Working one’s way through a sales agreement

Dubai’s real estate sector has been facing falling prices in 2015. However, with 2016 just around the corner, more analysts are hopeful for change with a view on Expo 2020.

The marketplace has been altered by economic conditions (including lower oil prices) and geopolitical turmoil. As a result, the general preference of purchasers has swung from units in projects that existed only on paper to units in projects that are complete — or visibly — under construction.

Additionally, purchasers are finding that they have greater strength in negotiating with developers in comparison with 2013 or 2014. The increased confidence of purchasers is perhaps most keenly evident in relation to the composition of the sale and purchase agreement (SPA) for off-plan properties, the document that governs the purchase by an investor of a unit from a developer.

Whereas previously developers would not contemplate revisions to the SPA, now investors are increasingly finding that there is flexibility and consequently those developers that are flexible are often the developers that attract more purchasers.

The purchase price will be at the forefront of purchaser’s thoughts and, in line with Rera (Real Estate Regulatory Agency) recommended policy, the purchaser should check whether the payment schedule in the SPA is linked with the Rera approved payment plan (usually based on construction milestones).

The real estate laws of particular importance in relation to the SPA are Law No 13 of 2008, Law No 9 of 2009, and Decree 6 of 2010. These laws govern the developer’s right to terminate an SPA for an off-plan unit in the event that the investor falls into default, setting out (i) a termination procedure to be followed and (ii) the monies that may be retained by the developer as compensation in the event of termination.

Failure to pay

These laws explain that the greater the completion of the project, the more monies that the developer may retain as compensation. For example, if a building is more than 80 per cent complete and the purchaser failed to pay instalment when due, then the developer has the right (after the sending of a 30-day notice through or copied to the Dubai Land Department) to terminate the SPA and retain as compensation 40 per cent of the purchase price.

The developer is free to then resell the unit to another purchaser

Such laws also provide that if the as-built area of the purchaser’s unit exceeds the area mentioned in the SPA, the developer is not permitted to increase the price, (unless otherwise stated in the contract) whereas if the as-built area of the unit is less than the area mentioned in the SPA, the purchase price must be decreased accordingly (except where the difference is less than or equal to 5 per cent).

The purchaser will often look to ensure that there is no contradictory wording in the SPA.

Given the real estate market’s events of 2015, investors are increasingly aware that many projects may experience difficulties leading to delays. As a result, purchasers may want to seek comfort that the SPA contains a commitment to purchase a unit with a foreseeable construction completion date.

To provide that comfort, the SPA will often contain (i) reference to an “anticipated” date of completion, with the developer retaining some freedom to delay the date due to events beyond the developer’s control and (ii) reference to a date beyond which, if the unit is not complete, the investor has the option of terminating the SPA and having monies returned to him.

Of course, not all purchasers are buying directly from developers. Many purchasers are instead seeking lucrative deals on the secondary market. In that event, where a purchaser buys from a seller, the sale and purchase agreement between them is often called a memorandum of understanding (MoU).

There are no definitive rules as to whether the investor or the seller should prepare the MoU. Regardless, both the purchaser and the seller should carefully review the MoU and obtain independent legal advice.

Registering a purchase

At an early stage, the purchaser will want evidence that the seller is indeed the owner of the unit and is entitled to sell. When the seller originally purchased the unit, he may have done so with the help of a mortgage. The purchaser, therefore, must be careful to ensure the mortgage is discharged before the purchase price is paid.

The purchaser will want to register his purchase at the Land Department, either in the Interim Real Estate Register (if the unit is incomplete) or in the Real Estate Register (if the unit is complete). Depending on the nature of the deal and the bargaining power of the parties, the payment of the purchase price may be linked to or conditional on the completion of registration.

To permit registration, though, the purchaser will need to exhibit a No Objection Certificate (NOC) from the developer. The developer is likely to require all service charges to be fully paid up to date before the NOC is granted.

The purchaser should take care to ensure that there are clear provisions in the MoU as to who will obtain the NOC and at whose cost. Similarly, a registration fee is payable at the Land Department for the registration process and the MoU should apportion this between the seller and purchaser.

Often the deal will involve the payment of a deposit by the purchaser on signing of the MoU. The parties should review the MoU wording explaining who will hold the deposit and in which circumstances the deposit must be released and to whom. If the parties wish greater comfort, they could arrange to enter into an escrow agreement contemplating a third-party (such as a lawyer) holding and releasing the deposit.

Even with increased strength, the SPA and the MoU can be a potential minefield for the unwary purchaser. Each document should be thoroughly reviewed before being signed and all parties should seek appropriate independent legal advice in order to be fully informed of the obligations into which they are entering.

Source: Shahram Safai, Special to Gulf News

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