The global economic meltdown had an adverse effect on the real estate industry of the Middle East. However, the Dubai real estate sector has been flourishing post its emergence from the unfavorable market environment of the global recession. The multitude of the different types of properties available has been attracting serious investors from different parts of the planet. The real estate industry of the Emirate has witnessed unprecedented development in the past few years. This calls for the need for a robust judicial system in order to secure the concerns of the developers and the investors. The enactment of various real estate laws and regulations has supplemented to the anomalous growth of the real estate industry in the country. However, the enforcement of these laws and regulations is subject to its interpretation by the judiciary. Therefore, it is essential to review and scrutinize the past judgments of the Dubai Court of Cassation (the Court) in order to comprehend the application of the laws and regulations in the multi-billion real estate industry of the Emirate.
Sequel to the Arbitration Clause
Most of the developers and investors in the 21st century insist on including an arbitration clause to their sale-purchase agreements (the Agreement) in order to avoid the impediments of the courts. However, would an arbitration clause be valid when the Agreement itself has not been registered with the authorities? Further, would a dispute regarding the validity of an Agreement be referred to arbitration solely due to the existence of an arbitration clause? The Dubai First Instance Court has taken the view that a dispute between the parties would be governed by the terms of the arbitration clause despite the non-registration of the Agreement. Hence, the lower court held that cases could be referred to arbitration even when the parties dispute the validity of an unregistered Agreement. However, the Apex Court of the Emirate had a different opinion in this regard. The Court held that a claim of invalidity of an Agreement due to its non-registration cannot be referred to an arbitral tribunal as its subject matter contradicts the public order of the Emirate. Article 3 of Law Number 13 of 2008 (the Law) has provided that the sale of a real estate property would be void if it has not been entered in the interim real estate register of the Dubai Land Department (the Department). This contemplates that the sale of a real estate unit would be against public policy if it is not recorded in the interim real estate register of the authorities. Further, article 203 of Federal Law Number 11 of 1992 regarding the civil procedure code has provided that arbitration is not allowed in matters in which reconciliation is not allowed.
Therefore, the judgment of the Cassation Court in appeal number 249 of 2010 stated that a real estate issue cannot be the subject matter of arbitration when the agreement has not been registered in accordance with article 3 of the Law. Further, the doctrine of separability provides that arbitration clauses are separate agreements and would survive even if the underlying contract is held void. However, arbitrations and reconciliations can only be exercised if the subject matter of the issue does not contradict the public order to the Emirate. Long story short, an issue regarding the validity of an Agreement cannot be referred to arbitration if the same has not been registered in the interim real estate register as per provisions of the Law.
No Date? Please Wait!
The prolonged delay by real estate developers to deliver the properties had led to a profuse of lawsuits in the wake of the global recession. Most of the Agreements did not include a precise date for the delivery of the property and consecutively, the developers relied on this as an excuse to postpone the construction of the properties. However, the Court successfully sheltered the interests of the aggrieved investors in this aspect with the pronouncement of twain 2011 judgments in appeal numbers 197 and 600.
An investor had approached the Court in order to terminate an Agreement due to the failure of the developer to commence the construction of the project. Further, the developer contended that the provisions of the Agreement did not comprise of any explicit delivery date and therefore, the investor did not have a substantial claim. However, in accordance with articles 246, 247 and 272 of Federal Law Number 5 of 1985, the developer of a real estate has the obligation to commence the construction of a project within a period of six (6) months from the date of obtaining the approval for sale from the relevant authorities. Further, an investor is provided with the right to terminate the Agreement and claim for past payments when the developer has failed to commence the construction of the project within the specified period. Therefore, the Court held that the absence of a provision regarding the date of commencement of construction or delivery of the property was not a considerable justification for the failure of the developers to initiate the construction process. Further, the apex court observed that a default by the main developer would not exempt the sub-developer from executing its obligations towards the investors. This judgment provided eminent relief to the investors and aided in strengthening the credence of potential real estate investors.
A Developer’s Recourse
An investor is not always the aggrieved party in a real estate dispute. Consider a situation in which the developer has commenced the construction of a building but is restrained due to the non-payment of the investor. Therefore, article 11 of the Law has provided for the following procedure in the event that an investor fails to meet his obligations pursuant to the terms of the Agreement:
- the developer should inform the Department regarding any default by the investor;
- subsequently, the Department would furnish a thirty (30) days’ notice to the investor for fulfilling his contractual obligations;
- the developer can exercise any recourse only when an investor has failed to perform his obligations within the specified notice period.
The judgments of the Cassation Court in appeals 105 of 2011 and 106 of 2011 have substantially elucidated the interpretation of article 11. The Court observed that a developer did not have the exclusive right to terminate an Agreement without the consent of the Department or the other party. Further, a developer is required to intimate the Department when an investor is in default of the Agreement. Generally, this scenario arises when an investor delays in making his periodical payments to the developer. Ergo, developers are entitled to terminate the Agreements only after providing the investors with considerable opportunities to fulfill their obligations of making payments within the notice period.
Further, the developer may retain a proportion of the payment by the investor in the event that the latter has failed to fulfill his obligations within the specified notice period. Article 11 of the Law as amended by Law Number 9 of 2009, has provided that the developer is permitted to retain the proportion of the payment subject to the extent of the completion of the project. The amended article states that a developer may terminate the Agreement and retain the following amounts when the investor has not met his contractual obligations within the notice period:-
- When at least eighty percent (80%) of the project is completed – the developer may retain all the payments and claim for the balance value from the investor. Further, the developer may auction the property if the investor fails to pay the outstanding amount.
- When more than sixty percent (60%) of the project is completed – the developer may retain a maximum of forty percent (40%) of the value of the property.
- When below sixty percent (60%) of the project is completed – the developer may retain a maximum of twenty-five percent (25%) of the value of the property.
- When the construction work of the project has not commenced – the developer may retain a maximum of thirty percent (30%) of the payment which has been made by the investor.
However, the developer has to return the balance amount to the investor within a period of one (1) year from the date of termination or sixty (60) days from the date of resale of the property, whichever is earlier.
The Backbone of a Flourishing Industry
The legislators have endeavored to safeguard the interests of both the parties as the Law has explicitly prohibited the developers from retaining any illicit amounts of the investors’ payments. Further, the Court has strived to stabilize the real estate industry by maintaining a justifiable balance in the interpretation of the laws and regulations in the emirate. This approach of the Court has incidentally aided in the development of the real estate industry. However, one must never hesitate to contact a law firm that provides bespoke legal advice in the event of a real estate dispute in the country.