By: Ludmila Yamalova, Managing Partner, HPL Yamalova & Plewka DMCC
In the last two months, the Dubai Land Department (LD) has begun issuing official notices of cancellation of sales contracts for purchasers’ default, pursuant to Law 13 of 2008, Article 11, as amended by Law 9 of 2009. The timing is likely attributed to the fact that, by now, enough time has passed for developers to revise their payment plans, as per RERA/LD’s instructions, have them approved by RERA, issue new notices of payment and then notices of default for non-payment. Yet, the LD’s process of how to deal with the termination notices from here on is not entirely clear, as there are no published guidelines. But in general, the process seems to work as follows.
The LD serves the purchaser with the Notice of Default stating, generally, the reason for the cancellation, which usually refers to an attached document from the developer. Pursuant to Law 13 and Law 9, the purchaser has 30 days to respond. From here on, the purchaser has two options: to ignore or to respond.
Most purchasers will respond. Some will personally visit the LD. Others call, write and/or email. Yet, others, especially those who are not resident in Dubai, hire attorneys, who, incidentally, are now required to have a power of attorney to represent their clients in LD/RERA.
Once they respond, the LD provides them a “Plea in Notice Letter” to indicate whether they agree or disagree and if so on what terms. In particular, they can either: 1) agree and “rectify the breach,” 2) admit and “terminate the contract,” 3) admit and “settle with the developer,” 4) deny and “terminate” or 5) deny and settle. The LD then schedules a meeting between the developer and the purchaser, with the LD acting as a mediator, to discuss settlement. If, as a result of the meeting, LD issues a final default, the purchaser still has the right to challenge that decision in court.
If the purchaser does not respond, then the LD “will consider the request of the Claimant [Developer] and will issue a final decision about this infraction.” It is unclear in what form this final decision will be memorialized, either through a final LD default notice or automatically with no further notice. But it appears that the LD will grant developers the right to default the purchaser on their own terms. This is important because many developers’ default notices usually refer to the default as being final and not subject to appeal. Under the U.A.E. law, however, as well as pursuant to the LD’s own representations, any such final decisions can be challenged in court.
It will be interesting to see how the U.A.E. courts treat such cases, as they may present a complex issue. For example, it is possible that after the LD officially defaults the purchaser, the developer re-sells the property to someone else. But then the original purchaser re-surfaces and challenges that decision in court. In that case, all three parties may become subject to a lawsuit – the LD, the developer and the new owner.
In terms of the bases on which the LD relies in determining, which contracts warrant termination and which ones do not, it is not entirely clear either. However, it appears that the bases, at some level, correspond to the percentage paid and, at another level, to the construction progress.
Arguably, cases where a project has been completed, but the purchaser has defaulted on the payment are easier to understand. Though even in those cases, the LD should take into account that there may be alternative arrangements besides default that would be mutually beneficial. For example, many investors who bought multiple units with the same developer would love to consolidate their investments, thereby freeing up inventory with clear title for the developers to sell off to third parties. A win-win situation, overall.
Cases, however, where the building is still under construction are a lot more complex. This is especially so in cases where construction has either not started or barely progressed. In such circumstances, it is understandable why purchasers object to paying any more until they see signs of meaningful progress. But so far, it appears that in cases where the purchaser has paid 30%, the LD will not allow developers to collect any further funds until construction is correlated with the payment schedule.
In cases where the purchaser has paid less than 30%, however, the LD seems to approve cancellations. Many believe that this is not fair, especially since it’s not clear whether LD gives any consideration to developer’s own compliance with the contract. Therefore, it is possible that the LD may be rewarding developers for defaulting, not to mention penalizing purchasers for, arguably, no good reason.
In summary, this is just another area of the real estate market that is just beginning to take shape. It will evolve over time and hopefully will do so on terms which are fair to all parties concerned.