31 Oct 2010

DUBAI REAL ESTATE: THREE NEW DEVELOPMENTS YOU NEED TO KNOW

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DUBAI REAL ESTATE: THREE NEW DEVELOPMENTS YOU NEED TO KNOW

1. REGISTRATION OF TITLE TO FREEHOLD PROPERTY: STILL A COMPLICATED AFFAIR? 
Earlier this year, the Dubai Land Department (DLD) put a hold on registering titles to freehold properties in the names of foreign (non local) entities. Further to that policy, titles still continued being registered in the name of local entities subject to the shareholders being individuals.

The DLD is now implementing a new policy effective 26 October 2010 in respect of registration of title to freehold properties. This new policy follows the signing of a memorandum of understanding between the DLD and Jebel Ali Free Zone (JAFZ), and the terms of this memorandum of understanding are confidential and not available to the public.

According to this new policy, titles to freehold properties will not be registered unless a no-objection certificate is procured from the Jebel Ali Free Zone Authority (JAFZA). Whilst procuring a no-objection letter seems a relatively simple task, through further discussions with JAFZA, Hadef & Partners has learnt this no-objection certificate can only be procured pursuant to the set up of an offshore company within JAFZ.

JAFZA has confirmed that setting up a JAFZ offshore entity is now a mandatory pre-requisite to purchasing freehold property in Dubai through a company and only upon JAFZ issuing a no-objection certificate will the DLD consider registering title. We have further confirmed with JAFZA that the shareholders of such JAFZ entity could be individuals or local or foreign entities.

The purpose behind this new policy has not yet been disclosed and we expect the DLD to provide more information to investors and real estate professionals, moving forward.

This new policy does not affect the ownership of properties registered in the name of local entities that were issued title deeds prior to 26 October 2010.

As always, Hadef & Partners recommends investors and purchasers of freehold properties in Dubai seek professional advice prior to investment and purchase of freehold property. All purchasers should understand the laws in Dubai and the procedures and regulations of the DLD in order to ensure they are compliant by all laws and their investments are protected.

2. DO YOU HAVE A VALID DEFENCE TO DE-REGISTRATION?
The Real Estate Regulatory Agency (RERA) issued a new circular dated 14 March 2010 (Circular), that sets out five valid circumstances to challenge a de-registration notice. These are:

  1. If the final contract of sale for the unit is not delivered to the purchaser
  2. If the developer refuses to link the payments with the stages of construction
  3. If the developer has substantially changed the specifications of the unit in a manner that is not agreed in the contract
  4. If the construction works of the project cease for more than six months
  5. If the unit has not been registered with the DLD.

The Circular goes on to state that the Legal Affairs Centre of the DLD shall not accept any objection other than those listed above, and the Legal Affairs Centre shall apply the law without any need to hold a meeting between the parties.

It appears that these circumstances are at the expense of other potentially valid circumstances and suggest the law is being applied in a manner that may not take into consideration other relevant facts and circumstances of the matter. For example, a purchaser may consider there is justification in withholding further payments if construction has slowed considerably (although it may not have completely ceased), and/or if the developer has already missed construction delivery deadlines. Additional defences for non-payment might include false and misleading conduct by the developer. For example, if the developer is not delivering the entire contracted development i.e. if a ‘five star’ hotel was promised as part of the overall facility and subsequently, the developer decided not to proceed with the ‘five star’ hotel. Such a defence may not fit within the narrowly defined “unit specification changes” in item 3 under section 2 above. In addition, if a purchaser did not appreciate the need to plead one of the five issues above then he risks being de-registered even if one of those items is applicable to the relevant case.

A purchaser may also be concerned about the viability of the project as a whole and may not be willing to throw good money after bad in a market that has already seen trust in developers seriously eroded. There are very few ways a purchaser can get information on the prospects for the delivery of a project so some purchasers may have valid concerns that are not being addressed by RERA.

3. HOW MUCH DO YOU NEED TO PAY TO BE SAFE?
Some purchasers feel the Dubai laws and regulations are developer friendly, however, a new RERA policy indicates that not all RERA policies are favourable towards developers. RERA recently modified its de-registration policy to essentially allow purchaser de-registration only where there is a difference of 10% between the purchase price paid by the purchaser and the level of construction achieved by the developer. Therefore, once a developer starts construction they can terminate purchasers who have paid 10% or less. Thereafter it is a sliding scale. For example, if the developer has achieved 10% construction then the developer can approach RERA to terminate a purchaser who has paid 20% but not one who has paid 21%.

It is not yet clear whether RERA will apply this new policy retroactively to cover purchasers who previously had their contracts de-registered. RERA’s view has to date been that once de-registration is effected, the purchaser’s only recourse is to issue proceedings in the court or arbitral body, as applicable.

Hadef & Partners would be pleased to address further queries and clarifications in relation to the above, please contact our Dubai Real Estate team.