Dubai Acts to Rein In Defaulting Developers

DUBAI - Property developers now cannot take the liberty of cancelling building contracts and fleeing the country with the investors’ money, as the Dubai Land Department has put in place a raft of laws to safeguard the interests of buyers of off-plan developments.

By Martin Croucher And Aneela Batool

Published: Sun 8 Feb 2009, 1:51 AM

Last updated: Thu 2 Apr 2015, 9:36 AM

The move came in the wake of a sudden rise in cases of fraud in which developers sold units in off-plan developments and fled the country without implementing projects.

Mohammed Sultan Thani, Deputy Director-General of the Land Department, said: “We are dealing with a lot of fraud cases. The police have also been involved. However, many times developers simply can’t get the financing to build the project. I suppose it’s just bad luck in those cases.”

Previously, developers have not had to register off-plan developments with the Land Department. However, Law 13 introduced in August last year has meant that registration has become a legal necessity.

“Those who don’t register their properties are violating a law and can be prosecuted,” said Thani.

Law 13 states that all developments must have been registered by the deadline of October 30, 2008, otherwise they can face legal action.

Thani said that so far 90 per cent of developers have registered and a Land Department team are calling around developers and asking them to register all of their sale and purchase agreements. However, none have been prosecuted so far.

“We don’t want to prosecute people straight away. In many cases, they don’t know they have to register,” he said. “However, if they are not willing to register, we can prosecute.”

Difficulty in gaining bank financing means that developers have slowed construction on several registered projects and demanded more money upfront from investors.

Law 13 also contains several other provisions for linking the payment for a property to the progress of construction.

Essa Almansoori, head of Trust Account at the Real Estate Regulatory Agency (Rera), said after receiving 30 per cent of the total investment, developers must link the remaining 70 per cent to the progress of construction.

Almansoori would not clarify if the schedule would follow the guidelines laid down by the authorities or whether it would emerge as a result of negotiations between the investor and the developer.

He added: “For any new development, the developer must own the land 100 per cent and have title deeds. In addition, he must have completed 20 per cent of the construction.”

Investor’s Fears Over Violation of Rules

It looked like the perfect investment. Located in the soon-to-be-thriving Business Bay district one of the properties was going to be snapped up quickly by investors.

The off-plan development was made more attractive by the fact that space was being sold at Dh800 per square foot. A double or even triple return on the investment appeared to be a “sure thing”.

That was two years ago. Today, buyers have yet to see the tower rise above the basement level despite having in some cases paid up to 55 per cent of the total investment.

One investor, who wished only to be known as K.A. as legal action is pending, said that he paid his first instalment in April 2007.

However, photographs of the site reveal that the company is still working on the excavation of the basement. An engineer working for the developer, Arabia Group Investments, confirmed that to be the case.

However, director of the Dubai office Tariq Hussein said the project is currently 25 to 30 per cent complete. “This stage of the construction takes the most time,” he said. “Once the groundwork is done, it will be much quicker to put up the building.”

The completion date of the project is 2010, but K.A. is doubtful that the deadline will be met. What is more, he is concerned that the developer could flee the country with his money, after apparently discovering that none of it has been paid into the escrow account. So far, he has paid Dh900,015 – or 55 per cent of the total investment.

“He can take the money and flee any time,” he said. “I have spent years earning this money and now I could lose everything.”

However, Hussein denied that there had been any improprieties and said that all of the money had been paid into the account.

Escrow accounts are designed to hold the buyers’ money until the property is complete. They were introduced in May 2007 by the Real Estate Regulatory Authority (Rera) and the rules became binding on deals made before and after that date.

K.A. claims that Hussein demanded that cheques be written to the company’s account – giving reassurances that the money would be paid into the secure account at a later date.

However, an email exchange between K.A. and the respective escrow account manager at Emirates Islamic Bank showed that this appears to have not been carried through.

In the exchange, dated December 16, 2008, the bank agent writes: “I checked the escrow account of Moon Tower 1, but I could not find any payment relating to your name or unit number.”

However, this newspaper has also seen copies of receipts allegedly signed by Hussein which show a payment of Dh249,378 on September 10, 2008 from K.A..

Essa Almansoori, head of trust account at Rera, said that it was necessary that developers need to adjust payment arrangements within six months of the law coming in on escrow accounts.

Ludmila Yamalove, partner at Dubai law firm MAC Davidson, said: “The law supersedes all contractual agreements. Accepting money outside of an escrow account is illegal and carries monetary and criminal penalties.

“That said, I know that a lot of developers haven’t complied with this law, but I don’t know any who have been jailed.”

When contacted, Tariq Hussein said that there had not been any irregularities. “I have paid all of the money into the escrow account,” he said.

Boom Time for
Law Firms as
Disputes Mount

Once upon a time, property investors rarely dealt with lawyers except when drawing up contracts.

However, in the recent months, there has been an explosion of demand as thousands of foreign speculators try to sell their assets and make a quick getaway.

Dubai’s property court, which opened in August, currently has over 750 disputes and more parties are waiting to register their complaints.

“Everyday, we get phone calls from a whole slew of new investors. We just can’t take everybody’s cases on,” said Ludmila Yamalova, partner at law firm MAC Davidson and Associates.

“It has only become like this since September, when the market turned on its head. To my knowledge, every single off-plan development in Dubai has at least one alarmed investor.”

Cases can range from speculative investors looking for a quick sale, or developers fleeing the country with investors’ money. But many of the reasons lie with economic conditions.

“I handle the cases of many Russian investors, and sometimes their money has just dried up. I don’t know how exactly, perhaps they lost it through stock. But suddenly they are left with nothing and need to sell all their assets to raise some money,” said Yamalova.

However, that has been made more difficult after the reinterpretation of Article 11, Law 13, by the Land Department.

Previously, the article meant that investors would only lose 30 per cent of the amount they had already paid if they cancelled the agreement.

“At the time, investors were willing to make the sacrifice if they needed to get out badly enough,” said Yamalova. “However, the Land Department issued a reinterpretation after being disturbed by the numbers of investors who were cancelling their agreements.”

The reinterpretation meant that investors would now stand to lose 30 per cent of the total amount of the investment if they back out.

This would mean that someone who had paid only 10 per cent of the total value would lose all of his money and be liable for a further 20 per cent of the property price.

“This means that many who want to sell and leave here often face very big obstacles, and could lose everything,” said Yamalova.,

More news from