STA Law Firm https://www.stalawfirm.com/en.htmlSTA Law Firm - Court Uncourt (Blog) - Dubai Real Estate LawenCopyright 2024 STA Law Firm All Rights Reserved<![CDATA[Understanding Real Estate Law in India: A Comprehensive Guide]]> Understanding Real Estate Law in India: A Comprehensive Guide

The real estate sector in India is a significant component of the country's economy, and understanding the legal framework governing it is crucial for developers, investors, homebuyers, and legal professionals. This article provides a detailed overview of real estate law in India.

The Indian real estate market has evolved rapidly, especially with the introduction of new regulations and reforms. Central to this evolution is the Real Estate (Regulation and Development) Act, 2016 (RERA), which aims to bring transparency and accountability. The sector is also governed by a myriad of laws and regulations at both the central and state levels.

The Real Estate (Regulation and Development) Act, 2016

RERA has significantly transformed the landscape of the Indian real estate sector. It established state-level regulatory authorities (RERAs) responsible for monitoring real estate projects and ensuring compliance with the Act. Key provisions include:

  • Project Registration: Mandatory registration of real estate projects and agents.
  • Transparency: Developers must disclose project details, including approvals, land status, and completion schedules.
  • Compliance: Strict penalties for developers for delays or fraud.
  • Consumer Protection: Establishes an adjudicating mechanism for speedy dispute resolution.

Other Relevant Legislation

  • Indian Contract Act, 1872: Forms the basis for all contracts, including those related to property transactions.
  • Transfer of Property Act, 1882: Deals with the transfer mechanism of immovable property.
  • Registration Act, 1908: Ensures a proper record of property transactions.
  • Consumer Protection Act, 2019: Consumer protection in real estate is not limited to RERA. The Consumer Protection Act, 2019, also plays a significant role in safeguarding buyer interests, allowing consumers to file complaints in consumer courts against builders for unfair trade practices.
  • Land Use and Development Control: Land use in India is regulated through various town and country planning acts enacted by state governments. These laws regulate zoning, land use, building regulations, and environmental compliance.
  • Foreign Investment: Foreign investment in the Indian real estate sector is subject to FEMA (Foreign Exchange Management Act, 1999) guidelines. The government has relaxed norms in recent years to attract more foreign direct investment (FDI) in this sector.
  • Stamp Duty and Registration: The execution of a property transaction requires the payment of stamp duty and registration fees, which varies from state to state. This legal formality is crucial for the transfer of ownership.
  • Tenancy Laws: Tenancy laws in India are primarily governed by state-specific legislation. These laws aim to balance the rights and responsibilities of landlords and tenants, often involving rent control and protection against unlawful eviction.
  • Real Estate Investment Trusts (REITs): REITs have opened new avenues for investment in real estate, governed by regulations set by the Securities and Exchange Board of India (SEBI). They offer investors an opportunity to invest in real estate assets without owning them directly.
  • Taxation in Real Estate

    Tax implications are an important aspect of real estate transactions. This includes income tax on rental income, capital gains tax on the sale of property, and tax benefits on home loans.

    Local Regulations and By-Laws

    Local municipal laws and building by-laws also significantly impact real estate development. These regulations cover aspects like building approvals, floor space index (FSI), and construction standards.

    Dispute Resolution

    The legal framework provides multiple avenues for dispute resolution, including civil courts, consumer courts, arbitration, and RERA tribunals. The choice of forum depends on the nature of the dispute.

    The Role of Technology

    With the advent of technology, many processes in real estate transactions, including land record management, project registration, and grievance redressal, have moved online, making them more efficient and transparent.

    Challenges and Future Prospects

    Despite significant advancements, challenges like project delays, liquidity crunch, and regulatory hurdles persist. However, the future of real estate in India seems promising with increasing urbanization, rising income levels, and the government's focus on affordable housing.

    Conclusion

    Navigating the complex terrain of real estate law in India requires a thorough understanding of various laws and regulations. The legal framework aims to promote fairness, transparency, and efficiency in the real estate sector. As the market continues to grow and evolve, staying informed and compliant with the latest legal developments is essential for all stakeholders involved.

     

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    Fri, 08 Mar 2024 00:00:00 GMT
    <![CDATA[Law of Agency in the US]]> Law of Agency in the US

    The law of agency in the United States plays a pivotal role in structuring and regulating relationships between individuals and entities, particularly in the realms of business, finance, and real estate. This area of law, which centers on interactions between agents and principals, is crucial for understanding how one party can act through another and the implications thereof. This article delves into the intricacies of the law of agency in the U.S., exploring its core principles, various types of agency relationships, and the duties and liabilities of the involved parties, along with its relevance in different legal contexts.

    At its core, agency law in the United States concerns the relationship between two parties: the principal and the agent. This relationship is defined by the authorization given to an agent to act on behalf of the principal. Such a relationship is based on mutual consent, where the principal allows the agent to act on their behalf and the agent agrees to this authority. The actions taken by the agent within their given authority are legally binding on the principal.

    Creation of Agency Relationships

    Agency relationships can be established in various ways. An express agency is formed through a clear oral or written agreement between the principal and the agent. Implied agency, on the other hand, is inferred from the behavior and circumstances of the parties involved. Agency by estoppel arises when a principal's actions lead a third party to reasonably believe that an agency relationship exists. Lastly, agency by ratification occurs when a principal approves or affirms an action previously undertaken by an agent without authorization.

    Types of Agency

    There are different forms of agency relationships, each with its unique characteristics and implications. In a general agency, the agent has broad authority to act on behalf of the principal across a range of matters. A special agency limits the agent's authority to specific activities or transactions. Universal agency grants the agent extensive powers to act on behalf of the principal in virtually all matters.

    The duties of agents include the duty of loyalty, where agents must act in the best interest of their principals and avoid conflicts of interest. They also have a duty of care, requiring them to perform their responsibilities with a reasonable level of skill and caution. Additionally, agents are obliged to keep their principals informed about relevant information concerning the agency. On the other hand, principals have certain duties as well, such as the duty to compensate their agents for their services, to reimburse them for expenses incurred in the course of their agency, and to indemnify them against losses suffered while acting within the scope of their agency.

    The issue of liability in agency relationships is complex. Agents can be held personally liable if they act beyond their authority, engage in wrongful acts while representing the principal, or enter into contracts in their own name instead of as an agent. Principals, however, may be liable for contracts entered into by their agents within the scope of their authority and for torts committed by their agents while acting within the realm of their employment, as per the principle of respondeat superior.

    Agency relationships can terminate in various ways. They may end by mutual agreement, lapse of time, or upon the achievement of the agency's purpose. Additionally, either party may choose to end the relationship through revocation or renunciation. The death or incapacity of either the principal or agent also results in the termination of the agency.

    Agency in Specific Contexts

    In business and commercial transactions, agency law is vital for understanding the relationships between corporations and their officers, employees, and agents. In real estate, it governs the relationship between real estate agents and their clients, crucial for issues like contractual obligations and fiduciary duties. In the finance and banking sector, agency relationships between fiduciaries and clients, such as investment advisors, highlight the importance of the law of agency in understanding the legal implications of financial transactions and advice.

    Conclusion

    The law of agency in the United States is a broad and essential aspect of legal relationships, influencing how individuals and entities interact and operate. It defines the legal framework within which agents and principals operate, outlines their duties and liabilities, and is integral to understanding and navigating legal relationships in various sectors. As such, a thorough understanding of agency law is indispensable for legal practitioners, business professionals, and anyone engaged in activities where acting through others is a necessity.

     

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    Tue, 30 Jan 2024 00:00:00 GMT
    <![CDATA[New UAE’s Finance Leasing Law]]> New UAE's Finance Leasing Law

    The United Arab Emirates is set to enact a new law, replacing the existing finance lease law (Federal Law No. 8 of 2018). Despite its publication in the Official Gazette, the new law is scheduled to take effect six months after its publication, specifically on March 29, 2024. The Current Law will remain in operation until the Effective Date, after which it will be automatically annulled.

    The new law explicitly states that laws and decisions implemented under the Current Law will persist until they are supplanted by new legislation or decisions. Notably, the UAE Cabinet Decision No. 76 of 2020, which addresses accounting standards relevant to finance leasing, plays a crucial role as an implementing regulation under the Current Law. This decision has been pivotal in assisting court-appointed experts in finance lease disputes, particularly in matters concerning rental calculations and claims adjudicated by UAE Courts.

    Financial Leasing Law

    Essentially, this law governs finance leasing activities in the UAE and delineates the commercial agreements between parties involved in a leasing contract. The Law introduces several key principles and enhancements, including:

    Registration with the UAE Central Bank : Entities engaging in financial leasing activities (Leasing Companies) in the UAE must obtain a license from the UAE Central Bank. Non-compliance may result in imprisonment or fines.

    Contractual Arrangements : Financial leasing is regulated by

    • A supply contract between the Leasing Company and a supplier, covering the acquisition of specific equipment, movable assets, or off-plan real estate property. Although the borrower may not be a party to the supply contract, it retains the right to select the specifications of the Leased Assets, influencing the supply contract. The Lessee has direct recourse against the supplier and can enforce the terms of the supply contract.  
    •  A leasing contract between the Lessee and the Leasing Company, outlining the use of the Leased Assets for a specified duration and purpose in exchange for the payment of lease amounts (plus interest) to the Leasing Company. While the legal title to the Leased Assets remains with the Leasing Company, the Lessee can choose to purchase them by making premium payments and relevant fees throughout the leasing period, subject to approval.

    Registration of Leasing Contract : The leasing contract must be registered in the relevant register in the Emirate where the Leased Assets are located.

    Enforcement on Leased Assets : Any third party owed amounts by the Lessee cannot enforce against the Leased Assets. However, in cases of bankruptcy or liquidation of the Leasing Company, the Lessee is entitled to either:

    • Continue the leasing contract in accordance with the terms, with the assets transferred to whomever is designated after the liquidation or bankruptcy.
    • Hand over the Leased Assets to the liquidator and collect any potential amounts payable as an unsecured creditor.

    Features of the New Law

    • Ownership of Asset: The New Law defines a 'Finance Lease' as an arrangement where the Lessor leases the Asset to the Lessee for a specified term, with the Lessee potentially having an option to own the Asset as per the New Law's provisions. Importantly, the New Law eliminates the requirement for the lessor to own the asset and engage in a separate contract with the lessee. This change aligns with the introduction of bilateral and tripartite finance lease agreements.
    • Bilateral and Tripartite Finance Leases: The New Law introduces bilateral finance leases between the lessor and the lessee, incorporating a purchase option for the leased asset, either in whole or in part. It also introduces tripartite finance leases involving the lessor, lessee, and a supplier. In a tripartite lease, the lessee selects the asset and the supplier, and the lessor owns the asset for leasing to the lessee. A tripartite lease may include a purchase option for acquiring the leased asset. The New Law covers sale-leaseback arrangements, a common practice in asset finance transactions.
    • Sub-lease Arrangements: The New Law recognizes sub-lease arrangements, encompassing sub-lessors and sub-lessees within the broader definitions of 'lessor' and 'lessee.'
    • Leased Asset: Departing from the Current Law, the New Law explicitly excludes certain assets like aircraft, airframes, helicopters, aircraft engines, marine vessels, and assets registrable in "special registers" under UAE law or international treaties. This exclusion aligns with international best practices. Additionally, the New Law excludes cash, investment bonds, and granted land in the UAE from its scope.
    • Scope of Application: The New Law applies to all finance lease contracts, irrespective of whether the lessee is licensed by the Central Bank. Notably, it seems to recognize cross-border finance leases and assets located in the UAE, excluding financial free zones like DIFC and ADGM.
    • New Licensing Requirements: While the Central Bank continues to regulate finance leasing by banks and licensed financial institutions, the UAE Cabinet will determine the regulatory framework for non-licensed financial institutions involved in such business. This is a significant departure from the Current Law, which mandates Central Bank licensing for anyone conducting finance lease business in the UAE.
    • Registration: The requirement for a special register for finance lease contracts is removed from the New Law. Instead, finance lease contracts should be registered in the register of the leased asset in the UAE. Unlike the Current Law, the New Law does not render a finance lease agreement void if unregistered, although registration remains necessary for enforceability against third parties.
    • Enforcement: The enforcement of rights for movable assets under a finance lease is governed by the Movable Asset Security Law (Law No. (4) of 2020)
    • Allocation of Risk: In a tripartite lease, unless agreed otherwise, the risk of loss of the leased asset transfers to the lessee, except when the asset is pending delivery. In a bilateral lease, the lessor is liable for the loss, and this liability cannot be transferred to the lessee unless caused by the lessee.
    • Maintenance Obligations:Unlike Ijara leases where maintenance is the lessor's obligation, the lessee is responsible for maintaining the asset under the New Law unless otherwise agreed by the parties.
    • In summary, the forthcoming regulations to be issued under the New Finance Lease Law are anticipated to offer additional clarity, particularly regarding the licensing and regulation of finance lease activities and the accounting treatment of such leases. The outcome of the differentiated approach adopted by the New Finance Lease Law in regulating financial institutions and other entities will be intriguing to observe
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    Sat, 20 Jan 2024 12:00:00 GMT
    <![CDATA[Six New Laws to Regulate the Real Estate Sector in UAE]]> Six New Laws to Regulate the Real Estate Sector in UAE

    In 2023, Dubai's dynamic property landscape is poised for significant transformations, solidifying its status as a top choice for both investors and homeowners. The Dubai Land Department (DLD) governs real estate laws and regulations, striving to safeguard the interests of buyers and sellers in this thriving market. Presently, the Dubai property market boasts over 930,000 registered properties, collectively valued at more than AED 1.5 trillion.

    Foreign nationals have the opportunity to invest in designated areas, while UAE nationals and expatriates have access to freehold ownership in specific zones. The DLD rigorously enforces regulations to ensure transparency and equity in real estate transactions, mandating the registration of property title deeds with the department.

    Dubai's real estate sector remains dynamic, adapting to the evolving needs of the market and its stakeholders through the continual introduction of new laws and regulations. These measures contribute to Dubai's reputation as a premier global hub for real estate investment, drawing buyers from across the globe.

    His Highness Sheikh Saud bin Rashid Al Mu'alla, a member of the Supreme Council and the ruler of Umm Al Quwain, has promulgated several laws pertaining to the Real Estate Foundation of Umm Al Quwain and the regulation of the emirate's real estate sector. These laws are also geared towards aiding the formulation and execution of plans to foster growth throughout the sector, aligning with the emirate's initiatives for urban development.

    Six new laws to regulate Real Estate Sector

    These regulations serve as a framework to support and propel progress, ensuring that the emirate of Umm Al Quwain can unlock its full economic potential and achieve sustainable development. Through these measures, the leadership aims to create an environment conducive to innovation, investment, and economic diversification, ultimately contributing to the prosperity and advancement of Umm Al Quwain.

    His Highness Sheikh Saud bin Rashid Al Mu'alla, a member of the Supreme Council and the ruler of Umm Al Quwain, has exhibited visionary leadership by enacting several groundbreaking regulations intended to regulate and enhance the emirate's real estate industry.

    A Comprehensive Legislative Approach

    Laws No. 2, 3, 4, 5, 6, and 7 of 2023 constitute a comprehensive legislative strategy crafted to achieve diverse objectives. Foremost among them is the establishment of a robust framework for the Real Estate Foundation of Umm Al Quwain, ensuring meticulous oversight of the operations within the real estate sector.

    Ensuring Orderly Property Registration

    Law No. 2 of 2023 introduces the Interim Real Estate Register of Umm Al Quwain, a crucial tool in overseeing property registration activities across the emirate. This initiative prioritizes the systematic registration of real estate holdings, aligning with the overarching goal of promoting sustainable urban development.

    Regulation and Safeguarding Interests

    Law No. 3 of 2023 focuses on overseeing real estate development operations in Umm Al Quwain. It specifically deals with key elements like the pricing structure of real estate projects and the establishment of real estate escrow accounts. These provisions are crucial in protecting the interests of investors, real estate firms, and property developers, promoting compliance with comprehensive regulatory standards.

    Enhancing Transaction Regulation

    Law No. 4 of 2023 introduces amendments to Law No. 3 of 2007, focusing on real estate escrow accounts in Umm Al Quwain. These modifications offer essential directives aimed at strengthening the oversight of real estate sales transactions. They aim to ensure that all parties involved fully adhere to the regulations set forth by the Real Estate Foundation.

    Transparency and Security

    Law No. 5 of 2023 centers on the regulation of mortgage registration activities, aligning with the regulations set forth by the Central Bank of the UAE. Additionally, this legislation tackles the resolution of concerns and breaches associated with unregistered mortgages, thereby contributing to a real estate environment that is more transparent and secure.

    Protecting Investor Rights and Project Completion

    Law No. 6 of 2023 places a strong emphasis on safeguarding the rights of investors when faced with delays or obstacles in real estate development projects. The objective is to facilitate project completion whenever feasible, and it institutes a specialized committee tasked with addressing issues pertaining to canceled or unfinished real estate ventures.

    Strengthening Brokerage Regulations

    Lastly, Law No. 7 of 2023 introduces amendments to Law No. 2 of 2005, which regulates real estate brokerage activities within the emirate. This extensive legal framework sets forth clear guidelines to regulate all brokerage activities, promoting transparency and accountability within this essential sector.

    In conclusion, these laws collectively highlight a proactive dedication to enhancing Umm Al Quwain's real estate sector. They play a pivotal role in fostering growth, safeguarding stakeholders' interests, and establishing a well-regulated, dynamic environment for real estate activities in the emirate.

     

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    Thu, 04 Jan 2024 00:00:00 GMT
    <![CDATA[Economic and Fraud Provisions in the Middle East]]> Economic and Fraud Provisions in the Middle East

    "There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud."

    - Milton Friedman

    Economic fraud is a term that has been repeated over the years, so much so that the consequences it bears do not have any precedence or impact on the ones that hear it. For many companies and capitalist machinery, this term essentially triggers them to explore options to hide their fraudulent tracks and continue operating in the same manner. To have governments help them cover the tracks in certain jurisdictions ultimately defeats the purpose of the assignment.

    Despite the incongruent activities of individuals, companies, and governments from the expected norm of justice in many jurisdictions, other countries are tenacious to implement a regulatory framework that will eradicate such fraudulent activities in the market. This article will discuss the economic and fraud provisions established in the Middle East, their effectiveness, and the scope of reach it possesses about financial crime.

    What are the Economic and Fraud provisions in the Middle East?

    If one area of the economy has seen a steady increase in the past years, it would be the economic fraud prevalent in society. Regardless of the number of provisions that jurisdictions and international organizations establish to combat financial fraud, none of them seems sufficient. The parties involved in economic fraud and other fraudulent practices are constantly evolving to cover their tracks efficiently.

    Infamous scandals like Bernie Madoff and the Ponzi scheme leave one in absolute awe as it remains unclear, what is the culprit: the crime or the criminal? Many innocent parties, including employees and clients, were adversely affected by the ill-doings of these financial schemes. After the outburst of many scandals and its impact on many innocent individuals, jurisdictions are trying to fasten their pace to stay a step ahead of wrongdoers and hopefully eliminate the potential threats in the market.

    The introduction of new anti-economic fraud regulations has paved the way for potential investors to feel a sense of security over their investments within the market, along with the ability of the regulations to enforce justice. Over time, people have understood that the formation and establishment of an anti-fraud legal framework are not sufficient to ensure peace and harmony in the market, an iron fist must be imposed on fraudulent parties and companies to deter them from doing such activities in the future and serving it as a lesson for other participants in the market who bear similar intentions.

    The types of economic fraud can be quite varied and are spread across different industries and the scope of nature. These could include housing benefit fraud, tenancy fraud, council tax fraud, blue badge fraud, social care fraud, business rates fraud, insurance fraud, bribery, and money laundering. These are just a top layer of economic crimes prevalent in an ocean of fraudulent activities in the market. The crimes that are more coherent to the wrongdoings in the market include not declaring the business location, stating that a property is not in use while it is, dishonestly requesting for an exemption to pay for charges that are owed, or any unauthorized movement of money to make ill-gains.

    Often, economic crime is caused not by companies but by customers towards companies. The highest reported crime boost in the Middle East is through customer fraud and procurement fraud, which have proved to be the most disruptive fraud within an economic crime. In a survey conducted on a global platform, the number of customer frauds was comparatively more in the Middle Eastern region.

    In an ongoing effort to combat fraud together, many companies in the Middle East began investing in more stringent controls and implementation of the rules to avoid economic crime, while many others conducted a thorough examination into reasons after the occurrence of a crime in the company. Another issue that stands alongside customer fraud about its prominence is procurement fraud. This fraud entails the practice of favoring associates with vendor and supplier contracts.

    All these efforts are measures taken to mitigate the risks involved and ensure that proper prevention is taken by instilling the right technology and talent to deviate from any fraudulent prone routes.

    However, it is not easy to ensure that accountability will be maintained and transparent feedback is provided. Another limitation of this procedure is that advanced technologies to combat financial crime can be costly, which would further deplete if the company possesses insufficient resources to acquire and install the platform and is not equipped with properly trained employees to manage the technology. The lack of proper expertise to handle the in-place technology could attract various cyber threats, which allows a wrongdoer from any part of the world to infiltrate the company's system.

    With this in mind, companies must equip themselves from the arsenal of defenses to protect themself and the financial and reputational facets of the company. The extent of damage that infiltration of the company's system can cause to the operations is quite unfathomable. It would be better for companies to leave their vault of secrets wide open than installing an IT platform that is managed poorly. The necessity of combating such insecurities is proliferating and must be countered at the earliest. One would like to believe that the efforts of the legal jurisdictions in the Middle East to battle economic crime are practical and promptly applied. However, many of the jurisdictions still fail to provide a proper implementation of the provisions established against economic crime.

    The readiness of companies in the Middle East to confront the indecisive nature of economic crime and report any issues as they arise is still moving at a stagnant rate. The stark increase in cyberattacks and its potential threats is not a mystery to the companies in these regions. Nevertheless, they decide against preparing themselves in defense of such risks and attacks. The firms in the region and the governmental organizations must understand the types of threats that could arise in the economy and the nature of such economic crimes. Although this would seem like an insignificant step, this particular action could help achieve a more profound revelation of the gaps and vulnerabilities of the economy and its protective framework.

    Many would argue that the relationship of the Middle East with economic crime and fraud dates back ages. All the glitz and glamour and the boom of economies are incongruent with the fraudulent activities occurring within the firms and regions. A region's legal systems cannot enforce the regulatory frameworks established to fight against economic crime if the country's government does not implement the rulings.

    To know more about Economic and Fraud Provisions in the Middle East in Singapore Click here 

     

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    Mon, 27 Dec 2021 03:22:00 GMT
    <![CDATA[Amendments to Jointly Owned Property Law]]> Amendments in Jointly Owned Property Law

    Investments are supposed to be financial decisions. However, in real life, people often make investment decisions emotionally. This is truer of real estate investments. Individuals get emotionally attached to their homes or the idea of owning a home. Hence, they make decisions based on many parameters that may neither be financial or mathematical. Real estate laws are essential for every individual wanting to invest in or own a property.

    In the United Arab Emirates, many new real estate laws have been introduced to standardize processes and formalize transactions between developers, property investors, and other stakeholders in the real estate market. The more recent legislation concerning jointly owned properties is one of the newer real estate laws in Dubai. 

    What is the Joint Ownership Law?

    Law Number 6 of 2019 concerning new joint ownership in Dubai (the "New Law") is an amendment to Law Number 27 of 2007 (the "2007 Law"). The New Law governs and defines the responsibilities of all the stakeholders involved with jointly owned properties in Dubai, which includes those located in free zones and special development zones. The New Law codifies and brings the developers, owners, and facilities management companies under one umbrella to create greater transparency around the management of such properties. 

    The New Law aims to boost competitiveness and enhance investment in the real estate sector by centralizing control of the owners' duties with the Dubai Land Department (DLD) and the Real Estate Regulatory Authority (RERA).

    The Major Changes:

    I. New Management System

    Under the 2007 Law, all owners of units automatically became members of the owners association of their building upon purchasing their Unit. Through its board, the owners association was responsible for the management, operation, maintenance, and repair of the common areas of the building, which could be delegated to an association manager to perform.

    Likewise, the New Law has replaced the management system with a three-tiered system provided under Article 18.

    Category I – Major Projects (Article 18 (a)(1)):

    Projects in this category will be determined as per the criteria prescribed under the relevant resolution issued by the Director-General. The Developer is also responsible for managing, operating, maintenance, and repair of Common Parts and Utility Services. A Major Project will have an Owners Committee constituted of members selected by RERA from amongst Owners residing in the Jointly Owned Real Property. The duties of the Owners Committee will be determined under the Statute and the rules and conditions prescribed under the relevant resolutions of the Director-General.

    The duties of the Owners Committees as set out in Article 24 of the New Law include:

  • To verify that the management company manages the common areas.
  • To review the annual budget for the maintenance of the common property and to make needed recommendations.
  • To discuss the obstacles and difficulties concerning the management, operation, maintenance, and repair of Common Parts; and submit the necessary recommendations on the same to the Management Entity or RERA, as the case may be; and
  • To receive complaints from owners and submitting them to RERA when the management company has failed to address them within 14 days of being notified.
  • Category II- Hotel Projects (Article 18 (a)(2)):

    These are projects wherein the Developer must outsource the management of Common Parts to a Hotel Project Management Company as per the relevant rules approved by the Director-General. If the Hotel Project Management Company expresses its wish that a committee is constituted, a Hotel Project will have an Owners Committee constituted of members selected by RERA. However, the Owners Committee will not be authorized to participate in the management of the Hotel Project or its Common Parts.

    Article 37 of the New Law provides relief for the incompetence of developers or Hotel Project Management Companies. When the Developer or Hotel Project Management Company is found to be incompetent or unable to manage the common property under Category I or Category II in a manner that ensures their sustainability and serviceability, the CEO may appoint a specialized Management Company to undertake the management and operation of that Jointly Owned Real Property or Common Parts. 

    Category III- Real estate projects other than the Major Projects and Hotel Projects (Article 18(a)(3)):

    Specialized Management Companies shall manage the common parts in these projects, selected and engaged by RERA as per the controls and regulations set by a decision issued by the Director-General. An owners' committee, formed for each real estate project, must have its members selected by RERA not exceeding nine members. The duties of the Owners Committee are set out in Article 24 of the New Law, as discussed above.

    Article 38 of the New Law provides for the incompetence of Management Companies. In the event where  RERA does find that a Management Company is incompetent, unqualified, or unable to manage and maintain Common Parts in Real Property projects of Category III, RERA may appoint a replacement Management Company to undertake the management of the Jointly Owned Real Property, by adhering to the following procedures:

  • Notifying the Owners Committee of the violations committed by the Management Company and seeking its opinion concerning such violations;
  • Serving a written warning on the Management Company stating its mistakes and wrong practices concerning the management, operation, maintenance, and repair of Common Parts; at which point the Management Company may respond to that written warning within 14 days from the date of service of the warning;
  • Appointing a certified audit firm to audit the Service Charges account and verifying the Management Company's compliance with the Service Charges budget approved by RERA; and
  • Granting the Management Company a time limit to hand over the management of the Jointly Owned Real Property to the replacement Management Company within 30 days from the date of issue of RERA's decision appointing that replacement Management Company.
  • Article 19 of the New Law lays down provisions for the management of Common Facilities. It provides that the master developer of a Master Project will undertake the management and maintenance of the Common Facilities in that project. The master developer must outsource such management and maintenance to a Management Company under a written agreement approved in advance by RERA.

    Article 40 of the New Laws states the liability of developers.  The Developer remains liable to remedy or rectify any defects in the structural parts of the Jointly Owned Real Property for ten years from the date of obtaining the completion certificate of the Real Property project developed by him.

    The Developer remains liable for the repair or replacement of defective installations in the Jointly Owned Real Property for one year from the date of handover of the Unit to the Owner. Such repairs and replacements include mechanical and electrical works, sanitary and sewerage installations, and similar installations. If the Owner refrains from taking possession of the Unit for whatever reason, the liability period shall commence from obtaining the completion certificate of the Real Property project developed by the Developer.

    Any agreement made after the New Law is in force and contradicts, in any way, the provisions of Article 40 of the New Law will be deemed null and void.

    The New Law has removed the Jointly Owned Property Declaration (the "JOPD"). 

    Under the 2007 Law, the JOPD was a requirement to be registered with RERA governing the use of the common areas and units and specified the duties and obligations of the owners, occupiers, and the Developer.

    The New Law has replaced the concept with Master Community Declaration, Statute, and Building Management Regulation (defined under Article 2 of the New Law):

    Master Community Declaration: The conditions and provisions governing the development and operation of a Master Project and the Jointly Owned Real Property and Common Facilities therein, including the planning and construction standards of the Master Community. 

    Statute: The rules and provisions governing an Owners Committee are established and approved by the provisions of this Law.

    Building Management Regulation: A document prepared by the relevant bylaws issued by the DLD and entered in the Jointly Owned Real Property Register, which states the procedures for maintenance of Common Parts, including equipment and services in any part of another building, and the percentages of the contribution of Owners in the relevant costs.

    Article 20 of the New Law also lays down that before selling any units, and the Developer must issue the Building Management Regulations for significant projects and hotel projects that RERA must approve.

    As per Article 6 of the New Law, the Master Community Declaration, Statute, and Building Management Regulation constitute a part of the title deed of Jointly Owned Real Property. The DLD will maintain an original copy of each of these documents. The Developer must prepare and file the Master Community Declaration and the Statute of the complex with the DLD within 60 days from the certificate of completion for the project. However, the Building Management Regulation is prepared by the RERA.

    Service Charges

    Similar to the 2007 Law, owners must pay to the management body their share of the service charge to cover the Common Parts management, operation, maintenance, and repair expenses (Article 25(a) of the New Law).

    However, as per Article 27 of the New Law, the management body may not collect the service charges without first obtaining the relevant approval of RERA. This approval will be issued per the approved Master Community Declaration and the relevant rules and criteria approved by the Director-General. RERA will appoint a legal auditing officer accredited by it for this purpose.

    Under Article 4 of the New Law, the DLD will maintain a special register of Jointly Owned Real Property, which contains the following:

  • Details of the land plots owned by developers on which Jointly Owned Real Property are to be constructed.
  • Details of Units intended for individual ownership in Jointly Owned Real Property and sold by developers, and names of Owners of these Units.
  • Details of members of Owners Committees;
  • Building Management Regulations;
  • Plans;
  • Details of Management Entities;
  • Contracts for management of Jointly Owned Real Property or Common Parts;
  • Statement of the total area of Common Parts and Designated Common Parts, and its ratio to the total area of Units in Jointly Owned Real Property; and
  • Details of developer-owned Areas in Jointly Owned Real Property.
  • Article 42 of the New Law lays down that the Rental Dispute Settlement Centre shall have exclusive jurisdiction to hear and determine all disputes and disagreements concerning the rights and obligations stipulated in the New Law, as per the rules and procedures of the Rental Dispute Settlement Centre.

    Conclusion

    RERA has been brought into the DLD structure and has a broader regulatory scope under the New Law. Under the New Law, RERA's investigatory and decision-making powers and regulation scope have become broader, more precise, and more robust. While RERA previously only oversaw brokers, owners' associations, and escrow accounts, RERA now regulates all estate business activities and consolidating all such activities. Tenancy registration and regulation are now within the remit of the DLD.

     

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    Sun, 05 Dec 2021 12:15:00 GMT
    <![CDATA[Termination of Sale Purchase Agreement in the UAE]]> Termination of Sale Purchase Agreement in the UAE

    Introduction 

    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. 
  • Conclusion

    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.

     

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    Sun, 31 Jan 2021 10:33:00 GMT
    <![CDATA[Real Estate Developments in Abu Dhabi and Dubai]]> Real Estate Developments in Abu Dhabi and Dubai

    The United Arab Emirates is continuously witnessing positive developments in the real estate market. The market is adapting to the changing terms of the scenario around the choices of the investors willing to invest in the real estate market. Abu Dhabi and Dubai are the ever-growing Emirates in the country with a boost of real estate development announcements over one year. Abu Dhabi recently experienced the launch of the Jubail Island project spanning at the cost of AED 5 Billion and the development of Abu Dhabi's massive waterfront residential scheme at the Yas Island.

    It is pertinent to note that the supply of the residential units has been continued for the first quarter of the year. With the issue of the amendments to the provisions of the Abu Dhabi Law Number 19 of 2005 ("Abu Dhabi Law") which dealt with real estate property and its amendments in the Emirate of Abu Dhabi. The Abu Dhabi Law was amended concerning Articles 3 and Article 4 under the new unnumbered law on 17 April 2019.

    Under article 3.1, the rights of the owner towards the property were limited to the following three (3) categories only:

  • Emirati citizens, natural or legal persons
  • public holding companies with ownership not exceeding 49 per cent non-nationals
  • any person who has been issued a decision by the Abu Dhabi Crown Prince or the President of the Executive Council
  • Article 3.2 stipulated that the foreign nationals, as well as the legal or natural persons, still have the right to acquire and own all in-kind and original rights in the properties within the areas of investment.

    Article 4 was amended concerning the holder of the 'Musataha'. Musataha is a type of agreement which entitles the holder of the real right in rem towards the construction of the building to make investments, mortgages, sell or purchase a plot of land. This term ranges from a period up to that of fifty (50) years. The Resolution Number 64 of 2010 issued by the Abu Dhabi Executive Council made provisions for the regulations, rules and the term of the Musataha Agreement. The parties to the Musataha Agreement shall exercise the right to dispose of the property, including the right to mortgage. This right can be taken into effect without obtaining the consent of the landlord.

    These developments play a major role in upbringing the real estate industry in Abu Dhabi. When a customer approaches a developer, it is of high importance that the preferences and choices of the investors are taken into account when the product is offered. In this case, the flat, unit or property. The industry data is critical when scrutinising the key indicators while at the planning stage.

    It is widely believed in the market, that the residential real estate sector for both Dubai as well as Abu Dhabi in a comparison state. To take an example, a foreign investor would prefer to make an investment in Dubai for some apparent reasons, like more knowledge on the real estate regulations and increased gains in the form of profits and interest on the investments. The developers are competing for attracting the investors with competitive value offering and campaigns for maintaining the turnover. Also, the payment structure has been on the lines to the construction progress. The developers are offering a plan in which a specific percentage out of the purchase price is to be paid on completion and sometimes after the end of the project.

    October 2018 saw the newly issued rules which were set to make things easier for the landlords to commence eviction of the tenants. These rules will allow the landlords to approach the respective enforcement departments for claiming any of the outstanding rents and the property back in possession. Initiatives like these make an effort to support and create awareness about the suitable environment for investing in the real estate in Abu Dhabi, together with the mechanism for ensuring simplified procedures and amicable resolution of disputes.

    Foreign Ownership:

    With the introduction of the Abu Dhabi Law, which allowed 100% foreign ownership, is intending to boost the confidence amongst the investors and encouraging transparency for longer investment terms. It will enable the foreign nationals to obtain an ownership of freehold titles within the investment zones along with the title deeds. It is to be noted that, previously, the investors were awarded a ninety-nine (99) year lease. This is a fundamental gear change in the market, which is set to enhance and encourage the economic activities in Abu Dhabi. These regulations will also substantially reduce the costs associated with registering the property. Abu Dhabi intends to focus on the foreign investor market in India and that of China, where there is potentially the highest number of investors showing a lot of interest to invest in the real estate in the United Arab Emirates.

    The main attraction towards the new Abu Dhabi Law is the initiative of the Abu Dhabi Government, introducing the long-term investor visas along with 100% ownership for the companies belonging to specific industries. This is aimed towards the economic growth and developmental support in Abu Dhabi.

    Off-Plan purchases:

    Rightly called as the Abu Dhabi Real Estate Law Number 3 of 2015 concerning the regulation of the Real Estate Sector in the Emirate of Abu Dhabi, provides for the strengthened protective incentives for the off-plan buyers. The off-plan sale is understood as an agreement where the investor is granted the rights in the property under the floor and compound plan. The law appointed the Abu Dhabi Department of Municipal Affairs ("DMA") as the regulator for real estate who shall be performing similar functions to that of the Real Estate Regulatory Authority ("RERA") of Dubai. The points to remember are as follows:

    • A central and unique or database record for all the projects in the Emirate of Abu Dhabi
    • Developers to charge only the administrative fees as approved by the DMA
    • Rules to be laid down by the owners' association
    • Sale of off-plan units only on the real right, i.e. right in rem over the property
    • Developers to open an escrow account for off-plan sale
    • Fine imposed on the developers in the event the project is delayed

    Rent cap in Abu Dhabi:

    The Department of Municipal Affairs and Transport (DMAT) in Abu Dhabi recently recalled the annual rent cap of 5%, which was abolished in the year 2013.

    Dubai:

    The real estate market in the Emirate of Dubai has always boomed with the majority of the investors willing to invest in the projects. As it was previously experienced for the rental and sale prices in 2018, the same is expected to decline in 2019. This is largely due to the excess amount of supply volume. However, the industry in the long-term perspective is optimistically positive. Since the prices are on the declining pace; it is making it favourable for the investors to think and invest their money in developing or developed projects. Often, the developers are offering attractive incentives and pries, which has widened the investor pool.

    2019 is set to experience a prosperous market avenue in Dubai's real estate market where the developers are promoting their projects with a payment plan that is suitable for the investors along with their off-plan projects. The disparity in the ratio of demand to supply is also making the developers to create an environment more favourable to the buyers. With the Expo 2020 approaching, the Dubai real property market is set to boost investments by foreign investors by a large parity. Also, with the 10-year investor visa, which was introduced is offering the eligible residents to have a strong sense of permanent residence in the country for investors willing to invest around AED 10 Million.

    Digital platforms in the real estate industry:

    • Real Estate Self-Transaction (REST) Platform:

    Dubai has launched the REST, a digital platform, which is expected to target the ease of managing all the transactions related to real estate or property.

    • Taqyimee:

    Taqyimee is a smartphone application for valuation services for real estate. It is expected to connect all the evaluators to all the potential and existing investors and owners.

    These platforms will increase the transparency in the real estate industry, making it more investor-friendly and providing easy accessibility to the services.

    Laws on Rent Cap

    Dubai

    The rent cap law in the Emirate of Dubai has issued the Government of Dubai Decree Number 43 of 2013 (the Decree) dealing with the determination of increasing the rents in the real estate industry in Dubai. The Decree imposed an increase in the rent cap to 20%. The rent cap law makes it clear that it applies to all the development areas and the free zones as the Dubai International Financial Center (DIFC). The RERA gives a detailed index on market price where the rental increase prices can be calculated.

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    Wed, 04 Nov 2020 04:15:00 GMT
    <![CDATA[How ADGM Registered Entities can Own Real Estate in Dubai]]> How ADGM Registered Businesses can Own Real Estate in Dubai

    Abu Dhabi Global Market (ADGM), an established free-zone and international financial centre in Abu Dhabi was legally established pursuant to Federal Decree Number 15 of 2013 and Abu Dhabi Law Number 4 of 2013 (the ADGM Founding Law). ADGM attracts several international business and investors to the free-zone, primarily due to the adoption of the English Common Law as the cornerstone of its legal and regulatory framework.

    The ownership of the real estate in Dubai is governed by Law Number 7 of 2006 concerning Real Estate Registration in Dubai and is restricted to the UAE and GCC nationals and the companies wholly owned by them as well as public joint-stock companies. The foreign nationals and companies wholly or partly owned by them have the right to own real estate in Dubai but only in certain designated areas, the residential and commercial areas, including Downtown Dubai and Burj Khalifa, The Palm, Emirates Hills, The Meadows, The Lakes, The Springs, Dubai Marina and Jumeirah Lakes Towers.

    How can an ADGM Entity Own Properties in Dubai?

    The Dubai Land Department (DLD) initially permitted all types of onshore and offshore companies to own real estate in Dubai. In 2012, it introduced a change in its policy, permitting only Jebel Ali Free Zone Authority (JAFZA) Offshore Companies as corporate holders of Dubai property. The JAFZA offshore company could, in turn, be owned either by an individual or a foreign offshore company, such as a British Virgin Islands (BVI) company. In 2018, the DLD entered into a Memorandum of Understanding (MoU) with the ADGM, thus allowing investors to tailor structures for real estate ownership, under a more familiar Common Law framework. ADGM incorporated entities are now permitted to own land and property in the areas of Dubai designated for foreign ownership pursuant to the MoU between the ADGM and the DLD and structure their businesses in ADGM accordingly.

    For registering property in Dubai under an ADGM entity, the following rules and procedures shall apply:

  • The DLD will register properties in the name of an ADGM entity as per its own rules, regulations and conditions and subject to the Law Number 7 of 2006 of Dubai;
  • The DLD shall rely on a Certificate of Incumbency issued by the Registration Authority of ADGM for ensuring the registration and licensing by the Registration Authority of ADGM as of the date of the Certificate of Incumbency;
  • The shareholders in the ADGM entity are either natural persons or companies whose shareholders can be verified by the DLD. However, the ultimate shareholders can be identified by relying on additional information requested by the DLD to the Registration Authority of ADGM;
  • For ADGM entities which are owned by a combination of natural and corporate persons, the DLD approval may be subject to compliance with specific conditions and submission of certain documents including a No Objection Certificate issued by the DLD approving the ownership of properties in Dubai;
  • An 'Acknowledgement and Undertaking Letter' in the form issued by DLD concerning the disclosure of future shareholding transactions must be signed and submitted by all the shareholders or directors of the ADGM entity to the DLD;
  • Fees concerning the registration, transfer and cancellation must be paid in full directly to the DLD. Change in ownership for an individual owner involves a 4 percent transfer fee payable to the DLD. A change in shareholding of a company where the property is held by an ADGM company will require a No-Objection Certificate (NOC) from the DLD subsequent to the payment of the 4 percent transfer fee, but prior to the proposed shareholding change. However, for a transfer from an individual name to an entity set up by the same individual, the DLD may consider the transaction as a 'gift transfer', subject to a 0.125 percent transfer fee.
  • The ADGM branches of foreign companies and listed public companies are outside the scope of the MoU, and the ADGM trusts and foundations are not permitted currently to own properties in Dubai, whether directly or indirectly.

    The easiest method of property ownership is through ADGM SPVs. The Special Purpose vehicles (SPVs) may serve as a special purpose for professional investors, or investment institutions for securitizing assets or investing in real property.

    Registering property in Dubai in the name of an ADGM SPV tends to offer several benefits, for instance:

  • Having a single ADGM SPV as the corporate owner of multiple properties can help in consolidating real estate holdings for easier management and transfer.
  • An ADGM SPV separates the real estate assets from personal liabilities.
  • Having a corporate structure allows for the securitization of real estate assets.
  • An ADGM SPV being a locally-registered entity is at reduced costs, as opposed to a foreign offshore structure such as BVI for the documents of foreign offshore structures undergo expensive attestations to be used for transactions within the UAE.
  • The ADGM, being a Common Law jurisdiction, has the inheritance procedures greatly simplified as the shares held by the ADGM SPV are transmitted as per the Common Law, and hence Personal Status Law does not apply on the event of the death of a shareholder. However, in the case of Muslim shareholders, Sharia may still be applied.
  • Conclusion

    The UAE continues to develop an unparalleled real estate sector to bring forth new initiatives to bolster the ease for investors. The cooperation between ADGM and the DLD aims to streamline regulations to further enhance accessibility into the real estate market. The MoU serves to augment the sustainable growth of the real estate sector. The DLD, previously limited to free zones in Dubai, has gained access to the financial free zone in Abu Dhabi through the MoU, thus providing facilitated and transparent services for all investors and consolidating the vision to position Dubai as the world's premier real estate destination. Investors must obtain proper counsel and advice from lawyers in Dubai or law firm in Abu Dhabi and further undertake proper and effective due dliigence before acquiring real estate..

     

     

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    Tue, 29 Sep 2020 12:02:00 GMT
    <![CDATA[Non-payment of Service charges in Dubai and Abu Dhabi]]> Non-payment of Service charges in Dubai and Abu Dhabi

    The Real Estate Regulatory Agency ("RERA") issued a notice in April 2020, stating that the homeowners in Dubai who defaulted on 2019 service charge payments will have their fines waived. But did this mean that the waiver would extend to 2020 payments? Well, that is at least what many homeowners believed which has been the prime reason why there has been a delay in the payments.

    "What is a service charge?" holds no link to the rent or the occupation of part of an area of land, but instead is used for the maintenance and upkeep of the property and the services offered to cover up the expenses for security staff, cleaning services, landscaping etc. Service charges can also fund luxury facilities for residents, such as communal leisure facilities.

    A tenant might come across in their lease or tenancy agreement the way in which a service charge is organized and details of what the landlord can and can't charge and the proportion of the charge which is to be paid by the individual leaseholder. The landlord (or sometimes a management company that is a party to the lease) provides the services, while the leaseholders pay for them.

    Typically, the old leases still provide services at a fixed rate, regardless of the actual costs incurred by the landlord. However, most service charges are calculated on the actual or estimated cost of the services and thus vary from year to year. These are known as variable service charges.

    Dubai

    Law Number 6 of 2019 on Ownership of Jointly Owned Property in the Emirate of Dubai (the "Dubai Law") clearly lays down that the Owner shall pay the Service Charge and Master Community Service Charge unless the Unit lease stipulates otherwise. In all cases, the Owner shall remain liable to pay the Service Charge and Master Community Service Charge if the tenant fails to pay them as prescribed by the Dubai Law.

    Article 25 of the Dubai Law lays down that the Owner shall pay the share of the Service Charge to the Management to cover the expenses of the Management, operation, maintenance and repair of the Common Areas. Services Charge for unsold Units, as well as for Units sold in which the Developer is obliged to pay the Service Charge for the buyer in the contract of sale or attachment in accordance with the provisions agreed in the contract. The area of the Unit registered in the Land Registry shall be relied upon when calculating the Owner's share of the Service Charge.

    It is forbidden for the Management to impose or collect any amount whatsoever from the Owner for the operation, management, maintenance and repair of common areas or common facilities except after obtaining the prior approval of the RERA, and in accordance with the directions issued by the Directors General. Moreover, the Developer or the Management cannot take action against the Owner which prevents him from benefiting from the Unit or the Common Areas or Common Facilities, solely to oblige him to pay the Service Charge or Master Community Service Charge in contravention of the procedures stipulated in the Dubai Law.

    Article 32 of the Dubai Law states that the Management has a lien on each Unit in respect of unpaid Service Charge. The Unit shall not be disposed of until after the paying of allowance to the Management. However, if the Owner fails to pay their share of the Service Charge or any part thereof, the Management shall demand them to pay this charge within thirty days from the date of notifying them thereof by a written notice approved by the RERA. If this time limit elapses, the financial claim issued by the Management to the Owner shall be enforceable before the execution judge in the Centre, in accordance with the rules and procedures in force in this regard. The competent execution judge may when necessary, sell the Unit whose Owner has not paid his share of the Service Charge, through public auction to recover the due Service Charge. The Owner who fails to pay his share of the Service Charge shall pay the legal fees, expenses and attorneys' fees determined by the competent execution judge.

    RERA has recently issued a "Need to pay up" notice insisting the homeowners need to come up with their share. To upkeep the properties, it is important that the payments towards the community's service fees are paid on time and in full. As the Owners Association Management Companies are required to get prior RERA approval as per the Dubai Law to send legal notices to homeowners who have repeatedly defaulted on service charge payments, the latest notice to pay up has cleared the possible legal option to pursue the defaulters.

    Abu Dhabi

    Law Number 3 of 2015 concerning the Regulation of the Real Estate Sector in the Emirate of Abu Dhabi (the "Abu Dhabi Law") applies to real property within the Emirate of Abu Dhabi with the exception of the Abu Dhabi Global Market. The Abu Dhabi Law covers a wide range of subjects including the development and regulation of strata title, the registration and enforcement of mortgages and the licensing of real estate agents, brokers and other entities.

    As per Article 68 of the Abu Dhabi Law, the Owners' Union may collect the service fees from the owners to finance its activities, as per the contribution percentage of each real estate unit. The service fees shall be paid by the Owner of each real estate unit to the Owners' Union on the due date, provided that the Developer pays his share in the fees with respect to unsold units. The Union's Articles of Association shall mention the type of service fees, how to collect them, and the records that should be kept.

    Upon the failure of the Owner to settle its service fees, a preferential right for the Owners' Union shall arise on the respective real estate unit. The Owners' Union shall, according to the resolution of its Board of Directors, notify the Owner of the real estate unit by the registered mail with acknowledgment receipt to settle the overdue service fees within three months from the date of notification. Should the Owner of the real estate unit fail to pay within the specified period of the notification, without expressing an acceptable excuse, the Owners' Union may submit an application before the judge of urgent matters to issue an order to sell the real estate unit for the settlement of the due service fees according to the provisions of the Civil Procedure Law.

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    Mon, 24 Aug 2020 01:57:00 GMT
    <![CDATA[ How to Get Away with (a) Building]]> 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.
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    Sun, 05 Apr 2020 08:56:00 GMT
    <![CDATA[Investors’ Due Diligence Before Purchasing Real Estate in Dubai]]> Investors' Due Diligence Before Purchasing Real Estate in Dubai

    Authors, legal professionals, bankers and jurists have written several papers on the increased foreclosure rates preceding 2008 in the United States' real estate market. This predicament led to a domino effect of issues on mortgages, (the infamous) collateral debt obligations and other financial instruments in the sector. However, this ripple did not stop within the borders of the United States. Various developing and developed economies observed the after-effects of the burst of this bubble over the (then) years to come. This ripple, in turn, changed the stringency level of legal provisions governing both financial and real estate sectors with governments across the globe, increasing the regulatory control. While STA's lawyers in Dubai have discussed on these aspects in the past, we will endeavour to explain the importance and requirement of conducting due diligence from an investor's perspective in Dubai before investing in the Emirate's real estate sector. Over the past few decades, Dubai has evolved to become one of the premier jurisdictions in the world for real estate investment due to its attractive projects and investor-friendly legal framework. Numerous investors from across the globe flood to the Emirate for purchasing from the lucrative array of real estate units that the Emirate has to offer.

    Broadly, there are two types of real estate units available to investors in the UAE: off-plan units and developed units. While each of these options has their own commercial and legal implictions, it is pertinent for any investor first to understand the reason why they are investing in real estate to understand the most suitable option. The Dubai Land Department (the DLD) is a reputed and effective regulator of real estate sector in Dubai, that has implemented numerous regulations and circulars to safeguard the

    interests of parties to a real estate transaction in Dubai.

    Caveat Emptor

    Investors should carefully examine various aspects when entering into a real estate transaction: namely legal, due diligence, financial due diligence and physical due diligence (commonly known as snagging). In addition to other matters that their counsels may advise on the transaction. Investors should understand the due diligence requirements and contact real estate lawyers in Dubai once they identify the particular unit (or project) that they wish to purchase.

  • Legal Due Diligence: Legal due diligence requirements could broadly cover the following aspects of a real estate unit: -
  • Regulatory Check: The DLD is the primary authority governing real estate in the Emirate of Dubai and issues title deeds to investors for the ownership of the real estate unit. It is also advisable for investors or their attorneys to contact the DLD for confirming the title of the property before initiating the process or handing over any token monies. Investors should primarily contact the seller or developer of the unit and confirm that the registration of ownership of the unit as per the records of the DLD and they have the authority to sell the property. For example, if the property is under the name of a corporate entity, then only the authorized signatory or actual power of attorney holder of the authorized signatory would have the ability to sign the sale purchase agreement and other documents. It would be prudent to undertake due diligence checks with the Dubai Municipality and other governmental authorities based on the type and utility of the particular real estate project. This is to ensure that there are no fines or other penalties on the said property.
  • Judicial Search: The investor's should also undertake search on any attachments or inclusions of the particular real estate unit in any litigation matter, i.e. confirmation that that unit is free of any legal liabilities. Parties holding a court judgment in their favour for obtaining monies from UAE courts are opento initiating execution proceedings and attaching real estate unit(s) of the judgmentdebtor in the event the latter defaults on the payments as stipulated in such judgment.Therefore, investors should be fully aware of any such judicial lien or liabilities on the unit before proceeding with the transaction.
  • Conveyance: This is one of the primary and and most crucial aspects to be managed by the investor before intusing any funds into the investment. It is pertinent for the investors to understand the specific clauses, payment terms, mortgage options and other provisions of the sale-purchase agreement and the reservation form (if provided) before signing the same. In certain situations, investors may be unaware of the rules of right to resell the unit, obtain mortgages, provisions regarding unit handover etc.This issue may occur when the investors may sign the sale-purchase agreements in haste without consulting lawyers or professionals specializing in the field. Foreign investors are often not aware of the laws and regulations in the real estate sector and tend to contrast interpretation of transactions with similar situations in their home countries (other jurisdictions). Therefore, it is pertinent for investors to understand their rights and liabilities as per the law of the land and a simple study of the documentation will not suffice. Ideally, a vigilant investor from a foreign jurisdiction may review the paperwork and make sure that the sale-purchase agreement is vetted by a real estate lawyer. However, this will not suffice if the investor does not have an understanding of their rights (such as right to take handover of the unit on agreed date, right to mortgage the property as per law, right to resell the real estate unit etc.) and liabilities (like processing payments as per the instalment dates agreed upon, to pay Oqood Registration fees etc.).
  • Check on arrears in service charges and other utilities: Investors should also check on any outstanding payments due to the Dubai Electricity and Water Authority, respective owners' association, chiller charges etc. to understand the existing liabilities on the units. Generally, the seller is required to obtain a no objection certificate from the master developer, owners' association/management company and transfer the name of the unit owner with the utilities' provider at the time of selling the unit(s). This is to safeguard the investors' interests and ensure that there are no hidden liabilities or charges on the particular unit.
  • Financial Due Diligence: This aspect of the due diligence process is twofold. First, to check and confirm the existence of any underlying mortgages, loans or other liabilities with financial institutions; and second, to identify the exact value of the particular real estate unit after checking with authorized and independent personnel/ companies. Investors should conduct a financial due diligence as well to ensure that there are no unknown financial obligations (or liens) on the particular real estate unit and to ensure that the unit is basically, worth the money - for instance, lack of knowledge of the market prices of units by foreign investors.
  • Snagging: In simple terms, snagging is a process by which investors ascertain whether the physical property is in line with market standards and the conditions as mentioned by the seller or developer.It helps the buyers to route the liability to remedy or fix any specific issues that the property may pose with regards to the unit area, plumbing and electric, flooring, walls, doors and other movable or immovable fixtures. Investors should ideally appoint a company that specializes in this field of work at the time of obtaining the handover of the units and report the same to the seller or developer within a limitation period of one (1) year, provided they do not waive off their rights towards the same or accept the property as-is.
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    Thu, 05 Mar 2020 12:00:00 GMT
    <![CDATA[Owners Association in Dubai]]> Owners Association in Dubai

    "Home ownership is the cornerstone of a strong community."

    – Rick Renzi

    On the bright sunny morning on 9 November 1987, the United States District Court (E.D. Virginia - Alexandria Division) ruled on a very important question in the real estate sector at that stage – the validity of third-party claims when there is no evidence of secondary liability [117 F.R.D. 576]. This case was filed by the Watergate Landmark Condominium Unit Owners' Association who were grossly discontented by certain construction works that were done on the balconies by Wiss, Janey, Elstner Associates (engineering firm), and Legum & Norman Realty (real estate management firm). The topic of this article is not simply the validity of such claims, but the legal standing itself of owners' associations to file claims against third parties. Ergo, we would rather cut to the chase in the abovementioned case and inform our readers that the court ruled that claims against third party entities are permissible only when the third parties would be liable to the first defendant in cases where the first defendant is held liable to the claimant. As an individual, many amongst us consider the ownership of a permanent home as a personal milestone. Be it an apartment or a house within a community, the joy of having a permanent space within a property is nothing short of unparalleled. Living in such a community has its own set of benefits, with the inclusion of having access to various common areas that can be utilized as and when residents wish to do so. It is a common practice in such communities to establish an owner's association in order to maintain and manage common areas of the community, wherein the association will be tasked with catering to issues such as security, enforcement of rules, maintenance and engagement with relevant authorities.

    Being a part of the Owners Association necessitates a payment known as the annual service charge, which will be utilized for the maintenance and preservation of the community. In Dubai Law Number 27 of 2007 was introduced as the Strata Law, to establish the regulations with regards to the ownership of jointly owned real property and the establishment of an owner's association. The reason for beginning this article with this case was to illuminate the readers of the rights of owners' associations to file cases. We all know that only legal persons have the right to sue or be sued. According to the Law Number 27 of 2007, once the sale of the first unit of the Jointly Owned Real Property is registered in the Property Register of the Dubai Land Department, an Owners Association will be legally constituted, which will comprise of the owners of the units in the Jointly Owned Real Property (and the Developer, in the case of unsold units). Some of the features and responsibilities of an Owners Association are:

    • It is to be a non-profit body that has a legal independent personality separate from its members, that can sue or be sued in its own name.
    • The Manager of the Owners Association will represent it before Courts and other relevant authorities.
    • The responsibility of management, operation, maintenance and repair of common areas lies with the Owners Association, wherein the Association must obtain a license from the Land Department.
    • The Owners Association can delegate its powers and responsibilities to any person or company, if applicable, in accordance with agreed terms and for remuneration.

    The Strata Law further mentioned that the Chairman of the Land Department is empowered to issue further resolutions and bylaws that are deemed necessary for the implementation of the provisions of the law. In accordance with this provision, in April 2010, the Chairman of the Land Department issued the Implementing Regulations of the Strata Law. It must be noted that this was issued as a series of 'guidelines' rather than 'regulations'. These guidelines were split into the following:

    • General Regulations: These regulations covered matters such as consumer protection, collection of service charges, financial disclosures and appointment of administrators to name a few.
    • Jointly Owned Property Declaration Regulation: The Jointly Owned Property Declaration Regulation laid out the details with regards to how Unit Owners can establish a Jointly Owned Property Scheme in the scenario the developer fails to do so. The regulation also provided for up to three layers of Jointly Owned Property Schemes within one Jointly Owned Property development.
    • Constitution Regulation: The Constitution Regulation specifies the manner of the constitution for each Owners Association. If the Developers had previously specified any other manner, it must be noted that with the issue of this regulation, it will no longer be valid.
    • Survey Regulation: The Survey Regulation specifies the registration and accreditation of surveyors and also the duties of these registered surveyors.

    The Legal Status of Owners Association

    According to Article 18 of Law Number 27 of 2007, the Owners Association is to be a non-profit entity with a separate legal personality that is independent of its members. Furthermore, it may sue and also be sued in own name and also take ownership of any movable property. Article 21 of the same law further states that for the purpose of management, operation, maintenance, and repair of Common Areas, the Owners Association is required to obtain a relevant license from the Land Department.

    Unfortunately, following the enactment of the guidelines, the Owners Association have not been able to function as a fully-fledged legal entity. This has resulted in developers still having an active role and being involved in the management and operation of these Jointly Owned Real Properties. In order to counter this situation, the Real Estate Regulatory Authority (RERA) began granting several Owners Association an interim status to carry out specific purposes. These Owners Associations were only allowed to carry out and involve themselves only in activities that were permitted in accordance with the granted status. This led to various Owners Associations having varying degrees of control over the management of the property and being heavily dependent on cooperation from the Developer. In the event any differences arose between the Developer and the Owners Association, it would become extremely difficult to manage the property, with RERA intervening to resolve such disputes and determine the legal rights of the Owners Association on a case-to-case basis.

    Since the Implementing Regulations of the Strata Law were issued as mere guidelines and not regulations, it has led to the following challenges:

    • The inability of Owners Association to enter into contracts with third parties;
    • The inability of Owners Association to open bank accounts;
    • The full-time status of Owners Association, due to permits being issued for specific purposes only, at present;
    • The ability of owners to sue or to be sued.           

    Such uncertainties have led to questions being asked about the effectiveness of the Strata Law, as one of the cornerstones of the law is the establishment of an Owners Association and how it manages the Jointly Owned Real Property, independent from the developer.

    The Merriam-Webster Dictionary defines a 'legal person' as a body of persons or an entity (as a corporation) considered as having many of the rights and responsibilities of a natural person and especially the capacity to sue and be sued. But is an owners' association a legal person? The laws pertaining to and surrounding owners' associations and jointly owned properties are substantially different in each jurisdiction. This depends on various factors such as the history of ownership rights in the locality, fundamental rights of the country, the legal standing of organized and unorganized (registered and unregistered) bodies etc. Let us move on and discuss the status quo of this subject in the Emirate of Dubai. H.H. Sheikh Mohammed bin Rashid Al Maktoum recently announced the implementation of Dubai Law Number 6 of 2019 regarding the joint ownership of the real estate.

    What is an Owners' Association?

    An owners' association is a not for profit establishment and is a separate legal entity which comprises of the units or apartments that are in joint ownership. The owners' association is divested with the responsibility of managing, monitoring, and maintaining the areas that are used in common and that each owner of the unit is a member of the association.

    This implies when you buy a condo or house in a structure or network, you become a member of the owners' association. What's more, that requires an installment of what is known as the annual service charge, for the support and upkeep of the standard zones of the community or the building. Owners' associations oversee, control and direct the common areas for the benefit of the considerable number of proprietors of a property, including matters like enforcement and authorization of statutory guidelines, network or building principles, support and upkeep, and security. They likewise assume property management in the facility, just as vital monetary administration required to release their job dependably. Why funds, one may inquire? Since properties need extensive money related duty to keep up and improve over their maturing life cycle.

    The owners' association is generally represented by a leading group of five to seven chosen unit owners, who work intentionally for the advancement of their locale. It is going by an owners' association chief, who might be a proprietor acting in a willful limit, yet there is a developing pattern for naming owners' association supervisors from an expert organization authorized and enrolled by the Real Estate Regulatory Agency (the RERA).

    RERA assumes a significant job regarding the administration and directs the connection between parties, including proprietors, landowners, designers, proprietor affiliation the board organizations and owner association management companies and specialist co-ops of offices in a land improvement or undertaking.

    Law Number 27 of 2007 on Ownership of Jointly Owned Properties in the Emirate of Dubai (the JOP Law)

    The latest execution by the Dubai Land Department is as two circulars. The first circular was given on 26 February 2014 for every one of owners' associations, being Circulation Number 1 of 2014 on Regulating Service Fees Claims. The second circular was given on 10 March 2014 for property engineers, being Circulation Number 2 of 2014 on Establishment of Owners Associations.

    In spite of desire following a few media releases and reports that the owners' associations enrollment and permitting procedure will be additionally explained and executed, the issuance of the developer circular and owners' associations circular does not give the truly necessary explanation that one would have sought after. In any case, the presentation of the developer circular and owners' associations has no uncertainty featured DLD's goal to perceive the owners' associations lawful status by slowly moving engineers' administration capacities to the OA.

    Common Properties Law Number (6) of 2019

    The Common Properties Law Number (6) of 2019 which has come into effect on 19 November 2019 brings about certain key changes under this law. Under this law, the developers in Dubai shall no longer be allowed to collect service charges from property owners. In other words, property owners or their approved property management companies shall assume all collection responsibilities. These collected funds essential go into the seven (so far) approved banks under this law. Additionally, in accordance with this law, all "fractional ownership" properties in the Emirate of Dubai must have owners associations as well as property management companies that act on their behalf. Dubai Land Department, through RERA, has launched an online system called "Mollak", which means 'owners' in Arabic, to essentially regulate jointly owned properties, monitor payment of service charges, to name a few. Additionally, Mollak also provides an integrated and new system to monitor and maintain accounts that are related to service charges whilst providing support services to all individuals/parties that are involved in jointly owned properties in the Emirate of Dubai.

    Murphy vs Yacht Cove Homeowners' Association [345 S.E.2d 709 (S.C. 1986)]

    The connection between the owners and their locale affiliation has been progressively characterized in litigation as of late, because of the fast development of regular intrigue networks and the issues being introduced to the courts. The owners' association is typically a consolidated substance working under corporate not-for-profit status. The owners' association was made by the developer/declarant to deal with the common interest community. The owners' association is financed by levy or appraisals contributed by the individual unit proprietors (or individuals) and is controlled by an Executive Board, Board of Managers, Trustees or a Board of Directors made out of unit proprietors who ordinarily fill in as volunteers. The owners' association is a different legitimate personality and may sue and be sued free of its individuals. Courts have held that even unincorporated network affiliations might be sued by property holders.

    Existing law in many states sees the connection between owners' association and an owner as being similar to the connection between a landlord and tenant. As a landlord, the owners' association is considered answerable for the upkeep of those regions over which it practices territory and control. In a typical intrigue network, these zones will for the most part be the 'common areas', 'normal components' or those zones outside of the individual units yet inside the basic intrigue network. Several areas where owners' rights have been documented by multiple appellate courts from across the jurisdictions:

  • Breach of the covenant by the owners' association
  • Breach of the fiduciary duty owed to owners by owners' association
  • Association director liability
  • Negligence of the owners' association
  • ]]>
    Thu, 27 Feb 2020 06:01:00 GMT
    <![CDATA[Defective Property Post Handover in Dubai and UAE]]>  

    Defective Handed Over Real Estate Units

    As Winston Churchill once said: "Land monopoly is the mother of all monopoly". Decades later, this statement has still proven to be accurate as real estate is a booming industry all over the world. Real estate in the United Arab Emirates (UAE) in particular, has seen a vast development in recent times. This article is tailored to address real estate in the UAE and in particular how the law deals with defective real estate units that are handed over.

    Development of real estate in the UAE

    Legislation has been passed where now foreign expats can own property in the UAE (subject to the Emirate and free zone). Prior to this, only UAE and GCC nationals could own property in the UAE and expats were only allowed leases for 99 years. How it worked beyond 99 years was unclear, therefore, new structured law governing this area of real estate owned by non-nationals was long overdue. In 2006, HH Sheik Mohammed bin Rashid Al Maktoum, Ruler of Dubai issued Law Number (7) of 2006 Concerning Land Registration in the Emirate of Dubai which for the first time facilitated the right of a foreign national to own property in Dubai. Article 4 of this law states that a foreign expat now has the right to 'acquire absolute ownership of land without restrictions as to time.'

    As this legislation came into force, foreign investors flooded to Dubai mostly to invest in real estate. Bearing this in mind, more legislation has been passed in recent time to regulate the buying and selling of property so as to promote real estate business in UAE with integrity. A few such examples are:

    • Law Number (8) of 2007 concerning Escrow Accounts for Real Estate development in Dubai; ensuring that developers do not misuse money invested by foreign and national investors.
    • Decree 43 of 2013; passed to bring rent control and allow foreign investors to profit from their UAE investment by renting it out without interfering with tenancy rights.
    • Upcoming law; to be passed in relation to wills and probate to enable foreign nationals to pass down their freehold property without being subjected to Shariah law.

    Defective property – patent or latent:

    Firstly, it is important to understand and differentiate the types of defects that are seen in real estate units. These defects can either be latent or patent. Patent defects are those which are apparent to any reasonable person viewing a property, i.e. broken windows, dry walls, infected ceilings etc. As these defects are noticeable, it is up to prospective buyers to make a decision or negotiate with the seller. Latent defects, on the other hand, are those flaws which are only identifiable by experts in the field and are sometimes not even visible to the naked eye. As per Article 544 of Federal Law Number 5 of 1985 (commonly known as the UAE Civil Code), a latent defect is defined as one which 'cannot be observed by external inspection'. The general rule for defective property is that the builders/sellers have to compensate the buyer for any latent defect (patent defects are known to the buyer and he can enter into a contract knowing about the defect at his own discretion).

    UAE law:

    Rules of contract law apply for cases dealing with property, and the validity and legality of the contract generally cover any issues. For instance, in Appeal Number 2017/452 (Real Estate Appeal), the Dubai Court of Cassation ruled on 14 March 2018 that as per the contract a buyer had to be compensated for the lack of 5 per cent space of the real estate he had contracted to buy from the defendant.

    UAE Civil Code on defective property:

    The UAE Civil Code provide guidance when it comes to defective property which is almost always applied in cases with latent defects. Article 237 states that a contract can be terminated if there is a defect even if the contract does not call for such a clause. If a person wishes to terminate a contract on reliance of this article, then, Article 240 which states that when a contract is cancelled due to a defect, the subject of the contract should be returned to the owner is also applicable. The article goes on to say that the contract price is recoverable by the affected party. However, it is important to note that this option to terminate the contract would not be applicable if a party accepts the defect or chooses not to exercise this right (Article 241(1)) but not when the party in question dies (Article 241(1)).

    The law also requires any person who has carried out, enabled or caused any defect in property to be bound to repair it. Article 282 states that a person liable for any tort is to repair the same. The party seeking compensation of any latent defect can claim for compensation for moral as well as financial damage (Article 293). However, the tricky part here is the statute of limitation, and if the buyer (or any affected person) is aware of the property defect and wishes to act within the expiration of the time period. The limitation period, however, does not apply if the defect in question is a part of a criminal proceedings claim (Article 298 (2)).

    But, what about property contracts which are contracted out to third parties?

    Decennial liability

    Decennial liability is a form of liability which initially arises from the French Civil Courts but is applicable in the UAE as well. In short, it means the person who hands over the property is liable for any defects found in the property for 10 years after the handover. This is applicable to the contractors but not to the subcontractors who help build the property. As the subcontractors are employed by the main contractors, vicarious liability applies here.

    The UAE Civil Code Articles 880 – 883 govern decennial liability. It provides that when the stability and the safety of the building is concerned, the contractor and the supervising architect/engineer is liable for it for a period of 10 years after handing over the property (Article 880(1)). This period cannot be negotiated between the parties for a shorter amount of time neither can the contractors contract out of this mandatory obligation (Article 882). This liability arises when the work on the property in question commences (Article 880(3)) and in case of liability, the affected party is to be compensated (Article 880(2)). This was seen in the case of Dubai Court of Cassation 150/2007, where it was held that a contractor/engineer would be liable to compensate the party to whom the property was handed over. This case also underlined an important principle that liability does not extend to affected third parties who are not part of the contractual agreement. Another important point to note is that, contractors will not be held liable for defects during the construction of the property as the decennial liability applies only after the handing over of the property. This principle was used in Abu Dhabi Court of Cassation 293/Judicial Year 3.

    Limitation

    When can an affected party make a claim for a defect in property? The general rule on limitation is 15 years from the date of loss suffered to bring about a claim as per the UAE Civil Code Article 473. In terms of commercial contracts, the general rule is 10 years as per Commercial Code Article 95. Article 880 of the UAE Civil Code deals with building contracts which is also a period of 10 years. The 15-year time period does not apply to defected property handovers in terms of decennial liability as per Article 883 of the UAE Civil Code.

    However, it is important to note that no claim can be made if the affected party claims for compensation after 3 years of discovering the defect in the property (Article 883 of the UAE Civil Code). This was seen in the UAE Federal Supreme Court Case Number 211 of 2019 in the Civil Circuit where it was held that a defective property dispute cannot be heard in this court on the basis that the case was time barred as the appellant brought about a claim after the three-year expiration date.

    With real estate booming in the UAE, it is important to acknowledge that there are laws governing various aspects which protect the rights of both parties. As seen from the case laws, the Courts generally uphold the relevant Codes.

     

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    Tue, 24 Dec 2019 05:34:00 GMT
    <![CDATA[Does the UAE real estate market need new financing rules?]]> Does the UAE Real Estate Market Need New Financing Rules?

    - Jui Dongare, Shubham Mishra, and Tulika Kaul

    The United Arab Emirates (UAE) property market has experienced quite a few major developments within the past decade, with a host of new laws, initiatives, and real estate projects being announced. Moving into 2019, the UAE real estate market has been characterised with a great deal of positivity and improvements. Over the past five (5) years, the UAE real estate sector has been in a continuous remedial phase. For instance, the UAE's property market peaked in mid-2014.

    According to rating agency Standard & Poor's (S&P), the UAE property market, particularly in the Emirate of Dubai, will witness encouraged and enhanced recovery beyond 2021. Hitherto, investors have maintained a wait-and-watch stance on the property market, in spite of positive initiatives being taken up by real estate developers and the governments of the various Emirates. Amid a reasonably positive outlook, property prices have continued to fluctuate, but at a positive stance, since 2014, leading to the creation of buyer's, market within the past five (5) years.

    With the Expo 2020 coming up, which is set to align well with the proposed stabilisation of the UAE property market, there is an uptick in the market related to the Expo. The Expo 2020 has already been taken into account into the property market, and the impact of the same had already been absorbed, thus perhaps accounting for the peaking of property prices in the Emirate of Dubai in mid-2014, given the Expo's announcement in late 2013.          

     

    UAE Government Policies & Industry Response

    The UAE government has initiated a host of new changes to the real estate sector, to strengthen the industry and its fundamentals prior to embarking on the journey towards rejuvenation in the following couple of years.

    Perhaps one of the most publicised of such initiatives has been the institution of a 10-year residency visa for long-term foreign investors, along with a 5-year retiree visa, in 2019. Requirements for qualifying for the 10-year visa include, inter alia, public investments by an individual amounting to at least AED 10 million, and requirements for the 5-year visa necessitate the investing of AED 5 million into a property by the individual. Such initiatives have been instituted with the hopes of reinvigorating interest the UAE property market and increasing demand for real estate in the midst of the current oversupply of properties that exists in the UAE.

    In the Emirate of Abu Dhabi, property ownership laws were amended to permit freehold ownership by foreign investors for the first time in particular economic free zones. All across the Emirates, authorities have sought to further reduce government fees required to pay for property registration and real estate transactions, further relaxing the restrictions on foreign ownership in the efforts to create a more conducive environment for property investments.

    The Dubai Land Department (DLD) even launched a real estate self-transaction (REST) to facilitate quicker and more efficient means of processing real estate transactions. The REST platform has allowed for the digital management of all property transactions from 2018 onwards, and REST was launched as a part of the "Dubai 10x Initiative", a marketing campaign launched by the Dubai government to market Dubai as "the most innovative city on Earth in 10 years".  The Dubai Real Estate Regulatory Authority (RERA) also launched a smartphone application named "Taqyimee", that offers real-time market prices for properties, and connects real estate owners to investors, thereby reducing factors such as time and cost involved in the sale of real estate. The DLD hopes that the institution of such digital platforms would increase transparency in the Dubai property market, thereby making it more investor-friendly and providing a greater degree of access to the market to property buyers. 

    In Dubai, a great deal of property developers such as, but not limited to, have sought to "simulate" demand through employing various creative strategies. Such strategies have included rent-to-own schemes, allowing post-handover payments, sale-and-leaseback models, ensuring investors cannot resell until completion of set time or certain percentage of payments, and acquiring bank finance for the initial down payments of properties. Some of these aforementioned offerings pave way for rental revenues and returns for investors on behalf of the property developer, or 10-year payment plans for financing homes, that allow for payments to be made years after completion of real estate projects. Such initiatives have seen varying levels of success across the Emirates, but continue to have a profound effect on the UAE's real estate market. A recent Bloomberg Business survey revealed that Dubai was at the least risk of a property bubble (compared to Munich, Toronto and Hong Kong that were set at top of the list).

    Perhaps the more extensive solution to this issue lies in the resolution of credit issues in the region with regards to real estate and analysing the mortgage laws that govern the sale of properties in the UAE.

     UAE Mortgage Laws & Financial Developments

    Financing a property is the key question that constitutes an individual's decision whilst purchasing a property. Most investors in the UAE property market take a mortgage to finance their purchase. For simplicity purposes, this article shall further only concern the Emirate of Dubai.

    Dubai's mortgage law pertains to Law Number (9) of 2009, which amended certain provisions of Law Number (13) of 2008, which regulated the interim real estate register in Dubai, and was otherwise known as Dubai's "Mortgage Law". The core elements of the statute are as follows:

    • Articles 3 – 6: Articles 3, 4, 5, and 6 define important terms such as a mortgage, mortgagee, and mortgagor.
    • Article 7: This article concerns the registration of a mortgage. It states that a mortgage is rendered invalid unless and until it is registered with the DLD, and that any agreement thus formed contrary to this is void. Also, it states that the mortgagor, i.e., the owner of the property shall be the sole bearer of the costs outlined within the mortgage agreement/contract unless agreed otherwise. It stipulates the cost of the registration of the mortgage, which is a fee of 0.25% of the amount of the loan, in addition to AED 4,100.
    • Articles 10 – 20: These articles lay out the rights and restrictions of the mortgagee and the mortgagor during the duration of the mortgage.
    • Articles 25 – 30: These articles pertain to the relevant execution proceedings that take place on the mortgaged property. This outlines the instructions on the manner in which a mortgagee may choose to commence legal proceedings against a mortgagor in the event that the mortgagor is defaulting on his/her payments. This law stipulates that after all the requisite procedures and notice periods are met following the legal proceedings, the property be sold at a public auction.

    It is also important to note that this law outlines all the particulars (as specified by RERA) that ought to be accompanied with the mortgage application during the registration process.

    However, one of the most contentious issues surrounding the UAE real estate market is the mortgage cap that exists on loans, often described as the "loan-to-value" (LTV) limit on a mortgage. At the end of October 2013, the UAE Central Bank put into effect a new set of regulations on mortgage lending by banks and financial institutions, which entailed finance companies, banks, and other financial institutions to provide mortgages in accordance with "best practices", so as to better protect borrowers. The Central Bank also issued a threshold of 50% on the amount of an individual's income that can be committed towards paying off debts, including a mortgage. The figure below outlines the LTV ratios set by the aforementioned change:

      UAE Nationals Non UAE Nationals First Property

    Property Valued  at 5 AED Million or less LTV: 80%

    Property Valued  at 5 AED Million or more LTV: 70%

    Property Valued  at 5 AED Million or less LTV: 80%

    Property Valued  at 5 AED Million or more LTV: 65%

    Subsequent Property LTV: 65% (Irrespective of value of property) LTV: 60% (Irrespective of value of property) Off-plan LTV: 50% (Irrespective of value of property) LTV: 50% (Irrespective of value of property)

    A few key takeaways from the impact of the mortgage cap; thus instituted are as follows:

    • For expatriates, mortgages became capped at 75% of the valuation of the first purchase of their property, and similarly, at 80% for UAE nationals.
    • Loans exceeding AED 5 million were further capped at 65% of the value of the property for expatriates.
    • For villas in Dubai valued from AED 5 million to AED 10 million, an up-front payment (in cash) would be needed to be made of almost 50% of the value of the property. For other property types, UAE nationals and expatriates would be required to make a down payment ranging from 20%-50% depending upon the value of the property.

    Many property stakeholders have continuously sought to change the LTV framework currently in place, to facilitate borrowing. Investors reckon that amendments to LTV limits would be able to guide the market towards a more balanced outlook. Investors have also sought to push the UAE Central Bank towards easing age restrictions for mortgage eligibility age limits from the current limits of 65 years for expatriates, and 70 years for UAE nationals, to limits along the lines of 80 years in the UNITED Kingdom (UK), or that of a no-limit level in the United States of America (USA). Amending the aforementioned limits to be based upon the mortgagor's ability to repay their obligations would seem as a reasonable measure to boost demand.

    In September 2018, a federation comprised of the UAE's leading banks cited the means of an amendment to the UAE's mortgage rules in order to enhance the real estate market.

    Role of Lawyers in Dubai Property Matters

    It is of high importance to hire a legal professional to under and to legitimize the ownership of the property. Investing in real estate in UAE is a worthwhile option, and now that Dubai is ever-growing as an international economic hub, there is an endless list of services that the Property lawyers in Dubai can advise their clients on. Evidently, foreign investors face challenges in terms of language (e.g. French speaking Canadian property buyer who does not speak English or Arabic desires to buy a property in Dubai on his own without the help of a lawyer or professional), understanding the commercial terms of sale and purchase, becoming aware of financing and possibility of availing the same, reading the fine print in the sale purchase agreement (the SPA) (which as outlined above, often restricts investors to resell their properties for a length of time), and negotiating the SPA. Likewise, investors also seek guidance on matters involving delayed handover, payment of transfer fees to Dubai Land Department, transfer of property to family members or subsidiary firms (which is set at 0.125% of the sale value/market value of the property), post-handover obligations, role of owners association and rights of property owners, default provisions, and insurance obligations, to name a few. These may also include the following: -

    • preparing and drafting of legal documentation;
    • title search;
    • legal filings;
    • facilitating the transfer of properties;
    • finalising and closing the construction deals; etc

    Change in Title and Property Gifts

    Our real estate lawyers have assisted majorly, when it comes to transferring gifts and with regards to the transfers which take place between siblings and if the transfer is possible on the same existing property. It is outlined specifically that the DLD shall not permit to conduct transfer via gifts amongst siblings, since only parent to child and husband to wife relationships gain eligibility. Further, it is not allowed to have multiple gift transfers on the same property to circumvent the earlier rule. That means, it is not permissible to transfer the gift from one sibling to the parent and then transferring the same gift to the other sibling. However, the most prominent exception to this rule is the transfer of gifts between companies and individuals.

    In high probability it is certainly possible to transfer a specific portion or entire rights in the property without the obligation of paying the transfer fees to the DLD.

    Transfer by way of Gifts

    Under the transfer by the method of gifts, the process of "Hiba" (in Arabic for gift) allows the first-degree relatives for transferring a portion or entire property rights by way of grant, donation or gift at the DLD. The procedure flows as under: -

    • obtaining the no-objection certificate
    • payment of transfer fees
    • finalising the transfer of title

    Conclusion

    In conclusion, a raft of the prior proposed changes ought to be instituted to the financing rules that govern the UAE's real estate market, in light of the recent developments that project the UAE's property market into the direction of a buyer's market in late 2020, or early 2021. To alleviate the risks that come along with this transition, and to expedite the recovery process, the UAE Central Bank must consider relaxing limits on its tightened credit rules, so as to facilitate borrowing and make buying property more attractive to a broader demographic of the UAE's population. While passive measures such as the implementation of a 10-year visa, and the waiving of auxiliary fees on transactions has helped to serve the purpose to a degree to a far more substantive move which would be a push towards hard changes in the legislation that governs mortgage rules in the UAE. 

     

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    Thu, 10 Oct 2019 02:22:00 GMT
    <![CDATA[Unveiling Dubai Expo 2020]]> Unveiling Dubai Expo 2020

    Tulika Kaul

    Introduction to Expo 2020

     "Our region deserves the chance to organize this great world exhibition. Our country is ready to host it. We will keep our promise in connecting great minds to build a better future and we will organize the best event in the history of the World Expo." – HE Sheikh Mohammed bin Rashid Al Maktoum

    Prior to the Expo 2020 vote being declared, some extremely memorable quotes rightly captured the quintessence of Dubai's bid. Consequently, the Bureau International des Expositions (BIE) in its general assembly hosted on 27 November 2013 awarded Dubai as the host of Expo 2020. The Director of Global Foresight and Innovation at Arup, Chris Luebkeman, rightly stated that "seven years is a short time but I can't imagine a better place to make that drive real."

    Being the first World Expo to be held in the region starting from the 20th of October, 2020, the United Arab Emirates (UAE) is welcoming the world for six months to celebrate culture, innovation and collaboration whilst aiming to leave a lasting and meaningful legacy. The mammoth trade fair shall be open for business against the backdrop of the scintillating skyscrapers and supermalls that Dubai is irrefutably renowned for. The Expo 2020 will be the largest event that has ever been staged in the Arab world and is set to welcome approximately 190 participant countries.

    It is pertinent to note that each World Expo held till date is based on a theme. For example, "Feeding the Planet, Energy of Life" was the theme of Milan Expo 2015; "Man and His World" was the theme of Montreal Expo 67. The theme chosen by Dubai for the Expo 2020 is "Connecting Minds, Creating the Future." Under this theme, millions of visitors from across the globe will experience hospitality at its finest, as well as the UAE's values of tolerance, cooperation and inclusion. Through this theme, Expo 2020 envisions to build partnerships as well as inspire ideas that forge the world of tomorrow. There are subthemes which form the key pillars:

  • Opportunity: Dubai, through the theme of Expo 2020, firmly believes that we possess the power to shape our future. Therefore, Expo 2020's goal is to unlock this potential in various ways, including supporting solutions to an array of social problems through Expo's Live Programme, as well as introducing the visitors to new ideas to inspire them to act.
  • Mobility: Indubitably, with the smarter movement of ideas, goods and knowledge, a whole new world of prospects and possibility unfolds. The Expo 2020 enlightens how this has assisted us to venture new frontiers, and how humanity is continually making grander leaps than ever through digital connectivity.
  • Sustainability: There is a growing need to live in balance with the world that we inhabit. The Expo 2020 embraces alternative sources of water, food and renewable energy, whilst emboldening us to reevaluate the ways in which we can preserve the planet.
  • Why is the World Expo important?

    Notably, the World Expo is a global destination for people from across the world to share their ideas, encourage collaboration, showcase innovation and rejoice human ingenuity. Some of the most dynamic inventions that were brought first to this world at an expo include the typewriter in Expo 1876 held in Philadelphia, the telegraph in Expo 1851 in  London, the diesel engine in Expo 1900 in Paris, etc. Most recently, inventions like solar trees as well as energy-saving elevators were showcased in Expo 2015 in Milan. Therefore, being the largest global gathering, the World Expo brings together the greatest mind from across the world to discuss how we can all shape the future, which is the very theme for Dubai Expo 2020. Below, we shall explore how World Expo will be beneficial for Dubai.

    Benefits of Dubai Expo 2020

    There are a number of changes that have been put in place to essentially embrace this event which includes new visa rules, infrastructure, business incentives, as well as various economy-boosting measures. Ever since the announcement of Dubai to hold the Expo 2020, there has been an exponential rise in the business setup in Dubai as well as company formation in the UAE. Further, Dubai's strategic location between the developing and developed nations is an advantage in regard to wider influx of expected visitors, not only during but also after the event. Let us explore how Expo 2020 boosts diverse industries in Dubai.

    Hospitality, Tourism and Leisure

    There is not even an iota of doubt that the event will have a noteworthy impact on these industries. Dubai is expected to host over 170 million visitors from across the globe. While Dubai has an array of different ranges of hotels to suit every visitor's convenience, the Emirate has witnessed the construction of various high rises which further indicates the creation of jobs. Amongst various researches and surveys, Dubai is expected to receive over USD 60 billion worth of purchases, most of which includes the culinary sector; which has resulted in investors establishing various retail restaurants and chains in the region.

    Construction and Real Estate Industry

    In addition to the residents that Dubai already births, the construction industry has seen a rise in demand in the number of properties to meet the needs of the expected visitors. Further, for the construction and infrastructure alone, the government has awarded contracts up to a tune of AED 12 billion. Incentive offering, guaranteed periods of rental income as well as lower service charge has encouraged potential buyers to invest in Dubai.

    Aviation and Transport

    A sum of approximately AED 28.6 billion has been apportioned by the UAE government for the expansion of DXB (Dubai International Airport). Furthermore, the Road and Transports Authority (RTA) has also invested an estimated USD 1.36 billion for the expansion of Dubai's Metro Red Line.

    Financial Services Industry

    The banking sector resourcefully supports the UAE well and additionally, is positioned and prepared for the anticipated visit. The UAE's Central Bank's tailored approach to Expo 2020 has put in place flexible regulations to assist the fiscal stability of investors who, in the wake of upcoming Expo 2020, are already tapping into an array of opportunities presented. For example, the combat on large financial exposure as well as the mortgage cap which has been introduced, curbs all forms of excessive spend. There various European and United States banks that have set up branches in the UAE.

    Residency Rules

    The government's introduction of the long term residency visa is a step towards ensuring the tourists who are interested in UAE residency are able to process the same at ease, before as well as after the event. There have been a plethora of professionals and entrepreneurs enquiring with STA's immigration lawyers in the UAE with regards to the possibility of obtaining the long term visa for their intended service sector. Further, the substantial turnaround in all the industries has been brimming with job opportunities in the UAE, especially in the construction, hospitality and the real estate sector.

    Legal Advisory Services

    Considering the rise in investments in the region since the Expo win, there is consequently a high demand for legal advisory services to secure oneself from business pitfalls. As one of the leading law firm in Dubai, we receive countless enquiries with regards to laws, rules and regulations which applies to individual entrepreneurs that earn large, medium as well as small enterprises. Furthermore, our lawyers in Dubai guide the clients against future disputes that a prudent businessman should understand at length, whilst carrying out comprehensive due diligence prior to committing to a transaction.

    Media

    Dubai Expo 2020 Bureau along with the Telecommunications Regulatory Authority (RTA) have mutually agreed to enhance the cooperation in various areas including organizing the use of Information and Communications Technology (ICT) systems and devices, coupled with the encouraging the participation of government entities in all programs that are launched by the center to host the Dubai Expo 2020. It is essential that these parties enhance their cooperation to ensure coordination with all authorized media entities in the Expo, essentially to identify the frequency requirements of the local and international media agencies that are participating in the exhibition, as well as to keep in place a mechanism for the submission of forms and applications for spectrum permits. Furthermore, it would also result in the cooperation of customs clearance to make sure the entry of all devices to the UAE is in the appropriate manner.

    Brand Protection Guidelines

    There is no doubt that entities and individuals in the UAE and across the globe would be eager to use the intellectual properties of Dubai Expo 2020 in order to boost their business activities by linking their services and products to Expo, consequently raising their own profile in the process.

    For the Expo's commercial partners, the apex beneficial asset is the intellectual property of Expo 2020 including the brand. Apart from the participant countries, below is the list of commercial partners that will be authorized to associate themselves with Dubai Expo 2020:

    • Official Partners;
    • Official Premier Partners;
    • Official Ticket Resellers;
    • Official Supporters like the government agencies who have signed a contract with the event;
    • Official Licensees and Retailers;
    • Official Providers; and
    • Official Media Partners.

    Why is it necessary to protect the brand?

    Without the financial support of various official partnerships, the Expo 2020 would not have been possible. The official partnerships are substantially devalued when businesses without the authority link themselves to the Expo 2020. These partnerships upon signing agreements with Dubai Expo 2020 commit to supporting and believing in the values that are embedded in the core of the brand, whilst working to bring Expo's vision, values and ideals to life.

    Ambush Marketing

    The act of creating a deceiving, authorized or false association with an event, with or without the intention, is referred to as ambush marketing. As an illustration, if a particular website uses the logo of Expo 2020 to enhance their services or products, it unjustifiably benefits from such association without actually paying for the privilege. This is ambush marketing. As another example, consider this situation: Supposedly the official media broadcast right is given to XYZ Media Company, though another Media Company ABC puts up billboards and advertisements outside the venue of the event; it is likely that a person would directly relate ABC to the event, even though XYZ is the official partner, thereby increasing the viewership of ABC where it enriches unethically. Hence, the Expo Brand Team is vigorously engaged in numerous monitoring activities in order to combat and prevent ambush marketing, and have asked the public to report any illegal or suspicious activity. Our media lawyers in the UAE are actively engaged in assisting client who is victims of ambush marketing and are glad to provide further tidings on the same.

    The Expo 2020 allows the editorial use of its protected marks. For example, when journalists provide more information or reports about the events in an article; on the condition that the statements are factual statements that are not made gratuitously for the purpose of marketing or linking to the commercial entity.

    Tawassul

    Tawassul, which means 'connect' in Arabic, is the operational tool that connects various media organizations to important updates and information on elements including licenses and permits, media accreditation, content assets like photographs, press releases, audio and video, electronic media kit etc. The Global Media Briefing is set to take place from the 20th to 22nd of October 2019, which is open to all genuine media organizations that wish to cover Expo 2020 to submit their interest through Media Accreditation Expression of Interest (Tawassul). This opens a window for all media organisations to receive a technical briefing to understand Expo 2020's plan for media to attend as well as cover the event.

    Conclusion

    Most certainly, Expo 2020 will cement Dubai's reputation and status as the epitome of business hubs in the world. Staging such a mega event as the World Expo has most definitely boosted the international profiles and economies of its host cities for over decades; and soon, it is Dubai's chance to step into the spotlight. When highlighting what the legacy of the event will be, it is pertinent to note that more than 80 per cent of the venue is premeditated in a way which can be repurposed and reused in the legacy phase.

     

     

     

     

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    Sat, 05 Oct 2019 12:07:00 GMT
    <![CDATA[Off Plan Contract Termination]]> The decision of the Land Department to Cancel the Registration

    In the Decision of Court of Cassation in Dubai and Law 19 of 2017

    Due to the importance of the real estate market in Dubai, especially the sales system on the map, which allows the investor to buy through installments and allows the developer to implement the project with investors' funds over a period of time, the real estate legislation organized the sale on the map from the beginning until the end, The process as well as amendments to it in view of the flexibility of the legislation to keep pace with the development that occurs in the community in the sense that the legislation is amended whenever circumstances need this amendment.

    The judiciary also follows this development in legislation and applies the new rules, with taking into account the retroactive effect of the law.

    The contract may not be rescinded or amended except by the will of the parties or by a court order in accordance with the law.

    Since the contract of sale on the map is not a completed contract, it is a contract that takes time to implement, where there is a period of time between the contract and the implementation for years, and during these years may arise some things whether the seller or buyer can not complete the implementation or delay, The buyer may falter in pay the installments or change his opinion or the value of the property decreases, and the developer may falter in execution, delay for some time or stop performing for any reason.

    All these reasons raise the issue of termination of the contract, which means ending it without the implementation (annulment).

    Whereas, Law No. 13 of 2008, which included how to terminate the contract in the event of breach of any of the obligations of the developer or investor, stipulated in Article 11 that "If the buyer breaches any of the conditions of the contract of sale of the unit with the developer The latter shall notify the Department of this and the Chamber shall grant the purchaser, either in person or by registered mail, or by electronic mail for 30 days to fulfill its contractual obligations. 2. If the time limit referred to in item (1) of this Article has elapsed without the buyer having fulfilled its contractual obligations, the developer may cancel the contract and return what he has received from the buyer after deducting no more than 30% of the value of the amounts paid from him.))

    It was then followed by Decree No. 9 of 2009, under which Article 11 of Law No. 13 of 2008 was amended and states that "(Article 11) 1 If the buyer violates any of the terms of the sale contract of the real estate unit signed with the developer, (2) If the period specified in section (1) of this Article has elapsed without the buyer having fulfilled its contractual obligations, the following provisions shall apply:

  • In the event that the developer completes at least 80% of the real estate project, the developer may retain all the amounts paid with the buyer's demand to pay the remaining value of the contract. In case of failure, the developer may demand the sale of the property by public auction to demand the remaining amounts due to him.
  • In case the developer completes at least 60% of the real estate project, the developer may terminate the contract and deduct not more than 40% of the value of the real estate unit provided in the contract.
  • In the case of real estate projects in which the construction started and did not reach 60%, the developer may terminate the contract and deduct not more than 25% of the value of the real estate unit stipulated in the contract.
  • In the case of real estate projects for which construction has not begun for reasons beyond the control of the developer and without negligence or negligence, the developer may terminate the contract and deduct not more than 30% of the value of the amounts paid by the buyer. 3- For the purposes of paragraphs (c) and (d) of Article (2) "Construction" means that the Contractor shall receive the location of the real estate project and start the construction work according to the designs adopted by the competent authorities.
  • For the purposes of paragraphs (b) and (c) of item (2), the developer shall return the amounts owed to the buyer within a period not exceeding one year from the date of cancellation or within a period not exceeding sixty days from the date of resale of the real estate unit whichever is earlier. Notwithstanding the provisions of paragraphs (1) and (2) of this Article, the Foundation may, on the basis of a reasoned report, decide to cancel the real estate project. In such case, the developer shall return all amounts received from the buyers in accordance with the procedures and provisions stipulated in Law No. (8) for the year 2007 on the accounts of guaranteeing real estate development in the Emirate of Dubai. 6. The provisions of this Article shall not apply to contracts for the sale of land in which the sale has not been made on the map, and shall remain subject to the provisions of the contract concluded between its parties. 7 The provisions of this Article shall apply to all contracts concluded before the provisions of this Law. ))

    This was followed by the issuance of the executive regulation of the law by Decree No. 6 of 2010.

    Under this legislation, the law would have allowed the developer, in the case of breach of the investor's obligations, to resort to the Land Department to give a 30-day notice for the execution of the contract.

    Some developers have already resorted to the department and issued decisions in accordance with those provisions. The contract was canceled and the registration was canceled and the units were subsequently sold to third parties.

    However, when the buyer appealed this decision before the judiciary, some of the provisions of primary and appeal to support this decision and others not to be acclaimed because it was issued by the Department of Land and Property is not a judicial body has the right to decide the annulment and concluded that these decisions are just a recommendation does not prevent Of recourse to the judiciary and does not have the authoritative prevention of reconsideration of the subject.

    There may be no problem if the unit has not been disposed of to a third party and the court has concluded that the decision has been reviewed and concluded that the investor has been proved wrong and then the contract has been annulled in favor of the developer.

    However, the problem is that if the unit was disposed of to a third party after the decision of the Land Department to cancel the contract, when the appeal against this decision before the judiciary, the conduct to a third party makes the implementation of the contract impossible, which leads to the separation of the force of law and the court so without consideration In the extent of breach of contract because it is broken by the force of the law and it is useless to discuss the breach.

    This law was amended by Law No. 19 of 2017, which explicitly stated the right of the developer to apply to the Land and Property Department to request annulment without resorting to a court or arbitration after following certain procedures and obtaining a document from the Land and Property Department. Where it ruled that "Article (11) of Law No. 13 of 2008 regarding the regulation of the initial land registry in the Emirate of Dubai, as amended by Law No. 19 of 2017, stipulates that (A) The following rules and procedures shall be followed in the event of a breach by the buyer of its obligations to implement the contract of sale on the map signed between him and the real estate developer. (1) The real estate developer shall notify the department of the buyer's breach of his contractual obligations, The real estate developer and purchaser, the descriptions of the real estate unit that was the subject of the sales contract on the map, a clear description of the contractual obligations to which the buyer vacated, and any other data determined by the department, (2) the department immediately upon receipt of the notification and after verification (A) notify the buyer of the fulfillment of its contractual obligations with the real estate developer within thirty (30) days from the date of notification, provided such notice is in writing and fixed date, and shall be notified to the buyer by the Department either in person or (B) the friendly settlement procedure between the developer and the purchaser, if possible, and is evidenced by an annex to a contract signed by the developer and buyer, (3) If the period referred to in paragraph 2 (a) of paragraph (a) of this Article has expired without the buyer executing his contractual obligations or completing the friendly settlement between him and the real estate developer, the Department shall issue an official document in favor of the real estate developer stating: (A) The real estate developer's commitment to the procedures stipulated in paragraph (a) of this article; (b) Determination of the percentage of completion of the real estate developer's contract by the real estate developer on the map in accordance with the standards and rules approved by the institution in this regard. Of the official document referred to in the coffee (3) of paragraph (a) of this Article and according to the percentage of completion, the following measures shall be taken against the buyer without resorting to judicial or arbitration: (a) If the real estate developer accomplishes more than (80%) of the real estate unit, (1) to maintain the contract between the buyer and the buyer and retain the full amounts paid to him with the buyer's demand to pay the remainder of the value of the contract, (2) request the Department to sell the real estate unit of the contract by auction to require the remaining amounts owed to him, The buyer for all costs incurred by such sale; and (3) the contract is terminated by its own will And a deduction of not more than (40%) of the value of the real estate unit provided for in the contract of sale on the map, and refunds to the buyer within one year from the date of the dissolution of the contract or within 60 days from the resale of the buyer's real estate unit The third article of Law No. 19 of 2017 stipulates that "this law shall be implemented from the date of its promulgation and shall be published in the Official Gazette". This means that the amended article shall be effective from the date of the law. (A) The real estate developer's commitment to the procedures stipulated in paragraph (a) of e (B) to determine the percentage of completion of the real estate developer of the real estate unit in place of the contract of sale on the map, in accordance with the standards and rules adopted by the institution in this regard, as this was - and the court papers in front of the two degrees of litigation have been exempt from the official document provided for in the substituted article, Then there is no room here to confirm all the procedures followed by the appellant under the text of Article (11) of Law No. 13 of 2008 before replacing them for the absence of the article replaced by the text on the validity of those procedures. ))

    The law also stipulates that all contracts on the map should be applied to all the contracts on the map, whether before or after the law. The law also states that these procedures are considered public order and result in violating them. The law also allows the investor to resort to the courts in case of abuse of the real estate developer provided for in this Act.

    In light of the above, it is clear to us that the development of the legislation is accompanied by an evolution of the provisions to keep pace with the development in practice and to bring the law into line with reality. It is not logical that the law provides for a procedure that is not applied or recognized before the courts. In all cases, the victim is not denied access to the judiciary.

    ]]>
    Thu, 29 Aug 2019 01:18:00 GMT
    <![CDATA[Tenancy Laws in the United Arab Emirates]]> Tenancy Law in the United Arab Emirates

    Introduction

    Tenancy law is a fundamental regulatory framework that systemizes the relationship between tenants and owners. It defines the obligations, risks, and procedural requirements to deal with disputes. In the UAE the provisions regarding tenancy law are found under Federal Law No.5 of 1985 on Civil Transactions, while some of the emirates have extended regulations under local decrees.

    The articles set out different obligations on the parties while leaving room for variant agreements. For instance, the articles provide that unless otherwise agreed by the parties, the landlord shall be responsible for the maintenance of the leased item, and any defects or damages that come as a result of inadequate maintenance. While the tenant is responsible for the upkeep of the unit as an ordinary person would, in addition to abstaining from any alterations or substantial changes to the object of the lease without the consent of the landlord. Where one of the parties was found derelict or negligent the articles obligate the party at fault to indemnify the losses under the discretion of the court. However, all disputes arising as a matter of tenancy law could be heard exclusively by the Real Estate and Rental Dispute Settlement Committee.

    Real Estate and Rental Dispute Settlement Committee

    The committee was formed by order of Decree No. 2 of 1993 to create a committee specialised in resolving disputes arising between lessors and lessees. Following the formation of the committee, the courts would no longer hear disputes arising between the parties of a lease. There were numerous cases where the court dismissed a claim regarding a disputed lease agreement, even where a governmental entity nullified the validity of the contract. In a case where the Chamber of Commerce terminated the lease of a Hotel for commercial purposes, the court ruled that, "as per article 1 of Law No. 2 of 1993 (on the formation of a judiciary committee to resolve disputes arising between lessors and lessees of any nature), the Explanatory Decree No.1 of 1999, and the proceedings of this court, it is not permissible for any tribunal but the mentioned committee to hear disputes arising between lessors and lessees with regard to uncovered funds. The tribunal was offered jurisdictional competence relating to public order, and therefore, the jurisdiction to hear such disputes was stripped from the ordinary courts. The termination of the contract by the Chamber of Commerce does not affect this decision, so long as the disputed contract gave the plaintiff and the defendant the character of the lessor and a lessee".  However, since late 2013 and by order of Decree No. 26 of 2013, the establishment of the Real Estate and Rent Disputes Settlement committee was repealed and replaced by the Rent Dispute Settlement centre structure. Fundamentally, the replacement was to resolve issues and inefficiencies within the former committee. Significantly, the new centre has a higher degree of judicial involvement, in addition to a faster and simpler mechanism. The powers of the centre were also limited to exclude financial and long term leases.  Also, the centre has a reconciliation division for adjudicating before raising the matter to the First Instance Division. However, the centre is still responsible for all tenancy agreement and has exclusive jurisdiction to hear rental disputes.

    The Civil Transaction Law defines a lease as an ownership grant of a specified object for a specified period for a specified time. The articles do not differentiate between commercial and residential leases as far as the maintenance, and the upkeep of the unit is concerned. Therefore, the tribunal would apply those general rules to all lease agreements, while recognising the different measures of care required for each. Article 777 of the Civil Transactions Law provides that where an item is leased a lease has the right of enjoyment as contracted, where the lessee exceeds this right he may be found liable. However, if the agreement does not state the extent of enjoyment available for the lessee, it should be reasonable according to the purpose of which the property is designed.

    General Obligations

    Lessor

    The lessor may not interfere or disrupt the lessee with his enjoyment of the leased property during the period of the lease. The lessor is also liable for the action of his servants that may prevent the lessee from enjoying the property as contracted. Unless the lessee had knowledge of a particular defect before the lease agreement, the lessor shall warrant the lessee of all defects in the property that may significantly affect his enjoyment.

    If the lessee is deprived enjoyment of the property for any of the above mentioned the reasons, then he is entitled to either recession or reduction of the rent. Additionally, the lessee is entitled to damages for the prejudice sustained against him

    Lessee

    On the other hand, the lessee may not exceed his power of enjoyment as stated by the agreement, or in accordance with the reasonable standards of the property. The lessee may not introduce any changes or alterations without the permission of the lessor. The lessee is bound to carry out frequent restoration and cleaning works that customarily are the responsibility of the lessee. Finally, the lessee may not prevent the lessor from carrying out his duties, such as maintenance work etc.

    Fit-out work

    As mentioned earlier and following Article 778 of the civil transaction law, the lessor may not make any substantial alteration to the object of the lease without the consent of the lessor. The lessee may only make alterations necessitated for the repair of the premises, and no damage should be suffered as a result of such adjustments. The lessee is liable for any alterations and damages that may be caused by them. Essentially, the lease puts the lessee on trust for the object of the lease. This relationship is reflected in the ruling of the court where it expressed that "following Articles 778, 784 and 792 of the Civil Transactions Law, it may be inferred that the position of the lessee on a lease is that of a trustee in a fiduciary relationship, where he stands responsible for any shortage, deterioration or losses suffered as a result of his negligence or intentional breach. Furthermore, it is not permissible for the lessee to introduce any substantial alterations to the object of the lease without the authorization of the lessor. Consequently, if the tenant infringes this obligation, they are liable to restore the object of the lease to its former condition. Moreover, the lessor is entitled to claim damages for any losses suffered as a result of the infringement."

    However, the lessee could avoid indemnification if they could provide sufficient evidence that the damages or losses suffered were not as a result of their perpetration or negligence. Here the burden of proof is on the lessee.

    Insurance Claims (subrogation)

     A question that may be raised at this point is where the lessor has insured the object of the lease, who bears the risk of the losses suffered and the burden of the legal claim? In a case where the insurance company raised a claim against a lessee for the reimbursements paid to the insured party, The Court of Cassation ruled that according to Article 742 of the civil transaction law, the character of a lessor is attributable to one who leases a particular benefit for a specified period of time for a determinate value. If the lessor has insured the object of the lease, it is upon the insurer to comply with the insurance policy and compensate the lessor for the losses suffered.   It is also permissible for the insurance company to replace the lessor with regards to any claim regarding his property. Additionally, the insurer may claim for the reimbursements paid to the lessor as a result of the infringement. 

    Note that the Court of First Instance dismissed this case on the grounds that only the Real estate and Rental dispute committee have jurisdiction to hear lease agreement disputes. However, on appeal the Court expressed that the insurer derives this right from a statutory action and not from a transferred power of attorney, thus, the insurer does not base the claim on the damages caused on the object of the lease directly, but only on risk the insurer had to bear as a result of the lessee's infringement. Consequently, this claim may not be raised in the tribunals of the Real Estate and Rental Dispute Settlement Committee, but may only be raised within the ordinary courts of the land, as mandated by statute. Therefore, only after the insurance company reimburses the injured party, the insurance company may seek a claim against the lessee. The lessee might find themselves liable for additional damages after the insurance claim since the insurance would reinstate the lessor only for losses suffered as a result of the damages and not as a result of missed out profits.

    Conclusion

    The tenancy law provides for a common ground where the tenant may enjoy his unit without interference while protecting the benefit of the landlord in his property. Therefore, the enjoyment of the leased unit is limited by the desired beneficial interest of the owner. Alterations to the nature of the apartment may not be in favour of the landlord, if however, the owner gave the tenant consent to make certain fit-out works then it is only permissible to the extent of the agreement.  It is also advisable for tenants to insure the fit-out work they want to undertake to avoid the risk accompanied by any damages that might occur. It is highly likely that the fit-out work would revoke the landlord's insurance policy, and the agreement would put the tenant at liability for any losses suffered. The tenant may also be joined in the insurance policy with the landlord, this way the insurance is meant to cover the tenant as well as the landlord. Most importantly, the insurance company will not be able to practice their right to subrogation against an insured party. Finally, the tenant would also need to obtain a license from the competent authorities before initiating any heavy restoration work, such as that which would require digging or altering the structure of the building. These are authorities that are concerned with urban development and planning control. 

     

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    Mon, 27 May 2019 12:41:00 GMT
    <![CDATA[Securitization: UAE and Global Overview]]> Securitization: An Overview

    Introduction

    Securitization is a powerful financial tool that renders possible the profitability of illiquid assets. We all agree that securitization contributed to the 2008 Financial Crisis, demonstrating how this powerful business instrument is a double-edged sword: it is capable of both boosting and devastating an economy. The United States also commonly known as an unchallenged leader in securitization markets. However, much of the current activity is happening in the Middle East, including the United Arab Emirates, where the new wave of securitization markets is emerging.

    Definition

    Through this financial process, several illiquid assets are packaged into pools and transformed into securities. The third-party investors in a secondary market then purchase these securities or their related cash flows. In other words, the security interests in the pool are sold to investors. The process enables the conversion of an asset or a group of assets into marketable security. In this article, I aim to offer a comprehensive explanation of the nature of the underlying holdings of securitization, the function of Special Purpose Vehicles, regulatory responses to securitization after the financial crisis, and the impact the economic process has had on different markets.

    An example of an illiquid asset is a debt instrument, which the originator (such as a bank) executes with numerous obligors (such as individuals who have a mortgage with the bank). These assets, which are into pools, can be various types of contractual debt (generally home equity mortgages) such as residential mortgages, commercial mortgages, auto loans, credit card debt obligations (or other non-debt assets which generate receivables). We combine these assets with other homogeneous assets, such as other mortgages issued on significantly similar terms, to form a pool. Then, they transfer it to trust or the Special purpose vehicle (SPV) which is the securitization vehicle. The company will sell the security interests to investors. They give the funds so raised to the Intermediary or Originator in consideration for the transfer of the assets.

    It is important to note that the vast array of asset varieties and the creation of liquidity for an illiquid asset makes securitization a powerful and practical financial tool. Furthermore, a pool of securities can be divided and sold to different investors based on the risk level these investors wish to adopt. If they are willing to take on the risk of mortgages that may or may not be paid off, then they will purchase the higher risk part of the pool. If they are not willing to take on such risk, they will buy the lower risk part of the lake.  Regarding value, mortgage-backed securities (MBS) dominate the global market, while asset-backed securities (ABS) feature steady growth rates.

    Benefits of Securitization

    The securitization process offers many essential benefits to participants. In this vein, it allows the originator to do the following things:

  • It will enable the transformation of an illiquid asset into a liquid financial instrument, thus setting up future revenue.
  •  It enables borrowing at a better rate given that the risk premium demanded by the investor is proportionate with the underlying pool of assets.
  • It improves balance sheet management with reduced leverage and gearing ratios by removing risky assets from its balance. It permits the use of capital to support loan writing and investment.
  • The prepayment risk of the underlying assets is after that on the investor.
  • It eliminates exposure to credit risk or the administration of the asset.
  • The originator gains access to a broader banking/investor base in the financial markets.
  • Securitization will benefit the investor in the following ways:

  • It enables the securities to obtain excellent credit ratings given that deals can entail credit enhancements.
  • The yields offered by securities exceed those on comparable corporate bonds.
  • The securities are liquid.
  • It is an investment in a diversified pool. Investors will prefer to hold a portion of a pool of risky assets than a single risky asset.
  • I.  Mortgage and Asset-Backed Securities (MBS)

    Categorically, the division of assets is in two categories being mortgage-backed securities and asset-backed securities. The form of a securitization backed by mortgages is called mortgage-backed securities. It comprises three central types:

  • mortgage pass-through securities
  • stripped MBS
  • collateralized mortgage obligations (CMO)
  • The fixes or floating rate mortgages sponsor these securities. An investor will purchase shares in a pool of mortgages, and receive a cash flow which basis on the features of the underlying mortgages such as principal amount, interest and payments made before the lease.

    Moreover, a stripped MBS is derivative mortgage security. The division of principal amount and interest is so segregated in such a way that the price of each investor is different from the other. There is a possibility of a stripped MBS which the companies structure in a way that there is an interest-only investor class and a principal-only investor class.

    Lastly, in a CMO, whole mortgages funded by debt issued in different tranches are purchased by the securitization vehicle. After that, there is a redistribution of Cash flows from the assets to different tranches. The principal and interest received by the securitization vehicle are used to pay attention to each branch. It creates different risk/yield relationships between investor classes by taking the mortgage (a single class instrument) and creating multi-class instruments. This type of mortgage-backed securities has developed immensely and has been the subject of considerable levels of financial re-engineering.

    II.  Asset-backed Securitizations (ABS)

    Asset-backed securities are securitizations backed by non-mortgage assets. These include (but are not limited to) the following:

  • automobile loans and leases
  • credit and department store charge card
  • computer and other equipment leases
  • accounts receivables
  • legal settlements
  • small business loans
  • student loans
  • home equity loans and lines of credit
  • boat loans

  • franchise loans
  • timeshare property loans

  • real estate rentals
  • whole business securitizations
  • Another vital perspective to consider to understand the securitization structure is the idea of credit enhancement. It is the way or strategy to enhance the procedure for assessment of a securitization exchange, as recommended by a credit rating agency keeping in mind the end goal to draw in financial investors for investing in these assets.

    Special Purpose Vehicles (SPV)

    SPV are subsidiary companies of a parent company, who provide an alternative mode of financing transactions. Given that there is the complete protection of assets from the actions of their parent company, they curb the financial risk to the property of the SPC. These vehicles play an indispensable role in the operation of global financial markets. The allow investors and businesses to raise capital, securitize assets, share risk, reduce tax and carry out activities without any chance (or at least not as significant a threat as would usually be the case). SPCs provide limited liability for shareholders, they can choose to operate on separate balance sheets than their companies ("off-balance sheets"), and they serve on these free balance sheets instead of recording transactions in the name of their parent companies. Following are the commonly used SPVs for the operations:

  • Securing projects from financial, commercial or operational failures
  • Securitizing Loans and Receivables. For instance, governments set up SPVs to fund their projects and the SPC entity enables the channeling of funds for projects in different areas.
  • Transfer of Assets: upon the transfer of assets to SPC, they become unidentifiable. As a result, it protects the firms in the event of bankruptcy or liquidation. This invulnerability has led courts to rule that there is a link between SPC assets and funds with the originating company.
  • Regulatory and Compliance: SPVs avoid regulation and compliance protocols since they can be set-up within orphan-like structures.
  • Financing and Raising Capital: They can be used to finance new projects without increasing costs or altering the shareholding structure. It makes them particularly useful for financing aircraft, power and infrastructure projects.
  • Global Aspect of Securitization

    In UAE

    Securitization also allows a company to deconstruct itself by separating highly liquid assets from the risks in association with the transaction. These assets are then used to raise funds in the capital markets at a lower cost, and a lower risk than if the company had grown funds directly (by issuing more debt or equity). The company will then retain the savings generated by these lower costs.

    In the United Arab Emirates, the company establishes a system of Islamic Securitization. It is a legal structure which replicates the economic purpose of a traditional asset-backed securitization structure and satisfies the requirements of Islamic Finance. The terms Al-Task and Tawriq are the terms used for securitization under Islamic Law. Given that most Islamic financial principles basis its concept of asset-backing, securitization fits particularly well with Islamic Finance.

    Conventional securitization, which originated in non-Islamic economies, involves interest-bearing debt. BY holding contingent claims on the performance of securitized assets, investors get entitled to pre-determines interest as well as the principal amount initially paid. However, Islamic finance principles prohibit profit from debt and speculation. Thus, the issuance of interest-bearing debt securities with a secured redemption conflict with Islamic financing principles. Despite the fact that securitization under Islamic Law bars interest income, the company structure it in such a process that it rewards investors for their direct exposure to business risk. Underlying securitization assets which do not comply with Sharia Law principles cannot securitize in the market.

    In the United Kingdom

    The UK is Europe's Largest Securitization Market, with issues worth approximately US Dollars 26 billion in 1999. The first asset class securitized in the UK are private mortgage loans. Subsequently, the market has expanded significantly to include credit card receivables, other consumer loans, lease receivables and whole business securitizations whereby the securitizations is on the entire future receivables of a company. In the UK, there is a continuous introduction of new asset types and structures.

    In Germany

    Germany market is not significant as the US. However, the ABS market in Germany has grown steadily since 1995. Housing loans, credit card receivables, and consumer loans are commonly the subjects of securitization processes in Germany. In mid of 1997, the German Bank Regulatory Office published a guideline allowing relief from capital adequacy requirements for banks if they meet the specific criteria. Since then, not only corporations but also banks have securitized many assets. In the past, traditional ABS transactions were based mainly on mortgage loans (residential and commercial), trade receivables, lease receivables and customer loans. Today, all kinds of assets can be securitized provided they are separable, transferable, pledgeable and free of objections.

    In Asian Region

    The Asian crisis has caused the securitization market in Asia to slow down. From properties to salaries, the market was continuously searching for new assets to securitize. The market was booming, as it was continually looking for innovative ways to overcome its legal, tax and accounting issues. But the market's collapse in 1997 drastically slowed down securitization's development process in the region. The market started to recover in 1998, and in total, four big deals were completed: in Hong Kong, Taiwan, Korea and an Asian Basket Deal (a CBO). 1999 saw a significant increase in activity focused on North Asia. Given that the central issue in the Asian market remained that of attracting investors, the focus in that region has been on credit enhancements and risk repackaging.

    Conclusion

    On the whole, securitization is a powerful financial tool that constitutes a significant part of today's global generation of profit. Given that securitization's abuses contributed to the global financial crisis, its regulation is critically important. US and European post-crisis regulation responses are insufficient. For achieving a more systematic regulatory framework, existing law will have to supplement.

    ]]>
    Tue, 24 Apr 2018 10:27:00 GMT
    <![CDATA[Guide: Real Estate Investment In Abu Dhabi]]>Real Estate Investment In Abu Dhabi

    Introduction

    PLANNING TO PURCHASE A PROPERTY?

    #

    Things to Know

    1.

    Conduct due diligence on both, the seller and the property before signing the documents.

    2.

     

    Verify the details of the property at the Abu Dhabi Municipality.

    3.

    Consult a property or real estate lawyer to review the paperwork and advise you on the structure of your transaction.

    4.

    Contrast the price of the specific property with other properties in the locality

    5.

    Compute the final registration fee of the property and decide the exact percentage of each party

    6.

    Make sure that the property is free of any debts and is not any form of collateral.

    7.

    Visit a property lawyer and understand the rights and obligations of the parties in case of a renovation and maintenance of leasehold properties.

    8.

    Check whether the property is prone to any environmental hazards.

    9.

    Check whether the property is likely to any environmental hazards

    Confirm the applicability of value-added tax (VAT) in the transaction involving the property.

    The math is lucid and co-related. A higher number of expatriates flooding into the region leads to a linear rise in the demand for property (for leasehold and freehold). But this demand for the property does not only refer to residential units. The number of commercial towers in the Emirate of Abu Dhabi has increased over the past decade, thanks to the investor-friendly regulations and dynamic corporate culture. The Abu Dhabi Government established the UPC or the Urban Planning Council of Abu Dhabi with the sole perspective of strategizing a plan for the Emirate of Abu Dhabi in line with Vision 2030.

    This plan was simple and lucid – develop progression by increasing the standard of living, embracing the Emirate's socio-economic culture, protect and preserve the region's traditions, invest in diverse projects to boost the overall economy of Abu Dhabi and meet the growing demand. Ultimately, this was to create a framework that would simultaneously, mold the Emirate's social structure and economic strategy

    The ADGM or Abu Dhabi Global Market came into existence in 2013 as premier and international financial center that would supply and meet the requirements of the stemming investors in the financial sector of the UAE. Therefore, the ADGM was a financial free zone that houses its dedicated courts and legal framework to back up its international clientele. Over this short span of time, the ADGM has become renowned in the region due to their high-end infrastructure and more over the English law system. Since its inception, this financial free zone was working towards establishing themselves as the dominant free zone in the region with a dedicated dispute resolution regime and jurisdictional override. The ADGM has their own civil and commercial laws that apply to entities and transactions within the free zone, outlined by the English common law system.

    In this real estate guide, our property lawyers in Abu Dhabi aim to outline and elucidate the provisions of the (the New Law) novel Law Number 3 of 2015 regarding the Regulation of Real Estate in the Emirate of Abu Dhabi and the rules governing real estate transactions and laws in the ADGM. The lawmakers of Abu Dhabi had enforced the new law, in line with the existing property laws in Dubai, to attract foreign investors and real estate investments into the Emirate. This New Law has touched all the major issues surrounding the real estate sector in Abu Dhabi (including, property registration, purchase, and sale of off-plan properties, licensing of parties in the real estate sector, mortgages and likewise.

    STA Law Firms is one of the leading law firms in the region with two (2) offices in the Emirate of Abu Dhabi. Our team of real estate lawyers in Abu Dhabi allocates proportionate and appropriate time into researching the background of the real estate and property market and status of real estate developers and brokers as a ground for due diligence reports. At STA, we render legal advice that is timely, practical and individually tailored to meet specific requirements of the clients.

     

     

      Index

    Your Ultimate Guide to Real Estate Investments in the Emirate of Abu Dhabi

  • Ownership of Real Estate

    1.1. Freehold Property

    1.2. Leased Ownership

    1.3. Jointly owned Real Estate property

  • Acquisition of Ownership
  •            2.1. Formal requirements

               2.2. Registration Fee

               2.3. Share Deals

               2.4. Public Auctions

  • Other Rights to Property
  •           3.1. Mortgages and Charges

              3.2. Easements

              3.3. Other Un-Registrable Rights

  • Leases
  •         4.1. Duration and Rent

            4.2. Operating Expenses

            4.3. Maintenance, Repair, and Renovation

            4.4. Subleases and Termination

  • Tax
  •         5.1. Transfer Taxes

            5.2. Value-Added Taxes

            5.3. Other charges arising from the occupation of real estate

  • Real Estate Finance
  •         6.1. Real Estate Investment Trusts (REITs)

  • Dispute Resolution
  • Environmental Aspects
  • 1.     Overview

    Similar to the Dubai Land Department (the DLD) in functionality, THE Abu Dhabi Land Department (the LRD) is the central regulatory authority that overlooks the real estate sector of the Emirate. Although it has an uncanny similarity to the DLD in functionality, the Abu Dhabi Municipality is responsible for recording and registering real estate transactions in the Emirate of Abu Dhabi.

    The rule of thumb in real estate transactions is that the seller should register the deal with the regulatory authority and non-compliance to this rule may mean that the specific agreement is not valid under the law. In this regard, the LRD issues an ownership certificate for each property transaction and this piece of document is one of the primary evidence that the court takes into consideration while deciding a dispute concerning the ownership of the property. In the United Arab Emirates, parties can invest in real estate in the following forms: -

  • Freehold ownership;
  • Leasehold ownership;
  • Jointly owned property
  • 1.1  Freehold ownership (Mainland)

    The owner, be it an individual or a corporate entity, of a freehold property, receives extensive benefits from the property, contingent upon their nationality and place of registration. Below is the classification of population in UAE that is likely to possess property in Abu Dhabi mainland:

  • Individuals having UAE nationality, and companies wholly owned by UAE nationals;
  • The Federal Government of UAE, the government of specific Emirate or their companies;
  • Companies wholly owned by Abu Dhabi government; and
  • Expatriates or entities which do not fall under the categories above.
  • The property Law of Abu Dhabi does not restrict the individuals having UAE nationality or organizations within UAE from holding property in the concerned Emirate. The residents of several Gulf Countries including Bahrain, Oman, Saudi Arabia, Kuwait are allowed to retain ownership of land or properties in specifically assigned investment zones within the Emirate of Abu Dhabi. On the contrary, foreign investors are just permitted, within the designated zones commonly known as Investment Zones, to purchase, sell, mortgage or lease out the property. The investment zones in Abu Dhabi are regions wherein the expatriates and GCC nationals can hold ownership rights. Importantly, non-UAE citizens are permitted to own apartments and entire floors inside the Investment Zone, or by usufruct or musataha rights. However, this reason does not grant an authorization to the owner of a particular portion of the original land on which the building is constructed. Following is the list of Investment Zones in Abu Dhabi:

  • Al Reef
  • Golf Gardens
  • Mangrove Village
  • Al Manara
  • Raha Beach
  • Al Bandar
  • Al Reem Island
  • Al Zeina
  • As mentioned above non-UAE nationals have the authority to purchase property in Abu Dhabi Investment Zone and not outside under the following conditions:

  • Usufruct for 99 years (Interest in Land)
  • Musataha for 50 years and renewable
  • Ownership title of floors within the building
  • Interest in the land for a lease agreement for a maximum period of 25 years
  • Thus, the law states that foreign investors can hold the interest in property either individually or jointly with other party mentioned as follows:

  • Discrete owner: This kind of ownership is most popular method amongst expatriates wherein, the individual purchases and register the property under his name.
  • Cooperative Ownership: This permits two or more individuals to hold the property jointly. Under this arrangement, the property will be registered under the name of all the owners with their specific position in the title deed.
  • Note: According to the Law Number 49 of 2018, the fees for the registration of sales and purchase will be decided by the executive committee mentioned under this law. The fees to be paid for a registration is between a minimum of 1% to a maximum of 4% of the transaction value. The relevant authority has the discretion to decide according to the value of the relevant purchase. However, the maximum fees capped at AED 1,000,000 for each transaction. The parties must share the fees equally between them unless otherwise, they agreed differently. 

        Abu Dhabi Global Markets (ADGM)

    The Abu Dhabi Global Market, an international financial free zone, has laid down its distinct rules and regulations pertaining to ownership of real estate within ADGM, which includes property regulations and strata regulations. The rules regulations of ADGM is only applicable to the properties situates on Al Maryah Island. ADGM permits UAE or GCC nations and corporations wholly owned by the concerned nationals to possess the land, apartments, floors or even units within the jurisdiction of ADGM on a freehold premise. In any case, considering the New Law, non-UAE nationals, individual or corporate entities, are restricted to freehold property in ADGM of land as it is reserved for UAE and GCC nationals. As aforementioned, expatriates (individual or company) are free to own title by acquiring floors or units in a specific building in ADGM. Additionally, ADGM perceives the joint ownership wherein, at least two (2) proprietors can claim the ownership of land. 

    Pursuant to ADGM rules and regulations, ADGM has established its separate property registration Department, ADGM Land Register which has set out a rundown real estate transaction that is to be enlisted with them. In ADGM, the commitment to guarantee that the exchange of title or the specific details of property exchange transactions to be recorded is on the individual or corporation that is offering or leasing the specific property. However, agreements pertaining to these property exchanges entered into by the relevant parties are enforceable pursuant to the provisions of the conveyance report regardless of whether the same is a non-enrolled with the ADGM Land Register. The Land Register records all reports identifying with the creation or exchange of property rights in ADGM. Moreover, ADGM will establish its separate courts (ADGM Court) for hearing any issues emerging from the Property Regulations and the Strata regulations  

    To read this Guide further, please click here.

     

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    Sat, 17 Mar 2018 03:59:00 GMT
    <![CDATA[The Emerging Role of NEC Form of Contracts]]> GOOD FOURTUNE- NEC4

    "It's not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change."

    - Charles Darwin

    Introduction

    Biological evolution has been "creating" lives on this earth for almost three billion years, constantly adapting everything to an ever-changing environment. It is refreshing to see how evolution works and the trick is to change a complex system by using what's already there, and namely to adapt to the change. A similar evolution took place in the engineering and construction industry recently in June 2017, when the New Engineering Contract (the NEC) 4 was released. The "out with the old and in with the new" approach in the engineering and construction industry played a vital role in how to do things differently in these sectors. An evolutionary step was taken by the NEC contract board from its predecessors "NEC3". Regarding its designers, the new generation NEC4 is a  positive development for existing users of NEC3 having a similar base. It will be considered, all over the world as an evolution in the engineering and construction industry. Based on direct feedback from industries, to support methods and provide solutions to client demands, NEC4 reflects changes in law and market practices by introducing new forms of contracts and by emphasizing on collaborative work. Through this article, you will experience the ride of evolution in the NEC world and what significant features the new NEC has to offer.

    Started From the Bottom; Now, We Are Here

    In 1993, the first NEC contract came into existence, written in simple language with the sole aim of stimulating good management. However, two years later the second edition named NEC engineering and construction contract was published with new forms of contract including professional services contracts and adjudicator's contracts along with some short forms and sub-contracts. The 20th century for NEC contracts was a great experience and a decade of extensive international application. Later in 2005, the NEC contract board launched the NEC3 contract suite. NEC3 flooded the market with term service contract, framework contract and later in 2010 with supply contracts. By the end of 2013, NEC3 was updated to 39 documents along with an enhanced set of guiding principles. It was a great success for 12 long years and was endorsed worldwide by several public and private sector undertakings with a track record of delivering timely projects within stipulated budgets.

    With the new era, new demands, new technology and with everything else that's new, it is the time for a new NEC. NEC4 arrived on 22 June 2017 in plain English and in the present tense which can be effortlessly translated and understood by people not speaking English as a first language. It simultaneously recognizes the necessity for contract administration, risk management, and terminology which will enable a flexible industry to manage, procure and deliver collaborative projects.

    What's new?

    NEC4 is an enhanced version of NEC3 or simply an upgrade with some new features and some new forms of contracts. The two most important contracts that have been added to the suite are NEC4 Design, Build and Operate (DBO) Contract and NEC4 Alliance Contract (the ALC). Targeting clients who seek construction, design, operation, and maintenance from a single contractor, DBO is the most suitable form of the contract offering a wide range of services, such as pre and post construction works which include the operation of the asset to achieve the required performance levels or more straightforward facility management. The DBO contract gives the opportunity to the client to procure a more integrated whole-life delivery system.

    On the other hand, ALC, a multi-party contract having a reliance on integrated risks and reward models, is only suitable for clients who are looking for a single collaborative contract by a fully integrated delivery team for large industrial and complex projects. The contract places its basis on achieving client objectives by working together and sharing risks and benefits. The benefit of using ALC is to form a stronger collaboration between all project participants, bound by a common interest and reducing grounds for disputes.

    Dispute Resolution Mechanism

    A new and advanced system of dispute resolution has been introduced by the NEC4, which provides a "Dispute Avoidance Board (the DAB)." It offers an alternative to two-tiered negotiation initially by senior representation followed by adjudication. DAB is most suitable for international projects and where the United Kingdom's Construction Act does not apply. The new option offered by NEC4 stipulates the appointment of DAB before the commencement of the project where the dispute will be referred to DAB before being transferred to adjudication. The procedure is similar to the FIDIC (Fédération Internationale Des Ingénieurs-Conseils)  contract, where either party under the contract can refer the dispute to DAB, whose decision is binding on both the parties. The DAB, however, under NEC4 will itself take the initiative to resolve potential disputes between the parties. The DAB will practically carry out periodic inspections throughout the life of the project to identifying potential disputes. Fostering a collaborative environment which will prevent the crystallization of disputes, is the intention of the makers which is transparent and outright from the wording of the contract.

    Evolution, Not Revolution

    Leaving behind traditional methods of procurement and limited forms of contract, NEC4's suite of contracts is described as an evolution and not a revolution in the engineering and construction industry. Following new features of next generation, NEC4 identifies and adapts to the constantly changing technology and environment:

           i.          Scope of improvement

    The new NEC4 contract contains a special feature for either party to identify the opportunities and to simultaneously improve the outcome of the project. The project manager has the right to accept, reject or request a quotation before making any decision. The contract can instruct for acceleration in works to complete the project prior to the completion date. NEC4 provides a new option allowing the contractor to alter the scope by reducing the cost of an asset over its whole life.

          ii.          Cost

    Cost for professional services, term service, and supply contracts is now defined in the same way as an engineering construction contract (the ECC), providing a common approach to all contracts for a closer integration of participants and in the supply chain.

         iii.          Harmonious system for resolving dispute

    NEC4 has introduced a mandatory requirement for consensual dispute resolution by appointing a senior representative by each party to negotiate the dispute and reach a temporary solution. The Engineering contract offer two options W1 and W2 where option W1 is for projects where UK's Construction Act does not apply, and option W2 where the act applies. The consensual dispute resolution under NEC4 is compulsory under Option W1 whereas, under option W2 only where UK's Housing, Grants, Construction, and Regeneration Act 1996 apply.

        iv.       Payment Mechanism

    The contractor is obliged under the new contract to file an application for periodic assessments and a contractor failing to submit such an application will not receive any payment. If the the payment is due to the client, the project manager will make the necessary assessment and will certify the payment. This approach used to be applicable to short forms of contracts only.

        v.        Building Information Modelling (BIM)

    This is a new option available under the ECC especially used for supporting the use of BIM. The contractor is required to provide an information execution plan either in the contract or within the client's defined time-period. The plan submitted by the contractor must have the ability to satisfy the BIM requirements set out by the client.

        vi.          Confidentiality Clause

    Most of the NEC4 contracts, except for the short ones, include core clauses restricting the disclosure of confidential project information. This clause meets the client's requirements for avoiding the need for additional amendments at a later stage.

    GCC welcoming NEC4

    In 2007, during the construction boom in the UAE's economy, the leading developer Aldar Properties was the first to adopt NEC3 at Al Raha Beach in Abu Dhabi. The Middle East's first experience of NEC contracts is still considered one of the largest contracts ever acknowledged by the Emirates. Similarly, NEC4 will likely to be appreciated worldwide considering the success of its predecessors. Given the predominance of the FIDIC contract worldwide, it will be challenging for NEC contracts to mark their grounds, especially in GCC countries.

    The NEC suite of contracts, unlike FIDIC, is based on principles of good faith, a well-recognized concept under Shariah Law and which enshrines in most of the Gulf countries' legal systems. Adapting takes time, transferring to NEC contracts would be time-consuming but fruitful. Away from all historical adversities, and undertaking projects and works programmes for large groups, NEC4 provides an opportunity for successful outcomes.

      ]]>
    Sat, 30 Dec 2017 03:15:00 GMT
    <![CDATA[Under the Radar]]> Under the Radar

    "Real estate investing, even on a very small scale remains a tried and true means of building an individual's cash flow and wealth"

    - Robert Kiyosaki

    It is not strange to find Dubai to be investors' favorite choice when it comes to real estate investment. Earning the name as one of the fastest developing cities in the world with limitless skyscrapers and real-estate projects announced every day, you unmistakably want to join the crowd and invest in some real estate project. However, Dubai's real estate companies are becoming more and more ambitious these days since they came out with a new trend. "Buy the house of your dreams outside Dubai"-this phrase is usually located near a picture of Eden's garden and, supposedly, the house of your dreams facing sunrise! All of this sounds tempting, and I would personally love to buy a house on top of a mountain with the perfect sunrise like from the movie 'UP'. But why would I invest in some foreign country for the house of my dreams if I am unable to place my trust in a local real-estate company to build this house right here in Dubai? Can anyone even trust such an advertisement? As outrageous as it may be: Yes! Yes, you can!

    The vision of Dubai is to create a stable city for local and foreign investors equally. To accomplish this goal, the Dubai Land Department (the Land Department) had recently issued Circular 13 of 2016 (the Circular), which has imposed serious restrictions to real estate brokers who want to advertise any property outside Dubai-even if it is on the internet. Real estate agents are not permitted to post any details of a foreign property online without being verified and approved by the Land Department. This means your house in Eden's garden does exist!

    According to the Circular 13, any real-estate company must obtain authorization from the Land Department to market properties-whether it is inside or outside the UAE. A real estate company must provide a list of documentation such as the property title deed, the marketing agreement between the broker in Dubai and property owner outside, details of the property, and whether the property is ready for purchase. Real estate brokers who intend to market foreign properties must obtain a letter from the owner of the foreign property stating the ways and terms of ownership for the likes of investors in Dubai. Further, and most importantly, the broker is not allowed to take any amount from the investor-the money is handed only to the owner of the property directly. Even the sale and purchase contract should be signed by the owner, purchaser, and broker stating the terms and conditions of the deal. When the investor and the property owner seals the deal, only then is the broker is entitled to his fees. Circular 13 has mentioned these requirements, and all real estate agents in Dubai are aware of such restrictions. Any violation by the brokers may subject him to heavy fines by the Land Department and, of course, to a Court claim by the investor.

    Therefore, the Dubai Land Department has evidently restricted the agents to facilitate the process of purchasing the property and providing all the required information related to the real estate. Other than that, investors deal with the owner of the property directly which is an accomplishment for the Land Department and a huge step towards creating transparency and a safe environment for investors.

    Why would anyone even think of buying property inside Dubai if you can get a better, cheaper deal outside? It is important to note that, even though it is safe to trust an advertisement of a foreign property in Dubai, the Circular is only protecting the investors from any false advertisements, wrong information, and fraud deals with agents listed among the Land Department. This does not mean that the Circular applies to the owners of property outside Dubai. The Circular will not protect you outside of the UAE where no one can predict what will happen. We know that, even here in Dubai, dealing with the property owners directly did not spare investors the hassle in courts or arbitration centers. From delay in the handover to vanishing from the construction site, what will prevent uncertain circumstances from happening outside Dubai? Investors cross their fingers when investing outside the region due to their lack of knowledge in the judicial system and policies of the foreign country. You can knock on that real estate door and leave no stone unturned. Knowing what is going to happen and outlining a roadmap even if you have received the worst out of your real-estate deal is better than having no roadmaps at all. Ergo, the best way to invest safely in any country-even in Dubai-is to involve your real-estate lawyer.

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    Sun, 26 Nov 2017 05:00:00 GMT
    <![CDATA[Heads of Terms]]> Heads of Terms

    "Intention is one of the most powerful forces there is. What you mean when you do a thing will always determine the outcome. The law creates the world."

     -        {C}{C}Brenna Yovanoff

    Overview                                                                                                                            

    Every contract is the result of an intense negotiation between the parties of the contract to settle the terms. Stemming from an oral discussion, these terms get translated onto paper and are signed by each party to record the conclusion of negotiation for the use of creating the final contract. These written provisions are called the "heads of terms." Corporate commercial transactions often begin with parties executing them. They are the first documents following non-disclosure agreements. Some of these documents are a term sheet, a Memorandum of Understanding (MOU), or a letter of intent (LOI). They predate the official final contract of a proposed transaction and are used mostly in corporate transactions: share acquisitions, loan finance, joint ventures, project financing, private equity investments, and more.

    Since they have no legal effect on each party, the UAE Courts consider heads of terms to be non-binding. The Dubai Court of Appeal states in one of their adjudicated cases that "pre-contractual negotiations are formalities with no legal effect, [because they are] preparations in anticipation of a final contract that is yet to be concluded."

    One may assume that parties will not be liable if no final agreement is ultimately reached based on the respective heads of terms. This assumption, however, is incorrect. It depends on the language used mostly. Article 257 of the UAE Civil Code[i] states that "the basic principles in contracts are the consent of the contracting party(ies) and the obligation(s) they have agreed to as set out in the contract." In the infamous case of National Bank of Umm Al Quwain (the Bank) v. Global Investment House [ii], the Dubai Courts reviewed this matter. Clause 3 of the MOU stated that the Bank and the Global Investment House (the GIH) should conclude a subscription agreement only once the Bank completes all formalities and legal matters preceding that agreement. The Court of Appeal stated that "if the wording of a contract is clear, the courts should not depart from it by way of interpretation to ascertain the intention of the parties. It is important that the negotiations produce an agreement containing the essential terms of the contract." Consequently, the Court upheld the MOU to be binding, stating that Clause 3 of the MOU contain a clear wording of the parties' intention and agreement and that they should not depart from it.

    Thus, even if heads of terms are non-binding, they often do contain legally binding provisions that are necessary for the protection of parties. The governing law, jurisdiction clauses, and confidentiality clauses still may bind parties. In a term sheet agreement, for example, a borrower will want the lender to give a binding confidentiality undertaking in respect of confidential information that the borrower provides in negotiations. In the UAE, confidentiality and exclusivity provisions are valid and enforceable only if they are clearly drafted and defined. If you breach a confidentiality undertaking, you will be liable for damages.  

    Good Faith

    UAE law also attributes great importance to the concept of good faith and the obligation of the parties to perform their contractual obligations in good faith.[iii] The existence of heads of terms gives rise to this responsibility. Depending on the provisions of these heads of terms, one may be under an obligation to keep the other party informed, cooperate with the other party in entering into a final contract, and not walk away from negotiations without good cause. Breach of the obligation to negotiate in good faith may result in payment of damages for loss suffered by the injured party and any expenses that they may have incurred in carrying on the negotiations.

    The Use of 'Subject to Contract'

    So how do we know whether the heads of terms are legally binding on the parties? It depends on all the facts of the matter and the conduct of the parties: whether we acted upon those heads of terms, how we drafted the provisions and the likes. In a recent UK case of RTS Flexible Systems v Molkerei Alois Muller GmbH, the Letter Of Intent contained no express indication of whether its terms were intended to be binding. However, it still amounted to a legally binding contract. The court held that "the comprehensive terms and the language used in the letter of intent meant that it was certain and complete to have contractual force." This Letter of Intent had contained the term "subject to contract," meaning that the Letter of Intent was intended to have been subject to a final, binding contract. The use of this phrase should create a strong presumption that parties involved in such a commercial transaction will not be bound to the LOI.[iv] However, if one begins to perform the contract as envisaged by the heads of terms, the words "subject to contract" might not be as effective as expected, as evidenced by this case. It is therefore preferable for heads of terms to spell out the parties' intention. For example, the parties may state that 'these heads of terms are not legally binding between the parties except by the provisions specifically set out in this document'; thereby, clearly stating the lack of intent of being bound to the heads of terms.

    Advantages and Disadvantages of Heads of Terms

    Disadvantages

  • Although heads of terms are not binding, one may find it difficult to maneuver a transaction if something emerges during the negotiations that had not been taken into consideration previously.
  • One may find themselves legally bound by its terms even if the parties did not have that intention.
  • Time spent arguing over the heads of terms could have been spent negotiating a definitive agreement.
  • Heads of terms will create a strong moral commitment to observe the terms agreed. Depending on the circumstances, this can be considered as an advantage or a disadvantage of heads of terms.
  • However, despite the fact that heads of terms are risky, they are helpful in many ways in corporate and commercial transactions. Some of those advantages are outlined below because of heads of terms:

    Advantages

  • Provides a framework to negotiate a final contract.
  • Initiates a moral commitment on both the parties to observe the terms agreed.
  • Provides a useful statement of major terms of the proposed deal.
  • Helps in setting out the timetable and obligations of both parties.
  • Increases efficiency.
  • Some Guidelines for Drafting Heads of Terms

    It should always be decided from the outset whether such a preliminary document should be made binding or nonbinding. If one wishes to be bound by it, it should be stated. However, if one does not desire to be bound, this may be expressly stated by using such wording as "subject to contract" or using language similar to the following:

    'The parties agree that this MOU/term sheet does not constitute a binding commitment by either party on any transaction (except the confidentiality and exclusivity sections set forth above).'

    However, one should bear in mind that the use of a precise wording or language may not alone be sufficient. One must always be careful with communication, actions, and conduct. As a general rule, one should confine the heads of terms to discussing the commercial deal only.

    Conclusion

    It is important to highlight that, before drafting heads of terms, one must have a clear understanding of what the parties wish to achieve. One should always consider issues that can be settled at the outset and which can be left on the detailed, definitive contract. If negotiations over the heads of terms stalled because of some unnecessary detail, this will delay preparation of the final agreement and increase the length and cost of the negotiations. Always remember that heads of terms can help in both defining the destination and planning a route. They should, therefore, be approached practically to avoid delay or progress in the wrong direction. 

    [i]  Federal Law Number 5 of 1987 (as amended)

    [ii] As decided on 21 May, 2012

    [iii] Article 246 of the Civil Code

    [iv]  Prudential Holborn Ltd v Fraser Williams [1993]

     

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    Mon, 20 Nov 2017 12:00:00 GMT
    <![CDATA[Mortgage of Movable Assets in Dubai and the UAE]]> Mortgage of Movable Assets

    The enactment of UAE Federal Law Number 20 of 2016 Concerning Mortgaging of Movable Properties as Security for Debts (the New Law) is a milestone towards the UAE government's initiative to bring positive changes in UAE's mortgage law. In parallel to the recent laws on commercial companies and on bankruptcy, the New Law endeavors to provide for a more certain and conducive financial regime in the UAE. The New Law bridges the gap and may result in providing business opportunity to avail of financing and lenders to safeguard their interest by a secured form of security. 

    The pivotal change that the New Law contributes to is the ability to create a pledge over moveable assets without the need to transfer the possession to the mortgagee or an alternate third party. The law preceding this one required mortgagors to transfer the possession of assets in favor of the mortgagee. The restricted the mortgagor from gaining beneficial interest from the property, consequently restricting the owner or obligor from repaying the amount of the loan. The New Law, therefore, rids of this hindrance and allows for mortgages to be created over movable property without the need to transfer possession from the mortgagor to the mortgagee.

    What constitutes assets?

    Article 3 of the New Law specifies movable assets that can be mortgaged (pledged) to include deposits in banks, raw goods and products, tools and equipment, and more. Article 2 more particularly provides that the New Law shall apply to any civil and commercial transactions that create a right of to pledge over movable assets by the provisions of the New Law.

    Security Register

    Article 10 of the New Law has laid down the conditions of registering a mortgage. A security interest by way of mortgage may only be created and affected by movable property in favor of third parties if it has been registered in the Register. Currently, the process of registration is unclear and more details on the matter is pending until the release of a Cabinet Resolution establishing the Security Registry. Further, Article 10(2) clarifies that once a mortgage right has been created on a mortgaged property and was declared according to the provisions of the New Law, no subsequent mortgage right may be created on the same mortgaged property unless through declaration thereof. This provision, along with Article 17, permits registration of ranking charges on the Security Registry. This priority in the ranking shall be determined by the date and time of registration of the pledge in the Security Registry.

    Another reason where the New Law benefits over the old regime is on account of the New Law allowing for future property to also be secured by creating mortgage over it. This move is applauded by lenders who have added comfort at the time of extending security to the obligors.

    Enforcement

    The process of registration is also a required precedent for the enforcement of the mortgage right. The provisions of the New Law have stated that the legality and application of the right specifically towards third parties must follow the Register's receipt of the registration. Following the enforcement of the rights, the mortgagee is allowed to surpass other creditors in obtaining the rights to the property.

    Process of Sale

  • There are conditions to the sale procedures of the mortgaged property that specifically Article 33 of the New Law clarifies. The provisions state that:
  • The Court may authorize the mortgagee to sell the mortgaged property after fulfilling the following conditions: (i) he obtains the issuance of the order permitting him to seize and execute against the mortgaged property and (ii) he acts with sufficient care for the sale thereof at a price not lower than the market price without following any of the sale procedures set forth in the Civil Procedure Law.
  • The Court may, if it finds it necessary to preserve the value of the mortgaged property, specify in the order permitting the mortgagee to seize and execute against the mortgaged property, the conditions of the sale method or may decide the sale method and determine a minimum limit of the sale price to be specified according to the market price.
  • The Court may rule to allow the mortgagor to sell the mortgaged property if it was proved that he could sell it at a higher price, within the period specified by the Court and under the guidance of the mortgagee or the Court.
  • If the Court allows the mortgagee to sell the mortgaged property, he shall declare the Court's decision in the Register five working days before the date specified for sale. Otherwise, it shall be considered void, provided that the declaration includes the following: -
    • Name and address of the mortgagee;
    • Names and addresses of the mortgagor and principal debtor;
    • Description of the mortgaged property to be sold;
    • Sale method;
    • Date, time and place of sale.

    Given this, the Article ends on the note that the mortgagee may be granted the permission to immediately sell a mortgaged property that has been exposed to destruction, damage or depreciation or if the mortgagor fails to provide a substitute for the great expenses that may incur.

     

    Conclusion

    The financial regime of a nation is vital for its growth and its economic development. The new mortgage law passed by the UAE lawmakers not only rids of the hindrance imposed on the mortgagors to deliver the possession but also places the present and future property on an equal footing.  In the wake of this new development, all the parties involved in the process of lending should be aware of the legalities surrounding mortgage and pledge of movable assets to ensure their compliance with the New Law.  

     

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    Sat, 18 Nov 2017 12:00:00 GMT
    <![CDATA[Keeping it Simple: Federal Law Number (8) of 2017 on Value Added Tax]]> Keeping it Simple: Federal Law Number (8) of 2017 on Value Added Tax

     

    The UAE's new governing law regarding VAT is the Federal Decree-Law Number (8) of 2017 (the Law). According to Article (1) of the Law defines Value Added Tax as 'tax levied on import and/ or supply of goods and/ or services at every stage of production and distribution, including the Deemed Supply.'

    The Law addresses the importance of understanding VAT and the impact it may have on a person, such as increase in the Value Added Tax, compulsory and voluntary registration, methods of payment, the required amount of payment, items that which is not subject to VAT, as well as many other regulations. Due to sudden transformation to the Value Added Tax system, it is essential that tax payers in the UAE review the new tax scheme in connection with their dealings. An interpretation of the Law defines a Taxable Person as an individual who is registered or should register for tax under the provisions of the Law.

    Under Article 3 of the Law, a standard tax rate of five percent (5%) on import and supply and goods and services. Supply of goods includes but is not limited to transfer of a contract for the exchange of goods and services. The article covers all possible goods transferred and traded in the UAE, including products supplied from an agent of a person.

    A government entity also falls within the ambit of law on the basis that it distributes goods or services (PROVIDED HOWEVER THAT the entity's conduct is in the non-sovereign capacity or if they are in competition with the private sector). However, a cabinet decision will be issued in the future to determine their entities, activities, and the possibility of a company falling under that expressed within article 10 of the Law.

    The VAT regulations also apply to service providers, therefore will impact and influence the interest of investors and entrepreneurs who desire to or consider future company formation in Dubai and the UAE. Authorities (such as free zones and Economic Department) in the UAE issue service licenses in several broad categories. In the past and till date, investors applied for business setup in Dubai and UAE with the ambition of servicing domestic as well as international clientele. Every person that comes under the scope mentioned above of the goods and services supply must register for the new tax system when they exceed the threshold level provided as per the Law. According to the threshold level, registration divides into two categories, namely, mandatory and voluntary registration.

    Article 13 mandates that every (natural or legal) person who resides in the UAE is required to make mandatory registration for the new tax scheme when his total value of all supply exceeds the amount of AED 375,000. Similarly, a person is obliged to take the same above action when the anticipated total value of supply exceeds the compulsory registration threshold in the next thirty (30) days.

    Payment of VAT will only arise in the above situations, however, to avoid liability of VAT from the new regulations, tax payers must calculate the tax due on their accounts up to 31st December 2017. The Executive Regulation which is to be published by the cabinet will specify the time limit that a person must inform the authority of his liability to register the tax.

    Voluntary registration applies to persons who are not mandatorily required to register for taxes under article (13). Article (19) mandates that from a previous twelve (12) months period, a person whose total value of supply exceeds AED 187,500 can voluntarily register under the new regulations. A person may also register if they anticipate that the total amount of supplies will exceed the voluntary threshold within the next thirty (30) days.

    The Law defines a set of guidelines on how to determine whether a person exceeds the mandatory or voluntary threshold. The following factors below must be taken into consideration:

           I.          The value of the taxable good(s) and service(s)

         II.          The value of Concerned Good(s) and Service(s) obtained by a person – 'Concerned Goods and Services' are those that have been imported and would not be exempt from tax if supplied within the UAE;

       III.     The gross (total) value of the whole or relevant part of taxable supplies that are owned by a person if he has wholly or partly acquired a business from another person who provided or sold those goods;

        IV.     The value of taxable supply made by Related Parties according to the cases stated in the Executive Regulation – 'Regulated Parties' two (2) or more parties that are considered as the same or not separated in an economic, financial and regulated perspective. The parties that can control the other(s) under the law of the land or through shares or voting rights.

    It is pertinent to note that the supply of transfer of capital assets should not be taken into consideration while calculating the mandatory or voluntary threshold to determine tax registration obligations of the parties.

    To register as Related Parties, each person must have fixed establishment in the UAE, and the person(s) undertaking the business in a partnership should have control over the other entities. The Executive Regulation will state the circumstances when a person may not be permitted to register under a tax group. Any person(s) undertaking business in the UAE should have one (1) tax registration number.

    Article (15) states that a taxable person could be exempted from mandatory tax registration in Article (13) if they file a request indicating that their supplies are subject to zero (0) rate, such as but not limited to international cargo or passenger transport that commence and arrive in the UAE; supply of land, sea and air transport for passengers and cargo, supply of aircraft and vessels; import of precious metals; firstly supply (sale or lease) of residential buildings in whole or part; supply of crude oil and natural gases.

    Further, one of the main raising question among the UAE people is whether these VAT apply to free zone as well. Free Zones are one of the most used or simplified company formation systems in UAE. One of the main reason is that free zone entities are Tax-free and they provide sole ownership for the Non-UAE residences. Also, the free zones are accessible for having their dedicated laws and regulations that would apply to companies and individuals within the free zone. Most scholars argue that the application of these new VAT to the free zone entities and persons will create questions on the underlying concept of free zones are free to act within their limitations. In contrast, some scholars argue that it is best for the Tax regime of the country to apply the new laws to free zone with some exemptions. However, the UAE government has taken a balanced place in this matter with the final consideration.

    Under Article 77, anyone committing Tax evasion is liable to the penalties provided under Federal Law Number 7 of 2017 on Tax Procedures. In addition to the aforementioned penalty, the person will be liable for an administrative penalty under the new Law if the person failed to display prices inclusive of Tax, if the taxable person failed to notify the authority of applying Tax, if the supply person failed to issue tax invoices or documents or tax credit note, and if a person failed to comply with the regulations related to electronic tax invoices. Moreover, it is important to understand that everything under the category of goods and services will not be taxed. Services such as education and healthcare exempted from this new law considering the value of such services to the country in general. Both the services were highly expected to be exempted before the establishment of the Law. Similarly, VAT is exempted in the supply of bare land, the supply of local passenger transport services, some of the financial services mentioned in the executive regulations, a direct or indirect export to outside implementing states, the supply of aircraft or vessels designated for rescue and assistance.

    According to Article 15, the person who falls under the category of the exemption from VAT must request the authorities stating his supply is excepted from the new tax or in other words subject to zero rates. One can understand that the intention of lawmakers was to simplify the procedure to socially valued services such as education and health services. Further, the supply of residential properties will be exempt as well. Another type of supply which has taken into consideration of exemption is the supply of bare land. Also, financial services will be subject to a narrow exemption. However, free based financial services are not categorized as an exemption in the Law and therefore will be charged under the Law.

    Praising the new Tax changes in recent years, the Deputy Ruler of Dubai said that the Tax procedure law is a significant milestone towards establishing the UAE's Tax system and diversifying the economy. Accordingly, UAE is shifting from the days where Tax laws were known as toothless laws or ineffective in practical to a strong regulation of Tax law. The FTA chairman has stated that the Law, issued by Shaikh Khalifa is an all- encompassing legislative framework which lays down the groundwork for the UAE's futuristic plan to enforce taxes as a method to ensure sustainability and diversify the government's revenue sources. The increased resources will enable the Government to maintain the momentum of its development and infrastructure for a better future." The government does not only provide legislation but also plan to provide administrative and all the required resources to increase the level of the system. The steps are taken such as a clear process for appeal when a person did not register to the Tax scheme in the first instance and providing FTA as transparent is international best practices. In overall, UAE government believe that this VAT system is designed to promote economic growth and plans for the country in a bigger picture. Now the UAE has Implemented the tax regulations, which is the most important revenue of a country. Now the government has to make sure Tax payers pay their Tax in practice. Implementing regulations and enforcement of the law is very important as well. The government will also have to focus on how to create Tax awareness among the people and what are the possible actions can be taken to get this into the practice. Once the country succeeds in making awareness of the persons on how they are part of the development of the country and how the Tax money is spent, the goal of Tax collecting will be completed. Different countries do it in different styles such as publishing magazines in newspaper, the internet or political websites and UAE has designed to promote a website to help Tax payers in every aspect as most of the UAE government departments are very successful in providing government services through online and its successfully designed websites which contain all the information, forms, and relevant Law for the user's perusal. The increase of taxes in other countries may aim at several objectives, but UAE aims at financing public expenditures. However, will these changes affect the investors of UAE and damage the long run reputation on tax related matters? Some scholars argue that new increase in tax may affect the overall business in UAE. Nevertheless, it can be analyzed to the effective date of the Law and how the suppliers of goods and services react on the matter.

    Although the Law is extensive, the application and implementation are yet to be seen in the UAE. The new VAT regulations will come into effect 1 January, 2018 and allow companies to register up to three (3) months before the implementation date.

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    Tue, 05 Sep 2017 12:00:00 GMT
    <![CDATA[FIDIC and ENAA: Comparison (Part II of II)]]> FIDIC AND ENAA: COMPARISON

    Part II of II

    In our previous issue, we discussed FIDIC and ENAA forms which are an internationally recognized and utilized form of contracts and the general comparisons between them. Our attorneys had also detailed the requirements of data accuracy, and other conditions of companies. Although, it does not end there. This Part II of the article gives a detailed comparison of the design obligations and force majeure clause requirements provided in the FIDIC and ENAA forms.

    Rachelle Doorley once said, '(construction of) buildings require the skill of an engineer, a contractor and an artist.' So, the question that might cross your mind is how an artist could grasp their work environment once submerged into the chaos of a construction site. If so, then, you're thinking of the wrong question. A more appropriate thought may be how an artist would confine his creative and free-flowing mind to the precise and narrow rules by which an engineer and contractor must abide. Although, uniformity is not encouraged in an artist's work; that is not the case for engineers and contractors who are likely to be bound by the standard forms of contracts and practices that prevail in their line of work. The requirements found in these standard forms and the role of both contractors and employers are detailed below in this second part of the article.

    Design Obligations

    The general design obligations under sub-clause 5.1 of the Conditions of Contract for Electrical and (for) Mechanical Works including Erection on Site (Yellow Book, 1987 First Edition, revised in 1999) states that:

    "The Contractor shall carry out, and be (liable or) responsible for, the design of the Works." Further upon receiving notice of commencement of works the "Contractor shall scrutinize the Employer's Requirements (including design criteria and calculations, if any) and (must also do so for the) items of reference mentioned in Sub-Clause 4.7 [Setting Out]. The Contractor must provide notice to the Engineer of any (and all) errors, fault or other defects found in the Employer's Requirements or these items of reference". Furthermore, it also contains provisions regarding the application of variations and adjustments, subject to an experienced contractor exercising due care and consequently discovering the error, fault, or other defects upon examination of the Site and the employer's requirements before submission of the tender. Extension of the time for competition shall not occur and neither shall adjustment of the contract price.

    From the above provisions, it is evident that the contractor is responsible for identifying any errors in the design criteria submitted by an employer and any defects when examining the site or the employer's requirements. The contractor is left with little remedy even if the data provided by the employer was incorrect as there is no responsibility placed on an employer for providing correct data or design criteria based on which the contractor lays down his plans. It seems that the form relies on the general premise of ancient practices where an employer was a layman and is persistent. However, in today's modern world, participants of large projects and users of these forms are technically well equipped from both the ends of the contract whether its employer or contractor.

    Further, sub-clause 5.8 Design Error states as:

    "If mistakes, omissions, ambiguities, inconsistencies, inadequacies or other defects exist in the Contractor's Documents, then they and the Works shall be corrected at the Contractor's cost, notwithstanding any consent or approval under this Clause."

    Accordingly, even if the engineer has granted approval after a review of the "Contractor's Documents" (which may include designs submitted by the contractor) under Sub-Clause 5.2, the obligation as to costs for correction of errors or such defects falls on the contractor. Undermining the role of the engineer in bringing out any deficiency or defect before any work is implemented and thereby rendering the role of engineers in projects almost limited to a determination of contractor's and employer's claims which finally is controlled by the contractual presumptions established hostile to a contractor.

    The ENAA (Engineers Advancement Association of Japan) form of contract under general conditions of clause 20.1.1 states as:

    "C 20.1.1 - Specifications and Drawings: The Contractor shall be responsible for any (and all) discrepancies, errors or omissions in the specifications, drawings and other technical documents prepared by them; (regardless of) the approval of such specifications, drawings, and other (such) documents from the Owner. However, the contractor would not be liable if such discrepancy or error happened due to inaccurate information furnished in writing to the contractor by or on behalf of the Owner."

    The above provision is self-explanatory as to the demarcations of the liabilities between the parties as the proviso imposes liability on an employer for erroneous information and exempts contractor for errors resultant of such owner's errors.

    Force Majeure

    The force majeure clause under Clause 19 defines force majeure as an exceptional event or circumstance (that is) beyond the party's control. It is something that could not have been reasonably comprehended before entering into the contract and upon its arising the party could have reasonably avoided or overcome. Further, it is not substantially attributable to the other party, and the clause also provides a non-exhaustive list of events. Sub-clause 19.2 has stated that when one party would be provided with substantial relief when the other parties prevent them from performing their obligations. Under Sub-Clause 19.7 the party is released from the performance of its obligations if the event makes it "impossible or unlawful" to fulfill its contractual obligations.

    Though the provision somewhat covers events and circumstances in general, the ENAA force majeure clause is wider in effect. Force majeure is a predicament which is beyond the reasonable control of the affected party, which is unavoidable. The non-exhaustive list if also provided under ENAA form with an addition of a category for labor, materials and utility shortages that are caused by force majeure events. Another difference is that the relief is provided not only for prevention but also for the works "hindered or delayed" due to force majeure. A force majeure clause is believed to apply to differing types of performance rather than only for non-performance as the word hinder has a greater interpretation than just rendering contractual obligation impossible and incapable of being performed. Further, there is a difference in notice provisions as the FIDIC force majeure notice should be furnished within a period of fourteen (14) days from the date of obtaining awareness about the event; whereas, in ENAA the notice period starts from the time of occurrence of the event.

    Conclusion

    The principle difference in these forms of contract discussed at hand is employer's liability for the scope of works and design outline or the requirements provided by the owner and technical specifications provided by the contractor by such documents. In FIDIC, the contractor possesses larger risks and responsibilities than an employer; whereas, in the ENAA standard form, the obligations seem balanced as the responsibility for specifications of work provided by the owner has been placed on themselves. However, simultaneously, there is a need of giving wider authority to the employer in ENAA form. Further, the owner's constant instruction and the need for approval or authority should not extend to the limits of the FIDIC form to interfere with the engineer's performance. It will also be interesting to compare Conditions of Contract for EPC Turnkey Projects (Silver Book 1999 First Edition) or Conditions of Contract for Design, Build and Operate Projects (DBO Contract 2008 First Edition) with the ENAA's turnkey form.

    STA's team of construction lawyers in Dubai are trained with an in-depth experience in the Real Estate law and have handled several turnkey projects including advisory on man-made islands, office, retail, industrial, leisure and residential sectors including mixed use and urban regeneration projects.

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    Tue, 22 Aug 2017 13:00:00 GMT
    <![CDATA[FIDIC and the ENAA: A Careful Comparison]]> FIDIC AND ENAA COMPARISION

    In the complex and technical world of construction and large manufacturing projects, the contracts and negotiations on the terms of an agreement between the parties are a means to keep the complex relation of parties within the bounds of clear understanding by utilizing a standard form of contract. The industry has seen the development of a various standard form of contract including, FIDIC (Fédération Internationale des Ingénieurs-Conseils), JCT (Joint Contracts Tribunal), ENAA (Engineering Advancement Association of Japan), ICE (Institution of Civil Engineers), etc. This list is not exhaustive but only indicative as there are numerous standard forms. We will discuss the standard form of contract produced by FIDIC and ENAA.  

    The FIDIC standard form of contract is internationally recognized and a utilized form of contract. FIDIC, established in 1913 by three countries namely Belgium, France, and Switzerland presently covers 97 countries as its member and has created forms of contract which are used extensively throughout the world. ENAA is a non-profit organization established in 1978 with the support of the Ministry of International Trade & Industry of Japan. Members of ENAA consist of 217 Companies (as of April 2016). The aims of the above organizations, in general, are to achieve inclusive, dynamic and sustainable development while having a voice for engineering professionals and, among other things, provide integrated assistance. 


    FORMS OF CONTRACTS

    1. FIDIC - The Fédération Internationale des Ingénieurs-Conseils: FIDIC has the best-known standard contracts which are as follows:

    • The Contract for Works of Civil Engineering Construction (Red Book, 1987 First Edition, revised in 1999).
    • Conditions of Contract for Electrical and (for) Mechanical Works including Erection on Site (Yellow Book, 1987 First Edition, revised in 1999).
    • Conditions of Contract for Design-Build and Turnkey (Orange Book, 1995).
    • Conditions of Contract for EPC Turnkey Projects (Silver Book, 1999 First Edition).
    • Conditions for Design, Build and Operate contracts (Gold Book, 2007).
    • Conditions of Contract for Plant and Design-Build (Yellow book, 1999 First Edition).
    • Conditions of Contract for i) Design, ii) Build and iii) Operate (the DBO) Projects (DBO Contract, 2008 First Edition).

    Other FIDIC contracts which are less known are the Turquoise Book for Dredging and Reclamation Works (January 2006), and also, the White Book Model Services Agreement (October 2006)

    ENAA

    ENAA also has model forms which are increasingly used by the industry recently in the past 12 years. The forms are as follows:


    • International Contract for Process Plant Construction (1986 – First Edition, revised in 1992 and 2010)
    • International Contract for Power Plant Construction (Turnkey Lump-sum Basis) (1996 – Second Edition, revised in 2012)
    • International Contract for Engineering, Procurement and Supply for Plant Construction (EPS type contract) (2007 Edition, revised in 2013) 

       

      General Comparisons

      The content structure of the FIDIC forms of contracts often consists of general conditions, forms of tender and contract agreement, guidance for the preparation of the particular conditions, and dispute adjudication agreements. The ENAA model forms' in its latest Process Model Form – 2010 edition consists of a form of contract, general conditions, and guide notes. Wherein Volume 2 includes a sample of an appendix, Volume 4 consist of work procedures and Volume 5 consists of the general conditions and the form of agreement (an alternative form of industrial plant – without process license). The Power Model Form - 2012 edition consists of a form of agreement, and general conditions and Volume 2 provides a sample of appendices to the agreement.

      Although the FIDIC forms seem to be very well drafted "by the engineers for the engineers," is seemingly balanced, have many provisions, and are very extensive, they bring out the fact that legal layman draft such contracts. ENAA is written well with clear, precise, and short wordings. For the purpose of this article, with consideration to its possible limitations, we shall be comparing between FIDIC's Yellow (Conditions of Contract for Plant and Design-Build, 1999 – First Edition) and ENAA's Power Plant Construction Form – 2012.  However, there can be references in general to other forms, when stated otherwise. Where the Yellow book is for Plant and Design Build, ENAA's Power Plant construction model form is a turnkey form for BOT (build-operate-transfer) projects.

      Data Accuracy Obligations

      In the yellow and silver book under Sub-Clause 4.10 Site Data, there seem to be no obligations on an employer regarding an error in data provided by him. However, the responsibility for proper interpretation of information is put on the contractor as below text interprets:

       "The Contractor shall be responsible for (and) interpreting all such data."


      Further, it sets out:


      "To the extent which was practicable (taking into account the cost and time), the Contractor shall be deemed to have obtained all (relevant; and) necessary information as to (inherent) risks, the contingencies and (all) the other circumstances which may influence or affect the Tender or Works. To the same extent, the Contractor shall be deemed to have inspected and examined the Site, its surroundings, the above data and other available information, and to have been satisfied before submitting the Tender as to all relevant matters,…."


      The above words clearly indicate that the responsibility is put on the contractor as the contractor is responsible for obtaining necessary information. Which includes but is not limited to the form and nature of the site, including the hydrological and climatic conditions, subsurface conditions, and the extent and nature of the work and goods that are necessary for executing and completing the works for remedying of any defects. Though the provision states that when "taking account of cost and time" it becomes highly difficult to determine such factors of time and "practicability." Thereby rendering the provisions uncertain without laying down a clear responsibility on the employer for any information provided. Thus, the above clause and in fact the entire yellow book does not foresee any obligation on an employer for inaccurate information and even fails to place responsibility on an employer for correct information.


      Whereas the ENAA provisions under General Conditions 10.1 states that:


      "The Owner(s) shall ensure (at all times) the correctness and exactitude of (each and;) all information and or data to be (provided; or) supplied by the Owner(s) as described in Appendix 9-3 (Scope of Works and Supply by the Owner(s)) except when otherwise expressly stated in the Contract,"


      As such it is clear that the ENAA form makes it the responsibility of an employer/owner to provide correct data before and during the contract.


      Accordingly, the contractor bears a heavy burden of not only accessing accurate data provided by the employer but also bears the responsibility for any physical condition[1]{C}{C} Under the definition of unforeseeable{C}[2]When this occurs, foreseeability will depend again on examination by the contractor.


      Employer's Requirements

      As per Sub-Clause 1.9, an experienced contractor should give notice to the Engineer who will be entitled to the terms of Sub-Clause 20.1 [Contractor's Claims] when the contractor fails to discover errors in an employer's requirements. These errors would get overlooked while exercising due care and scrutiny of the Employer's Requirements under Sub-Clause 5.1 [General Design Obligations]. 


      Further, "the Engineer shall proceed in accordance with Sub-Clause 3.5 [Determinations] to agree or determine (i) whether and (if so) to what extent the error could not reasonably have been so discovered."  


      The yellow book or other such forms having similar provisions place a heavy burden on the contractor to review the employer's requirements at the tender stage. Further, as per every variation[3]Bearing in mind that from time to time to examine the employer's requirements before providing a tender and examinations without emphasizing on the obligation of an employer for such errors or on the engineer while evaluating the requirements issued by the employer.  It is pertinent to note that providing the employer's need is a factor in the control of employer which is published as per his ideas and concept of the project along with all technical and quality consideration which must also be a proper valuation of the contract price. Therefore, it is the employer who must retain responsibility for the definition and description of the works. Failing such demarcation and allocation of liability creates doubts as to the practical implementation of such provisions. 


      The above provision of Sub-Clause 1.9 further seems contrary to clause 5.4 which states as:


      "5.4 Technical Standards and the Regulations: The design, the Contractor's (each and all) Documents, the execution and the completed Works shall (in totality) comply with the Country's technical standards, the building, construction and (also;) environmental Laws, Laws applicable to the product being produced from the Works, and other standards specified in the Employer's Requirements, applicable to the Works, or defined by the applicable Laws."


      The above states that the design and contractor's documents must be in accordance with employer's requirement. However, the responsibility of errors in employer's requirement is not enforceable or even actionable against the employer under this form of contract. Further, only if it is determined to be undiscoverable by the engineer the contractor will be entitled to cost and extension of time.


      The ENAA model form under General Conditions Sub-Clause 27.3 - Defect Liability states:


      "The Contractor's obligations under this GC 27 shall not apply to ..........................(3) any designs, specifications or other data designed, supplied or specified by or on behalf of the Owner, or any matters for which the Contractor has disclaimed responsibility hereunder ."


      The above clause excludes the liability of the contractor on design discrepancies, errors or omissions if such erroneous specification, drawing or such technical documents are prepared due to inaccurate information provided by or on behalf of the employer. The ENAA form also provides that the contractor shall make reasonable site examination and other data, however, puts the obligation on the employer for inaccuracy. This clause in is accordance with the principle of the risk of liability being placed on the party who can control such risk.


      Part II of this two series article will discuss Design obligations, force majeure, and other relevant provisions. 


      [1] Sub-Clause 4.12 provides. For example, "physical conditions" means natural physical conditions and those that are man-made. Further, other pollutants and physical obstructions which the Contractor may encounter at the Site while executing the Works. These include sub-surface and hydrological conditions but exclude weather.

      [2] in sub-clause 1.1.6.8 climatic conditions are not included. "Unforeseeable" is defined as unreasonably foreseeable by an experienced Contractor on the date of submission of the Tender.

      [3], 1.1.6.9 "Variation" means changes to the Employer's Requirements or the Works, which are instructed or approved as a Variation under Clause 13 [Variations and Adjustments].

       

       

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    Fri, 14 Jul 2017 07:00:00 GMT
    <![CDATA[FIDIC in the Middle East - The Must Knows for Industry Players]]>FIDIC in the Middle East - The Must Knows for Industry Players   The UAE industry has seldom been ignorant to internationally set standards- that in more than one ways.    Originally established as an organization by three founding countries Belgium, France, and Switzerland- today FIDIC, which is an abbreviation for the French acronym  "Federation Internationale Des Ingenious Conseils" meaning the International Federation of Consulting Engineers represents an international standard for the construction and consulting industry.     FIDIC is well known for drafting standard form of Conditions of Contract for the worldwide construction industry, particularly in the context of higher value international construction projects, and endorsed by many multilateral development banks ("MDBs").    The Rainbow Forms:   Until 1999, FIDIC was synonymous with the Red Book (Conditions of Contract for Building and Civil Engineering) and the Yellow Book (Conditions of Contract for Plant and Design-Build- for the electrical and mechanical plant). With complexities surrounding the particular industries, soon FIDIC revised its old model templates and published the 'Rainbow Suite' in 1999, which. The Red, Pink, Yellow, Silver, Orange, Gold, White, Green and Blue books are exhaustive and industry specific.   The FIDIC forms apply to a wide range of differing engineering and construction projects; from traditional civil engineering to hi-tech windmills and heavy duty oil and gas process plants.    There are 20 clauses in the revised FIDIC form of contracts. In keeping with the desire for standardization, each of the new books includes General Conditions together with guidance for the preparation of the Particular Conditions, and a Letter of Tender, Contract Agreement, and Dispute Adjudication Agreements.   FIDIC in the UAE:   The FIDIC family of contract templates have gained wider acceptance amongst the UAE construction and consulting industry key players. The Government of Abu Dhabi passed Law Number 21 of 2006 which provides for the standardization of the construction contracts for the projects initiated by the government entities. Accordingly, in 2007, the Abu Dhabi Government under the license from FIDIC prepared two versions of FIDIC contracts-  i) The build only contracts; and ii) The design contract.   Both the above form was specially modified forms of FIDIC municipality construction contract.    The UAE industry has been slow in accepting the FIDIC 1999 forms, and most contractors continue to use the 1987 forms. The primary reason behind this practice is the misconception that FIDIC contracts do not require inputs from a local lawyer.  Reduced liability of engineer in the new contracts, for instance, is a key point substantiated in a ruling of Dubai Courts.    Acceptance of FIDIC module by UAE Courts   Clause 20 of the FIDIC form of contracts deals with claims, disputes, and arbitration. Clause 20.4 notably provides that a conflict between the contracting parties shall first be submitted to a Dispute Adjudication Board (DAB). Subsequently, the dispute is subject to the jurisdiction of the arbitration center.   In a case before the Dubai Courts for ratification of an arbitral award, questions were raised about the enforceability of a FIDIC form of contract and the agreement to arbitrate under the contract because: i.    contract was not executed by the respondent in the case but through an engineer of the respondent ii.   no special power of attorney was issued in favor of the engineer; and iii.  no consent to arbitration was therefore given by respondent and award should be declared null.   In reversing the judgment of the appeal court, the Dubai Court of Cassation (Supreme Court) held that no doubt the contract was executed through an engineer, he was acting in the capacity of respondent's employee. The court further applied Article 203 of the UAE Civil Procedure Law and stated that parties agreed to arbitration under clause 67 (1) of the general conditions. In this case, the performance of the contract was concluded as the consent to arbitration.   Conclusion:   The new form of FIDIC contract rules out situations like above case study to a greater extent as the role of the engineer is now limited, and more liability has been shifted on the employer. The introduction of the DAB also comes as a ray of hope for distressed parties.   Keynote- However frequently used in practice, the necessity of a contract to be tailor-made for a particular region, cannot be ruled out.    Provisions of Law You Should Know!     Article 880 of the UAE Civil Code imposes a joint liability on the contractor and the designer for ten years for the total or partial collapse of a building or for a defect which threatens the stability of the building.     Under Article 473 of the UAE Civil Code, the limitation period for contractual claims in civil matters in the UAE is 15 years from the date the cause of action arises     In Sub-Clauses 9.4(b) and 11.4(c) of both FIDIC Contracts, the Employer has the right to terminate the Contract or reject the Works, if the defect or failure to pass the test deprives the Employer "of substantially the whole benefit of the Works."   ]]>Wed, 29 Mar 2017 02:49:00 GMT<![CDATA[Who is Liable to Pay when Circumstances for Construction Change?]]> Who is Liable to Pay when Circumstances for Construction Change?

    Construction has been one of the most dynamic industrial sectors in the Middle East due to the increase in need of palatial residential and office spaces that arise from the surfeit of expatriates that flock into the region every year. Therefore, construction contractors and building owners often find it necessary to support their colossal investments in the business with exhaustive and scrupulous contracts in order to eliminate any future uncertainties. However, parties frequently fail to comprehend the legal complications that are involved in these contracts due to the undeniable need to foresee the future conditions of the construction sites. Some say the best things in life happen unexpectedly, but what happens in peculiar cases where a construction site contract does not turn out to be entirely static? No party involved could have readily anticipated such a pleasant surprise!

    It doesn't take a wise man to fathom that the desert locality of the UAE is subject to a huge international spotlight prevailing from construction specialists participating in mega-development projects throughout the country. It remains imperative for international practitioners to fully grasp the geotechnical problems and soil conditions of this region, which enables them to anticipate any unforeseen features of construction techniques by evaluating adverse physical conditions which may cause an imposition in the implementation of their construction plans.

    One may argue that the peculiarity of a construction contract in the UAE, at least to some extent, is that site conditions are not entirely static. Since site conditions may alternate, one might wonder about the status of the mutual obligations of the parties within the contract. This is where the unforeseen physical conditions clause comes into play and forms an imperative standard provision apparent in construction contracts in several mature jurisdictions.  Since unforeseen physical conditions between two parties may result in steaming contested and exorbitant disputes, the manner in which the risk of encountering physical conditions is allocated serves as a vital step before the signing or tender of a contract.  Under the UAE law, construction contracts are governed by the Commercial Transactions Law [i], Commercial Customs[ii], and the Civil Transactions Law[iii] (the Civil Code) – specifically provisions relating to the so-called Muqawala contracts.  The notion of unforeseen physical changes under UAE contracts should thus be incorporated as part of the provisions of the UAE Civil Code that deals with construction works.

    Putting the contractor to the test

    Most standard forms of construction contracts contain a site investigation clause, which entails the experienced contractor to exercise due diligence in noticing sensibly foreseeable physical conditions and disclaiming any warranty about the unforeseen physical conditions encountered at the site. Unexpected physical circumstances commonly arise in two situations:

  • Type I differing site condition - referred to as a prerequisite that materially differs from the requirements specified in the information about the job provided.
  •  Type II differing site condition –referred to as an unforeseen or unusual condition that materially differs from what is usually and generally encountered on the specific type of work in the particular locality.  
  • The Dubai Municipality Conditions of Contract for Works of Civil Engineering Construction (the DMCC) places an imperative stance on the concept of foreseeability of physical conditions, and whether they were of such a nature that they could have been readily anticipated. Closely linked to the notion of foreseeability is the assessment of site information which can be derived through an examination of relevant documents and physical investigations as per the standard conditions.

    Further, the DMCC has conferred the contractor with the duty to conduct a reasonable inspection of the site under the stipulated constraints of costs and time. Reasonableness in this context is envisaged by determining what a rational or well-skilled contractor in the same field of work would be able to discover under the given circumstances. However, the owner does not have any responsibility to share any information regarding the conditions of the site.

    An Owner's Claim

    Generally, the owner does not prefer the contractor bearing all of the risks of unforeseen physical conditions since this might invite the opportunity for the contractor to inflate his bid or include unforeseen events in his price to account for the probability of physical conditions that may not actually occur.  The case, however, may arise if the contractor alleges that he was forced to, for instance, excavate addition rock due to unforeseen ground conditions.  

    Clause 11.1 of the DMCC provides that the contractor shall be deemed to have inspected and examined the site and its surroundings and to have satisfied himself as to the nature of, amongst other things, the subsurface conditions. This clause further provides that the contractor would be deemed to have obtained all necessary information as to all circumstances that may affect his tender. Therefore, the owner cannot be held liable for the contractor's failure to get the information necessary to correctly calculate the applicable rates since the contract places the burden of investigation and pricing on the claimants. However, the contractor is relieved from bearing the burden of the risk, when the risk:- 

     i.          arises due to the fault or responsibility of the owner, in which case the "prevention principle" will usually inhibit the owner from insisting on adhering to time or budget that he has disrupted; or

    ii.          was not anticipated by either party (such as force majeure or imprevision)

    An Act of God

    Article 273 of the UAE Civil Code provides that in contracts which bind both parties if force majeure were to supervene, allocating the performance of the contract impossible, the corresponding obligation would cease, and the contract would automatically be canceled. Moreover, in the case of partial impossibility, the impossible aspect of the contract would be extinguished. The same is applicable for the case of temporary impossibility in continuing contracts where, in both cases, it shall be permissible for the obligor to cancel the contract provided that it is done so in the light of the obligee's attention.  In this regard, the Dubai Court of Cassation examined the impact of the force majeure event on the obligations of the parties and held that the event must be of such a nature that its consequences are incapable of being prevented, thus rendering performance of the obligation impossible in its entirety. The Court of Cassation also declared that the party seeking the benefit of force majeure doctrine should not have contributed to its occurrence. [iv]

    The concept of imprevision has been recognized under Article 249 of the UAE Civil Code as an emergency circumstance. Imprevision is based on the notion of rebus sic standibus, which limits the sanctity of a contract (pacta sunt servanda) when there is a change of circumstances. It provides that if exceptional circumstances of a public unforeseen nature occur as a result of which performance of the contractual obligation, even if not impossible, becomes oppressive for the obligor, it would be permissible for the judge to reduce the oppressive obligation to a legitimate level if justice so requires. Any agreement to the contrary will be rendered void.

    The Dubai Court of Cassation further held that the concept of imprevision applies to any performance in a contract that has not been completed by the time of the occurrence of the supervening event.[v] In another example, the Dubai Court of Cassation held that imprevision is applicable not only to fixed-term contracts but also to any contract in which the related performance has been suspended due to an emergency event. It is left to the discretion of the judge to balance the burdensome obligations to a reasonable extent.[vi]

    Usually, in construction contracts, the employer has no duty to provide the contractor with information concerning known or expected site conditions. However, what happens in the case where the owner willingly holds back or conceals information relating to site conditions which differ from those originally stipulated at the time of execution of the contract? The position in the UAE with regard to misrepresentation is addressed under Article 185 of the UAE Civil Code, which defines misrepresentation as when one of the two contracting parties deceive the other through fraudulent means by actions or words resulting in the other consenting to what he would have otherwise not consented to. The UAE legislation construes misrepresentation and gross unfairness conjunctively, rather than separately. The Dubai Court of Cassation reinforced this rule and held that in order to assess gross unfairness, it should emerge as a result of an extreme imbalance between the actual value of the agreement subject and the price paid for it by the buyer.[vii]

    Dusty Announcements

    Each differing site conditions clause requires the contractor to give the owner notice of the claim before

    the condition is disturbed, regardless of whether it is a type 1 or type 2 differing site condition, each differing site conditions clause requires the contractor to give the owner notice of the claim before the condition is disturbed.  That, in turn, enables the owner to determine whether a differing site condition exists and, if so, how to handle such a condition.

    In a standard formatted construction contract, the contractor is required to promptly submit a notice within a specified number of days in the event of unexpected physical conditions which might cause any obstruction in the execution of the work. Ultimately, the discovery of such obstruction is likely to result in a claim for an extension of time and/or additional cost. Failure to do so may prevent the contractor from conducting future claims and may even expose him to a claim for liquidated damages.

    Clause 12.3 of the DMCC provides that the contractor shall specify the exact nature of the physical obstructions of physical conditions encountered in any notice given under Sub-Clause 12.2. The contractor shall also with the notice or as soon as possible thereafter, give:

    i.                 details of the anticipated effects thereof

    ii.                the measures he is taking or proposing to take, and;

    iii.         the extent of the anticipated delay in or interference with the execution of the works.

    With regards to the notice to be given to the contractor, Clause 68.1 further states that all certificates, notices or instructions to be given to the contractor by the employer or the engineer under the terms of the contract shall be sent by post, cable, telex or facsimile transmission or must be left at the contractor's principal place of business or such other address as the contractor shall nominate for the purpose. The contractor shall, within 7 days of the acceptance of his tender by the employer, notify the employer and the engineer of the registered address of his office in Dubai to which he may require notices to be served. Clause 68.2 further highlights the conditions of rendering a notice to employer and engineer and further states that any notice to be given to the employer or to the engineer under the terms of the contract shall be served by delivering the same to the respective addresses nominated for as per the relevant conditions.

    Conclusion

    Most importantly, and as far as possible, the pillar of good faith creates an obligation upon parties to cooperate in achieving a sense of contractual objectives on standards of integrity and honesty in conduct. Article 246 of the Civil Code stated in this regard that a contract must be in a manner consistent with good faith. In addition, it stipulates that the contractor's commitment is not limited to what is stated in the contract, but also includes all other requirements according to the law and custom, and the nature of the act.  The Dubai Court of Cassation confirmed the above and further stipulated that in the case of any delay in execution, the court has the right to determine whether or not the delay would serve as a valid means for termination depending on the facts of the matter. The court may further make use of an expert report in determining the same.[viii] While the success of a differing site conditions claim may greatly rely on specific facts and prevailing circumstances, by carefully stipulating a bid review and site inspection upfront and providing timely notice in compliance with the contract, both parties will be best positioned to successfully navigate the challenging circumstance that may arise in an altered condition. Therefore, construction contractors and owners should always take bay at the shade of the bespoke legal advice provided by a law firm that specializes in the sector in order to eliminate any ambiguity that might arise in regard to construction contracts.


    [i] Federal Law no. 18 of 1993

    [ii] Common Customs Law of the GCC States

    [iii] Federal Law No. (5) of 1985

    [iv] Case 268/2009 -290(215) dated 15 November 2009

    [v] 71 Dubai Court of Cassation 346/2009: 7 February 2010

    [vi] Dubai Court of Cassation Civil 346/2009: 7 February 2010

    [vii] Dubai Court of Cassation petition No. 201/2004–15/01/2005.

    [viii] The Court of Cassation appeal No. 2011/119 -18-09-2011.

     

     

     

    ]]>
    Thu, 05 Jan 2017 12:00:00 GMT
    <![CDATA[Electronic Registration of Cases- Advantages and Legal Issues]]> Electronic Registration of Cases- Advantages and Legal Issues

    "The Internet is becoming the town square for the global village of tomorrow."

    -Bill Gates

    Introduction

    Dubai has evolved to become the marketing and commercial hub of the Middle Eastern region. A surfeit of investors, traders and tourists flock into the Emirate on a daily or rather an hourly basis. All of Dubai's biggest and most commendable feats have been due to its ability to take calculated risks and introduce the novel, bespoke and contemporary ideas. However, one could believe that disputes and legal matters within the region would eventually increase given the voluminous domestic and cross-border trade, an influx of investors and with the entry of diverse workforce. Therefore, this has simultaneously aided in the elevation of the number of lawsuits in the Emirate.

    To overcome these hurdles resulting from increased law-suits the Dubai Courts recently launched an innovative service named Al Salfa which allowed parties to register their cases online and thereby removing the barrier as to physically submitting claims before the court. This is the first program of its kind in the Emirate and is currently the basis on which cases are currently registered in Dubai. This new program promotes efficiency, speed, and ease, allowing users to register their cases at their convenience. In the first instance, this program was introduced in the year 2010 and was available only to registered law firms and lawyers in Dubai. Soon enough, however, this E-service became available to all clients, enabling them to register all types of cases, orders on petitions, provisional attachments, and summary actions electronically. Virtually every matter including real estate disputes, commercial, labor, civil and personal affairs could be instituted under this new online system. Further, the authorities have also permitted orders upon petitions of all kinds, precautionary attachments, and other urgent matters to be instituted electronically.

    The governmental authorities, on the other hand, began to make use of Al Salfa by registering legal delegations, such as delegations in execution or notification. In fact, this service was embraced by the Free Zone Authority in Jebel Ali as well to register all it's labor cases through Al Salfa, thereby saving workers the time and effort it would cost them if they were sent straight to Dubai Courts.

    On their website, the Dubai Courts clarify that the method of online registration, uploading of the statement of claims, and the documents attached thereto shall be reviewed by specialists at the E-services section. The competent authorities, then, would review the details of the case and the papers attached thereto to ensure the validity of the claims and electronically communicate with the suitor to update him on the status of his application.

    Need for Intervention

    As advantageous and easy to use this new service is, legal problems do arise on its application, which we will further explicate in this article. We will review these problems and propose solutions that may be contributed towards the resolving of these problems, hoping that these problems will gather enough attention to lead to registration of cases in all courts, free of any legal problems that may affect the rights of the litigant.

    The positive characteristics of electronic registration of cases via the Al Salfa program are numerous. Cases can be registered at any time and from any place in addition to the smoothness and rapidity of obtaining files and information, saving time, environmentally conscious reduction of paper waste, avoiding overstocked lawsuit files and reducing crowding in court buildings. Furthermore, this service is even available to specialists, judges, executives, bailiffs, secretaries and litigants. In the manual registration of claims, we see problems arising with names of companies that do not actually exist due to its legal form or a change in its name. Electronic registration removes this hindrance as well, as names and addresses are audited in order to establish the actual existence of natural and legal persons before judgment is passed.

    Despite the clear upsides to the usage of this service, the legal problems that arise from the application of this program might affect the validity of claims and procedures, leading to a judgment that doesn't accept a lawsuit or challenge.

    According to the laws stipulated by the Dubai Courts, there is a specific time period during which filing of lawsuits or registration of appeals is permitted and valid. The problem arises when we realize that electronic registration of cases is not technically done on the same day since it is subject to aforementioned reviewing and auditing, which could take months depending on the type of case that is filed.

    The dilemma here is to figure out if the date of electronic submission is to be considered as the date of registration of a case or not.

    Fortunately, however, the Court of Cassation resolved this dilemma by deciding that the date of submission of an electronic application should be taken into consideration [i]. Furthermore, Federal Law Number 21 of 2015 Establishing Judicial Fees of Dubai Courts (the Amendment), states in Article 162(1)"The appeal shall be filed by virtue of a memorandum submitted to the Case Management Office at the competent court of appeal. The memorandum shall be immediately registered either in the relevant register or electronically…" Thus, in accordance with the aforementioned law, the date of submission is formally considered the date of filing the appeal, thereby conforming to the time period restrictions on cases, as stipulated by the law.

    In order to file a challenge before the Court of Cassation or Court of Appeals, one must deposit a security with the treasury in order to ensure the validity of the deposit and for orderly compliance.

    Under Article 37, the Amendment, it is stated that [ii]:

    {i.         - The claimant, upon submitting the challenge by appeal in the lawsuits relating to rights, should deposit a security amounted to (AED 1000) in the court treasury.

    {.          - The claimant, upon submitting the challenge by cassation in the lawsuits relating to rights, should deposit a security amounted to (AED 3000) in the court treasury.

    Given that matters were manually registered prior to the launch of Al Salfa, there were no problems depositing a security in person. The Court of Cassation has decided in several judgments that in cases where a petition was challenged before the Court of Cassation and where such petition did not carry a proof of payment towards applicable fees, such petition would not be accepted as a challenge by the court [iii]. (unless the claimant is not exempted from paying the fee as decided as per the provisions of the law.) However, the aforementioned Article 162 of the Amendment doesn't mention the deposit form of security required for an appeal when matters are registered electronically, nor makes any reference as to any such requirement. This legal conundrum, to us, is one of the most concerning contradictions that arise due to the application of the Al Salfa E-service.

    Conclusion

    As we see, the creation of an E-service like Al Salfa has definitely eradicated several cumbersome problems when it comes to registering cases manually and has proven incredibly advantageous to its users. It is a fascinating and commendable service that does its users a whole lot of good. However, there are some legal complexities that might complicate the usage of this service and encumber it with a sense of powerlessness.

    As a solution, our proposal to a concerned legislator would be the amend the law relevant to the judicial fees of Dubai Court in order to not contradict the Law of Civil Procedures [iv], or perhaps, to cancel the condition of depositing a security upon submitting the statement of appeal. This would be a good way to avoid any doubt regarding the acceptance of appeals that are registered electronically.


    [i] Judgment issued by the Court of Cassation in Dubai on 7/2/2016 in challenge number 709/2015-comemracil.

    [ii] Federal Law no. 11 of 1992

    [iii] Judgment issued by the Court of Cassation Dubai on 15/6/2010 in the challenge No. 144/2010- commercial.

    [iv] supra

     

     

    ]]>
    Sun, 01 Jan 2017 12:00:00 GMT
    <![CDATA[Project Financing - a Primer ]]> Project Finance as the technique of financing any development idea is rapidly increasing in developing countries due to their drive to gain industrial development and improve infrastructural amenities. The infrastructural projects or projects relating to energy industry are usually funded by the government through public funds since historical times due to the mammoth size of initial capital investment required. The governments introduce private parties into big infrastructural projects by public-private partnership (PPP) arrangements considering long-run maintenance of the projects and investing the public funds into other projects. Other incentives for the government can be inter alia to introduce new technology, privatization of some sectors for policy reasons and efficiency in operations of the infrastructural systems.

    The project finance is a complex process involving various parties, stages, process and legal and financial implications involved in the process. Further, considering the bounds of current publication we will outline the other aspects of this work in subsequent volumes of our publication. This article will accentuate the brief account of what is public finance and understanding of the parties involved.

    The project finance is defined as "the financing of long-term infrastructure, industrial projects and public services based upon a non-recourse or limited recourse financial structure where project debt and equity used to finance the project are paid back from the cash flow generated by the project."

    The project financing is called limited recourse or non-recourse as the major volume of financing is derived predominantly out of revenues generated by the project itself not from any form of share capital. The viability of the project is deliberated upon in pre-development stage which includes concerns such as the title of ownership of assets, revenue generation estimates, profit generation and utility, etc during the planning and financial due diligence. However the concerns in project financing starts with reconciling the interest of various parties involved in the financing. The parties to the project financing are varied and independent having different interests in the project. In pre-development phase parties need to evaluate the financial viability and technical feasibility. General understanding of each party's objective behind engaging into such financing is pertinent to establish prudent negotiations. The parties and their general role along with the some probable objective are listed below:

    1. Host government

    The government of country where project proposed is planned to be based and which will be issuing all the relevant permits, authorization, licenses and subsidies, if any, for the project. The host government is usually contracting authority by entering into project agreement and /or carries out bidding process to allocate the project to private party and thereafter may either handover the project for development as well as later maintenance. The host government may allow private party to develop the project, either conjunctively or otherwise, or take under public ownership after the development of project once the return on its investment has been received by the private party or decide to regain ownership in case of failure by the private sector to deliver the project. The host government's involvement in the project may also be limited to granting consents for project, to granting various tax concessions and / or being partner in the project. The private party financing the project allows host government to allocate resources in other areas of expenditures. The host government can be party to various agreements for the project concerning supply of electricity, water or any other raw materials and imports required.

    2. Project Company

    This is also called special purpose vehicle (hereinafter referred to as SPV). This company is created with sole purpose of project. It can be corporation established for this purpose or limited partnership usually a PPP. This company is often created in host country where project is intended to be carried out. SPV is the center of all agreement and project financing. SPV is owned and managed by its sponsors/shareholders. The SPV is used to finance the large project without putting a corporation at risk or isolate parent company from project-related risk by shifting it on other investors. SPV in project financing allows shareholders to keep project liabilities "off-balance sheet". Such off-balance sheet structure needs review of applicable laws to understand its applicability in host country of project and incorporation of SPV. The host government and SPV enter into project agreement to defining degree of participation by host government and further laying down rights and obligations during the term of the agreement for concession agreement. The host government and SPV may enter into different agreements for different phases. The host government would enter into property purchase or product purchase agreements with SPV after the project completion.

    3.Sponsors

    The sponsors are equity shareholders and /or owners of the project. The main objective is to earn profits either by simple high investment returns called as financial sponsors or by selling the products of parent company usually falling under the category of industrial sponsors as the project is associated to their business activity. However, there can be different factors based on which the sponsors enter into project financing which includes sharing the risk in undertaking the project and carry out project off-balance sheet, enter into new activity by means of diversification and such other corporate strategic plans. The sponsors may be single party or consortium. There can be public sponsors such as municipalities, agencies or corporations whose objective is public welfare or utility. Since sponsors are equity holders they bear the maximum risk of the project they also earn the huge share of the profits is the project is successful. Sponsors enter into management and shareholders agreements or service agreements with the SPV.

    4. Lenders

    The lenders are primarily large commercial banks, national or international. Considering the large scale of investments there is often a syndicate formed of the group of lenders. This includes investment banks, bondholders or multilateral agencies. The lenders in the project financing only have recourse to the assets of the project at hand. The nature of security depends on the negotiations and loan agreements signed between SPV and lenders. The lenders may also create right against parties other than SPV and sponsors such as off-take purchasers for assurance of purchase of the agreed quantity of purchase, construction companies/contractors to complete the construction as per required standards and performance criteria by giving completion guarantees as agreed. These rights must be expressly stated in agreements between the parties directly. Comprehensive security structure needs to be planned based on the review of laws such as ownership of real property laws as project property are the only assets available, bankruptcy laws and any other financial laws as they may hamper the enforceability of security rights of lenders. Further lenders must note that there are often reversion rights available with the host government to prevent wearing down and suspending of any public utility services thereby giving host government right to regain ownership over the project works or developments of the project. Since the lenders are in syndicate the lenders may appoint an agent to represent their interests.

    Multilateral credit agencies such as World Bank, Asian Development Bank, International Finance Corporation, so on and so forth can ensure protection against regional risks to commercial banks such as political risks. Export credit agencies may also lend money to promote that industry.

    Other parties

    Purchasers: As per the off-take agreement the purchaser will be obligated to purchase the products of the project in advance usually found in energy industry products.

    Contractors: The projects will require contractors for various purposes and thereby enter into various different agreements with parties as contractors for construction works vide construction agreements ensuring timely completion and liabilities in terms of liquidated damages for delay. Construction contractors enter into design and perform operations and maintenance (P&M) vide P&M agreement between SPV and operators and engineering, procurement and construction (EPC) contracts for designated works.

    Suppliers: The supplier is important to party to project in terms of technical support and financial estimates as price implications impact entire project works. The supply agreement can be for any requirements during the project such as raw materials. The agreement may be, in a sense, off-take purchase agreement for the SPV. The supply agreements need various price considerations bearing implications on project revenue at different phases. The agreements relating to oil and gas sales usually called gas sales agreement are also supplied agreements from SPV point of view. The factual analysis of depletion of such natural resources needs scrutiny while negotiating the agreement. The practice of selling of portfolio of reserves is also undertaken in the UK, however, a lesser followed practice in developing countries.

    The SPV along with other parties needs legal and financial advisors for reconciliation of interest of parties and negotiations with several parties by keeping in mind the main objective of the SPV while taking up the project whether it is simply financial investment to earn profit or to work in line with corporate strategic plans of business development and associations. The stages in the project financing and risk factors in projects financing from the standpoint of different parties need elaborate assessment and will be addressed in the subsequent publication.

    Read the latest legal update on Public Private Partnership in Dubai here. For more information, contact one of our lawyers in Dubai here.

    ]]>
    Mon, 11 Apr 2016 06:00:00 GMT
    <![CDATA[Musataha Agreements Under UAE Law]]> 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.

    ]]>
    Mon, 11 Apr 2016 04:23:00 GMT
    <![CDATA[Key Decisions on Dubai Property Laws between 2009 and 2013 by Dubai Court of Cassation]]>

    The prodigious and fortuitous impact (and, speed) of the global financial crisis has left a lasting legacy on many. Questions have been raised in past as to what led to the crisis, people who were instrumental in driving the downturn and people affected by same. Speed and force without direction can be destructive and the global financial crisis has set a clear tone and precedent to this effect thereby affecting trade, commerce, financial channels, and more. One of the other areas that were also significantly affected was the real estate sector.   Speaking specifically of Dubai – the property market witnessed a vigorous blow from the puissant effect of the financial crisis. The economic perplexities beset since 2008 led to an increase in litigation placing substantial strain on the judiciary. Whilst the property regulations themselves were in their infancy, lack of adequate machinery and set procedures to handle claims altogether raised elevated levels of concern for the government. This eventually led to the constitution of the real estate plenary department within Dubai courts that was tasked specifically with handling property and real estate disputes within Dubai. A number of decisions were passed by courts between 2009 and 2013 and this article aims to analyze and discuss some of the key decisions.   In the year 2007, Dubai witnessed the creation of Real Estate Regulatory Authority (the RERA) (as amended) pursuant to the enactment of Law number 16 of 2007 effective from publication date is 30 July 2007. Constitution of RERA took place immediately following promulgation of Law number 8 of 2007 concerning Escrow Accounts for Real Estate Development in the Emirate of Dubai. Other property related statutes were also passed in the year 2007 and 2006 which clearly attests to the Government of Dubai's intention to regulate the property market. Clearly, Rome was not built in a day and neither was Dubai. The Government of Dubai, however, recognized the potential in the city's real property sector and started taking diligent steps to address possible risks and pitfalls that could arise. That said, the financial crisis did not come knocking and Dubai was yet in process of implementing the law that could regulate the demand and supply inequity – Law number 13 of 2008 (the Law 13)regulating the Interim Property Register in the Emirate of Dubai (as amended by Law number (9) of 2009 regulating the Interim Real Property Register of the Emirate of Dubai and its amendments). Much ink has been penned over Law 13 which essentially aims at curbing speculators from flipping properties. 

    Dubai Court of Cassation on Law 13

    Article 3 of Law 13 reads out as under:- (1)Any disposition that occurs in respect of any Real Property Unit sold off-plan will be entered in the Interim Property Register, and any sale or any other legal disposition that transfers or restricts ownership or any ancillary rights will be void unless entered in that Register. (2)Any developer, who disposed of a Real Property Unit by way of sale or any other disposition that transferred or encumbered a Real Property Unit before this Law came into force, must apply to the Department to enter such disposition or encumbrance in the Property Register or in the Interim Property Register, as the case may be, within sixty (60) days from the date on which this Law comes into force.   The Dubai Court of Cassation has decided on Article 3 (1) in Case 279 of 2011 (dated 27 November 2011). In this matter, the parties to the dispute had signed certain reservation agreement under the date of 22 January 2008. The sale was carried out by an agent holding power of attorney from the developer entrusting the agent to enter into the agreement, sign the same and carry out the sale process. The Court also reviewed a letter dated 6 January 2010 issued by Dubai Land Department evidencing that the developer in the present case had failed to meet requirements imposed under Article 3 (1) being registration of units in the interim register.   The court considered the interpretation and application of Law 13 and held as under:-
    • The effect of the provisions of article 3 and 5 of Law No. 13 of 2008 regulating the interim register in the emirate of Dubai as amended by Law No. 9 of 2009, is that all real property dispositions by way of a contract for the sale of real estate must be registered on the interim register with the Dubai Lands Department.
    • Failure (or; refusal) by the developer to register the units in accordance with principles set out in Law 13 shall be the violation of obligations imposed on developer under Law 13and the courts shall in such event treat unregistered contracts as void.
    The Dubai Court of Cassation based on above-refused developer's appeal on the grounds that it was devoid of any merits.   Dubai Court of Cassation in Case 33 of 2009 decided on 17 January 2010 has echoed the above decision and held as under: "The provisions of article 3 of Law No. 13 of 2008 regulating the preliminary real estate register in the emirate of Dubai show the requirement to register all dispositions over real estate units sold on the plan. The person who is required to submit the application to the Department is the developer. His role is restricted to submitting the application, whether the disposition took place before or after the law was promulgated and the provisions thereof came into effect. It requires the developer, within a period not exceeding 60 days from the date the provisions thereof came into effect, to submit an application to the Lands and Property Department for registration of the units sold before the provisions thereof came into effect, on the land register if they have been built, or on the preliminary land register if the construction thereof has not yet been completed. His failure to take that step, as provided for in article 3(2) of the law, will not result in the disposition being void. It will result only in the developer being referred to the competent investigatory authorities after preparation of the report in that respect by the Director General of the Lands and Property Department, pursuant to the provisions of article 13 of that law. That is because the legislature renders the disposition void only in the event that it is not registered."   In dealing with Article 3 (2) of Law 13, the Dubai Court of Cassation in Appeal number 4 of 2011 and dated 19 June 2011held as under:-
    • The sixty (60) days' time limit imposed by Article 3(2) of Law 13 is the legal time limit set out under the law where the invalidity (of unregistered contracts) will be decided only if registration was not carried out at all or if it was impossible to carry out the registration.
    • It is the responsibility of the developer to submit the application form along with all information and details before the Dubai Land Department in line with its application procedure. Acceptance and processing of registration is the role and responsibility of Dubai Land Department.
    • The objective underlying Article 3 (2) of Law 13 is for the Dubai Land Department to monitor and supervise real property transactions in the Emirate of Dubai to safeguard the rights and interests of property owners.
    The court held and decided that failure to register within sixty (60) days per Article 3 (2) of Law 13 shall not invalidate the contract between developer and buyer.   There are set precedents recognizing developer's legal right to terminate the contract such as in case 43 of 2009 (decided on 11 April 2010) by Dubai Court of Cassation wherein it was held and stated:- "The basic rule in determining the time for payment of the price is the agreement between the developer and the buyer. If there is no agreement between them in that regard, the buyer will be obliged to pay the price upon making the contract and before requiring registration of the unit sold in his name in the preliminary register. That is to say, the obligation of the buyer is a contractual obligation to pay the price and precedes the obligation of the developer to take steps for registration in the preliminary register, in the absence of a contrary agreement. Consequently, the developer may refuse to perform his obligation to take the necessary steps to register ownership of the unit of real estate sold in the name of the seller on the preliminary register if the buyer has not performed his obligation to pay the price unless there has been an agreement to defer payment of the price. In such event, the developer will not be regarded as being in breach of his obligation in such a way as to justify rescission of the contract."
      In the next feature will, we will continue to look at several other precedents passed by Dubai courts on Dubai property laws and laws affecting the real estate.

     

    ]]>
    Sun, 06 Mar 2016 10:49:00 GMT
    <![CDATA[Extension of Time in Construction Contracts ]]> Extension of Time in Construction Contracts 

    The construction contracts are generally prepared as per Fédération Internationale des Ingénieurs-Conseils (the FIDIC) red books 1987 and 1999, yellow book and silver book contract forms specifically in UAE to deliver projects. The legal provisions applying to such contracts are UAE Civil Code, Federal Law No. 5 of 1985 as amended. The construction contracts are governed inter alia by Articles 872 to 896 and contractual provisions depending on its consonance with laws.

      This Article accentuates the entitlement of the contractor/subcontractor to "Extension of Time" (the EOT) under construction contracts. Just as liquidated damages are meant to discourage contractors from undue delay in completion of projects and entitle the employer (which is a misnomer for owner) for compensation, Extension of time can be considered an encouraging clause to claim for any undue delay caused in the completion of construction due to events which are not attributable to the contractor. In sum, EOT clauses are embedded into contracts on the notion that no party should gain from its own breach or default.   The important clauses and/ or principles to be considered when dealing with this subject are completion time, preventive principle, time bar clause, time at large, the extension of time clause and liquidated damages clause. For the sake of commercial certainty, the completion date is usually found in contracts and these are effectively based on practical considerations of the project. Accordingly, the contractor is under the legal obligation to comply with the agreed time- limit and handover the project. Time being of the essence in contract, failure by the contractor to handover within the agreed time-frame could trigger a claim for liquidated damages from the employer.  However, the wide range of activities and circumstances may lead to the uncertainty of completion of the project as it is difficult to be accurate about completion in mammoth projects due to reasons ranging from force majeure, variations, the supply of labor, delay in procuring materials etc. by a party or parties to contract. The preventive principle is the common law principle applied to protect contractors (from potential claims involving liquidated damages against them) from the delay caused by the act of employers who prevent (deliberately or otherwise) timely   completion of project work(s). The result of such principle is to have an extension of time clause so as to prevent the employer from being incapacitated to extend completion time and potentially to enable the contractor to establish that the completion time has become at large. Hence it is in the interest of not only contractor but also of the employer to have an EOT clause. As "Time at Large" means the contractor escapes the liquidated damages clause and his obligation is now to complete within a reasonable time.   Generally speaking, construction contracts provide for a clause whereby contractors may be allowed to extend the date of completion in the event that a notice is served to the employer consistent with the provisions of the contract. Failure by the contractor to meet notice requirement could entail a claim against the contractor for liquidated damages. The construction contract providing for a clause on extension discussed above is also referred to as "Time Bar clause". These notices become the condition precedents to the claim of EOT.    The circumstances giving rise to the entitlement of EOT are as follows:    1. Employer's Acts of delay: Preventive principle aim at safeguarding contractors from potential claims for liquidated damages for the delay caused on account of acts of the employer. In the context of the United Arab Emirates, the corresponding provisions for safeguarding contractors can be found under Article 247 of the UAE Civil Code which reads as under:-    "In contracts binding upon both parties, if the mutual obligations are due for performance, each of the parties may refuse to perform his obligation if the other contracting party does not perform that which he is obliged to do."1    This Article works against the employer and entitles the contractor for EOT against the acts of delay attributable to the employer for breach of its obligation to work in good faith while performing his contractual obligation. Another provision of the UAE Civil Code which has the effect of preventive principle is Article 287 which reads out as under:-   "If a person proves that the loss arose out of an extraneous cause in which he played no part such as a natural disaster, unavoidable accident, force majeure, act of a third party, or act of the person suffering loss, he shall not be bound to make it good in the absence of a legal provision or agreement to the contrary."   In the context of the above Article 287, we can note that the limitation imposed by this Article has the legal effect only and only in cases where parties have no agreement to the contrary. F  This covers all external reasons that are not caused by contractor subject to the contrary being agreed in the contract terms.   2. Payment   Payment mechanisms in construction contracts are regulated by and based on generally accepted business customs. These may include – bank guarantee(s), bonds, or payments by employers on the installment basis. These payments may effectively be linked to construction milestones requiring contractors and qualified engineers to submit their timesheets in an agreed form and timeline. To protect larger interests of employers, contracts also have defects liability clauses in construction contracts. The defects liability clause has the legal effect of employers retaining an agreed percentage of contract consideration.   Speaking of payments and accepted business customs, contractors and sub-contractors may also be paid on 'pay when paid' basis which is generally referred to as a "back to back" contract arrangement. Under this scheme, the contracts between contractors and sub-contractors mirror the clauses found in the contract signed between employers and contractors. In the United Arab Emirates, the Muqawala form of contracts falls under the above scheme.   In absence of any such provision, the law lays down under Article 885 and Article 891 of the UAE Civil Code to this effect as follows:-   "The employer shall be obliged to pay the consideration upon delivery of the property contracted for unless there is an agreement or a custom to the contrary." "A sub-contractor shall have no claim against the employer for anything due to him from the first contractor unless he has made an assignment to him against the employer."   Back to back payment terms provide advantages to the main contractor. For instance, the entitlement of subcontractor for EOT may not provide EOT to the main contractor from employer thereby exposing the main contractor to double liability in absence of back to back payment term. The double liability includes granting EOT to the subcontractor and paying liquidated damages to the employer at the same time. In view of the judgment the lumpsum contracts have to be executed as per the agreed plan and are not subject to variation as the intention of the law is to protect the employer who is a person with little technical experience. However, the court held that the same does not apply between contractor and subcontractor as they both have equal technical aptitude and know-how.   Article 247 of the Civil Code is also relevant when speaking of payments. Thus unpaid contractor can slow down or even suspend the work lawfully with maintaining entitlement to EOT as delayed payment leads to delayed completion and does not render the contractor liable.   3. Variations/ Additional work in scope and nature of work   Variations are common to the construction industry. FIDIC based contracts also provide for broad variation clauses to accommodate the rights and interests of parties concerned. Whilst FIDIC form of contracts are generally relied upon as templates by construction professionals, parties are an absolute discretion to amend and modify these clauses to best fit and suit the requirements of the project and/or the parties. The effect of variation clause may impact several considerations but it certainly has an impact on pricing in most cases. Under the fabric of Islamic sharia, the emphasis is placed on the term 'gharar' which prohibits loss to one of the parties and unjust enrichment to other thereby giving rise to 'extension of time' to recover additional charges.  The variations have several impacts on the EOT. The variations which may lead to uncertainty and loss to other party and unjust enrichment of other can be considered to be prohibited as per Islamic principle of "gharar" and hence entitling EOT for recovering additional charges. Article 887 of the Civil Code dealing with lumpsum muqawala contracts provides as under:-   "(1) If a muqawala contract is made on the basis of an agreed plan in consideration of a lump sum payment, the contractor may not demand any increase over the lump sum as may arise out of the execution of such plan. (2) If any variation or addition is made to the plan with the consent of the employer, the existing agreement with the contractor must be observed in connection with such variation or addition."    The condition imposed in Article 887 implies amending the remuneration and the completion time as per the variation and observing the terms of the contract in relation to the variation. If the variation has caused the critical delay in its work schedule the contractor may be entitled to EOT provided it is notified in a timely manner. The contractor can also raise the dispute in the manner stated in the contract for dissatisfaction on engineer's assessment of invoice raised, quality and quantity or reasonable rates of such variation.   4. Actual loss    The contracts may have pre-determined value for damages however as the court has right under Article 360 part 2 to adjust the compensation to be equal to actual loss the contractor can be impliedly said to have been granted EOT for the delay which did not cause any loss to the employer.   5. Other reasons entitling EOT    The various other reasons that are considered by the courts for granting EOT are stated as follows: Article 249 of the Civil Code considers unforeseeable exceptional events that have public nature occur and renders performance of the obligation arduous although being possible but in a way threatening the obligor with severe loss. In such event, the judge may reduce the oppressive obligation to a reasonable level if justice so requires, and any agreement to the contrary shall be void. This prevents the contractor from unreasonable events or factors that may affect its performance or completion of the project. This effectively saves the contractor from to weighing each party's interest, as a rule of public policy. It is pertinent to note that this is different from the case of force majeure. In fact, this Article defines a borderline between force majeure and unforeseen contingencies.  Consequences following force majeure are stated under Article 273 of UCC. The Article has two parts one automatically cancels the contract in case of force majeure rendering the performance impossible. The second part of the Article states that in case of partial impossibility or temporary impossibility that part of the contract shall be extinguished and obligator has right to cancel the contract on informing the oblige. In case of defaults of the subcontractor, the contractors are acquitted of their liability in delays. Though it is not specifically laid down in provisions, the judges (Dubai Court of Cassation, 266 of2008 decided on 17 March 2009) consider the fact on the case to case basis as relieving from delay liabilities attributable to a subcontractor as preferred by the Engineer or the Employer.    FIDIC form entitling EOT for cause of delays    The FIDIC forms considers various factors such as Change in the amount or nature of extra or additional work, any cause of delay referred to in the FIDIC Red book 1999 conditions such as stated under (i) clause 4.7 - Delays that result from inaccurate plot reference point and levels; (ii) 8.4(d) - unpredictable shortage of material and manpower caused by epidemic or actions of government (iii) 8.5 - unpredictable Delays caused by Authorities provided that the Contractor has diligently abided by its procedures (iv) 10.3 - Employer's Prevention of the Contractor's to conduct the Completion Test (v) 13.7 - Modification for any increase or decrease in cost resulting from changes in Laws (vi) 17.4 Employer's risks' consequences (that cause loss or damage to the documents of the contractor or his works or goods) (vii) 19.4 - Force Majeure.  The other causes of delay considered for entitling EOT under FIDIC 1999 red book inter alia are exceptionally adverse climatic conditions, any delay, impediment or prevention by the employer and other special circumstances which may occur, other than through a default of or breach of contract by the contractor or for which he is responsible. The specific provisions provided under FIDIC are under subclauses such as 6.4 for delayed drawings, 12.2 for unforeseen conditions or physical obstructions, 36.5 for delay in certain tests requested by engineer, 69.4 which entitled EOT for delays which are resultants of reduced speed of works or suspension due to non payments, 40.2 for delays due to suspension instructed by engineer and 42.2 delays in giving possession of the site. It is pertinent to note that the condition stated in the contract such as written notice, instructions in writing, procedural requirements stated in the contract and so on need to be complied with for claiming EOT. The judgments passed on this subject are uncertain, wide-ranging and diverse as the facts of the case and judge's discretion are of enormous consideration.   Conclusion:    General clauses which are rendered vague and ambiguous due to poor drafting provide room for interpretation. This principle is clearly laid down in Article 265 of the Civil Transactions Code:   "(1) if the wording of a contract is clear, it may not be departed from by way of interpretation to ascertain the intention of the parties.  (2) If there is scope for interpretation of the contract, an inquiry shall be made into the mutual intention of the parties without stopping at the literal meaning of the words, and guidance may be sought in so doing from the nature of the transaction, and the trust and confidence which should exist between the parties in accordance with the custom current in dealings"   In view of the fact that most of the construction contract disputes are predominantly due to payments resulting from EOT or liquidated damages. Express terms need meticulous drafting expressing clear intentions of parties.   ]]>
    Mon, 04 Jan 2016 12:00:00 GMT
    <![CDATA[Joint Ventures in Dubai's Real Estate Sector]]> Joint venture is an agreement between two or more parties wherein they principally agree on developing a new asset or entity by infusing equity for a term. In a joint venture transaction, parties agree to co-operate with each other and term of the joint venture may be defined or open. Parties to a joint venture agreement generally agree to certain timelines and milestones and subject to milestones being achieved, the agreement will result into a new transaction or result in the completion of the joint venture. The below article discusses Joint Ventures in Dubai's Real Estate Sector and key points one should consider prior to exploring joint-venture opportunities within Dubai's property sector.

      Clearly, the joint venture is today one of the most preferred choice globally given the flexibility offered by the mechanism. Joint ventures in UAE are recognized and regulated pursuant to UAE Commercial Companies Law (Federal Law number 8 of 1984) now amended to Companies Law (Federal Law number 2 of 2015). There is a rise in joint venture transactions in real estate within the UAE. To illustrate, owners of land parcels who do not have knowledge, acumen or experience in construction and development of properties may find joint venture proposal from experienced property developer appealing and comforting. But don't think joint venture marriages are made in heaven. If the parties to joint venture transaction are unclear about their respective roles or if the joint venture contract is not certain and definite or parties' choice of JV vehicle (wholly owned, branch, partnership, consortium or contractual joint venture) is not the correct form of entity, the purpose and objective of such joint venture is likely to fail.   The complexities surrounding construction business in terms of process, environment and entity structures exposes participants to a certain degree of risk. Accordingly, risk identification is important in construction projects and careful planning would ensure that the project is successfully delivered. The risks of failure of real estate joint ventures can be high and the financial consequences may be expensive. Parties should carry out detailed due diligence and in doing so they should appoint qualified joint-venture lawyers experienced in property and real estate laws. Besides legal due diligence, financial due diligence is desirable and parties should consult their financial advisors. This aspect has been discussed thoroughly in our previous issues on Dubai property laws listed on this blog.    The joint venture partnership that is effectively successful in achieving its commercial and business objectives within resources contributed by each joint venture party will satisfy the definition of a successful JV. Such successful JV besides achieving its objectives also brings trust, confidence, and opportunities to parties. Domestic or international joint ventures are however subject to risks as discussed above.   In real estate transactions, for instance, parties may be subject to one or more of the following:-
  • Financial risks that may arise on account of inflation, cost of borrowing, the bankruptcy of either party, interest rate fluctuations, complex exchange controls or related financial difficulties;
  • change in statutory regulation, increased compliance, increase in transfer fees, the imposition of new taxes or stamp duties, the imposition of unfavorable conditions, or difficulties in withdrawing capital;
  • the increased cost of construction, failure to achieve projections, delayed approvals, disputes from contractor or third parties, availability of labor; and
  • other restrictions including price controls, conflict of interest issues, etc.
  • Almost all real estate and construction projects require third-party financing. Assets are often financed through non-recourse loans and these loans are subject to bonds and guarantees in favor of lenders. Parties should carefully examine and review guarantor obligations. Likewise, management responsibilities need to be clearly defined. Real estate developments are also generally in need of more capital than is initially budgeted. Urgent capital requirements coupled with a lack of clear contractual provisions can often put JV parties in a dispute. Parties to JV agreement should identify the party that is entitled to call for additional capital and consequences for failure of the party that fails to provide such additional required capital. The joint venture agreement should also provide for a clear exit mechanism allowing a party to exit the joint venture.   The joint venture is a great structure which combines strengths of the property developer and equity partner but a strong joint venture agreement, sound underwriting, and careful planning are keys to govern the relationship of parties and conclude a successful joint venture transaction.   ]]>
    Tue, 01 Dec 2015 12:00:00 GMT
    <![CDATA[Construction Law: Prolongation Claim in Arbitration]]>Construction Insight:
        The sight of a rainbow in the middle of a desert is a rather recherché glimpse. The United Arab Emirates, however, is not a conventional desert panorama come true.  

    Take for example the construction industry in the region. There is an interesting mix of cultures and backgrounds within the construction sector, for which UAE is often referred to as the boiling pot of nationalities. The variety of joint ventures and presence of conglomerates with diverse international backgrounds stands as a testament to above. Majority of players in this industry are world renowned and it, therefore, infers that the prevalence of the FIDIC 'Rainbow Suite' is not something new to this region. 

    Much ink has been spilled on the use of FIDIC contracts in UAE. Legal experts have dismayed the fact that UAE industry's reliance on FIDIC 1987 version of the Red Book has, as a matter of fact, has become a loyalty factor. The use of latest edition of the Red Book is less commonly seen. What has also been debated is the paradoxical use of an internationally standardized template in a civil law jurisdiction.  All that said, as experts in the field STA attorneys continue to witness the execution of multi-million contracts in the region which are commonly inspired from the FIDIC Red and Yellow Books, and the disputes culminating from them. In this article, we will examine the extension of time (EOT) clause, compensation for it and its acceptability before UAE arbitral bodies.   FIDIC is the French acronym for International Federation of Consulting Engineer.  It is the most commonly used form of contract in the construction industry. Established in 1913 and since then amending and adding to the templates of construction contracts, FIDIC now constitutes a 'rainbow suite', of which includes the following (i) the Red Book (ii) the Yellow Book (iii) the Orange Book (iv) the Green book (v) the Silver Book (vi) the Blue Book (vii) White Book (viii) Gold Book. The most commonly used FIDIC templates in UAE are the Red and Yellow Books. Pursuant to Law Number 21 of 2006, the Emirate of Abu Dhabi mandated the use of 'build only contract' and 'design contract' templates in the construction field for the projects initiated by the government entities.   Dispute Resolution Under FIDIC With the customary usage of 1987 and 1999 versions of FIDIC contracts, one question that arises is the interpretation of these contracts when a dispute arises in relation to a claim for the extension of time. In line with the dispute resolution clause of the fifth edition of the Red book, when a dispute arises the parties must notify the other of such dispute and refer the same to the Dispute Adjudication Board (DAB). DAB must make a decision within the specified time limit of 84 days. In the event any of the parties is not satisfied with the decision, it must send a notice of dissatisfaction within 28 days following which the dispute can be referred to International Arbitration after 56 days have elapsed and no resolution is achieved. In practice, within UAE, the Common Law qualified attorneys have advocated strict adherence to these timelines while the courts have been lenient about the time limits. The courts place reliance on facts of each dispute and the intention of the parties.  Before a matter can be referred to a court, it must be subject to the jurisdiction of ADCCAC or the DIAC if the dispute resolution mechanism is vested with the arbitration- as is the case with most standard forms of construction contracts. The governing law clause is subject to the prevailing regulations of the United Arab Emirates. Therefore, the interpretation of the contractual relationship is largely inspired by the UAE Civil Code. While the parties are free to choose an arbitrator of their choice, any decision which is in contravention of the UAE Civil Code can be challenged and no longer remains to bind.    The condition precedent for a compensation claim Construction projects are subject to the risk of prolongation on account of different reasons- a force majeure event, late mobilization of the plant, amendment to the scope of work, so on and so forth. Clause 20.1. of the Yellow Book sets out a 'condition precedent' for a claim of EOT. The clause states that:   "If the Contractor considers himself to be entitled to an extension of the Time for completion and/or additional payment, the contractor shall give notice to the Engineer, describing the event or circumstances giving rise to the claim. The Notice shall be given as soon as practicable, and not later than 28 days after the Contractor became aware, or should have become aware, or should have become aware, of the event or circumstance.   If the Contractor fails to give notice of a claim within such period the Time of Completion shall not be extended, the Contractor shall not be entitled to additional payment, and the Employer shall be discharged from all liability in connection with the claim. "   The above clause read in conjunction with another clause 8.4 sets out a clear mandate that the contractor must set out his concern when an event of delay has been triggered.    The cause and effect link When assessing the compensation for extension of time or project prolongation costs, the burden of proof lies on the claimant to prove that a 'delay event' occurred and that it suffered a loss due to the same. However, FIDIC templates do not provide for the calculation of compensation in the event an extension of time is invoked. This leads to several interpretations of the FIDIC templates. Internationally, the Delay and Disruption Protocol published by the Society of Construction Law (SCL) has been accepted in assessing the EOT claim. Several guideline notes form part of the protocol. The protocol covers important concepts relating to 'global claims', 'float', 'concurrent delays', the role of the contractors' administrator and disruption.    The SCL protocol identifies the need for recording a project's report through a specialist. It lays emphasis on the actual expenses and actual overhead during a disruption or prolongation period.   When a party brings a claim for EOT and aims to claim compensation towards the same, it must realize the significance of identifying the 'delay event'. Most contractors rely on the fact that the project was delayed and bring in claims for compensation. Primarily, delay claims fail due to the lack of supportive documents to establish that the delay was not concurrent. In other cases, parties are able to access the losses incurred by them including overhead expenses but fail to establish that such loss was due to a delay event on the party of the other party. This vacuum between the loss incurred and reason by virtue of which the loss accumulated is seldom identified by parties in the dispute.   Key Point  Generally speaking, the reason behind a rather naïve understanding of above concerns is that most contracting parties assume a contract template to be enough for protecting their interests. Contrary to the aforesaid, it is the continued legal support for a project and inclusion of local laws that form a deciding factor in the assessment of prolongation compensation.   Claims subject to the jurisdiction of ADCCAC and DIAC are governed by the UAE legislation. In this regard, UAE Civil Code has a dedicated chapter 'Muqawala' which addresses the relationship between the parties.  The arbitral bodies in such cases are required to rely heavily on UAE Civil Code provisions rather than internally set guidelines.    STA has a specialized Construction and Real Estate practice that works closely with the Arbitration practice. The above article is a general overview - if you have any specific queries you may contact us on the details overleaf.  

     

    ]]>Mon, 27 Jul 2015 12:00:00 GMT<![CDATA[Hotel Management Agreements in the UAE ]]>

    While driving back from work yesterday I noticed a renowned hotel brand had popped up in my community out of nowhere. A few days back that same building was supposedly a mixed-use development, but it now boasts the logo of a luxury hotel chain. As discussed in the first installment of this series, statistics show that Dubai hotels welcomed 11.6 million guests in 2014 alone – in addition to this the global economy is recovering, and the recent development in my neighborhood therefore shouldn't come as such a surprise. 

    When driving past the hotel in question, it is abundantly clear that it has some way to go before it is ready to open its doors for business. Scaffolding is still in place, there are no glass panes in the windows and the surrounding areas are yet to be landscaped. Yet although the work of the various hotel employees may not start until the first rooms are occupied, other professionals have their work cut out before the construction boundaries have even been set up. This includes the lawyers, whose involvement in hospitality projects starts from the very scratch. Almost without exception, hotel projects will require lawyers to negotiate and draft any agreements for the sale and purchase of the hotel plot, joint ventures between the landowners and developers, franchising arrangements, construction contracts and so on. As a consequence of this, lawyers are often witnessing to the complexities surrounding the regulatory requirements of the hospitality industry which can lead to legal hassles. In our last issue of Court Uncourt we examined hotel management agreements (HMAs), focusing particularly on cases of hotel renovation processes. In this article, we shall discuss the essential elements of a well-drafted HMA, and additionally address the procedure for converting an existing property in a hotel property.   In terms of governing bodies, the UAE hospitality industry is largely governed by the Abu Dhabi Tourism Authority (ADTA) and Department of Tourism and Commerce Marketing, Dubai (DTCM) in Abu Dhabi and Dubai respectively. In response to the question of whether a residential or commercial building can be converted into a holiday home or hotel, yes - this is possible, subject to the approval of the governing body. A number of compliance procedures need to be followed if your project involves this scope of work. For instance, if you have agreed with a building owner to long lease the property and operate the same as the hotel, you will be  poised with questions relating to:    (i) the treatment of tenants;  (ii) type of rights granted (whether in rem, in personam or quasi-rem rights); and  (iii) due procedures to be followed for the issuance of the approval   Each of the above questions is answered in a legal due-diligence which precedes the process of application to the authorities and grant of related approvals. Both ADTA and DTCM have set out a list of general information along with respective application forms for such an approval which have to be duly provided. As with any commercial unit, the process involves fresh approvals from a health and safety point of view.    i. Business tenancy  One of the most imperative conditions for a well-drafted HMA is a clear demarcation between management and leasing rights. To put it simply, tenancy rights are restored in a person by signing an agreement for uninterrupted use of a property for a defined term. Management agreements, on the other hand, are an assignment of rights to manage on the terms and conditions set out by the owner. When negotiating an HMA one must exercise due care to understand if any indirect tenancy rights have been vested with the operator.  The considerations in this regard evolve due to the fact that several legal implications arise when an indirect tenancy is created.  Firstly, if the operator is able to prove that your HMA is, in fact, a long-term lease agreement instead of an HMA the nature of your contract is heavily affected. The contractual terms may, therefore, be subject to provisions of prevailing tenancy laws instead of the Federal Commercial Transactions Law. Secondly, the direct effect of the former would have a knock-on effect on the dispute resolution clause. Tenancy disputes are not within the ambit of arbitration and must be submitted to the rent committee, who by law have exclusive jurisdiction over any rental disputes. Naturally, the rent committee (s) have limited exposure in the interpretation of contracts as against the courts or arbitral bodies. Thirdly, an owner who may be holding a leasehold title for the land cannot legally enter into a tenancy agreement without a prior approval for sub-letting the land. In the absence of such clear sub-let provisions in the principle tenancy contract, the owner may face legal implications for assigning a title not owned by him.    ii. Exclusivity and division  Negotiation of HMAs reaches dead ends where operators and owners argue on the exclusivity of management rights. Most contracts restore unfettered management rights on the operators while financial rights are restricted. Such provisions create a general imbalance between the rights and liabilities of the parties. An HMA is required to make provisions relating to financial activities based on the feasibility study of the hotel project. In the event of a dispute between the parties, the death of a party or any such unforeseen event, the cash flow for hotel operations must not be affected. That said, key considerations including capital and reserve funds should be addressed in an HMA.    It is therefore imperative to exercise caution and consult seasoned attorneys when negotiating and drafting an HMA. There are several aspects of the agreement that can have a significant impact on the operational and financial functions of a hotel. We at STA will continue to bring forth aspects of the burgeoning hotel industry – just think of us as the legal chocolate on your hotel pillow.     ]]>
    Fri, 08 May 2015 12:00:00 GMT
    <![CDATA[Cancelled Construction Projects in Dubai]]> Decree Number 21 of 2013 – One Year Later

    We're all familiar with the story. Mr. A buys property off-plan. Developer advises property completion will occur by 201X. Mr. A awaits handover with anticipation. 201X comes and goes, with no news on the property. Developer or sales agent contact Mr. A to advise that construction status and the delay in completion. Some years pass, and Mr. A sees no further development. Developer and sales agent are unforthcoming. Mr. A decides to take legal action. Mr. A contacts one international law firm, famed for providing bespoke legal advice and seamless, high-quality counsel…

    Incomplete construction projects are by no means a new phenomenon in Dubai. Indeed, one year ago our legal newsstands were heavy with articles relating to this topic owing to Decree 21 of 2013 (the Decree). Issued on 23 July 2013, the Decree proposed a system for the management of litigation cases filed as a result of cancelled construction projects. In summary, it provided for the formation of a special judicial committee (the Committee) to rule on cases in which the developer of an officially-cancelled construction project has failed to refund the purchasers' money. Although Article 11 (5) of Law Number 13 of 2008 (Law 13) gave the Real Estate Regulatory Authority (RERA) the authority to annul delayed construction projects, and Executive Council Resolution 6 of 2010 (the Council Resolution) laid out the circumstances, conditions and procedures for such cancellation, further attention was needed to ensure the streamlined settlement of all outstanding dues and enforcement of the parties' rights. Article 27 of the Council Resolution states that should a developer fail to reimburse a purchaser within a timeframe established pursuant to the same Resolution then RERA shall take all measures to ensure that the rights of the purchaser are upheld – an obligation which may necessitate RERA referring the matter to the "competent judicial authorities". The Decree goes further to name the "competent judicial authority" as the Committee.

    We know what you're thinking –"this is a newsletter, not a history letter." So why are we writing an article on an arguably stale, old topic? The reason is this: although July – September 2013 brought to us the promise of a reformed litigation system for the relevant cases and a plethora of publications on the subject, we have seen no practical changes to date. Article 9 of the Decree makes clear that the provisions shall have effect from the date of publication in the Official Gazette, which occurred on 10 September 2013. Clear guidelines were in place regarding the constitution of the Committee – namely that each panel should consist of at least three (3) judges from the Dubai Courts under Article 1 – and Articles 3 and 5 take measures to ensure that the Committee has exclusive and undisputable jurisdiction over the specified matters. Although such concise provisions govern the actual working of the Decree, there is yet, no fixed date for the diversion of cases into the new system. This element is despite the fact that Article 3 states that all judgments issued before the commencement of the Committee's work must (not "may") be referred to the Committee for consideration nonetheless.

    It may therefore seem as though the workload of the Committee is already building up and, as we are all aware, the cancellation of construction projects is no rare occurrence in Dubai. However purchasers wishing to refer their relevant disputes to the appropriate authority remain without the guidance of precedent or knowledge of the way in which decisions will be made by the Committee, and several questions remain unanswered. What would happen, for example, if a developer claims that it intends to recommence works on a project? Or what if the developer wishes to sell the land?

    In answering these questions, we should remember the purpose of the Committee. As per Article 2A of the Decree, this is "to consider and decide such issues, demands, and claims that may arise between real estate developers and purchasers, whose subject matter or cause is CANCELLED real estate projects". Cancelled. Not delayed, stalled or suffering a setback, but officially and permanently cancelled. And the authority to enforce cancellation is not the power of the Committee but the power of RERA as per Law 13 and the Council Resolution. If cancellation is imposed by RERA under the conditions prescribed by Article 23 of the Council Resolution then under Article 24 the developer shall have seven (7) days to appeal against the decision to RERA. RERA shall then have a further seven (7) days to consider the same and deliver a final verdict. If the decision remains the same and the project is cancelled RERA must meet the provisions of Article 25 – namely appoint an auditor (and the cost of the developer) and ensure that any monies in the escrow account get refunded to purchasers within 14 days. If the account contains insufficient funds to reimburse a purchaser fully the developer shall be afforded 60 days (and any such extension permitted by RERA) to provide purchasers with their money.

    We have already established that Article 27 of the Council Resolution provides that should a developer fail to reimburse a purchaser then RERA must refer the case to the appropriate judicial authorities (namely the Committee) for the enforcement of the same. We have further clarified that, under Article 2A of the Decree, the Committee's field of focus shall be disputes arising between the developer and purchaser as a result of the cancelled project. It, therefore, follows that the Committee has no jurisdiction in cases whereby the developer is challenging the cancellation of the project. These are matters for RERA, who have exclusive authority over whether or not a project is to be cancelled. So to revert to our earlier questions – what would happen if a developer wished to recommence development on a project or wanted to sell the land? If the escrow account proved to be sufficient to reimburse purchasers and other outstanding dues can be settled without the sale of the land, then post-settlement the developer shall surely be free to dispose of the land, however, he so choses. And if RERA has ruled that a project is to be cancelled the developer has no other authority to whom to appeal. His only other option regarding re-commencement of the project shall be to apply afresh to RERA at a later date.

    So if RERA are the sole body with the power to cancel a project and the Committee shall not have the authority to overturn the decision, what are the duties of the Committee? Article 2A of the Decree further clarifies that the Committee shall have the power to liquidate projects cancelled by RERA. Therefore if a purchaser approaches the Committee with the grievance that the developer has not refunded his money in accordance with Articles 25 and 26 of the Council Resolution the Committee may consider the following: should liquidation be effected and, if so, how should the funds be allocated? In addition to taking into consideration the purchaser's right to a refund the Committee shall also need to consider contractors, sub-contractors, suppliers, service providers and any other party with a claim to interest.

    Let us revisit Mr A. In the instance that the construction of his property has been cancelled by RERA and the developer has not refunded his money, what will happen? When the Committee becomes operational it shall have the authority to order the developer to reimburse him. And if the developer isn't sufficiently solvent to do so, it may order liquidation and allocate the resulting funds in the appropriate proportions – which may or may not involve the payment of Mr A. The obvious question here is "but what if Mr A receives nothing"? Unfortunately for Mr A he will have no further options. Pursuant to Article 5 of the Decree the Committee's decision is final and binding there shall be no further right to appeal.

    So what are the advantages of this new system? In the happier circumstance that the Committee is able to allocate Mr A his dues then under Article 5 the decision may be enforced by the Execution Section of the Dubai Courts, and to Mr A's relief Article 9 states that any matters handled by the Committee shall be exempt from any court fee.

    Of course, Mr. A will still need to pay his representatives' professional fees – but fortunately for him, the aforementioned international law firm with expert property lawyers in Dubai approached offer excellent competitive rates…

    Please get in touch with our expert team of property lawyers in Dubai for more information

     

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    Thu, 20 Nov 2014 12:00:00 GMT
    <![CDATA[Due Diligence in Real Estate - A Look at Dubai's Property Regulations]]>

    Obvious, really, yet "performing due diligence" is a phrase readily associated with the legal industry. Reminding ourselves of the basic definition realizes that we each "perform due diligence" hundreds of times per day. We might check the weather forecast or traffic reports before leaving the house, read reviews before selecting a film to watch, research a company before applying for a job. It is unlikely that we would enter a car showroom on a whim and select a vehicle based on aesthetics, or turn up at the airport and pick our holiday destination at random. The fact that these relatively minor tasks require the application of such due diligence goes some way towards emphasizing the caution that should be exercised before entering into a major project.

    A major project involving construction and real estate, for example. Or entering into a joint venture. Or, on an even greater level, both.

    Let us imagine that Company A (a developer) wants to build and sell a hotel. Before any construction could even be considered Company A would need to find a suitable plot of land and secure the appropriate permissions, consents and NOCs, not just for the sale and purchase of the land but also for the construction and operation of a hotel thereon. These tasks alone would be subject to thorough checks and analysis before the project could go any further. If Company A was to source a plot and entered into a provisional sale and purchase agreement with the seller then it would need to ascertain certain information before any definitive agreement could be executed, namely:

    • Are there any issues with the title? Is it restricted in any way? Does the seller have the sole and absolute right to sell the land and transfer the title?
    • For what uses has the land been approved? Are there any restrictions or approvals in place affecting the intended use of the land as a hotel?
    •  Is access to utilities such as water, sewage, electricity etc available?
    • Is access to the land restricted in any way? Do access routes already exist? Does the title include any responsibility towards maintaining existing access routes?

    As the definition suggests due diligence requires a great degree of care and attention, meaning that Company A will have to do more than simply ask the seller to confirm the above. In order to be thoroughly conscientious Company A's lawyers should correspond with the seller on its behalf, request all and any documentation pertaining to the ownership, title, use and history of the land and thoroughly study the same so as to ascertain whether or not there are any issues which may affect the purchase of the land or Company A's intended usage. However, in order to minimize the risk of issues and complications arising during the project, Company A and its lawyers would be sensible to summarize the entire scope of work from purchase to construction to completion, and request all relevant information required for due diligence at the outset and before the signing of any definitive agreement. In doing this Company A's lawyers would be in a position to advise against the transaction should any issue seem to counter Company A's interests.

    Now let us imagine that Company A decides that it wants to develop a bigger, more structurally complex hotel in Dubai. After considering their finances and resources, Company A decides that achieving this objective would be far more realistic if it joined forces with Company B, another developer also desirous of building and selling a large state-of-the-art hotel in Company A's country of choice. Company B additionally has finances and resources which, when combined with those of Company A, would be sufficient to allow for the successful completion of the project. Company A and Company B, therefore, agree to enter into a joint venture.

    Clearly, the practicalities of the purchase of land, construction of the hotel and sale of the same would be little different to those involved in Company A developing its original hotel as above, and thorough due diligence would still be required to this effect. However, Company A now has the additional task of considering all the factors relating to Company B which may affect the venture, such as:

    - Is Company B sufficiently financially secure? Is it likely to encounter financial problems which would affect the venture?   Past liabilities of Company B and disclosures on such Past liabilities.

    - Is Company B already involved in any joint ventures with other companies and, if so, what are the details of these? Are there any conflicting business issues?

    How verifiable are the resources that Company B is proposing that it brings to the project?

    - What is the structure of Company B? How is it managed?

    - Who are Company B's customers, suppliers, clients and trading partners? Are they able to verify that Company B is capable of maintaining a sound working relationship?

    - Is Company B involved in any legal or public issues which may affect the venture, or have any detrimental effect on   Company A by association?

    - How successful are any previous or ongoing development projects in which Company B has been/is currently involved?

    This is by no means an exhaustive list, and requesting documentation pertaining to Company B's past and present state is by no means the full extent of due diligence. Throughout their working relationship Company A and Company B are likely to encounter each other's trade secrets and intellectual property – provisions will, therefore, need to be agreed in advance so as to ensure the protection of each company after the venture has ended, and series of contracts and agreements will inevitably be needed in order to govern each company's rights, obligations, liabilities and duties throughout the venture and thereafter.

    From a professional standpoint, it has been observed in many instances that parties to a joint venture agreement tend not to adhere to joint-venture terms. For instance - Company A in present case owns a piece of land and Company B has the technical know, means and experience to develop, construct and market the property – a joint venture would naturally result from the synergies existing between Company A and Company B whereby Company B saves in terms of investing financial resources to develop the property on Company A's land and Company A saves itself from time and labor to construct a property. It is important to state here that although joint venture contract can regulate the relationship between Company A and Company B in this case, Company B enjoys a dominant position once it has assumed possession of land. Briefly, the joint-venture agreement between the parties provided:-

    a. Company B shall be solely responsible towards construction, completion, and handover of the project;

    b. Company B shall set up the joint escrow account in name of Company A and Company B with JKL Bank and all sale consideration    shall be credited into the escrow account;

    c. 60% percent of the saleable area to be owned by Company B and 40% to be retained by Company A;

    d. Marketing and pricing decisions to be agreed upon mutually by both the parties.

    The cursory reading of the above terms may suggest that these terms are fair and adequate to regulate the relationship of respective parties. However, once Company B assumes occupation of the project site and commences actual construction, Company A i) cannot consider termination of joint venture agreement as it may be subject to penalties and damages towards losses sustained by Company B towards construction works; ii) has no control over construction, contracting or building works; iii) is responsible towards terms, liabilities, and obligations imposed under joint venture agreement. Interestingly, Company A's dominant position will affect Company B to a much more significant level. Say, for instance, Company A fails to open a joint escrow account for any reason or; delays construction of property on account of some dispute with contractor or project manager or is subject to court proceedings thereby affecting joint venture agreement, or unilaterally engages in sale and marketing of units developed. Although Company A may have the option to bring an action against Company B for its breaches, the cost, expense, and length of proceedings will run against the interest of Company A and its management. To this extent, if parties have agreed to be governed pursuant to DIFC Law, Company A may get some relief as DIFC Courts have wide powers to pass necessary orders including injunction under clause 22, Chapter 5 of the DIFC Court Law (Law number 10 of 2004).

    The benefits of entering into this joint venture may well be remarkable and far beyond those attained by Company A's sole venture, but it is only through thorough due diligence that Company A will be able to sensibly ascertain that entering into the relationship is in its best interests. And given the wide scope of work of both the desired project and the definition of the relationship between the entities it is inevitable the completion of due diligence will in itself be an enormous task.

    Proceed, Company A, but proceed with caution.

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    Tue, 23 Sep 2014 12:00:00 GMT
    <![CDATA[Ijarah and Arbitration]]>

    Questions that are generally debated these days within business and legal diasporas pertain to the recession aftermath. These questions seek to inquire matters such as i) what led to the recession, ii) could it have been prevented and; iii) what do we learn from this precedent? For instance, let us consider the case of Royal Bank of Scotland. The bank's market valuations soared to extreme high levels until 2008 making it a global banking powerhouse. The 2008 crisis however changed the bank's financial position leading it to collapse in the arms of the British state for a high price of USD 32 billion. Economists and experts speculated and continue to comment that this event has marked the biggest failure in UK's banking sector.

    Many of the property investors in today's market turn to a bank to avail mortgage facility. The cumbersome administrative policies of banks backed with detailed AML and KYC policies leave investors with very little time to carefully read through the fine print in mortgage contracts and understand the implications that may arise. In this article we examine the implications arising out of a commonly used financing module referred to as 'ijara' within the Islamic finance domain.

    The banking sector operates across several verticals, one such vertical being Islamic finance. The products offered under Islamic finance are designed or structured under the fabric of Sharia Law. Sharia is not a codified law but inspired by religious teachings and the holy book, the Quran.

    On a more specific note, ijara by way of an explanation means lease, rent or wage. The concept of ijara refers to selling the benefit of use or service for a fixed price or wage. Pursuant to this form of an arrangement, bank makes available to its customer the use or occupation of assets (purchased by customer and financed by bank) for a fixed period and price.

    Within the United Arab Emirates, 'ijara' has been linked to real property transactions whereby banks enter into a forward lease agreement to finance its clients' property. Under this arrangement, property is financed by the bank on long term basis and the borrower pays fixed monthly rentals. The lease rentals are structured in a manner that upon conclusion of the lease term, the bank recovers purchasing cost and profits. In return, the borrower gains title to the property by way of a gift or related disposition.

    To illustrate a case study, a property investor invoked arbitration clause to claim compensation worth AED 12million against a property developer for delaying handover of a commercial property by more than five years. The claim for compensation included borrowing costs incurred by the investor towards ijara form of mortgage availed from one of the local banks. In the present case, the developer challenged the legal capacity of the investor. The developer relied upon the sale and purchase agreement (the SPA) and cited that the mortgaging bank was named as the purchaser under the SPA. Accordingly, the investor had no valid agreement with the developer and consequently it had no power to bring proceedings based on arbitration clause under the SPA. The legal question that arises from above case study is whether the investor infact has any legal right to bring an action on his own?

    Article 258 (1) of the UAE Civil Code states – "The criterion in (the construction of) contracts is intention and meanings and not words and form'. Bank's principle business is that of accepting deposits and granting loans. Under an ijara agreement, bank does not intend to assume ownership rights in the property purchased but instead acts as a financer to facilitate the transaction on behalf of its borrower.  Article 245 of the UAE Civil Code sets out "In the case of commutative contracts to derive benefits from the property, provided the conditions for validity thereof are satisfied, the person dealing in the property shall have the obligation to deliver it to the usufructuary, and the usufructuary shall have the obligation to deliver considerations for the benefit of the owner of the property'.

    A Dubai court recently voided an ijara agreement on the grounds that it represented not a lease, but a sale contract and the asset being sold was not completed at the time developer started collecting payments. A similar decision was passed by Dubai courts in 2010. In appeal number 268, 290/2209, the Dubai Court of Cassation has held that 'relationship between parties extends to more than what is written on paper, it is at the discretion of the judge to consider the relationship between the parties and determine the rights of each party.' Article 248 of the Civil Code permits a judge to treat a contract void if such contract is made by way of adhesion or contains unfair provisions.

    In terms of the SPA, it may be argued that both bank and investor share similar set of obligations. Whilst bank continues to fulfill payment obligations to developer, the investor continues to pay consideration to bank in addition to service charges and maintenance fees. Importantly, investor has 'inherent interest' in the property, whereas bank does not. The investor is in fact the successor in title and it can be argued that an assignment exists by virtue of Article 1109 of the UAE Civil Code. The successors and assigns provision is part and parcel of commercial contracts and inserted in almost every agreement. An assignment is effected once a party transfers its right to a third party allowing third party to accept other party's performance. To this effect, Article 251 of the UAE Civil Code states that "If the contract gives rise to personal rights connected with a thing transferred thereafter to a special successor, such rights shall be transferred to such successor at the time at which the thing is transferred if it is one of the appurtenances thereof and the special successor was aware of those rights at the time of transfer of the thing to him."

    Article 254 of the UAE Civil Code reads: "

    (1) It shall be permissible for a person to contract in his own name imposing a condition that rights are to enure to     the benefit of a third party if he has a personal interest, whether material or moral, in the performance thereof.

    (2) Such a condition shall confer upon third party, a direct right against the undertaker for the performance of those     conditions in the contract enabling him to demand performance thereof unless there is a contrary agreement, and     such undertaker may rely as against the beneficiary on any defences arising out of the contract'

    (3)The person making the condition may also demand the performance of the condition in favour of the     beneficiary, unless it appears from the contract that the beneficiary alone has such a right."

    The Dubai Court of Cassation delivered a landmark decision in 2000 (Contract of Supply and Installation of Mechanical, Electrical and Sanitary works, between the Main Contractor and a Subcontractor) whereby it ruled that if the arbitration agreement is incorporated in the main contract, and one of the parties to the main contract assigns its rights and obligations under such contract to a third party who consents to the assignment, whether in an express or implicit manner, the assignee will replace the assignor in his commitment to the arbitration clause. (Dubai Court of Cassation – Cassation Appeal No. 537 year 1999 – 23/04/2000).

    Litigation involving banking and financial claims may sound stressful to some but the courts in UAE have restored investor's sentiments by applying the letter of law.

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    Fri, 16 May 2014 12:00:00 GMT