There are across the world, different institutions of property, radically different ways of separating the land space, and developing rights in consonance with other legal, economic and social institutions. These differences get into the limelight when one pays attention to the sometimes subtle differences in policies and regulations that govern them. The near collapse of most financial markets around the world in 2008; has left a lasting legacy on many. Investors, property developers, banks, insurers, and companies must exercise a higher degree of caution to protect their legal rights and interests about their real estate portfolios. Real estate is indisputably a major asset for any business, and the ever-changing political and legislative landscape across GCC calls for a careful due diligence. We have covered property laws of Dubai, Abu Dhabi, Qatar and other parts of GCC extensively within previous issues of Court Uncourt.
Within the GCC (Gulf Co-operation Council), the United Arab Emirates is the second largest economy. The real estate industry in the UAE witnessed a change in the year 2002 when the Dubai government permitted foreign nationals to own freehold properties in Dubai. Other Emirates within the UAE soon followed Dubai's footsteps, and Abu Dhabi promulgated its first property legislation (Law number 19 of 2005 concerning Real Estate Ownership) in August 2005 with the announcement of 99-year land ownership and renewable fifty (50) years surface ownership to foreign nationals within investment zones of Abu Dhabi. The first piece of this two-part series aims at discussing the musataha form of contracts wherein the holder (also, musatahee) is conferred with the right to use, develop and gain benefits from land for a set period. Property interests within GCC can broadly be categorized as i) short-term lease contracts; ii) long-term lease; iii) freehold title which permits the title owner to use, and occupy the property in perpetuity. Musataha form of development is more common in the Emirate of Abu Dhabi. In the second part of this series, we will be discussing the rapidly growing Islamic capital market securities and particularly the sukuks Islamic bonds.
Generally speaking, musataha is a form of long-term lease limited for a term of fifty (50) years (renewable) and imposes mandatory development obligations on a party whereas the musatahee enjoys the right to own and occupy the property for the agreed term. In contrast to musataha, the usufruct is a long term lease limited to a term of ninety-nine (99) years but imposes development restriction. Article 1353 covered under Chapter II, Section 3 of the UAE Civil Code (Law number 5 of 1985, as amended) defines musataha as 'A right of musataha is a right in rem conferring upon the owner thereof the right to build a building or to plan on the land of another'. Usufruct, on the other hand, is defined under Article 1333 as ‘usufructuary right to use the property of another and to exploit the same as long as the property is retained in its original condition'. From contractual point of view, it may be possible for parties to cement musataha and usufruct interest whereby the musatahee can legally buy a property and subsequently carry out development works under musataha and hold the property for an extended term of 99 years under a usufruct title. Both musataha and usufruct may be used as asset forming base for ijara based sukuk. In essence, musataha is a diluted version of freehold form of ownership given that it provides a less degree of interest in title as compared to freehold or absolute ownership. That said, contract’s title does not effectively determine the nature and effect of interest parties intend to create. For instance, lease and management agreement or lease and joint venture agreement may not necessarily be a lease or management or joint venture agreement and local courts can very much construe such contract as musataha if the agreement in question contains building obligations and satisfies the conditions set out under Article 1353 of the UAE Civil Code.
Under the musataha form of arrangement, the rights of musatahee can be limited to buildings built on the land whereby freehold land is kept independent from any mortgage. This can be beneficial and useful to both – the grantor as well as the beneficiary of musataha rights and parties can agree to key terms governing their relationship, rights and obligations. Musataha structures are also often adopted in the context of BOT (build, operate and transfer) projects. Accordingly, if ABC the owner of land and JKL the musatahee can agree to principle terms of musataha including termination rights, mortgage, insurance, grant of development rights, and other related key terms. Musataha
In the Emirate of Dubai, the Dubai Land Department recognizes musataha form of arrangement and permits musatahee to mortgage developments built on the land (land per se cannot be mortgaged unless parties have mutually consented and agreed upon).
The Abu Dhabi Municipality (Land Department) did not maintain a register allowing musatahee's to register their interest until recently. Registration of interest brings certainty to parties and secures their respective legal rights and position. More importantly, registration of musataha agreement is also important for musataha rights to become binding and effective. The Abu Dhabi Executive Council has also introduced specimen form of musataha agreements to be adopted by government entities (with the exception of federal UAE government and entities of federal government) in matters involving a transaction between two or more government entities and/or transaction between government entities and third parties.
Abu Dhabi's real estate market is continuously evolving and musataha form of arrangement is widely practiced in the Emirate. Clearly, use of musataha rights acts in best interest of both the parties in light of the fact that such structures can attract financing much easily and helps parties in defining and protecting their respective rights and interests. In the current investment climate, parties are recommended to seek professional legal advice to ensure that they buy peace of mind and further ensure that their project is structured in the most efficient manner. Prior to this, parties should also adopt reasonable safeguards in terms of determining whether musataha form of arrangement is best suited to a particular project, carrying out necessary due diligence, and defining and determining key legal documentation that will govern their respective rights and interests.