Executive Council Decree No 6 of 2010 ("Decree 6"), approving executive regulations to Dubai Law 13 of 2008 (as amended by Law 9 of 2009) ("Law 13"), has recently been published in the Dubai Government Gazette and is stated to take effect from 14 February 2010. The issuance of the much anticipated Decree 6 has been widely publicised and, with the regulations now in force, this article gives context and takes a closer look at some of the issues which are likely to be of particular significance to off plan developers and purchasers.
Decree 6 is intended to supplement and clarify certain issues arising out of Law 13 which, by way of background, establishes a system of registration of interests under off plan sale agreements. Law 13 also sets out a mandatory procedure which must be followed by developers wishing to terminate off plan sale agreements by reason of purchaser default, as well as the amounts to be forfeited by purchasers upon termination (determined by reference to construction progress).
Although, much like Law 13, Decree 6 contains provisions concerning a range of issues associated with off plan transactions, there are a few key points for developers and purchasers. In particular, Decree 6:
- Confirms that a developer will be considered to have complied
with its obligation under Law 13 to register sales in existing
projects if an application to register the sales was made within
the prescribed 60 day period (regardless of whether registration
actually took place within this timescale). Decree 6 also
confirms the ability of the Land Department to register off plan
sales for existing projects, even where the application for
registration takes place (or has taken place) after the expiry of
the 60 day timescale.
These provisions significantly reduce the ability for a purchaser to claim that an off plan sale is void where registered outside of the prescribed 60 day timescale set out in Law 13 – a claim raised by many purchasers in light of the first instance decision in the much talked about "Mizin" case. Decree 6 confirms, however, that the Land Department will impose an AED 10,000 penalty upon any developer which fails to register on time, which will result in cost implications for those developers who have not yet attended to their off plan registration obligations.
- Confirms the power of the Land Department to cancel a real
estate project, and sets out specific circumstances in which
cancellation may occur. These include circumstances in which
the Land Department considers that the developer is not serious
about implementing the project, where the developer is grossly
negligent or where the developer breaches obligations under
Dubai's escrow laws. The right for developers to object
to any cancellation decision is also provided for.
Where funds in an escrow account are insufficient to meet the claims of purchasers upon project cancellation, Decree 6 provides that the Land Department will take steps to protect purchaser rights including by referring the matter to judicial authorities.
The power of the Land Department to cancel a project already exists under Law 13, however to date this has been sparingly exercised. It will be interesting to see whether cancellations occur more frequently now that further definition regarding the exercise of the power exists, particularly in respect of the many Dubai projects where the developer's ability to achieve completion is in doubt.
- Sets out specific rights for purchasers to apply to a court
seeking termination of a sale agreement, which apply in addition to
any rights under existing legal rules. These include where a
developer refuses to deliver a final form sale agreement, refuses
to link payments to construction milestones, significantly changes
unit specifications or where major structural defects
exist.
- Sets out circumstances which will be considered "beyond
the control" of a developer, and also circumstances in which a
developer will be considered to be "negligent".
This ties in with other provisions in Decree 6, including for the
purposes of determining whether a developer is entitled to retain
any purchaser monies where a sale agreement is terminated before
commencement of construction (discussed below). It will be
interesting to see, however, whether courts may have regard to this
aspect of Decree 6 generally, particularly when considering the
rights of developers to extend completion dates pursuant to
"force majeure" clauses in sale agreements.
Circumstances deemed to be beyond the control of a developer include where changes to plot specifications or planning controls are made by the master developer or government authorities, whilst circumstances deemed to constitute developer negligence include where there is an unreasonable delay in preparing a project for construction or delays in obtaining approval to plans or designs. The Land Department also retains a discretion to determine circumstances which are "beyond the control" of the developer or "negligent", as well as the ability to mediate disputes between developers and purchasers.
- Expands upon the existing provisions of Law 13 regarding the
process to be followed by developers wishing to terminate off plan
sale agreements. In particular, Decree 6 suggests that
default notices may now be issued by developers directly, provided
that copy notices are provided to the Land Department.
Decree 6 also repeats the prescribed amounts to be forfeited by purchasers upon termination of any off plan sale agreement. For developers who have completed at least 80% of a project, a new option exists to retain a maximum of 40% of the purchase price upon termination. Previously, Law 13 provided that developers in these circumstances must resell the unit by way of public auction to recover amounts owing and, whilst this option remains, many developers at advanced stages of completion will welcome the new alternative.
As with Law 13, Decree 6 confirms that a developer will not be entitled to retain any monies where termination takes place prior to commencement of construction, unless the developer can prove that it is not in breach of its obligations and the failure to commence construction relates to matters beyond the developers control (as defined in Decree 6, and discussed above). For these purposes, Decree 6 provides that site levelling and mobilisation is evidence of commencement of construction, which is a relatively low threshold. Subsequent levels of construction progress for termination purposes will be determined by technical reports prepared by a Land Department accredited consultant, and we understand that this procedure has already been implemented in practice.
Where the total amount paid to a developer is less than the amount which a developer is entitled to retain upon termination in accordance with Law 13, Decree 6 confirms the right of the developer to sue for the shortfall. This may be a concern for those purchasers who have simply abandoned investments on commercial grounds.
- Prohibits a developer from refusing to transfer registration of
a unit to a purchaser on grounds that the purchaser has failed to
pay an amount which is not set out in the sale agreement.
This will restrict the ability of developers to recover payment of
handover fees, service charge deposits, the developer's
proportion of registration fees or other amounts, unless the right
to require payment is clearly set out in the sale agreement.
Decree 6 also provides that the Land Department may determine those
amounts which are permitted to be imposed upon purchasers.
- Purports to vary the position under Law 13 regarding variations
in unit areas. Law 13 prohibits developers from requiring
payment of additional amounts from purchasers where the size of a
unit as constructed is larger than the size stated in the sale
agreement. However, Decree 6 provides that developers are
prohibited from charging such amounts "unless otherwise agreed
upon". This should enable developers to rely upon
provisions in existing sale contracts which provide for a variation
in price to reflect any increase in unit size.
Like Law 13, Decree 6 requires developers to compensate purchasers where the area of a unit as constructed is materially smaller than the size stated in the sale agreement, and a tolerance level of 5% is fixed for this purpose.
Clarification on key issues arising out of Law 13 has been
sought for some time, and Decree 6 goes some way to achieving
this. As with Law 13, a key issue will be the extent to which
the Land Department exercises its powers and functions under Decree
6, including powers relating to project cancellation and the
mediation of disputes between developers and purchasers.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
