The role of legislation in real estate growth in the UAE

The role of legislation in real estate growth in the UAEImage Credit: Supplied

There have been a number of groundbreaking developments in property laws over the past year that are set to significantly impact the real estate sector in Dubai and Abu Dhabi and promote investor confidence. Outlined below are some of the key developments and analysis of their impact on the market.

1. New committee for cancelled projects

Dubai has introduced a new judicial committee to oversee claims and cases between buyers and developers of stalled projects.

Decree No. 21 of 2013 on the formation of a special judicial committee for the liquidation of cancelled real estate projects in Dubai and the settlement of relevant rights aims to enhance legal procedures that facilitate the settlement of property disputes in respect of cancelled real estate projects.

The decree has been in force since September 10. The committee tackles numerous debt-related cases that arose as a result of the global financial downturn, which pushed many developers to abandon hundreds of projects.

The decree is intended to benefit buyers who made payments for off-plan real estate projects that have now been cancelled by the Real Estate Regulatory Agency (Rera).

The move is expected to speed up the process of dispute resolution and to lessen the legal fees incurred by the litigants. The decisions and rulings of the new committee will be carried out by the Execution Department of the Dubai Courts and are deemed final and cannot be appealed.

However, there will still be uncertainty over third party claims and priority.

The committee offers a fast-tracked and cost-effective forum for investors to recover their losses, since claims brought before the committee shall be exempted from court fees. However, the two main assets of any cancelled project available for liquidation by the committee (i.e. the land and the funds in the escrow account) are often insufficient, so it is unlikely investors will recover the full amount of their investment.

On the other hand, the new committee can promote investor confidence and enhance market stability. However, investors seeking to recover their money from developers of projects that have been put on hold by Rera will still have to pursue a court action or arbitration, thereby protracting the process and increasing costs.

2. Decree on Rent Disputes Settlement Committee

The Dubai Government issued Decree No. 26 of 2013 concerning rent disputes, which aims to establish a judicial system and develop a quick and simple adjudication procedure for all tenancy disputes. The Rental Dispute Settlement Centre, the judicial arm of the Dubai Land Department (DLD), has been in operation since November 18.

The decree applies to both residential and commercial property, and the jurisdiction of the centre also extends to most of the free zones in Dubai.

According to Article 16 of the decree, rental lawsuits must be settled within a period not exceeding 30 days from the date the case is referred to the committee. The deadline can be extended in accordance with the rules and procedures adopted by the chairman of the centre.

The final judgment issued by the centre's Department of First Instance and the Department of Appeal will be executed by the Execution Department, however, the chairman of the centre can also ask the Dubai Courts to execute judgments.

Unlike the current regime, the new regime now allows for appeals. Disputes with a value of more than Dh100,000 can be appealed, however, it is worth noting that disputes for a lesser value can only be appealed under a limited number of circumstances, including where an eviction judgment is issued or where a judgment is issued in violation of due process.

Undoubtedly, the new regime seeks to enhance the legal procedures that facilitate the settlement of rental disputes. Anecdotal evidence suggests the committee is often sympathetic towards tenants and decisions are made within 30 to 60days.

3. Abolition of the rent cap in Abu Dhabi

Abu Dhabi Law No. 20 of 2006 on rent and regulating the landlord and tenant relationship in Abu Dhabi had protected tenants from rent increases beyond a cap of 5 per cent per year and only allowed landlords to oppose lease renewals in a limited range of circumstances.

The Abu Dhabi Executive Council resolution abolishing the rent cap has not been published in the Official Gazette, but was announced in the local press to take effect from November 22 last year.

Under the new law, landlords are free to increase rents on lease renewals of residential and commercial premises. However, the regulation is likely to provide that any increase should be based on prevailing market values. Furthermore, a tenant will still have the ability to dispute a rent increase with Abu Dhabi's Rental Disputes Committee.

The change can drive landlords and tenants to consider longer lease terms, with fixed rents or rent increases. Further clarity is expected on the rules for the enforcement of the law, while new rules to protect both landlords and tenants are expected.

The impact may be particularly noticeable in older communities where rents have been weak and, in some cases, in decline. These areas, which are primarily confined to Abu Dhabi island, have had a two-tiered market for many years, with older buildings being outperformed by newer developments.

The increased supply of newly built schemes is expected to give tenants a greater choice and can turn Abu Dhabi into a renter's market. However, it is still too early to assess this.

4. Rent cap in Dubai

Decree No. 43 of 2013 determining the increase in real estate rentals was issued on December 18. The decree applies to all landlords, whether public or private, and includes free zones such as the Dubai International Financial Centre and Jebel Ali Free Zone.

The decree specifies the permitted rental increases on renewal according to the average market rent, which is to be set according to a rent index approved by Rera.

The decree states that the maximum rent increase in Dubai shall be determined as follows:

• No increase if the current rent is less than 10 per cent of the average rent for a similar property.

• 5 per cent increase if the current annual rent is 11- 20 per cent lower than the average rent for a similar property.

• 10 per cent if the current rent is 21-30 per cent lower than the average rent for a similar property.

• 15 per cent if the current rent is 31-40 per cent lower than the average rent for a similar property.

• 20 per cent if the current rent is more than 40 per cent lower than the average rent for a similar property.

Free zones in Dubai are governed by their own regulatory frameworks, which are separate from those applied in non-free zone property. Many free zones in the emirate have not issued their own tenancy laws and regulations yet and in practice follow Dubai's laws. Hence, this decree is in line with the current practices of free zones in the emirate.

There are concerns business expansion and population growth in Dubai will cause demand to outweigh real estate supply and the cap is viewed as a measure to protect tenants against disproportionate rent increases.

The index-linked cap allows for growth in returns proportionate to the market and this can dissuade landlords from turning to eviction as a way to capitalize on market growth in the build-up to the World Expo 2020 in Dubai.

5. Further developments

The Dubai Government announced plans to introduce a number of new real estate laws with the objective of helping protect the rights of investors. One of these initiatives, the new Tanweer legislation (Tanweer in Arabic means enlighten), is set to be implemented by the DLD to further enhance the transparency and attractiveness of Dubai's real estate sector and to safeguard the rights of investors.

The UAE real estate sector is a constantly evolving. With the recent market upturn and the raft of new laws designed to strengthen the industry, investors and developers alike should be aware of the new environment in which they are operating.

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Source: Sameena Hanif, Special to Property Weekly

The author is a Senior Legal Consultant at DLA Piper specializing in real estate, including acquisitions, disposals and leasing, property finance, hotels and resorts, real estate funds and dispute resolution

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