What is recourse for developers when investors fail to pay?
In the instance of off-plan property purchase, historically a degree of risk is placed on the part of the investor. It is accepted that, with the outlay of funds for a product not yet in existence or at completion, the purchaser requires a certain degree of protection over and above the ordinary due diligence one would be expected to undertake prior to purchase of a premises in a projected real estate development.
To ensure that investors are adequately protected, lawmakers have prescribed various requirements that developers seeking to procure funds from off-plan sales must satisfy prior to marketing and sale of off-plan real estate units. In terms of Law No. 8 of 2007, a dedicated escrow account must be opened with an accredited identified agent of the Dubai Land Department (DLD), which agent is tasked with maintenance of complete record of transactions as well as audited account thereof.
Further, mandatory registration of all real estate projects under the Real Estate Regulatory Agency (Rera) is required in terms of Law No. 7 of 2006, as well as appropriate developer licensing and documentation delivery in support of their intended project. Any and all disposal of units in the project are to be recorded on the interim real estate register under Law No. 13 of 2008. Further, particular process is identified under Law No. 9 of 2009, equipping the Rera with the ability to cancel stalled projects as and when required.
As with of obligation. all contracts, Any benefit prospective does property not ordinarily owner accrue commits in the to performance absence under the terms agreed which would ordinarily involve periodic payment toward the subject unit in the proposed development. In the event of failure to pay the agreed upon amount, the investor could potentially render a developer unable to complete, leading to a propensity for project cancellation.
It is, therefore, encouraging that lawmakers have deemed it appropriate to amend the legislation surrounding off-plan purchase and introduce extended protections whereby a developer that does not receive payment per the agreed schedule may initiate action to ensure their project does not suffer protracted cancellation processes owing to insufficient funding.
The update issued on the law relating to interim property registration, under Law No. 19 of 2017 amending Law No. 13 of 2008, provides particular and substantial recourse to developers where an investor fails to perform in accordance with the terms of the sale and purchase agreement.
There are variant degrees of remedy, including withholding amounts and contract termination,
dependent upon project completion
the 30 The DLD days’ amendments may notice be requested per the provide required to issue that form to an investor whereafter the parties to the contract are invited to resolve issues per amicable settlement. Thereafter, and assuming the parties are unable to reach settlement, the DLD is furnished with the authority to issue an official confirmation of the developers’ fulfillment of contractual obligations specifying the percentage project completion per their records.
Recourse available to developers is now clearly outlined with variant degrees of remedy, inclusive of withholding amounts and contract termination, dependent upon the statement of project completion as released by the DLD. Further, no formal legal action is required, providing streamlined and expeditious access to the available remedies.
demanding Under completion to retain the that amendments, amounts reflects the investor 80 received per where deliver cent and the or the continue real above, due estate amount. the with project developer performance Alternatively, percentage is entitled the at subject the developers’ unit for collection option, the of DLD balance may amounts be instructed due by to the auction purchaser, or the developer may unilaterally cancel the contract and retain 40 per cent of the purchase price, returning the remaining amounts to the defaulting investor within one year of termination of the contract, alternatively within 60 days following resale of the unit (whichever occurs first).
The amendments go on to provide variable deductions and options applicable, depending upon percentage completion identified by the DLD. Where the project completion is between 60 per cent to 80 per cent, the developer may cancel the contract, retain 40 per cent purchase price and return the remaining amounts as specified and where completion is at below 60 per cent, the developer is entitled to retention of 25 per cent.
These additions to the existing rules are likely to assist developers that would otherwise be forced to pursue lengthy court process or initiate arbitration proceedings against defaulting investors involving substantial costs and potential project delay as a result.
Real estate projects invariably encounter delay and face cancellation as a result of funding issues. Thus, fewer bureaucratic hurdles in accessing escrow funds and initiating action against a defaulting investor, as well as provision of alternate remedy under the amendment, is valuable in promoting equal protection of contracting parties and providing necessary process in retention of funds at critical points in completion of real estate development.