GUIDE TO OFF-PLAN PROPERTY LAWS IN ABU DHABI
Previously, laws concerning off-plan property sales in Abu Dhabi was a legal blind-spot that caused ambiguity and failure in securing the interests of the investors. However, the establishment of Law Number 3 of 2015 on the Regulation of Real Estate Sector in Abu Dhabi came as a relief since it had explicitly mentioned the provisions regarding off-plan sales. The salient off-plan features of this legislation include the establishment of the interim register and escrow that had already been established in Dubai a few years ago.
This article from our team of property lawyers in Abu Dhabi details the legal status of off-plan sales, the compliance requirements of developers and the liability of the developers in case a company delayed or postponed the construction of the property after the investors depositing all their funds.
Off-plan property sale is a well-known method for the developers in the United Arab Emirates (UAE) to secure investors in any new real estate project. This form of transaction creates a nexus amongst various parties involved in the transaction such as financiers, developers, and investors by way of entering into different agreements. In Abu Dhabi, unlike Dubai, the government had not enacted any regulations concerning off-plan sales. Therefore, the market for investors was less confident, especially before the enactment of Law Number (3) of 2015 Concerning the Regulation of the Real Estate Sector in the Emirate of Abu Dhabi (the Law). The government soon realized the need for precise guidance in Abu Dhabi, considering the faster pace of development and launching of several new real estate projects following the year 2010. In comparison to the regulatory framework of Dubai, Abu Dhabi had no protection regarding any delay, non-completion, or defects of the property/project. There were several risk elements involved in such investments. For example, the financier would be required to accept the credit risk of the property developer and also that of the investor for financing the purchase of an off-plan property. The financier would rely on the records of the developer as there was no interim registry to record the real estate rights in the property.
Under Article 1, the Law defines Off-Plan Sales as “the contract whereby the buyer obtains a grant of property rights to real estate unit(s) suggested according to the compound plan and the floor plan.” In Abu Dhabi, the Department of Municipality Affairs (the DMA) is responsible for maintaining the real estate records that have similar functions as those of Real Estate Regulatory Authority (the RERA) in Dubai. The new Law mandates the provisions discussed below regarding the registration of real estate property.
Significant Features of the new Law:
- Concerning Article 15 of the new Law, the developers are not allowed to sell any unit unless they fulfill the conditions as stated. The most significant feature is that the developers—apart from getting a license from Department of Economic Development—are required to obtain an NOC from the DMA that they are eligible to undertake the development of such real estate project, which ensures the qualification of the developer and its professional capacity. This requirement as to NOC is a significant aspect of curbing: (i) any mismanagement of the real estate project where the interest of the public is involved at large; and (ii) the developer breaches its obligations and misuses its position and entitlements. Earlier, the terms of the agreement signed between parties were binding on them. However, absence of regulations has departed several investors from their legitimate rights
- Further, the initial floor plan and initial compound plan (the Development Plan) shall be submitted by the developer before the real estate registers with the DMA. This requirement, in particular, confirms and prevents any objection raised by DMA at a later stage while implementing the plan. The developer shall also obtain the approval of the DMA on the disclosure statement and shall show all the data related to the real estate unit and the development project.
- Also, the developer would hold the interest in the land on which the project will develop or the contractual right(s) that would permit them to build the land-parcel and grant property rights to the property units constructed on the said land. One of the most notable features of the new Law the is the maintenance of an escrow account that the developer should open. The developer would deposit the investor’s money in the account for construction expenses. All proceeds from off-plan sales should be placed and stored in the escrow account and shall only be taken out in stages to fund the development of the project. The developer, however, effectively has to self-fund or obtain finance for the first twenty percent (20%) of construction works, given the restrictions. Under article 18 of the new Law has laid down a separate provision for escrow accounts and the developers’ obligations for managing the funds for the construction. Developers who plan to sell off-plan property units of the project should open an escrow account after submitting an application and necessary documents to the DMA. The developer should also appoint an account trustee and all the funds paid by the investors of the off-plan property units should be deposited into this escrow account as per the new Law and its Executive Regulation.
- The developer and the account trustee should form an 'Escrow Account Agreement' in line with the standard form of the DMC to open the account for the particular real estate project. The developers should open a separate escrow account for each project and the amounts deposited in this escrow should be solely used for construction and settlement of financing payments under the provisions of the escrow account agreement and the new Law.
- Mortgage: Article 23 of the new Law has stated that the developer can mortgage the land of the development project only for raising funds for construction after meeting the following conditions:
The buyer of the real estate unit should get notified as to the land on which the project will be developed or the property right, and such terms should reflect in the sale and purchase contract.
- The developer should undertake, and the funder of the developer should subsequently approve that any mortgage over the real estate unit, for which the investor has fully paid the price by depositing it in the escrow account, will be removed.
- The bank or the financial institution will be responsible for depositing the whole amount of the funds in the respective escrow account and shall not to pay it directly to the developer.
The developer is liable to ensure and take necessary steps to comply with the provisions of the new Law. On the other hand, the property buyer will be bound to pay the value of the (off-plan) real estate unit by the actual completion percentage of the construction works, unless otherwise agreed.
The DMA shall issue the resolutions required for the organization of the matters related to the methods and mechanisms of off-plan sales as well as the documents that should be exchanged between the concerned parties in this regard.
What would not constitute a breach by the developer?
Article 17(2) has stated that the following acts of the developer will not be considered as a breach of the Law:
- if the land on which the real estate development project is expropriated for the benefit of the public;
- if any governmental entities freeze development of the project for re-planning;
- if there are buildings, excavations or service lines, found at the site of the real estate development project; and
- if the main developer has made amendments to the site of the project, and it resulted in the change of the borders and area of the project in a manner that affects the implementation of the sub developer's obligations.
The new Law has given high hopes to the real estate market in the Emirate of Abu Dhabi similar to that of Emirate of Dubai where the real estate regulations are well developed. The provisions of the new Law have regained the confidence of investors since it reassures investors' rights. Earlier, in the absence of any such regulations, it was difficult for investors to understand their legal status in the event of delay of the construction of a project. Now the position of investors is clear, as the new Law has stated the definite rights and obligations of each party and adheres to international standards of property development.