Legal safety nets owners need to look out for

Legal safety netsShahram Safai and Geoff Smith, Partner and Senior Associate Afridi & Angell

The stakes are always high when you are investing in a property. It often means parting with a significant part of your life savings. So, it is essential that there are legal safeguards in place.

Shahram Safai, Partner, and Geoff Smith, Senior Associate of Afridi & Angell, explain some of the essential legal safety nets that a potential homeowner should look out for before taking the plunge.

Legal safety nets

A homebuyer should carry out a sufficient level of legal due diligence.

This can include (i) checking that the seller is the owner of the property, (ii) checking if there are any restrictions or other interests registered over the property which will have an impact on use and/or enjoyment of the property, and (iii) carrying out a survey of the property to ensure that there are no hidden costs on repair or maintenance.

In addition, the homebuyer should ensure that a sufficiently drafted sale and purchase agreement is entered into so as to ensure the legal protection of the homebuyer’s rights and remedies. At times, many homebuyers are left with faulty design and poor construction of buildings after a couple of years of taking possession. The developer is responsible, under law, for structural repairs for a period of 10 years following completion. In addition, the developer is responsible for a one-year defects liability period.

A homeowner will be able to take action against the developer for breach of contract, but so far, there have been few instances of this happening due to the perceived costs and uncertainty of doing so.

Off-plan property

A purchaser buying an off-plan property should pay attention to (i) the sale and purchase agreement, (ii) the Disclosure Statement, (iii) the Jointly Owned Property Declaration, (iv) the escrow account registration and (v) the title/ownership documents of the developer.

In our opinion, the delivery of off-plan properties has improved in Dubai. The introduction of the Escrow Law in 2007 has afforded greater protection to off-plan purchasers which has resulted in fewer defaulting developers.

Nevertheless, there are still instances of defaulting developers, which in turn has a detrimental effect on off-plan purchasers, especially when the escrow funds have been used in full. There needs to be a change in the way new developments are funded in Dubai.

Currently, projects are heavily funded from off-plan sales, which in turn shifts a large amount of risk away from the developer (who may have put very little of its own funds into the project) onto off-plan purchasers.

As in many established real estate jurisdictions, construction/development finance needs to be the norm rather than the exception; however, this will only develop over time as and when the Dubai property market becomes more sophisticated.

Landlord/tenant laws

In respect of landlord/tenant laws, a balancing of the scales is required as, currently, the tenancy laws in Dubai are very tenant-friendly. Greater rights should be introduced for landlords to terminate a lease on expiry with shorter notice periods (say, six months instead of the current 12) and by removing the restrictions that currently exist vis-à-vis recovery of possession, namely (i) if the landlord wishes to sell the property, (ii) if the landlord wishes to recover possession of the property for his own use, or (iii) if the landlord wishes to carry out material repairs/alterations to the property.

Where a landlord serves a valid 12-month notice on a tenant for the purpose of sale, there are practical difficulties with this as many purchasers (unless investors) will not purchase a property until vacant possession is obtained. This, coupled with difficult tenants refusing to allow access for viewings, makes it impossible for the landlord to sell.

This needs to be addressed with clear guidance given as to the rights and obligations of both the landlord and tenant.

Transparency on service charges

Homeowners should put pressure on the developers/interim owners association to comply with their obligations under law to audit the service charges on an annual basis and for them to provide greater information as to the items of expenditure. Before taking possession, a prospective purchaser should request to see the RERA-approved service charge budget and also the Jointly Owned Property Declaration (JOPD). The JOPD should identify in detail what a developer/owners’ association may spend the service charge on.

Source: S. Dhar, Special to Freehold

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