When Dubai's property market was booming, it was not
uncommon for developers to collect post dated cheques
("PDCs") from buyers as a method to secure future
installments towards off-plan purchases. Similarly, it is common
practice in the UAE for landlords and banks to collect PDCs for
future lease and loan payments respectively. This practice is
considered by many as a method of securing payment, because of the
criminal liabilities (i.e. threat of imprisonment) attached to the
failure to honour a cheque in the UAE. Recent high profile cases,
as well as the introduction of a new law in Dubai, have highlighted
the issues with relying on PDCs, and the question is whether we
have seen the end of their use in the market or whether they will
remain an established tool for credit and performance.
For development transactions in Dubai, the introduction of Decree
56 of 2009 ("Decree 56") should serve to curb reliance on
PDCs. The Decree, which came into force on 1 November 2009,
established a special judicial committee ("the
Committee") to resolve all complaints involving bounced
cheques issued to developers in connection with real estate
transactions in Dubai, with an obligation on the police, and any
other judicial investigation authority, to refer all complaints
relating to such cheques to the Committee. The aim is undoubtedly
to reduce the increasing number of criminal cases before the Dubai
Courts involving bounced cheques issued in connection with property
transactions amidst the downturn in Dubai. In particular, reasons
for the non-honouring of a cheque will be considered and in some
cases cheques may be ordered to be cancelled or replaced.
It introduces a new step in the process of action being taken against a party who has not honoured a cheque and, as such, makes the practice of relying on PDCs for these types of transactions less favourable.
We understand that the Committee has been hearing cases since January 2010. Given the volume of cases referred to the Committee, a developer could be waiting some time before being able to pursue a party for failure to honour a cheque.
The practice of using PDCs as security for payments is not unique to Dubai and the UAE, and PDCs are frequently used throughout the GCC. Recent changes to law in Qatar (which reversed a 2006 law to remove legal protection of PDCs by May 2010) show that PDCs are still in favour and likely to continue to be used for the foreseeable future. Saudi Arabia has recently introduced a law to increase penalties on those who issue cheques and fail to honour them, in an attempt to uphold their use, but reduce the increasing number of defaults.
Going forward: suggestions for securing future payments
The method of using PDCs to secure future payments has never offered certainty of protection to the receiver of the cheque. Even though it is a criminal offence pursuant to Federal UAE law (and laws of many of its surrounding countries) to knowingly issue a cheque with insufficient funds to clear that cheque, if a cheque is not honoured, the receiver must still pursue the issuer to enforce payment. Whilst the issuer can be investigated or charged, the receiver could remain without payment of funds.
This demonstrates the need for due diligence to be undertaken by all parties seeking to rely on future payments in a transaction. The introduction of Decree 56 in Dubai is likely to assist in making this a priority for developers entering into real estate transactions with buyers.
In many other jurisdictions, it is common practice for developers to carry out credit checks in order to limit their exposure to buyers who are not credit-worthy. For individuals in those jurisdictions, a variety of companies can perform credit checks and issue a credit rating based on past records and data. For companies, company searches can be carried out; research into an investor's trading history and filing of accounts can be undertaken. The introduction of Emcredit in Dubai has gone some way to making credit information available to lenders and members.
For those who are not eligible to access this information, there are certain practical steps that can be taken when assessing the ability of a buyer, such as:
- request a bank reference;
- view originals and take copies of passports and visa pages (for individuals and company representatives);
- question how the investor proposes to finance the purchase and issue a due diligence questionnaire to find out more details about the investor's income and expenses;
- seek evidence of an offer in principle from the lender if the investor intends to fund the purchase through bank financing;
- check whether any international background checks can be made;
- request guarantees, either personal, from a bank or the parent company;
- ask investors to provide evidence of the ultimate beneficial owners, if a corporate entity is investing;
- check with the Chamber of Commerce or relevant Free Zone Authority if the company is solvent; and
- request copies of company accounts for corporate purchasers.
The above list is by no means a definitive one and parties should seek advice if they wish to incorporate or consider options to best protect or secure the receipt of future payments pursuant to an agreement.
Conclusions
We are unlikely to see an end to the practice of collecting PDCs in the near future, particularly by banks, and landlords of short terms leases. It is important that both issuers and recipients of such cheques are clear on the issues surrounding them.
The creation of the Committee under Decree 56 will go some way towards reducing the large volume of criminal cases before the Dubai Courts involving bounced cheques issued in connection with property transactions. The effect on developers in particular, will be to ensure that they carry out a level of due diligence at the outset and consider alternative means of securing payments from investors. As such, it is likely we will see the Dubai market moving towards a more sophisticated environment for real estate development transactions. Other countries in the region may adopt a similar practice, or will continue to look generally at ways of reducing the number of bounced cheques.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
