Ludmila Yamalova: Welcome and welcome back. This is Ludmila with Lawgical with LYLAW. To recap, in the previous segment we discussed due diligence in purchasing properties from the perspective of the buyer. In this segment, we will discuss due diligence from the perspective of the seller.
In relevant terms, there are about 18 relevant issues that sellers of properties in the U.A.E. should consider prior to entering into a transaction with the buyer.
- Form of contract
Depending on where the property is located, in some places, for example, in Dubai, there are certain standard contracts that are issued by the Land Department which parties are required to sign. In those examples or in those cases, parties need to decide whether they only want to proceed on the basis of those standard contracts. In the case of Dubai, it’s Form F between the buyer and the seller, or if they want to add also private contracts, often referred to as addendums, to the standard contracts.
- Seller is an individual or company
It is important to consider at the outset whether the seller is an individual or a company. If the seller is an individual, it is a much simpler transaction than if the seller is a corporation. If the seller is a corporation, it is important to obtain all the proper corporate documents authorizing the transfer of property at the outset. Obtaining these documents and the timing required to do so should be factored into the transaction early on.
- Price
The seller should consider what price they want to sell the property for and how that price should be paid.
- Buyer
The seller needs to do the due diligence on who the buyer is, whether the buyer is an individual, multiple individuals, or whether the buyer is a company, a corporation. If the buyer is an individual, it is a simple transaction. If the buyers are multiple individuals, then all the documentation must be addressed with that in mind from the outset. If the buyer is a company, once again, it is a much more complex transaction because it is important to establish the authority of who is entering into the transaction on behalf of the corporation, who has the power to sign the documents, and in particular who has the power to pay.
- Form of payment
The transaction could be done as a cash transaction or through a mortgage. If it is through a mortgage, then the seller needs to factor in the timing that is required for the buyer to obtain the mortgage and the documentation that will be required by the bank throughout the transaction. If the payment is made in the form of cash, instead of a mortgage, then on the day of transfer the seller will be expected to receive a manager’s check or if the value of the property is not so high, then the payment can be made by cash. In the event the payment is made by cash, it is very important that the parties obtain proper documentation evidencing that the payment has been made.
- Seller’s mortgage
The seller should at the outset find out from their own bank the conditions for repaying that mortgage early on. The seller should also find out from the bank the process for settling the payment, vis a vis the transfer of property and the documents required in connection with this.
- Timing
The seller should clearly indicate the time by which he or she wishes for the property to be transferred and any grace period applicable, if at all of interest to the seller. In the event timing is of the essence, it is very important that the seller specifically state so in the contract and clearly specifies that timing is of the essence and is therefore a material term of a contract. As such, in the event that timing is not met, this constitutes a valid ground for the seller to terminate the transaction and request a penalty for a breach of contract.
- Whether the property is rented
The seller should clearly consider how they wish to deal with the renters in the event the property is rented. If the property is rented, then they should give 12 months of notice to the renter to vacate the property on the grounds that the seller will be transferring ownership to a new party.
- Representation of the seller
In many cases, sellers wish for someone other than themselves to represent them in the transaction. They may wish for someone to represent them in the transaction prior to the day of transfer, or they may wish for someone to represent them all the way through the transaction and through the day of transfer. Depending on how they wish to be represented, they need to ensure that there is a valid power of attorney that will allow the representatives to do their job properly. That is to say if they are being represented on the basis of a power of attorney that is issued in the U.A.E., that power of attorney has to be very specific as to the specifications of the property and, in fact, in Dubai these days should a seller want to be represented on the basis of a power of attorney, they need to bring an original title deed to the notary on the day of issuing the power of attorney so that the notary can include the specifics of the property in the power of attorney. If the seller wishes to be represented by someone all the way through the transfer of property, then the power of attorney should specifically state that their representative has the right to accept payment on their behalf.
- Role of a broker
In the U.A.E., there is no law that requires the broker to be involved in helping the sellers to sell the property. Often however, parties are being told that the brokers are required. That is not so and therefore should the parties wish for the brokers to be involved it is up to them to discuss the terms of that relationship.
- Role of conveyancers
Similarly, with conveyancers, there is no law that requires for parties to engage the help of conveyancers. Once again, often statements are made suggesting that conveyancers are in integral and obligatory part of selling the property in the U.A.E. That is not so. Conveyancers can be helpful in the event the seller is not in the country, but generally most of the responsibilities that fall on conveyancers can and should be performed by brokers if brokers are involved.
- List of fees that is involved in selling the transaction
It is important that the parties discuss those fees early on and decide on who is going to be covering those fees and when. Some examples of the relevant fees are:
- Brokers’ fees. The parties need to discuss and address in the agreement who is paying the brokers’ fees, what those fees are, and when they should be paid.
- The other fee is the Dubai Land Department transfer fee. That in Dubai is 4%. Other emirates have similar transfer fees. The parties need to decide early on and expressly state in the agreement who will be paying those fees and whether they will be split. In Dubai, for example, the law mandates that the 4% fees are to be split between the seller and the buyer. In practice, however, buyers are expected to pay the full 4%. Recently though, the parties have been agreeing more often to split the fee 50/50.
- The other fees are related to NOCs. NOCs refers to No Objection Certificates which has become a term of art in the U.A.E., but for the seller to transfer the property the seller is required to obtain a number of NOCs from different parties such as the developer, the utility providers, and any other maintenance or management companies.
The parties need to address the payment of all those fees in the agreement and any applicable refund. For example, service fees are often paid in advance and therefore if the property transfers hands before the remainder of the service fees are paid, then it may be that the seller is required to refund some of the service fees to the buyer. The parties need to address this issue early on and work out a mechanism by which the refund will take place.
- One of the other fees refers to property inspection. Recently, property inspection has become more common and that is property inspection by hiring former property surveyors. There is a cost to it, and it is for the parties to decide who wishes to cover that cost.
- One other fee which is a new fee for the parties to consider, but an important one, relates to VAT. The VAT applies to commercial properties. Therefore, if a property is an office, then the parties need to address the payment of the VAT very early on. Recently the FTA has introduced an amendment which allows for the seller to be exempt from paying the VAT for commercial property if it is rented upon the transfer of ownership. This issue is very important to address and document specifically at the outset.
- Buyer’s conditions for going ahead with the purchase.
Sometimes buyers wish to make certain conditions be contingencies for concluding the transaction. In most cases it refers to, for example, mortgages. Another example is the state of the property. If a buyer makes obtaining a mortgage a specific condition to proceeding with a transaction, the seller needs to clearly address that and understand the repercussions of such conditions. Similarly, if the buyer makes addressing certain property issues a condition to proceeding with a transaction, the seller needs to clearly understand what those conditions are, how to remedy them, by when, and what happens in the event those issues are not addressed timely.
- Deposit
Requiring a deposit from the buyer to sell the property is not mandated by law, but it has become a common practice amongst the parties. In most cases, the sellers’ request a deposit of 10% of the value of the property. Once again, this is not mandatory, but contractual. In the event the seller wishes for a deposit, it is very important that the parties clearly discuss and address in the contract the amount of the deposit, the form of the deposit, and the conditions attached to that deposit.
- Termination and default
Parties need to address very clearly upon which reasons they will be allowed to terminate the agreement or withdraw from the agreement without penalties and which grounds constitute a default and therefore allowing one or the other party to request compensation. Usually compensation is paid by way of a deposit. It does not have to be that way however, so therefore if the parties want specific compensation, they need to clearly address this early on.
- Handover
The parties need to agree on the handover date and the handover specifics. By handover, I mean the handover of keys for the property, access cards, any other statements of account, or original documents related to the ownership of the property or maintenance of the property or the service fees of the property. Whatever the handover documents or items the parties expect, those items should be discussed early on and preferably included in the agreement.
- Transfer date
The parties need to understand clearly when they wish for the transfer date to take place, include that in the agreement, and clearly specific what is expected on that transfer date. On other words, there will be payment of the price, there will be payment to the brokers, there will be payment to the Land Department, there may be a refund of service fees, and there could be a handover of various documents and items. Therefore, it would be very helpful for the parties to include in the agreement what is expected from both of them on the day of transfer.
- Dispute resolution
In the event the parties have found themselves in disagreement, they need to address where the dispute where may be resolved and any other fees that may occur as part of resolving the dispute, but more importantly, parties need to understand the costs of proceeding with a dispute and do a balancing analysis of whether it is worth it for them to file a case or whether it is better just to walk away and look for, in the case of a seller, a new buyer.
This concludes our segment on the due diligence of selling property in the U.A.E. Once again there are 18 factors for the sellers to consider. Thank you for listening.
Tune in next week. We will be talking about the application of the VAT to real estate transactions in the U.A.E.
