08 Dec 2015

The Developer – Broker Nexus

Authored by: Philip Sequeira

The Developer – Broker Nexus

Cityscape 2015 was not long ago declared a big hit and generated millions of Dirhams in real estate property deals. A visit to the Cityscape Exhibition, which was held at the World Trade Centre Exhibition Halls, indicated that despite the downturn in the real estate market, there was still a lot of interest generated by the extraordinarily large stalls that were set up by the developers and brokers alike. Indeed, even the Dubai Land Department (DLD) had its own stall set up at the exhibition centre to support the industry.

A large number of brokers were also present representing multiple developers and a range of projects. This raises the question of whether brokers can be held responsible for delay or cancellation of projects after brokering transactions for the sale of properties to end-users.

By-Law No. (85) of 2006 which regulates the Real Estate Brokers Register in the Emirate of Dubai (By-Law 85) is very specific on the dos and don’ts relating to a Real Estate Broker. A Real Estate Broker is defined as “any person who undertakes real estate brokerage business in accordance with this By-Law”. Therefore, if the broker has complied with By-Law 85, and is not in contravention of any other UAE laws, he or she should not fear liability for the acts of a developer which are beyond his/her control.

Following the Global Financial Crisis (GFC) and the burst property bubble of 2008/2009, large numbers of projects were shelved or declared cancelled, under cancellation or liquidated. A number of developers associated with such projects either left the country or filed for bankruptcy. In such cases, what recourse does an end-user who had purchased the property through a broker have?  If the developer is bankrupt or has absconded, can the end-user pursue the broker who introduced him to the property and/or the developer?

What is the role of a broker? Traditionally a broker is a person who introduces buyers and sellers of property to generate a transaction.  Although he provides information on the property, he is merely a conduit between the developer and buyer. His job involves introducing the buyer to the developer in return for remuneration. A broker uses his skills and expertise to promote the property, however, he should declare his position as a broker clearly and not use unethical tactics to sell properties. The code of ethics under By-Law 85 needs to be strictly followed by the broker when selling properties on behalf of a developer.

Accordingly, in a property transaction where brokers are involved, provided that the three parties carry out their due diligence, each party will be responsible for his own actions. For instance, so long as the broker has been transparent in his role as broker and in providing all the details of the property to the buyer, then the buyer is free to either purchase the property or to walk away.

It is true that some brokers, on occasion, are aggressive in their sales pitch, however, it is up to a responsible buyer to determine whether the property meets his needs. Therefore, if the buyer decides to purchase the property, the broker must proceed with the sale on behalf of the developer in accordance with the applicable agreement.

In most cases, the terms and conditions of the sale are between the buyer and the developer, and not the broker.  Therefore, before buying a property, the buyer must carry out its own due diligence regarding the project, the broker and the developer.  The buyer should assess relevant considerations such as:

  1. Is the broker licensed by the competent authorities in Dubai?
  2. Does the broker have an agreement with the developer to arrange the sale of properties to buyers?
  3. Is the agreement between the developer and broker registered with the DLD?
  4. Is the broker able to adequately answer all questions regarding the property?
  5. Is the project registered with the DLD and is the escrow account open?

Similar due diligence should be carried out by the broker. A broker selling off-plan properties should also ensure that the developer has good standing in the market and is registered with the DLD.  Further, the broker should also ensure that the terms of engagement are clearly set out and agreed by both parties, i.e. the broker brings expertise and resources to sell and the developer is willing to pay remuneration for his services. Also in order to safeguard the terms and conditions including his fees, it would be in the interest of both parties (more so the broker’s) to ensure that the Agreement is registered with the DLD in accordance with applicable law. This strengthens the agreement and also provides credence to the roles and responsibilities of each party.

Having said that, brokers could face liability where information made available by them to the buyers was false and misleading. Provided that the broker has been transparent with the buyer in providing all information regarding the project and also in his dealings between the parties, the broker should be able to avoid any legal liability in case of default by the developer; however, the broker may suffer reputational damage if it represents unscrupulous developers. Please note, however, that a broker may be liable to compensate damages resulting from the destruction or loss of documents, papers or items delivered to him and related to the transaction he is intermediating unless he proves that such destruction or loss was due to a force majeure pursuant to Article 265 of the Commercial Code.

In addition, Article 267 of the Commercial Code provides that a “broker is not required to guarantee the solvency of the two parties to the transaction in which he intermediates.  He shall bear no liability for the implementation of the said transaction or for the value and quality of the goods related thereto, unless it is established that he committed an act of fraud or fault and he is held for guarantee under the agreement or the law”.

In summary, brokers should always conduct themselves in a professional manner and in accordance with By-Law 85, and they should safeguard documents or other items placed in their custody, and provided they do not commit any fraudulent or deceitful acts they are unlikely to be held responsible for breaches of property sales contracts.

 
 

This article, including any advice, commentary or recommendation herein, is provided on a complimentary basis without consideration of any specific objectives, circumstances or facts. It reflects the views of the writer which may, in some cases, differ from those of the firm, especially in the developing jurisdiction of the UAE.