Termination of Sale Purchase Agreement in the UAE
A Sale and Purchase Agreement (SPA) is a widely used contract/agreement in business transactions. It is predominantly used in the land department. It is beneficial, and a vital necessity that people looking to settle or finalize a deal of either property or any other movable or immovable asset have a well-drafted SPA. Despite its important nature, parties are unsuccessful in studying the document and understand their legal status with respect to the laws of the UAE. This article aims to throw light on one of the aspects of the SPA - the termination of the SPA in accordance with the property laws in the UAE.
Termination - Definition
A valid and enforceable contract must be executed. Once it is executed the contractual relationship automatically terminates. However, the dissolution of a contract may occur prior to its execution or before it can be fulfilled by the parties. Termination of a contract/agreement has the effect of discharging the parties from their unperformed obligation under the said contract/agreement.
Types of Termination
The UAE Civil Transactions Law lays down provisions relating to contracts, the effect of such contracts of parties, the dissolution of contracts and the effects of such amongst others.
Article 267 of the Law states that any agreement may be terminated only in the ways mentioned in the provision. There are primarily four types of termination under the UAE Law, and they are:
- Termination by mutual agreement after the conclusion of a contract
- Termination by judicial decision
- Termination by prior agreement
- Termination by law
- Termination by mutual agreement after the conclusion of the contract
The UAE Civil Transactions Law acknowledges the right of parties to cancel the contract/agreement if they have each other's consent once they have entered into the contract in Article 268. Parties can revoke any agreement made, by mutual consent after the contract has been concluded and they will be put back in their original position that they were in before such contract was made. This mode of termination of contracts/agreements is valid in the UAE and is called iqala. Iqala is seen as the termination of an agreement as well as termination between the parties and a new agreement with respect to the third party. These two views have been accepted by the UAE Laws. Referring to Articles 268, 269 and 270 of the UAE Civil Transactions Law, the Dubai Court of Cassation inferred that these articles cumulatively substantiate that cancellation of a contract by mutual consent of the parties is also an agreement per se as the various obligations arising from the existing contract between the parties will expire and this will lead to the dissolution of the contract in addition to the cessation of the obligations.
- Termination by judicial decision
In a contract/agreement that is binding on both parties, if one party refuses to carry out his obligations as stated in the contract then, the other party can institute a proceeding against such party to either perform the contract or cancel it as stated in Article 272 of the UAE Civil Transactions Law. Such proceedings must be instituted after giving notice to the defaulting party. The judge may pass an order requiring the defaulting party to perform the contract or may choose to defer the performance for a specified period of time, or an order to cancel the contract and pay the necessary damages may be ordered.
For the court to pass an order to terminate an agreement, a few conditions have to be met.
- Binding contracts - the contract entered into by the parties must be a binding contract. A non-binding contract is defined in Article 218 and is one that has a condition in place, stating that the parties may cancel such contract or agreement without mutual consent or without an order of the court. Termination of an agreement can only occur in binding agreements.
- One party's failure to fulfill any of its contractual obligations - if one of the parties fails to fulfil his obligation then the other party can seek execution of that obligation from the court or request the court to terminate the agreement.
- Party requesting termination must perform or be prepared to carry out his obligations - If such party is not ready to perform or fulfill his obligations, then he does not have the right to claim termination of the agreement. If a part is seeking termination, he must fulfill his own obligations. For instance, if a buyer wishes to terminate an agreement, then it is imperative that he establish that he has paid the price of the item that he wishes to purchase or is willing and ready to pay the price. If a seller wishes to terminate an agreement, then he must prove that he has fulfilled his obligations or is willing to fulfill them.
- Party requesting termination is able to return to the situation that they were originally in before the contract post-termination - the party who insists on termination of the contract must be able to restore the situation to what it was prior to contract. If he is unable to do so, then the court may order the obligor to perform the agreement or order the payment of compensation to the other party. Inability to restore the situation to what it previously eliminated the right to termination of the contract.
- Sending notice to the other party - it is an essential requirement for the party requesting termination to send a notice to the other party mentioning the party's refusal to fulfill his obligations.
- Defaulting party/Obligor must not take any action to fulfil his obligations - for the court to pass an order to terminate the contract, it must first determine if the defaulting party/obligor has not taken any actions to fulfill his obligations. However, if he has taken steps to fulfill his obligations, then the court can exercise discretion and order payment of compensation for delay in performance.
- Termination by prior agreement
According to Article 271 of the UAE Civil Transactions Law, parties can agree and include a clause in their agreement stating that in case of non-performance by either one of the parties the agreement shall be considered or deemed to be cancelled, and judicial intervention is not required. The Court of Cassation has defined this mode of termination as 'explicit cancellation condition'. When such a condition has been made a part of the agreement, then termination of the contract is mandatory. Enough emphasis has also been placed on the point that the explicit cancellation condition does not need to follow a specific format or require certain specific words.
A prior agreement to terminate in the contract if the relevant circumstances arise deprives the obligor and the judge of the option to choose between the performance of the contract and termination of the contract. However, this deprivation does not in any way authorize the obligor to proceed with termination without sending a notice to the other party. The UAE Courts in several decisions have proclaimed that the judge takes away his discretion in the matter of cancellation, regarding an agreement of termination of a contract without warning or notice.
- Termination by law
If the performance of the very subject matter of the contract becomes impossible and such impossibility is not caused by any action of the party, then the contractual obligations shall cease to exist, and the contract shall be automatically cancelled in accordance to Article 273 of the UAE Civil Transactions Law. If for example a sale purchase agreement was entered into by two parties with respect to a particular property. Unfortunately, due to a natural calamity, the property gets destroyed. The performance of the contract then becomes impossible owing to the destruction of the subject matter and hence will be deemed to be terminated by law. The seller must then return the consideration if received from the buyer. Therefore, it can be said that the following conditions must be satisfied for a contract to be terminated by law:
- Impossibility of performance of the subject matter of the agreement.
- Impossibility must happen after the conclusion of the contract.
- Impossibility caused by a third party and for reasons not attributable to the party under obligation
- Impossibility should be regarding the entirety of the contract and not just a part of it.
With respect to the last condition, if there is a partial impossibility, then only that part of the contract will be extinguished.
Termination of SPA in the UAE
The most common scenario that plays out in the real estate market is when Developers fail to fulfill their contractual obligations, and hence the purchasers seek to terminate the SPA. A purchaser of a real estate property in the UAE can, according to the provisions of the UAE Civil Transactions Law, set out to terminate the SPA and seek a complete refund of the consideration paid towards the purchase of properties.
There is seen to be general incompetence on the part of Developers when it comes to fulfilling their obligations. Numerous cases are put forth before the court wherein the Developers fail to deliver the properties on the contractually agreed date leading to a dispute. It is, however, necessary that the buyer has fully complied with his contractual obligations and must have adequate evidence to support such compliance.
It is a general practice for SPA's to include an Anticipated Completion Date (ACD) by which one party commits to handing over the possession of the property to the other party. There is also an allowance granted to the sellers to extend the ACD by a period of six to twelve months. An application for termination of SPA cannot be filed unless such period has expired else the application will be rejected on the grounds that the claim was premature.
Most SPAs allow the buyer to terminate the SPA when the seller fails to deliver the property on the contractually agreed date. However, a few SPAs do not extend any remedy whatsoever or provide only interest as a contract remedy. SPAs that had been abandoned with an unspecified completion date were allowed to be terminated by the Purchasers in judicial decisions.
Unforeseen occurrences or Force Majeure is the only remedy available to the seller in a situation where he has failed to comply with his contractual obligations. The French Civil Code, 1804 propounded a civil law doctrine that has been religiously followed by the UAE legal mandate. The circumstances leading to the unforeseen occurrence should have been one that was not expected by the breaching party at the time of executing the SPA. Financial difficulties, even at the time of recessions, are not force majeure. The breach of a parallel contract by a third party also does not fall within the ambit of force majeure and hence is not available as a remedy for the seller.
A unique case was decided upon the Dubai Court of Cassation based on a claim made by an investor for the return of monies paid towards the purchase of land after the termination of the SPA. Two parties entered into an agreement for the sale of a particular property. The terms of the agreement stated that the seller could terminate the agreement immediately at any time and without any notice if the cheques given by the buyer were dishonored. In such a case, the title of the property would automatically revert to the seller. The seller was under obligation to return the funds transferred by the investor along with the advance payment. However, the seller had the right to retain 10 percent of the amount already paid by the investor.
In this case, the buyer breached the payment terms of the agreement as he was unable to pay the installments. The seller consequently withdrew the title and terminated the agreement. The buyer then requested the return of the balance amount transferred by him after deducting the 10 percent that the seller had a right to retain, but the seller refused to do so. The buyer initiated a claim before the Dubai Courts against the seller demanding repayment of the money. The Dubai Court of appeal favored the investor, and an appeal was made to the Dubai Court of Cassation by the seller. The Court of Cassation returned the seller's land to him and awarded him damages as well owing to the loss of opportunity to exploit the property and the loss of profit that ensued.
This judgement throws light on the type of contracts where one or both parties have the choice to pull out from the agreement during a given period. An agreement that gives the parties the right to exercise the option of conditionality is essentially a non-binding contract for the party who has the right to halt the contract, but it has a binding effect on the party who does not have the option of conditionality.
Law Number 19 of 2017 issued in the Emirate of Dubai grants the right to terminate an off-plan sale without the requirement of a court order or an arbitral award to the Dubai Land Department (DLD) as well as the developer. The developer should follow the procedure laid out by the DLD before terminating the off-plan sale for the default of the buyer.
The procedure is enumerated as follows:
- The default must be notified to the Dubai Economic Department (DED).
- Based on such notice, the DED will serve an official notice to the defaulting party.
- The DLD will then issue a report of registration in case there is non-compliance from the buyer.
- The DED, after issuing a notice to the defaulting buyer grants them a 30-day grace period to try and rectify the default. The DLD can issue its report only if the defaulting buyer fails to rectify the default within this 30-day period. After the publication of the report, the DLD will deregister the Sale and Purchase Agreement (SPA) that exists between the buyer and the seller. The developer can then, without any court order or award, terminate the SPA after issuance of the DLD report.
- The completion status of the project greatly influences the DLD report. Depending on the percentage of completion, the share that the developer gets to retain from the purchase money varies.
- If the construction has not been started for reasons not attributable to the developer then he can retain a maximum of 30 percent of the amount received towards purchase money and must return the balance to the buyer within 60 days from the termination of the SPA.
- If the completion status of the construction is below 60 percent, then 25 percent of the purchase price can be retained by the developer, and he must return the balance amount within one year from the termination of the SPA or within sixty days after the property has been successfully sold, whichever occurs earlier.
- If the completion status is between 60-80 percent, the developer has the right to retain 40 percent of the purchase price and return the remaining amount within one year from the termination of the SPA.
- If the completion status is beyond 80 percent, then the developer has one of three choices. He can request the buyer to execute the SPA or have the DLD sell the property in a public auction where the proceeds would be set off against the unpaid purchase price to the developer or in the worst-case scenario the developer may terminate the SPA and retain 40 percent of the purchase. The developer is by law not permitted to retain more than 40 percent of the purchase price, and he must return the balance amount to the buyer.
The Sale and Purchase Agreement can be said to be the essential document in a business transaction involving properties and hence must be perfectly and accurately drafted so as to safeguard the rights of both parties. A purchaser must do a thorough check on the developer and whether all the necessary items are in place signing the agreement. It is important that the purchaser requests a copy of the title deed to ensure that there is no dispute to the title and the owner is clearly the rightful owner of such property. He must also look into the DLD records to check if the property has been duly registered. Any Purchaser who has to the best of his abilities complied with the SPA but has not been put in possession of the property within the date of completion as agreed in the SPA can seek termination of the SPA before any competent authority and request for a refund of the amounts that were paid towards the purchase price.