How to Get Away with (a) Building?
A short essay on joint development agreements, musataha structures and constructions on third-party property.
Queen Elizabeth II is frequently regarded as the owner of one of the world’s largest real estate portfolio with properties in the United Kingdom, Ireland, Falkland Islands and Canada to name a few. However, there is a major difference between being a real estate owner and a real estate developer. Although both attribute their finances in the real estate sector, they do not conduct standalone operations in most cases. Real estate developers need not always own the particular land to construct a real estate project. For instance, suppose a real estate developer has a particular ocean-view project in mind; this would mean that this particular developer would now need to identify a landowner who (i) owns a piece of land that fits the developer’s idea and is suitable for the project; and (ii) agrees to lease, sell or agree on a joint-venture basis with the real estate developer.
Certain sectors such as real estate, aviation, maritime and mining frequently demand a higher amount of influx of capital and developmental costs than others. Therefore, many-a-times these real estate developers would rather hope to enter into a joint-venture agreement with the landowner than purchase such property since the former is generally required to allocate substantial resources towards the development. In this article, our real estate lawyers in Dubai talks about the legalities surrounding these real estate joint development agreements in the United Arab Emirates (UAE).
Before we proceed with this article, it is pertinent for the reader to understand the definition of a real estate joint development agreement. A joint development agreement is a contract entered into by two or more entities (or individuals) to establish the terms of the development of any particular project. The parties to a real estate joint development arrangement generally have two (2) options to structure the transaction. The first option is to establish a company where the landlord and real estate developer are shareholders. However, the Federal Law Number 2 of 2015 concerning Commercial Companies (the Companies Law) is silent on the concept of joint venture entities. Therefore, the parties would need to establish one of the other types of entities prescribed in the Companies Law such as (generally) a limited liability company or alternatively incorporate a company in a free zone that permits project development in the Emirate of Dubai (such as an offshore entity in the Jebel Ali Free Zone). In this scenario, the agreement between the shareholders of the company would be the primary documentation of the real estate joint development arrangement if the parties do not explicitly enter into a joint development agreement. On the other hand, the second option is for the landlord and the real estate development company to enter into a real estate joint development agreement. In either case, the following legislations would apply to a real estate joint development arrangement in Dubai: -
- The Companies Law (in the event the landlord and the real estate developer incorporates a company for the purpose of developing the project);
- Federal Law 5 of 1985 on the Civil Code (as amended);
- Federal Law 11 of 1992 on the Civil Procedure Law;
- Federal Law Number 18 of 1993 on Commercial Transactions Law; and
- Laws, Decrees, Executive Council Resolutions and by-Laws issues by the Dubai Land Department (the DLD).
Key Points in Real Estate Joint Development Arrangements
In such arrangements, the landlord has the responsibility to provide any and all documentation pertaining to the particular property including (but not limited to) the title deed, ownership documents, valuation of the land, proof of permitted use and the like. Whereas, the real estate developer ensure that the transaction and the development will be in compliance with the abovementioned statutes, requisites approvals and no-objection certificates are in place, anticipated completion date has been set, escrow account has been applied for and obtained (if the units in such project would be sold off-plan), sub-contractors and parties have been appointed. The developer should also liaise with the requisite regulatory authorities such as the DLD, Dubai Municipality and the General Directorate of Civil Defense in Dubai. Another (and one of the most important) aspect of these transactions is the authority to sell the units in these projects to the investors. The landlord should ideally provide the developer with all the necessary clearance and authority to act on behalf of the landlord to sell the units of the project. If the proposed construction is towards selling to third party investors, the terms of the joint development agreement should also clearly stipulate that the parties agree to register such units in the name of these investors after they meet the conditions set out in the sale purchase agreements. STA’s real estate team had earlier discussed about these issues from an investor’s viewpoint in Court Uncourt (Investors Due Diligence before Purchasing Real Estate in Dubai - Volume VII; Issue 3).
These transactions are also structured in form of musataha agreements as well in certain circumstances. Musataha is a real estate transaction wherein the landlord leases the plot to the developer on a long-term basis (up to fifty years) with the right to construct structures and buildings. Article 1353 (Chapter II, Section 3) of the Federal Law 5 of 1985 on the Civil Code (as amended) has laid down that a musataha is a right of (in rem) provided to construct on a land which is owned by another party. In such transactions, the owner of the right of Musataha. In such transactions, the owner of the right of Musataha is deemed to be the owner of the real estate project constructed on the land and they may sell the units of such project accordingly, as mentioned in the musataha agreement. However, it is pertinent to note that the landlord is conferred with the right to demolish (remove) the buildings and fixtures. Further, the landlord may also retain the buildings and fixtures in circumstances when the demolition is not possible or detrimental to the land, provided they obtain the consent of the real estate developer.
From a Judicial Perspective
The article now goes on to explain three different cases between parties to a real estate transaction to understand the view of the court in matters where a party has constructed a project on the land of another.
- Court of Cassation Case Number 307 of 2010 (Real Estate): The plaintiff (company) gave a piece of gifted land to an individual for their ‘use’ vide an unregistered agreement. It is pertinent for the reader to understand the meaning of the term ‘use’ in this case. Real estate transactions generally involve a sale, lease (or rent) or transfer of right to use (musataha). The individual in whose favour the right to use the land was issued, further passed on this right through an unregistered will to the defendant. In this particular matter, the plaintiff (governmental authority) initiated legal action against the defendant to appoint a specialized expert to indicate the actual rental value of a house on a plot located in Al Satwa area for the period of 8 April 2000 till the date of the submission of the expert’s report. The plaintiff also requested for the expert to ascertain the damages incurred to the property along with a statement of the requisite maintenance charges to be incurred (including bills for electricity and water) due to the defendant’s use of the property. The plaintiff also requested the court to evaluate the compensation due to aforementioned damages and the eviction of the defendant. The defendant contended that he had a will with the property issued to him. The defendant also submitted a request to the DLD to register the house under his name and to conduct an investigation (by an expert) so as to prove that the development on the land was built by his money. However, he had initiated this process while he was still contending the validity of the abovementioned will (since the agreement and the will were not registered) in the court.
Initially, the court rejected the claims of the defendant and ordered the defendant to pay an amount of AED 945,218 to the plaintiff for the rental value of the property from 8 April 2000 (the date the individual died) to 11 February 2009. Further, the court also ordered the defendant to pay an amount of AED 129,600 as an annual rent for the period of 12 February 2009 till the handover date plus AED 100,000 as maintenance costs. Therefore, the defendant filed an appeal (case number 418/2010) requesting the court to cancel the judgment issued by the Court of First Instance. After studying the facts and the issues in the matter, the Appeal Court decided to amend the judgment issued by the Court of First Instance by reducing the amount granted as rent to AED 700,418 for the period of 2003 (from the time of succession certificate of the deceased individual) to 11 February 2009 and agreed on the other amounts.
Thereafter, the plaintiff and defendant filed a case at the Court of Cassation under case number 307/2010 and case number 308/2010 respectively. The Court of cassation reviewed the submissions of both parties and decided to reject the defendant’s case (case number 308/2010) and ordered the defendant to pay the expenses along with AED 1,000 (UAE Dirhams one thousand) as attorneys’ fees. On the other hand, the Court of Cassation ruled in case number 307/2010 to reject the judgment issued by the Court of Appeal (case number 418/2010) and ruled in favour of the judgment issued by the Court of First Instance. The court also ordered the defendant to pay for expenses of the two stages of litigation, plus attorney fees of AED 1,000 (UAE Dirhams one thousand).
- Appeal Number 250/2017 (Real Estate Appeal): In this particular matter, the plaintiff owned a particular piece of property that was provided to the defendant (vide an unregistered agreement) to use the land. The defendant who had the possession of the land constructed certain buildings on this land (with his money) and thereafter, a dispute arose between the parties. The plaintiff filed a case claiming for the rent, and repossession of the land (including the fixtures developed by the defendant). The court reviewed the matter along with the provisions of the Federal Law 5 of 1985 on the Civil Code (as amended) and ruled that the land along with the fixtures on the same would be the property of the plaintiff and the plaintiff can give a sum of money to the defendant for constructing the land. One of the primary contentions with which the court arrives at this conclusion was that the agreement was not registered. Therefore, parties to a real estate transaction should always ensure that the agreement between them is registered is the manner prescribed under the law.
- Appeal Number 225/2018 (Real Estate Appeal): The courts adjudicated this case wherein the plaintiff entered into an agreement with a developer group (joint venture between various entities). However, the developer group had used multiple entities in the transaction (meaning one entity signed the agreement, another entity obtained the funds, a third entity was involved in the construction of the project). The primary question before the courts in this matter, was to determine the liability of the parties. The court found that all the entities of the developer group which were involved in the transaction would be liable in the matter, irrespective of the size of their contribution to the matter.