent press attention has highlighted a few cases of buyers being left without recourse to claim a return of payments made when the development they invested in failed to complete. The Escrow Law is designed to protect buyers from such events occurring again and will apply to all developers selling units on an off-plan basis in Dubai. This law is bolstered by the introduction of a Real Estate Regulatory Authority (“RERA”) which will have responsibility for, among other matters, implementing the escrow regulations. RERA is established pursuant to Law No. 14 of 2007 and is formed under the umbrella of the Dubai Land Department (“Land Department”) with authority to regulate the real estate sector in Dubai.

Application

The Land Department has confirmed that the new law applies to all developments currently under construction and to all future developments where monies are to be collected for off-plan sales. It therefore applies to existing developments to the extent that construction is not yet completed and payments are still being collected. For these projects, an escrow account will need to be set up for the payments due after 28 June 2007, and developers have six (6) months (i.e to 28 December 2007) to comply with the new regulations (subject to the Land Department extending this deadline). For those projects with just one payment left to be made, a developer still needs to apply to RERA, although RERA will consider each application on a case by case basis and decide if a special arrangement can be made where developments are close to completion. Consideration will also be given to developers who have paid a bank guarantee to a master developer to protect third party funds and, again, a special arrangement may apply in these cases.

The Escrow Law provides for a special “Register of Developers” to be prepared by the Land Department and for all “developers” to be licensed to carry out the activity of real estate development in Dubai. “Developer” is defined as an entity or individual licensed to carry on property development in Dubai. This has caused some confusion to date, as there is currently no specific business activity of “real estate development” for licensing purposes and those real estate activities that are covered are traditionally reserved for nationals of the UAE and GCC and companies owned by them. RERA has recently confirmed that a new business activity category of property development is to be introduced and that off-shore/foreign companies will be entitled to apply. It is expected that a financial bond or capital will be required, although the amount of this is not yet clear. The interaction between the Economic Department, relevant freezone authorities, and RERA on this subject also needs to be clarified. Once the licence is issued, the developer can then join the Land Department register.

It is not yet clear whether developers can use funds from the escrow account to fund land payments the developers themselves are making for the project land. RERA has confirmed that developers may retain up to five percent (5%) of the escrow funds to use for advertising and brokers fees and disbursements to be made, but has not confirmed this point specifically.

Buyer Protections

In terms of buyer’s protections under the Escrow Law, payment instalments on off-plan developments will no longer be paid directly to the developer but must be paid into a trust account specially managed by financial or banking institutions approved by the Dubai Land Department (“Escrow Agent”). The developer and the Escrow Agent will agree on the terms and conditions relating to the management of the account, and the developer must manage its investors’ funds in accordance with the agreed regulations. The escrow account will be solely dedicated to one project and the account will be opened in the name of the project. If developers are carrying out more than one development, a separate escrow account must be opened for each development. Funds will be released in stages in accordance with the agreement and only when certain levels of construction are completed. A copy of the agreement will be lodged with the Land Department. The Land Department has not yet published an approved form of agreement.

Where a developer mortgages a development or obtains a loan from a financing firm or company, Article 13 of the Escrow Law stipulates that such funds must be deposited into the escrow account and will be disposed of in accordance with the agreed regulations.

Further protection is offered to buyers under Articles 14 and 15 of the Escrow Law. Under Article 14, the Escrow Agent will retain five percent (5%) of the total amount paid into the escrow account after the developer has obtained the certificate of completion. Such funds must remain in the escrow account for a period of one year after the date of registering all units in the buyers’ names. Article 15 applies in the event of unforeseen emergencies that result in non-completion of the development and provides that after consultation with the Escrow Agent, the Land Department may take such measures required to protect the buyers’ rights and complete the development or refund to the buyer the monies paid by them.

Advertising

When it comes to advertising, the Escrow Law places an obligation on the developer to obtain a written permit from the Land Department prior to launching a project in the media. Article 5 stipulates that a developer may not advertise in local or foreign media, or participate in local or foreign exhibitions for the purpose of promoting the sale of off plan units or real property unless a written permit is obtained. The Director General of the Land Department may also issue a decision outlining requirements to be met by the developer before advertising in the media or participating in exhibitions. RERA has confirmed that is does not wish to freeze or halt developments unnecessarily and that the process to obtain a permit should be simple, with a permit issued on the same day where a developer applies at the RERA office in person. The organisers of Cityscape have issued all of the exhibitors at this year’s exhibition with an application form for a temporary licence to be issued by the Land Department.

Enforcement

As we have seen by the introduction of new Law No. 14, RERA will be responsible for enforcing the provisions of Law No 8 and may at any time request the Escrow Agent to provide it with any information or data it deems necessary. RERA can determine if a breach of the law has occurred and under the provisions of Law No. 8 may then serve written notice on the Escrow Agent to remedy the breach within a specified period of time.

If it transpires that a developer or any other person involved in the development process knowingly breaches the law, the penalties under Law No. 8 include imprisonment and fines of not less than AED 100,000. A developer’s registration may also be cancelled if it is declared bankrupt, does not start works within six (6) months from the date of approval (without acceptable excuse), its licence is cancelled or it commits any violation of the law or the laws governing the activity of real estate development in Dubai. It will be interesting to see the extent to which these enforcement remedies will be applied going forward, and whether this law has real strength in terms of changing the current market.

Going Forward

Guidelines are expected to be issued outlining the exact procedure for the establishment, management and operation of escrow accounts, the approved Escrow Agents, and the form of escrow agreement. Depending on the length of time it takes for developers to become registered and licensed, the Land Department/RERA may need to consider an extension for developers to comply with the new law.

The introduction of Law No 8 and the establishment of RERA is further evidence of the government’s intention to regulate the property market and instill further confidence in buyers looking to invest in Dubai following the issue of the real property ownership law No 7 of 2006. Further reforms are expected in the near future and will build on this, including the introduction of a strata title or condominium law, which will regulate the ownership of common areas in multi-owned buildings and allow the Land Department to register parts of those areas against an individual unit holder’s title.