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Q&A – Real Estate

Q&A – Real Estate

Executive Magazine

12 August 2011

Q: What is the current situation regarding trying to recover monies from ‘lost’ real estate projects, is it getting easier negotiating as developers are now used to it , more clarity on project cancellations, and the same for the legal process, more verdicts more clarity or not yet?

A: The situation regarding investors’ trying to recover monies has changed some and not.  What has changed is that many investors by now have given up trying.  Of those, some have simply resigned to wait and see.  Others have simply walked away.  Among those who are still trying, the sentiment is grim.  Many of the court cases have either been in favour of the developers or are still ongoing, with, what appears, very little hope.  The developers, in turn, while may seem to be softening up, in reality are just buying time and refusing to compromise.  There, not much has changed.   Most developers continue to maintain that the projects are on plan and are going ahead.  They blame the global economic setback or master developers’ delays in infrastructure as force majeure.  Other developers are starting to handover projects, albeit two to three years late.  But utterly refuse to offer any meaningful settlements or discounts to account for the delay.  In the meantime, all developers persistently continue to request payments, with the usual threats of penalties for late payments.  This is further compounded by their requests for additional fees for things such as registration, service charges, various deposits and so on.

Q: Do you know how many verdicts have materialized by now in the Dubai Property Court?

A: One of the factors that further frustrates the situation for the investor community is that there is no repository of information, public or private, of court judgments or even legal updates.  The courts do not publish their decisions.  The only way to find out about them is from the party to the case, most of whom, in turn, are very reluctant to share.  Also, many of the cases where victories are heard about are being appealed and lost and may now be on the way to the final appeal stage.  Therefore, it is virtually impossible to determine how many cases have materialized and the nature of those judgments.  Same thing applies to legislative updates.  There is no centralized database of new laws and regulations.

Q: Do you think the future paints a rosier picture regarding getting ones money back and if so why, if not why? Am thinking of that new Real Estate Investor Protection Law as well, can it help with money recovery or is it likely to not be retroactive again?

A: The chances for investors to receive money back are virtually non-existent.   And the situation will only get worse, as there is less money left to refund.  Since the onset of the crisis, developers have been spending whatever they had left in their coffers.  Some have used it on continuing to build their real estate projects, albeit belatedly.  Others have simply been trying to stay alive, by spending investors’ money on keeping the remaining employees on the payroll, paying legal fees to thwart investors’ claims, and engaging public relations firms in an effort to re-build their image.  And even Dubai’s announcement of introducing the so-called Investor Protection Law may not be of much respite.  While the nature of that law is difficult to speculate, as it has not yet been published, most likely, it will have a prospective effect and not retrospective, thereby affecting only investors’ rights for future projects.  Therefore, as far as the existing claims are concerned, the more realistic approach is to hope that eventually developers will come around and start offering meaningful discounts, consolidation options and financing alternatives to make investments at least somewhat palatable under the circumstances.

Q: Your personal recommendation on recovering monies in real estate, especially those, which involve large sums.  It is obviously a long, costly road to try and go to court, but worth it to achieve justice, if negotiations fail.

A: The most realistic scenario to recover money in Dubai real estate is in form of a settlement.  Settlement encompasses compromise.  Therefore, investors must have realistic expectations and be ready to accept a compromised solution.  They should first focus on trying to negotiate a settlement with the objective of minimizing their exposure.  This may include either a discount on the purchase price, financing options or consolidation solutions as an alternative to receiving money.  While generally speaking the chances of success in court depends on the merits of each case, the legal precedents thus far have not been encouraging.  And even in the cases of favourable outcome for investors, in many cases developers simply do not have money to refund.  This means that to enforce a successful verdict against a defaulting developer will often require filing yet another case.  And ultimately, if the developer does not have money, there is little sense to spend money on court proceedings just for the satisfaction of having a favourable judgment.  It is more likely that developers have assets that are of some value.  And it is the disposition of those assets that investors should try to negotiate with developers about.  In cases where the amount of money is substantial, however, there may not be any other chance but to file a formal legal action.  In some cases doing so has more prospects.  This involves cases where investors can opt out for arbitration instead of a court case in local courts.  And some cases may be subject to the jurisdiction of alternative courts, such as the Dubai International Financial Centre Court.  Arguing a case in either arbitration or in the DIFC Courts, for now, seems yield more positive outcome.  Also, in some cases, it is possible to file legal actions against developers in foreign jurisdictions.  This could be possible, for example, in cases where the developer either conducts business or has substantial assets in another jurisdiction, whose courts may be friendlier to investors’ interests.  But all formal legal actions inevitably come at great cost.  Therefore, the cost-benefit analysis must justify proceeding with that course of action.  And in some cases, filing a case may serve as leverage to get the developer to the negotiating table, thereby mitigating the costs of full legal proceedings.

Q: Abu Dhabi still hasn’t developed specific real estate laws, as far as I am aware, do you think recovery under the federal justice system there is more likely?  Am thinking Hydra as an example as many seem to win.

A: For now, the chances of recovery under the federal justice system have not been any more positive for the investors than those of the individual emirates.  That is not to say that the federal system should not be tried and tested.  In fact, having an alternative avenue for litigating disputes may encourage more expeditious and helpful verdicts from lower courts, as few judges like to have their verdicts overturned.  Also, the U.A.E. federal law contains significant legal mechanisms for protecting investors’ interests, even in its present form.  But the individual emirates’ courts often do not decide cases on the bases of the federal law, but rather on the basis of their own local laws.  The higher federal court, however, would presumably rely mainly on the federal law, as it should be the supreme law of the land and should supersede the local emirate’s laws.   Therefore, from the standpoint of a legal professional, it is more important that the courts start enforcing the federal law than legislators start introducing new laws.

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