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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