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Dubai Real Estate

Dubai Real Estate

Property Magazine

28 June 2011

By: Ludmila Yamalova, Managing Partner, HPL Yamalova & Plewka DMCC

Dubai Investor Protection Law

At the end of 2010, Dubai Real Estate Regulatory Authority (“RERA”) announced that it would introduce the so-called, Real Estate Investor Protection Law (“Law”) and that it would do so “very soon.”  As of the end of March 2011, the Law has not yet been published.  Nor have official drafts of the Law been publicly circulated.  No further updates as to the scope or the timeline of the Law have been issued in the last four months.  Yet, the investor community is eager for the Law to take effect, though very little is known about the protection, as its title suggests, it promises to the investors.

Because all that has been announced about the Law has been in the way of comments from RERA and other government officials in the media, it is difficult to accurately ascertain the exact nature and scope of the Law.  Some even question whether the Law will ever be introduced.  Also, it is unclear as to how much of what the investors wish for this Law to address will be incorporated in its final version.  As such, whatever comments are made about the Law today are speculative in nature.  Given that, perhaps then the best way to speculate about it is to analyze statements and comments made by public officials, industry commentators and investor community.

The RERA officials have been quoted in the media in the context of describing the Law to include the following provisions.  One provision relates to penalizing developers for delaying delivery of their projects, in the form of fines in increments of AED 500,000, potentially amounting to millions of Dirhams.  Another provision may relate to penalizing developers for “committing fraud or falsifying statements,” such as “falsifying [construction] progress report.”  Impending new regulations for property handover and corresponding standards for quality control have also been mentioned.  To that end, there has also been discussion of introducing a grading system to assess and grade developers.  Introduction of regulations for property valuation professionals have also been announced.  The revamping and strengthening of the escrow services laws and regulations is too being contemplated.

RERA has also alluded to possibly introducing a standard template of the sales and purchase agreement, which all developers will be required to follow.  Among other things, this new template is supposed to include an equal penalty on both developers and investors for breaching their obligations.  This, for example, would require developers to pay a penalty for delivering properties late.  Another provision in this template will allegedly require developers to pay their 1% of the property registration fee, instead of passing it onto the purchaser.

Whatever the final form of the Law may be, the utility of at least some of the alleged provisions in the Law, however, is questionable.  One, the new template of the sales and purchase agreement is supposed to apply only to new contracts, and not the existing ones.  Yet, the majority of disputes, in which investors feel they need protection, relate to the existing contracts.  Two, some of the provisions are already adequately addressed in other laws.  The property registration fee, codified in the Dubai Law 21 of 2006, is one example.  Similarly, the planned penalties to be imposed on developers, either for delivering properties late or for falsifying project status reports, are covered by provisions under the U.A.E. federal law, civil and criminal alike, in existence since 1987.  Those laws provide sufficient remedy and guidance as to the adjudication of parties’ disputes, including real estate ones.  Therefore, what is required today is the enforcement of many of the existing laws, instead of introduction of news ones.  This, of course, is subject to the Dubai Courts applying federal laws, as opposed to only applying local Dubai laws.

Increasing Transparency in Dubai’s Real Estate Market

Undoubtedly realizing the need to regulate the unprecedented growth of its real estate market, starting in 2007, Dubai began to introduce a series of legislation regulating the market.  The intended effect of these regulations was, among other things, to make the market more transparent.  Transparency was required to understand the true state of the market to better regulate it, in order to safeguard investors’ rights.  Investors and the regulators alike needed to know, for example, what off-plan projects were being launched, what sales were taking place, who was selling them and how the money was being spent.  As such, laws requiring that all projects are registered with the Dubai’s Real Estate Regulatory Authority (RERA), that all developers are approved by RERA, that all sales contracts are registered with RERA and that all money was to be deposited into specialized escrow accounts were introduced.  Similarly, regulations requiring payment plans to be linked to constructions milestones and approved by RERA also followed shortly.

The transparency efforts continued on after the downfall of Dubai’s real estate market, precipitated by the global financial downturn.  Management of many of the biggest developers, in particular government owned, was swiftly restructured, with subsequent restructuring measures ongoing today.   A specialized court to deal with real estate disputes, called the Property Court, was introduced.  Although, in practice, the Property Court is part of the same Dubai Courts, the intention was to have a dedicated set of judges to deal exclusively with all property cases.  Similarly, while the effectiveness of the Court’s decisions is subject to debate, there have been reports of cases in favour of investors.

A series of regulations by RERA are also noteworthy.  One example is RERA’s system aiming to track construction progress of all real estate projects in Dubai.  While it is unclear how comprehensive or updated this system is, it does serve as a useful resource, especially for non-resident investors who have no access to monitor their investments directly.  Another example is RERA’s recent announcement that it has completed surveying the majority of the projects in Dubai and, on that basis, has cancelled in the order of 250 projects, which it has determined to be unviable.  Although, the list of these cancelled projects is yet to be published, if at all, the move is evidence of a more cohesive and strategic approach to Dubai’s real estate market.  Yet another example is RERA’s new Tayseer system, which aims to pair up RERA approved developers and banks to fund completion of those projects, subject to tight guidelines and management by RERA.  Also important is RERA’s recent regulation requiring all real estate agents and real estate brokerage companies to be licensed by and registered with RERA.  This was a development necessary to address an increasing number of cases of real estate agents defrauding investors and renters with a series of scams.

In general, RERA and the Land Department have become more approachable and welcoming of investors, taking note of investors’ claims, meeting with them directly and even trying to act as mediators.  RERA has also been actively involved with the formation of owners’ associations and acting as a mediator between developers and associations.  Although that process is still ongoing and much delayed, their activism and openness are encouraging.

Discussing how the industry can collaborate to introduce benchmarks and data-sharing to improve standards across the market

To improve standards across the market, which should include new benchmarks and data-sharing, however, RERA alone is not enough.  It is essential that the industry as a whole must collaborate.  And there are many ways to do so.

One much needed change is an introduction of a credit rating system to track investors’ creditworthiness, either through central bank regulations or an independent private or public system.  This will also aid in establishing an effective debt collection system that holds borrowers accountable for their debts, without necessarily expelling them out of the country or by jailing them.

Such system will inevitably address a mounting and pervasive problem of what is a rather archaic system of criminalizing issuers of dishonoured cheques.  Due to the absence of a credit rating system, most debts in the U.A.E. are secured by cheques.  If a borrower’s financial ability changes whereby he can no longer honor those payments, the cheque is cashed as security and, when bounces for insufficient funds, it becomes a criminal offense.  The penalty is jail sentence, until the cheque is paid off.  There are numerous problems related to this issue.  But the main point is that jailing someone who is otherwise a productive member of society with earning powers, albeit reduced, does not benefit anyone.  It is far more preferable to allow them to restructure their debt obligations to make them affordable, thereby allowing them to settle their payments at least partially.

This problem exists especially in the cases of mortgages.  All mortgages with U.A.E. banks are secured by such cheques.  And since the downturn, many borrowers have lost the ability to pay their obligations as per the original terms.  Banks today, however, are still very much reluctant to restructure mortgages to make them affordable.  Instead, they continue to threaten borrowers with criminal sanctions for bouncing cheques.

Similarly, the foreclosure laws need to be clarified and enforced, so that banks are incentivized to start foreclosing on properties.  The mechanism for doing so is already in place vis-à-vis Dubai’s current foreclosure laws.  But it needs to be put into practice, insofar as banks have yet to start foreclosing.  This will move the market along, instead of remaining in the current stalemate state of affairs.

Along the same lines, there is an urgent need to modernize the U.A.E.’s bankruptcy laws, allowing borrowers another chance to restructure their obligations, without being subject to criminal sanctions.  This will also encourage innovation and entrepreneurship, which are inextricably defined by risk.  Those with good faith intentions should be allowed to fail, although not without repercussions, so that they can continue to test their creativity and initiative.

Another important development is to clarify and strengthen the right of freehold ownership.  In particular, freehold ownership must mean that the owner of the property has an absolute and unconditional right to dispose of the property as he pleases.  Today, however, RERA requires a non-objection certificate (NOC) from the developer for the owner to sell his property to third party.  This defies the very definition of freehold ownership, however.  There must not be any restrictions on disposing of the property, let alone a requirement for the legitimate owner of the property to seek permission from a developer, a party who should have no right to the property as it has already sold it as freehold.

Finally, the re-introduction of the three-year property visa is a much awaited development.  This time, the decision comes at the federal level and would apply to all Emirates.  Once implemented, this will be a crucial step in boosting the real estate market in all of the U.A.E., in particular, and the economy of the country, in general.  It will once again encourage financially capable investors to invest in the U.A.E. and to do so at multiple levels.

Another important way for other institutions to boost the market is, for example, for Courts to become more transparent and more receptive to adapting to change.  This ranges from some very simple tactics, such as making judgments publicly available to interpreting laws in the context of today’s reality.  For example, the existing bankruptcy laws could be used in their present form, if interpreted in the context of today’s reality.  Also, the laws on bounced cheques should be read in the new and, in fact, more letter-of-the-law manner, where it is the intent to defraud rather than mere writing of the cheque that is criminal.  Another much needed change is for Courts to do away with the requirement that every real estate contract can only be adjudicated in a separate case, each one of which is accompanied by rather high court fees, thereby making it prohibitively expensive for investors to seek recourse through Courts.

Strategies for investors and developers to mitigate risk in un-transparent markets

In the meantime, there are sure ways for investors to mitigate risks in the existing market, with its current shortcomings.  The most important one is due diligence.  Investors should conduct thorough research and seek professional advice before making any significant investments.  It is through such due diligence that they will gain clarity on the costs and risks associated with their investments.  Many investors today are frustrated more about what they see as hidden and ever growing fees and costs on their investments.  While this may be true, there are ways to estimate them, with proper advice and due diligence.  Similarly, investors must now take the time to read, understand and negotiate terms of their agreements instead of blindly signing them, which has been the case.

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