A Quarterly Newsletter from the UAE and Oman member firms of the PKF International Ltd.

VOL 15, Issue 02 April 2013

Regulatory Update

Introducing Tanweer – The Real Estate Investor Protection Law

The Dubai Land Department (DLD) has circulated a new investor protection law which aims to give more protection to property investors after the financial crisis. The most significant item in the proposed legislation is the protection it seeks to provide property investors in Dubai. The measures include a refund or replacement property for buyers where the developer delivers a defective property and financial penalties for late delivery of property. The laws would also establish the grounds on which a purchaser can demand cancellation of the contract if, for instance, the developer refuses to link payment plans with construction milestones.

Tanweer is being proposed to deal with some specific issues identified by the DLD last year, where investors needed further assistance in dealing with errant developers. In the crazy days of the property boom in Dubai, many developers forced investors to sign one-sided sale agreements. These agreements were usually very onerous on the investor as far as payment was concerned, whilst being lenient to the developer as far as delivery was concerned. In addition, the sales agreements generally required owners to allow the developer to control common areas and collect service charges after delivery of the unit.

Such post-delivery management agreements provided developers with unreasonable levels of power and effectively removed owners’ rights of freedom of choice as to who managed their communities and how they were maintained. This issue also opened the community management industry to threats of profit taking in an area that is generally, considered world-wide to be a not-for-profit area as far as owners are concerned.

The above issue was recognised with the implementation of Dubai’s Jointly Owned Property Law in 2007. Homeowners however had to wait for the full implementation of the Law which occurred when the Real Estate Regulatory Agency (RERA) issued the associated regulations. The general thrust of the Jointly Owned Property Law and its Regulations is that common areas within projects of Dubai that are intended for joint ownership by all owners must be registered as “jointly owned property”. Further, control of the management over such areas must be handed to the owners who will manage and administer such areas through an Owners’ Association in a “not-for-profit” capacity.

However, very few Owners’ Associations have been registered since the implementation of the Jointly Owned Property Law. Despite this, many owners have worked towards wresting control of common areas from developers who have thus far resisted in handing over control.

Owners have been waiting for the registration of their Owners’ Association through RERA so they can review in detail the way in which their communities have been managed by developers. Confidence was generated in their ability to do this through the provisions of the General Regulations issued under the Jointly Owned Property Law in 2010. These stipulated that service agreements (which include agreements with developers for the management of common areas) cannot be longer than three years, and most importantly, that the owners may, by majority resolution, terminate any historical agreements at their first annual general meeting.

Although the Law has many provisions to provide protection to investors, these are focused on addressing the balance on disclosure requirements and delivery requirements in favour of investors with respect to off-plan properties.

The disturbing news however is that one of the articles of Tanweer (Article 13) may contain an ominous sign with respect to the ability of owners to control their common areas after delivery. This article states that if the developer retains the right of management of the common areas in the jointly owned property, then it shall provide buyers / beneficiaries of the property with estimated information of the value of the facilities’ services and full details of the entity which is going to manage such facilities. This has obvious implications, since it contradicts the Jointly Owned Property Law.

Whilst Tanweer includes several measures that would help investors in off-plan property acquisitions, these provisions are not retrospective in nature and therefore may be of little benefit to existing investors, particularly those who have invested in projects that have since been either stalled or shelved. Tanweer may therefore be of limited value to the market unless off-plan property sales experience another upwardly mobile movement in the near future.

Thus, whilst Tanweer appears to give a lot to investors it may also in effect nullify some of the most sought after benefits of the Jointly Owned Property Law. The area of concern is Article 13 which appears to have a wide application, and supports previous arrangements in onerous sales agreements, while being silent about the terms, or the length for which such arrangements can be enforced. If there is a rethink on the issue of common area management then Tanweer may not have the intended effect of strengthening the market and may threaten to undermine the modest recovery the completed property market has enjoyed recently. This issue requires clarification at the earliest.

Some Important Clauses of Tanweer in a Nutshell

  • The draft calls for more transparency in real estate dealings. It covers the real estate register maintained by the DLD requiring increased disclosures about properties, including zoning, court orders and any financial information regarding the property, which is to be made available to interested parties.
  • The developer is now also obliged to accurately report the state of construction of the project, including the date of completion and any envisaged delays, as well as, outline the common areas and facilities. A failure on the part of the developers in specifying the net area of a unit will result in DLD imposing its own calculations.
  • The service fees and responsibility of common area management will no longer be a surprise, but part of the contract.
  • To reduce fraudulent activity, DLD’s approval prior to advertising real estate for sale is being reinforced and the law calls for all brokers to proactively show their license cards to clients.
  • The funder or financier of a project has the right to anonymity unless he chooses to be public. In this case all the financing details will appear in the DLD’s register and the financier cannot turn back on his financial commitments.
  • The habit of ‘property flipping’ will be discouraged. Investors cannot sell a property unit, by merely holding a reservation deed. Furthermore, the seller is responsible for declaring all the property’s details, as specified under the law.
  • In the case of off-plan sales, construction milestones must be adhered to and brokers cannot receive a commission until the property is completed and fully paid off.
  • Construction defects have to be rectified within 12 months. If not, the buyer has the right to return the unit.
  • The law will pave the way for property investors to get a complete refund if a developer fails to complete or handover a property within the stipulated timeframe, or if the developer deliberately defrauds, or alters the specifications of the unit without obtaining the necessary permits.
  • Investors will also be able to claim compensation in cases of breach of any warranty or undertaking contained in the sale contract by a broker or for misrepresentation by a developer or broker.
  • As before, all payments have to land in escrow accounts.
  • For court cases, contracts now have to be in both English and Arabic.
  • Once the title deed has been given to a buyer, developers cannot refuse to hand over the unit for any reason.

 

The year 2010 saw Dubai’s real estate market staging a partial recovery although property prices were still a good way short of the ‘boom time’ peaks. In 2012, the market appears to have learnt from its mistakes, has matured considerably with properties having good location attracting the best value. There is a marked increase in the demand for commercial properties. The verdict on whether the recovery of Dubai’s real estate market has been aided by the development of Dubai’s legislative process is still open to debate, however it is an important contributing factor and proof that a dependable legal framework is necessary to create protection and an air of security.

In summary, although this law is a step in the right direction it needs to be fine-tuned to be truly relevant and beneficial to investors and lead the real estate market to a more matured state.

(This article is compiled by Mr. Chaitanya G. Kirtikar, Manager, Offshore and Free Zone Services)