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Dwelling Due Diligence

Dwelling Due Diligence

Lawgical with LYLAW

20 November 2018

Ludmila Yamalova:  Welcome back to Lawgical with LYLAW.  This is our second segment on the subject of real estate in the U.A.E.  This particular segment will focus on rental laws and in particular on the emirate of Dubai and its treatment of rental relationships.

If you are new to Dubai or new to the U.A.E. and looking to rent a property or if you are a landlord and about to rent a property for the first time or an investor interested in investing in Dubai for the first time with the purpose of renting out your properties, this would be an interesting segment for you.

In general Dubai, unlike other emirates, has had a specific and dedicated rental law since 2007 which has been amended a number of times since then.  Most recently, there have been discussions of further amendments, in particular related to separating the treatment of commercial properties and residential properties either by separate laws or at least treatment within the same law but different treatment of the types of real estate.

At this point, however, it’s important to highlight that both residential and commercial properties are subject to the same rental laws.  There is one exception in Dubai and that is one that relates to properties that are based in the DIFC.  The DIFC is the Dubai International Financial Centre which is its own legal jurisdiction with its own laws and courts that govern real estate relationships of any parties that are renting real estate in the DIFC.

Generally speaking, if you are looking to rent a property, one of the first things that is important to do is to conduct due diligence.  Due diligence is a legal term that in simple terms entails research, that is research on the property and the transaction and the parties with whom you are about to engage.  What due diligence means in the case of, for example, renting a property for a tenant may include several elements.

Some of them relevant and some more immediate elements are related to the ownership of the property.  That is, if you’re a tenant looking to rent the property, make sure that one of the first documents that you request, before you certainly sign any documents and certainly before you part with money, is to request to see the title deed of the property.  That is to ensure that the particular property is still owned by the person who represents to be the landlord and who therefore will be the party to the agreement.  (1) One way to review title deeds is just to request either the landlord or the broker to send you a copy.  (2) The other way is to go to the Land Department yourself and verify that the property is still owned by those parties.  (3) The third and even easier option is to download an app for Dubai where you can enter the property details, ask for the title deed to confirm that the property is still owned by the individual who holds himself to be the owner.  That is one element of due diligence.

The other one is one that relates to the owner or owners, and that may be complicated because some properties may be owned by multiple owners in different percentages.  Some properties could also be owned by a corporate entity and depending on who the party is that owns the property, the underlying due diligence will be somewhat different and also the terms outlined in the contract will also vary.

For example, if you have two owners on the title deed, you need to make sure that both owners sign off on the lease agreement.  You need to make sure also that the payments are addressed to both of them unless there is some power of attorney.  That is, once again, it is very important to confirm that it is a valid power of attorney and that the content matches the representations on which you’re relying, and that is for example, that for one owner it is okay to accept rent on behalf of the other owner.

For example, if you have a property that you have rented for 100,000 dirhams and there are two owners that are 50/50, you should not presume that issuing a check to one owner for the 100,000 dirhams is appropriate.  That is because the property is actually legally owned by two people, and both of the owners need to receive the payment unless there is an authority providing one party to represent the other.

If the owner is a corporate entity, the particular due diligence could be even more complex because a corporate entity cannot obviously act on its own.  There has to be an authorized representative, and you need therefore to request all the corporate documents that outline the structure of the particular company and in particular the representative authorities that belong to that entity.

One of the other elements that important to investigate in the process of due diligence is one related to representatives and brokers.  That is to say that, often in Dubai in particular and it’s similar in other emirates, parties hold themselves out to the public as being authorized representatives leads tenants to believe that they could either sign contracts on behalf of the landlord or they can collect money on behalf of the landlord, and often in fact, they even hold themselves as the landlords themselves, and then when the transaction comes closer to executing, they will say, well, in fact, it’s my brother that owns the property or my father that owns the property, so make to establish that particular element very early on.  If they are someone other than the landlord, then request a copy of the power of attorney and make sure (1) power of attorney is current and (2) that the content of the power of attorney is inclusive of the rights and the authority that the representative is relying on.  In particular for the power of attorney, what’s important is the ability of the representative to accept money on behalf of the landlord.  This is very important.  Just because there is a general power of attorney allowing somebody to do everything, that does not translate that they also have the right to accept cash unless it is specifically stated in the power of attorney.

One of the other parts of due diligence should be one related to inspection.  Don’t shy away from actually inspecting the property or visiting the property and documenting very clearly all the issues that you may either want to have fixed or to at least have documented so that you don’t compromise your security deposit at the end of the relationship.  It’s very important to highlight that whatever representations are being made to you on which you plan to rely, that they are actually documented and written.  We hear these cases quite frequently.  A broker or the landlord will say, yes, yes, yes, it’s okay.  Your security deposit will be refunded to you at the end, but even if, for example, you leave the property unpainted at the end, unless you have proof that was the agreement between you, the chances are that the landlord will be able to hold the deposit back because the property was not freshly painted.  Unless there is proof to that effect, then you will risk your deposit.  That is just one example.  Whatever representations are made that are material enough to you, make sure that they’re documented in writing.

One of the other important issues to resolve is whether the property is vacant because often properties are rented with tenants in them already.  Be mindful or cautious about signing lease agreements and paying rent until you are sure that the property is vacant and that is because it’s also possible legally and practically for the previous tenant to either extend the lease past the lease term and also practically they can just stay and move out later.  Therefore, if you’re relying on a specific date to move in, make sure that the property is either already vacant or that there is a very clear confirmation that you feel confident that you can actually move in on that day.

Also, if you are dealing through a broker or somebody who holds themselves out to be a real estate broker, then you want to make sure that the broker is properly licensed and hold a RERA card.  These details would be important to include in the rental agreement and whatever other agreements you are undertaking or will be issuing.  Also, make sure that you discuss the issue of who’s paying for the broker’s fees early on.

One of the other issues that needs to be considered early on in the process and that is one of payment of service charges or liabilities that are attached to the properties.  In many cases, it’s still quite common for landlords to either not pay service charges or pay them late, and so therefore, you as a tenant moving into the property will be compromised in your enjoyment of the property if those service fees are not paid timely.  Therefore, as part of your due diligence before you execute or finalize any agreements and spend money, you need to make sure that the service charges are cleared and do not, most importantly, be ashamed or scared to ask for all of these documents, which also, by the way, copies of the landlord’s passport or the representative’s passport and their emirate ID or whatever other U.A.E. related forms of identification.

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