Over the past decade Dubai has become known for the development of some of the largest and most ambitious real estate and hospitality projects in the world. In conjunction with the growth of the real estate market, there has been a rapid and significant change to real estate law and policy. At a recent conference, Hadef’s real estate team highlighted some of the important areas that real estate developers and investors need to keep abreast of in order to stay up to date with current market practices, rights and obligations. Georgina Chan, a Senior Associate in Hadef’s Dubai real estate team, provides a brief summary of the key points covered at that conference.
Property ownership rights in the UAE
The UAE Civil Code codifies the different types of real estate rights that exist under UAE law, which basically comprise “freehold”, “usufruct” and “musataha” rights. As a federal law, the Civil Code will always (except in certain special cases) take priority over laws issued by individual Emirates. That being said, the Constitution of the UAE grants each Emirate the right to make its own laws relating to real estate and we have seen this happening in practice, with Dubai leading the way in terms of developing its own bespoke real estate laws.
The rights of individual Emirates to make their own real estate laws and policies have been particularly significant when it comes to the ability of foreigners to invest in real estate in the UAE. The rights of foreigners in each of the Emirates vary significantly, with Dubai being the most flexible given that foreigners may be granted a right in certain designated investment areas to acquire absolute ownership with restrictions as to time or a right to acquire a usufruct or leasehold right for a period not exceeding 99 years. The laws of other Emirates apply the same rights to varying lesser degrees, with Fujairah currently offering the most limited rights to foreigners wishing to invest in real estate in that Emirate. It seems that Dubai will continue to have an advantage over other Emirates in terms of marketing freehold developments given that it remains the easiest Emirate for foreigners to acquire a freehold ownership right.
Leases have been a topical issue in Dubai over the past 12 months, particularly as regards to attempts by landlords to increase rents beyond the rental cap approved by the Dubai Real Estate Regulatory Agency. Although recent media coverage suggests landlords are commonly attempting to claim rent increases beyond the rent cap, the 2014 Hadef & Partners real estate survey shows that the majority of rents (based on those responding to that survey) had gone up by less than 10% and very few disputes have had to be referred to the Rent Dispute Settlement Centre, as where there was a dispute this was in most cases settled before being referred to the Centre.
A common misconception remains in the market that a landlord is prohibited from increasing rent in the second year of a lease, however this limitation no longer applies.
In the case of abandoned or terminated projects, the process of untangling the related contractual and security issues, and refunding investors, continues to be slow. Current statistics show that of the 166 off-plan projects which have been liquidated, only 10 have been fully unwound.
One of the key issues arising when a developer who has sold units off-plan becomes bankrupt or insolvent, is where third party investors rank in terms of security. An investor who has a registered interest in the Oqood register has a contractual registration, but legally this does not appear to extend to a real secured real estate right against the development plot which would mean an Oqood registration would rank second to a secured creditor. This concept does not appear to be well understood by the market.
It is important for directors of development companies to be aware that they can be held liable for mismanagement pursuant to Article 111 of the UAE Companies Law. In a bankruptcy context, Article 809 of the UAE Commercial Transaction Law provides that if the assets of the company are insufficient to satisfy at least 20% of its debts, the directors can be ordered personally to pay the debts of the company.
Dubai Jointly Owned Property Law
The Owners Associations legally registered since the enactment of the Jointly Owned Property Law have generally been interim associations. However, we may see further developments in this area of the law in 2015.
There are also indications that there may be amendments to the Jointly Owned Property Law, including provision for certain master developers to personally manage their own master communities.
Commencing Legal Proceedings in Dubai?
As there is no process of discovery in the local Courts, it is important for a Court plaintiff to be armed with its own evidence before commencing proceedings. Many parties rely on the appointment of a court appointed expert as part of information gathering. Awards of legal costs by the Dubai Courts are limited in nature and are generally in the range of AED500 – 2,000 even if you are the successful party.
Transfer of property and the DLD
Where there is a sale of mortgaged property it is common for a purchaser to pay the outstanding mortgage amount in order to discharge the mortgage, prior to transfer. The danger with this procedure is if a sale does not proceed for whatever reason the seller could still end up with a mortgage free property. The Dubai Land Department protects against this potential risk through a blocking system, which prevents the vendor from selling the property to a third party, but this procedure is unable to address all of the issues that could arise. Parties need to be aware of this risk when negotiating and implementing a sale and purchase agreement.