“Off-plan projects” Regulation in Dubai:A Conflicting-laws bubble appears.
“Off-plan projects” Regulation in Dubai:A Conflicting-laws bubble appears.
By: Mostafa Sobhy Draz – Senior Legal Consultant, Litigation.
Dubai is a leading real estate market known for its appeal as a tourist destination, investment hub, and centre for economic growth. It is no surprise that the city has taken the lead in promoting off-plan projects and setting up legal frameworks to govern them. As a legal advisor and lawyer in our law firm, I have participated in many cases against renowned international real estate developers. However, when both parties, the developer and the purchaser, fail to fulfil their obligations, it creates a conflicting-laws execution bubble, per the Court of Cassation’s principles on off-plan projects.
This article will examine Dubai’s real estate legislation system, explore the reasons behind the emergence of the execution bubble, and propose potential solutions to mitigate any conflicts.
What is an Off-plan Project?
An off-plan project is a real estate development that still needs to be finished. People can buy units in the development even before it’s built, but they usually have to pay a deposit first. The rest of the money is paid in instalments as the construction progresses, and this money is kept in an “Escrow account” controlled by the authorities. This ensures that the money is appropriately used and helps to protect the buyers.
This payment method is helpful for real estate developers because they don’t have to pay for everything upfront. Instead, they can use the money from buyers to help pay for the development as it progresses. This is good for urban development because it allows more developments to be built without developers having to take on too much financial risk.
The majority of new huge developments in Dubai are off-plan, and the city has become synonymous with this investment. This means people can buy units in the building before it’s even built. But there are risks involved with this type of purchase. Sometimes the project can be cancelled, and it may take a long time to get your money back. Or the real estate developer might need more money to finish the project, which can cause big problems.
Another risk is that the building might turn out differently than the developer promised, or it might take longer to finish than expected. This can mean that people end up paying more mortgage interest than planned. To avoid problems, people should read the contract before signing it. Sometimes the contracts are very long and complicated, so it’s a good idea to have a real estate lawyer look at them first. The developer usually makes the contracts, so they might need to be fairer to the buyer.
Off-plan projects can be a great way to get into the Dubai property market at a reduced price, but it’s important to be aware of the risks involved before making any decisions.
Off-plan projects Regulation in Dubai:
In 2007 and 2008, H.H Sheikh Mohammed bin Rashid Al Maktoum issued two laws in Dubai to regulate off-plan real estate. The first law (no. 8 of 2007) was about Escrow Accounts for real estate development, while the second law (no. 13 of 2008) was about the interim property register.
According to article no. 3 of the second law, any transfer or sale of property units sold off-plan must be registered in the Interim Property Register. Otherwise, these transfers or sales will not be considered legal. Meanwhile, Article 8 of the same law states that once a development project is completed, developers must register it in the Property Register maintained by the DLD. If a purchaser has fulfilled their contractual obligations, sold units must also be registered in their name, following the procedures adopted by the DLD.
According to article no. 11, if a purchaser violates any terms of the sale contract for a real estate unit with a developer, the developer must inform the DLD about the breach. The DLD must then provide the purchaser with a notice period of 30 days, either in person, via registered mail, or electronic mail, to fulfil their contractual obligations.
If the purchaser doesn’t fulfil their obligations within the notice period, the developer can cancel the contract and refund the purchaser’s payments. However, the developer may deduct up to 30% of the payments made by the purchaser.
In 2017, H.H Sheikh Mohammed issued law no. (19) of 2017, which amended law no. (13) of 2008. Specifically, the changes affected article no. (11). The new provisions state that the notice of breach must be in writing and include the date it was issued. The notice must be given to the purchaser either in person or by registered mail with an acknowledgement of receipt, email, or other means as prescribed by the DLD.
The DLD may help the developer and purchaser reach an amicable settlement. If they do, the settlement must be added as an addendum to the Off-plan Sale agreement and executed by both the developer and purchaser.
When the notice period has ended, and the purchaser has not fulfilled their contractual obligations or reached a settlement with the developer, the DLD will issue an official document in favour of the developer. This document confirms the developer’s compliance with the procedures and specifies the completion percentage of the actual property unit.
after receiving the official document from the DLD and assessing the completion percentage, the developer has several options available.
First, they may choose to maintain the Off-plan Sale agreement with the purchaser, keep all amounts paid by the purchaser, and claim the remaining balance of the property unit’s price from the purchaser.
Second, the developer can ask the DLD to sell the actual property unit in question through a public auction to collect any outstanding amounts owed to the developer. The purchaser would be held liable for any costs associated with the sale.
Lastly, the developer may unilaterally terminate the Off-plan Sale agreement, retain a percentage of the unit’s value according to the percentage of completion specified in the agreement, and refund any excess amounts to the purchaser within one year of terminating the agreement or within 60 days of reselling the unit to another purchaser, whichever happens, earlier.
Paragraph (d) of the section above states that the rules and procedures outlined in this Article apply to all off-plan sale agreements, regardless of when they were concluded. Article (e) declares that these rules and procedures are part of public order, and failing to comply with them will result in the nullity of the legal act in question.
On 24/11/2020, H.H Sheikh Mohammed issued Law No. (19) of 2020, which amends Law No. (13) of 2008, specifically Article No. (11) once again. The updated provisions of this article state that all actions, decisions, and dispositions were taken before this Law’s effective date are considered valid and enforceable as long as they were made in compliance with the legislation in effect. This also applies to the termination of Off-plan Sale agreements after the effective date of Law No. (13) of 2008, unless a competent court has rendered a definitive judgement to revoke such termination before the effective date of this Law.
What created the conflict?
According to current regulations, if a purchaser breaches their contractual obligations in an off-plan sale contract, Article 11 of Law No. (13) of 2008, as amended, will be applied, and the developer has the right to take legal action as specified in the Article.
It’s important to note that Law No. (13) of 2008 does not provide specific provisions for cases where the developer breaches their contractual obligations in an off-plan sale contract. Article 11 only applies to the purchaser’s breach of obligations, assuming that the developer has fulfilled their obligations.
Suppose the developer breaches their contractual obligations, and the purchaser has fulfilled them. In that case, the purchaser can only seek legal recourse according to general rules of Law, including instances where the sale contract is invalid because the property was not registered in the initial real estate registry under the purchaser’s name.
It’s worth noting that the principles of the Court of Cassation in cases related to off-plan real estate sales allow the developer to avoid termination of sales contracts if they can complete the project 100% before the Court of Appeal issues a ruling once the developer reaches 100% completion of the project, Law No. (7) of 2006 Concerning Real Property Registration in the Emirate of Dubai becomes applicable. This indicates that the view on the developer’s breach of contractual obligations is focused on completing construction works and the completion rate. While it’s understandable to monitor the percentage of completion for off-plan projects strictly, it’s also noticeable that there is a lack of focus on other types of breaches that the real estate developer may commit, which could lead to judicial termination or nullity of the sale contract. This lack of focus can create confusion and a potential conflict regarding the applicable Law.
There are many practical situations where applicable laws may conflict, especially when both the developer and the buyer are involved. For example, when the developer completes 100% of construction works and obtains a completion certificate for a building whose units were sold off-plan but fails to fulfil other obligations like registering some rights in rem in the real estate register while simultaneously trying to claim the final payment of the unit’s price.
Despite the purchaser’s right to hold onto outstanding instalments according to Article No. 247 of the Civil Transactions Law, the purchaser may need to be made aware that the developer has sent a notice and unilaterally terminated the contract, completing the termination process.
If the purchaser submits a lawsuit claiming contract nullity and full refund according to Paragraph No. 1 of Article No. 3 of Law No. 13 of 2008: “Any disposition that occurs in respect of any Real Property Unit sold off-plan will be entered in the Interim Property Register, and any sale or any other legal disposition that transfers or restricts ownership or any ancillary rights will be null unless entered in that Register,” the developer may argue that the real estate unit has already been cancelled.
The Court of Cassation has established several principles regarding the applicable law once the developer obtains a completion certificate. At this point, Law No. (7) of 2006 Concerning Real Property Registration in the Emirate of Dubai supersedes the law no. (13) of 2008, and the unit is no longer considered Off-plan, even if the developer has not registered the unit in the name of the purchaser in the final property register. However, the Court of Cassation has also accepted unilateral termination of sales contract procedures initiated after building completion, even though Law No. (7) of 2006 does not have any article regulating this. As a result, this sets Law No. (7) of 2006 and the law no. (13) of 2008 in conflict, leading to difficulties for first instance and appeal courts.
Furthermore, the impact of non-entry in the property register differs between the two laws. Article no. (9) of Law No. (7) of 2006 states that transactions that create, transfer, amend, or extinguish real property rights that are not recorded will not be deemed valid without any sanction. On the other hand, the effect of non-recorded rights under the article no. (3) of the law no. (13) of 2008 is nullity. Thus, applying both laws in the same lawsuit creates confusion concerning the effect of non-recorded rights.
The laws governing real estate registration in Dubai have focused on individual breaches by either the purchaser or the developer. However, they need more clarity in the case of a mutual violation.
According to us, one solution to eliminate this bubble could be to amend Law No. (13) of 2008, specifically by limiting entry in the property register to purchasers who have fulfilled their contractual obligations and setting provisions for final entry for all purchasers. Amending paragraph no (4) of Article no (11) of Law No. (13) of 2008 to indicate that the applicable Law becomes Law No. (7) of 2006, when the percentage of completion of the Real Property project exceeds eighty percent (80%) and not (100%) completed, it would provide more clarity.
This means that the developer’s authority to terminate the sales contract unilaterally would end when the developer receives the completion certificate, allowing for the activation of only one Law for both parties. It would not harm the developer to request the termination of sales contracts with purchasers who did not fulfil their contractual obligations, as Dubai Courts are known for delivering justice in the fastest and shortest time.
Here’s a second solution according to us. The implementation of Law No. 13 of 2008 is no longer terminated when the developer obtains the completion certificate, according to a retraction by the Court of Cassation. This means that the Law remains applicable until disputes between the developer and purchaser are resolved, even if construction is complete and the certificate has been issued. The solution aims to balance the rights and obligations of both parties, allowing the developer to unilaterally terminate the sales contract under Article no. 11 of the same Law while protecting the purchaser’s rights through the nullity effect stated in Article no. 3. This approach also promotes the documentation of real estate transactions, leading to more accurate information recorded in the real estate registry and increased stability of transactions. The competent authorities can better monitor real estate transactions, an essential aspect of the Emirate’s economy, given the significance of the real estate market.