Cityscape Global 2010, which took place in Dubai in early October, provided an interesting forum to compare the state of recovery of dented real estate markets around the globe two years on from the start of the financial crisis.

As a real estate lawyer based in Dubai, I have found it fascinating to see how the Dubai Government has dealt with its first 'boom and bust' cycle that has occurred over the last eight years. In more mature markets such as the USA and many parts of Europe, it is fairly much taken for granted that the necessary laws and regulations are in place to provide for both scenarios. However, when HH Sheikh Mohammed Bin Rashid Al Maktoum announced in May 2002 that real estate in designated areas of Dubai would become available for ownership by foreigners on a freehold basis, there were virtually no specialized laws and regulations in place to accommodate this burgeoning real estate market. The task has therefore been to systematically introduce the necessary legislation, first to cater for the off-plan sales model largely adopted by Dubai's developers and, most recently, to address the tensions and conflicts that have ensued between developers, investors and financiers as the flow of money ran dry in late 2008.

The legislative process started with Law No (7) of 2006 Concerning Real Property Registration in the Emirate of Dubai. This Law provided that foreigners would be permitted 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". The list included the majority of the developments then under the course of construction in 'new Dubai', including Nakheel's Jumeirah Palm Island and International City projects, Dubai Holding's Jumeirah Beach Residence and Business Bay projects and Emaar's Emirates Living (Emirates Hills, The Lakes, The Springs, The Meadows) and Arabian Ranches projects.

In 2007 we saw the creation of Dubai's Real Estate Regulatory Authority ("RERA"), a governmental authority attached to the Dubai Land Department. Over the last three years, RERA has played a crucial role in developing and supervising Dubai's real estate regulatory framework. Its first task was 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. More particularly, 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.

Following the enactment of the Escrow Law in 2007, we saw the enactment in 2008 of Law No (13) of 2008 Regulating the Interim Real Estate Register in the Emirate of Dubai. 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. Alongside Law No 13, we saw the enactment of Law No (14) of 2008 Concerning Mortgages in the Emirate of Dubai. Law No 14 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. Originally intended to provide banks and other financial institutions with the confidence they needed to lend against property in Dubai, Law No 14 turned out to be a timely piece of legislation to deal with the new phenomenon of mortgage defaults brought about by the financial crisis and subsequent property market decline.

The Strata Law, Law No (27) of 2007 on Ownership of Jointly Owned Properties in the Emirate of Dubai, was another major piece of legislation enacted during the boom years. The implementing regulations to this Law were enacted as Directions in April of this year and developers are now working toward the implementation of compliant strata schemes for their existing projects. Amongst other things, the Strata 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.

The foregoing legislative initiatives each aim to bring regulation, protection and fairness between parties in a positive property market. But what measures has the Dubai Government introduced to address the tensions and conflicts that have ensued between developers, investors and financiers since the flow of money ran dry in late 2008?

There is no doubt that Dubai's off-plan development market has been severely impaired by a classic catch-22 scenario during the last two years: banks have not been able to lend to purchasers, purchasers have not been able to pay developers, developers have not been able to fund their construction activities and have in many cases ceased or slowed down construction, purchasers have sought to use developers' failure to construct as a basis to claim breach of contract and grounds for non-payment, and so on. In this way many projects quickly reached deadlock.

With regards to measures taken to address the catch-22 scenario referred to above, firstly we have seen the enactment of Law No (9) of 2009 amending Law No (13) of 2008. More specifically, Article 11 of Law No 13 in its original form established a process for a developer to terminate an off-plan sales contract in the event that a purchaser defaulted in his 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% of such money. Article 11 was drafted in an environment of rapidly escalating off-plan property prices when measures were required to discourage developers from terminating sale contracts in order to re-sell units at a higher price elsewhere. The change of circumstances brought about by the credit crunch in late 2008 brought an end to this concern. Instead, it became imperative to ensure that in cases where developers sought termination of a sale contract due to non-payment by the purchaser, the measure of compensation that a developer could expect would be directly related to his own progress toward completion of the project and fulfillment of the sale contract. Thus Law No 9 introduced a regime whereby the compensation that a developer could claim in the event of his termination of a sale contract was linked to the stage of construction reached on site. For example, if a developer has not commenced construction for reasons outside his control the developer is entitled, pursuant to Law No 9, to forfeit not more than 30% of the amounts paid by the purchaser. However, if a developer has completed at least 80% of the project, he is permitted to retain all amounts paid by the purchaser and claim the balance of the purchase price from the purchaser as compensation. These provisions were confirmed by Executive Council Resolution No (6) of 2010 that was passed earlier this year, but this Resolution went further by also establishing grounds upon which a purchaser could seek termination of a sale contract due to the developer's breach. 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.

A final welcome legislative initiative this year was Decree No (4) of 2010 Regulating the Ownership of Land Granted for Industrial and Commercial Purposes in the Emirate of Dubai. This Decree introduced a mechanism to enable holders of industrial or commercial granted lands in Dubai to convert their granted title to freehold title upon payment of a fee assessed against the market value of the land in a deemed 'unimproved' condition. The benefits of having freehold title rather than granted title include the ability to mortgage the property to raise capital and to sell the property on the open market (subject to applicable nationality restrictions).

With regards to Dubai's ability to capably deal with the rising volume and specific nature of real estate disputes, we have seen a number of specialized dispute resolution forums introduced in the last two years, namely: the new Property Court; the so-called 'Bounced Cheque Committee'; and the two Special Judicial Committees established to resolve disputes involving Dubai World and the property finance companies Amlak Finance and Tamweel, respectively. These new forums supplement the already existing Rent Committee and Dubai International Arbitration Centre as popular forums for dispute resolution.

Will Dubai's real estate market see a recovery? Yes, of course, but it is unlikely that we will see property prices and rental values returning to their dizzying heights of mid-2008. History has shown that real estate 'boom and bust' cycles of varying extents are inevitable; the issue is how we deal with their causes and effects. As the foregoing attests, Dubai's legislative machine has shown its ability to address market needs, in good times as well as bad. For now, Dubai has the opportunity to attract new businesses and residents through its offer of high quality, affordable accommodation and first class city infrastructure...and there begins another cycle.

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