Abu Dhabi Realty: New regulations

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A new law regulating real estate activities in Abu Dhabi takes effect today, heralding a new era in the capital’s property industry. Pundits say the implementation of Property Law No. 3 for 2015, which was published in the Official Gazette on June 30, will strengthen Abu Dhabi’s property sector by providing clear and more transparent regulations and reinforce the rights of homebuyers and real estate investors.

The new law is a serious attempt to better manage many areas of the real estate sector in Abu Dhabi that to date have remained largely unregulated, says James Farn, Partner at Hadef and Partners. “It provides for, among other things, the licensing of property developers, real estate brokers, property valuers and surveyors through the Municipal Affairs Department of the Abu Dhabi Municipality [DMA],” says Farn.

A key provision in the new law allows either the buyer or seller to terminate a contract and procure a refund, although only in certain circumstances and only in relation to off-plan sales, says Sallie Bowtell, Partner at Trowers and Hamlins.

“In particular, Article 17 of the law entitles either the investor or the developer to terminate an off-plan contract if the other party has committed a fundamental breach of contract, which has not been remedied following notice of such a breach,” says Bowtell. “Examples of fundamental breaches by the developer include not linking the payment plan to construction milestones, delivering an unusable unit or one that does not match the sale contract, or any other breach determined by the DMA.”

Investors can also terminate an off-plan sale agreement when construction is delayed. “If construction has not commenced as required under the sale agreement, then not less than 5 per cent of the buyers in that development may jointly file a complaint to the DMA, the body that has been charged under the new law with regulating off-plan sales in the emirate,” says Bowtell. “It is then within the DMA’s discretion to cancel the project and distribute the sales proceeds among the investors.”

While this is beneficial, it also requires some measure of coordination among buyers in the same project, which is difficult to achieve in practice, says Bowtell. Furthermore, she adds that when construction is delayed more than six months, the DMA may require the developer to pay a penalty to the investor, unless the developer can prove the delay was beyond its control.

However, if the delay is extended and a solution cannot be found to bring it to complete the development, then the DMA may approve the distribution of the monies held in escrow to the investors, she says.

Farn adds that there may be instances in which a project cannot be implemented but where this cannot be attributed to the developer’s own fault. In this case, the purchaser cannot terminate the sale and purchase contract. These may include circumstances where land is taken away for public interest reasons or if the project ceases because governmental authorities re-designate their existing planning approvals and, therefore, change designated use.

Escrow account
In Abu Dhabi, there has not been an escrow law prior to this regulation. Therefore, with this new provision buyer’s protection is enhanced by allowing them to get their money back in certain approved situations.

“Unlike Dubai, which has had its own discrete escrow law since 2007, there has historically been no obligation placed on developers in the emirate of Abu Dhabi to hold purchasers’ money in any segregated or specially designated account for their own benefit,” says Farn. “The new law now requires the establishment of a project-specific escrow account that prescribes details for the management of such account and places certain obligations on the account bank as an account trustee to ensure that the monies deposited with it are used for their intended purpose. With these protections, purchasers should in theory at least be able to get their money back if the project does not proceed.”

Without these new escrow provisions, purchasers would be less certain of ensuring the return of their money because it would be uncertain whether the developer’s bank held the monies either as a banker or in a fiduciary capacity, Farn further explains.

“A bank holding money in either a specially segregated account or in a fiduciary capacity would enhance the prospect of the purchaser getting his money back in the case of the developer’s bankruptcy, because it would be easier in those circumstances to show that the purchaser had a proprietary claim to such monies in such circumstances,” he says. “Where the parties have signed a sale and purchase agreement, the purchaser would usually be able to found his claim for return of his monies based on contract as well, although that may have a limited effect in the event of the developer’s bankruptcy.”

The account trustee (or developer’s bank) is obliged to take certain measures to preserve the money and rights of the depositors and in certain circumstances guarantee the completion of the real estate development.

Farn points out that specifically, Article 25 of the new Law allows purchasers holding 5 per cent or more of the sold units in a development to submit a complaint to the DMA, if there has been a delay in project commencement or delivery of the project. The DMA will then carry out an investigation, and if it finds no lawful excuse for the delay, can impose a fine or even cancel the project, he adds. “In such circumstances, the monies deposited in the escrow account must be distributed among the depositors and other interested project parties in a specific order as described under Article 26 of the new law. Such provisions may not apply, however, to projects which have already started before the new law comes into force and where less than half of the project has been completed,” says Farn.

“Article 26 also deals with circumstances in which the project fails and places an obligation on the escrow bank to take preservatory measures to ensure completion subject to the DMA’s approval. If this is not possible and the project cannot be reactivated after a period of six months from the date of DMA’s approval, the account trustee must distribute the monies held in the escrow account in a pre-agreed order under the supervision of the DMA.” All interested parties, including purchasers, the developer’s own funders and contractors and suppliers of goods and services to the project, are entitled by law to a share in the distribution of such monies.

“However, even with a pre-agreed order of distribution, a question still remains as to whether the account bank holds the monies in its account as a banker or as a fiduciary — and therefore whether the waterfall arrangements as specified in the new law would be capable of overriding the normal provisions concerning distribution of assets, which would apply in the event of the developer’s bankruptcy, as described under the UAE Commercial Transactions Law,” says Farn.

“If there is sufficient money, then all of the interested project parties will be paid in full, however, in the case of insufficient funds, the parties will be paid pro rata subject to the overriding order of payment described in the Article.”

Under the waterfall arrangement, any money owed to the account bank as a result of managing the account is cleared first, before payments are made to the developer’s funders, purchasers, contractors and suppliers (pro rata if the remaining amount is insufficient to pay all parties). The developer will get whatever is left.

In cases where there is insufficient monies held in the account, the rights of stakeholders (as creditors of the developer) are preserved and they will have an unsecured claim against the developer for any shortfall.

The advantage
The law aims to provide more rights to buyers and improve investment framework for real estate in Abu Dhabi, says Robin Teh, Country Manager — UAE, Chestertons. It will make the sellers more accountable and not delay projects, he adds.

Off-plan investments are becoming superior investment options because of government regulations regarding escrow accounts where a buyer’s money is safe until a project’s completion, he says. “The main aim of ushering in the law is to safeguard the investors’ money and retain the credibility of the developers in the market.”

However, Teh advises buyers to adhere to a general checklist when buying off-plan, ensuring that their seller is legitimate in the first place. “The track record of the developer, registration with regulatory authorities, previous projects completed, exact details of property/affection plan, the specification of the unit, payment schedule, and conditions are few key aspects to check when investing in an off-plan property,” he says.

In short
The new law will introduce provisions that are being implemented for the first time in Abu Dhabi.
These include:
• Right to terminate an off-plan purchase
• Escrow accounts will be set up for off-plan sales
• Owners associations to be created
• Fines for delayed projects 


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Source: Hina Navin, Special to Property WeeklyPW

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