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Prior to 2007, it was common for developers to sell units offplan to purchasers with only a vague description of the apartment or villa. Once handed over, the apartment or villa would occasionally end up being smaller or larger than what was stated in the sale and purchase agreement. If larger, the unit purchaser may have been asked to pay more than the agreed purchase price to match the increase in the unit size. If smaller, the purchaser would try and seek compensation. Other commonly recurring issues were major changes in the unit, layouts, finishing and specifications, or presence of defects In addition, there was little clarity as to who was responsible for maintaining developments once completed and rectifying defects.
To restore confidence in the property market and protect property investors, a number of laws were introduced from 2007 onwards: Law No.27 of 2007 (JOP Law), Law No.8 of 2007 (Escrow Law) and Law No.13 of 2008 (Oqood Law). Regulations to these laws also came in the form of Dubai Executive Council Resolution of 2010 (ECR 6) regulating the Interim Property Register in Dubai and the Directions to the JOP Law in 2010 (Directions to the JOP Law).
Such intervention by the Dubai government and the Dubai Land Department (DLD) demonstrated not only a proactive attitude to resolve the problem, but also convert Dubai into a world-class real estate market.
Oqood Law, Escrow Law and ECR 6
The Oqood Law was legislated on area variation requiring developers to compensate purchasers for the variation in area of the unit except for cases of marginal difference. However, Oqood Law remained silent on the permissible marginal difference and its extent. Nor did it clarify the necessary measurement specifications for units that developers must use when selling off-plan.
The Directions to the JOP Law introduced a clear methodology for measuring units and also an obligation to clearly disclose to purchasers the areas of their unit and the layouts and specifications of their unit and the common areas. ECR 6 supplemented Oqood Lawby clarifying that the developer should indemnify the purchaser if the final area of the unit is more or less than the original agreed area by less than 5 per cent. However, if the final area is more than 5 per cent less than the original agreed area, the developer has to provide the purchaser with a proportional reduction in the purchase price as compensation.
While the Oqood Law did not allow developers to seek additional payment where the final unit area was larger than the agreed size, ECR 6 provided a window to the developers to contractually opt out of the Oqood Law requirement and agree for an additional payment with the purchaser for the area increase. Provided, however, the developer is complying with the Directions to the JOP Law, the instances where purchasers end up with significantly larger units from
those contracted for should be relatively rare. Purchasers nonetheless should peruse carefully the sale and purchase agreement.
The Escrow Law requires that the purchaser or developer deposit all payments towards an off-plan unit made in an escrow account with a bank that works with the Real Estate Regulatory Agency (Rera) to ensure all funds received by the developer are applied towards the project. This gives purchasers some comfort that their funds are being fenced and not used by the developer for other projects.
The JOP Law sets out a strata and owners’ association mechanism for the management of the common areas of a development. All developments that are subject of the JOP Law must have a Rera-licensed community manager and Rera takes a close interest in the conduct of developers in relation to their developments.
The JOP Law makes the developer liable for a period of 10 years commencing from the date of completion of the building to repair and cure any structural defects in the jointly owned property. In addition, the JOP Law also makes the developer remain liable for one year from the completion certificate date of the building to repair or replace defective installations, which include mechanical and electrical works, sanitary and plumbing installations. Such obligations pertain to both the units and the common areas of a development. The developer may be owed similar obligations from the contractor to rectify defects and it may simply be a case of the developer proactively pursuing the contractor to remedy the defects.
In Dubai, it would be common for most developers to specify that a purchaser may inspect the unit upon completion at least once prior to taking possession. Typically the purchaser would receive an invitation from the developer to conduct a joint inspection of the unit to identify any snags or defects that require rectification.
The period to inspect the unit is often short and a right to reinspect is rarely granted. In addition, if there are any disputes, the sale and purchase agreement will very likely allow such dispute to be determined by a representative of the developer or its consultant.
It is recommended that the purchaser engage the services of a licensed surveyor who can attend the inspection to confirm the condition and area of the unit. If a variation in the area above the permissible limit or other defect is found, the purchaser can consider negotiating a reduction in the purchase price with the developer as compensation.
However, if the defects relate to major construction issues or material changes to the agreed unit specifications, such as a two-bedroom apartment being changed to a one-bedder, the purchaser has the right to seek termination of the sale and purchase contract with the developer. In such cases, the purchaser should seek professional legal advice to explore legal options and develop a strategy on the best way forward.
For completed units purchased from the secondary market, the potential investor should conduct due diligence of the unit by engaging the services of a licensed surveyor. The surveyor verifies the dimensions of the unit, common areas and fire safety system and provides a written report identifying the defects in accordance with best practice methods, such as International Association of Certified Home/Property Inspectors (InterNACHI).
In the event that any discrepancies are found that exceed the permissible limit or presence of major defects, the purchaser may use such discrepancy as a bargaining tool to reduce the agreed purchase price with the owner or, if appropriate, reconsider the investment.
It is also important that purchasers ensure they are not contractually committed to complete the deal prior to the inspection as they may want to negotiate or withdraw from the contract if the inspection reveals problems. Typically, the relevant contract or memorandum of understanding may contain a right for purchasers to withdraw from the contract if they are not satisfied with the inspection.
While the Oqood Law covers the entitlement of the purchaser to seek compensation for delivery of a smaller unit than agreed, it does not regulate any changes required to the proportion of service charges that will be allocated to that unit.
There have been cases where the developer delivered a smaller unit to the purchaser and did not charge any additional cost for it, but the service charges remained as calculated based on the original area.
The Directions to the JOP Law now require that the purchaser should have the service charges based primarily upon the area of the unit. In addition, if units have large balconies, there may be an adjustment for such areas to ensure that the service charge allocations are fair.
It is usual for the developer to have a contract with a contractor for the construction of the project. Construction contracts usually contain defect liability periods.
In addition to any contractual obligation to rectify defects, the contractor and designing architect may also have statutory liability to fix defects. One type of liability is decennial liability, which gives the developer a right to claim against the constructing contractor where there is a major defect that affects the structure or safety of the building for a period of 10 years from the handover of the project.
This statutory right does not protect the purchaser unless the purchaser obtains a similar indemnity from the developer, although the developer owes purchasers equivalent obligations under the JOP Law.
It would be common for the developer to have a form of security that the contractor will attend to any defects or incomplete work during the defects liability period under the construction contract between the developer and the contractor. This may be in the form of cash retention or a bank bond and is normally between 5 per cent and 10 per cent of the cost of construction.
This normally covers a period of 12 months from the date of takeover under the construction contract, but may in some cases be up to 24 months. However, if the developer and the contractor are related, it is common for the contractor to have no security or defects period.
The takeover date under the construction contract is a different date to the date of settlement of the sale and purchase agreement.
To conclude, although the legal system in Dubai is now well-regulated, purchasers nonetheless can take precautions to protect their interests. Such precautions include carefully reviewing or having reviewed by their legal advisor the terms and conditions of the sale and purchase contract and seeking advice from professional property surveyors.
Source: Aruna Mukherji and Scott Lambert, Special to Property Weekly