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Overview: Musataha Agreements in the UAE

Published on : 02 Feb 2020
Author(s):Several

Musataha Agreements in the UAE

Introduction

The Rights of Musataha is a vital tool for real estate development in the United Arab Emirates (UAE). It enables the investors to establish stable and safe investment projects whilst achieving the adequate balance between the rights of the proprietor and those of the investor; thus, an investor is able to avoid the restrictions preventing the foreigners from owning land in the region coupled with avoiding the exorbitant expenses therein in the investment zones. Additionally, the proprietors benefit from the ideal utilization of their lands, which in turn also helps the State (UAE). Therefore, the state has tended to expand the implementation of musataha agreements with regards to government lands allocated for rather specific investment purposes. Dubai Municipality along with the Abu Dhabi Municipality has obliged the investor by a contract for the utilization of its lands under this system.

General Framework

Rights with regards to property ownership are entrenched in Federal Law Number (5) of 1985 commonly known as the Civil Code. Under the Civil Code, the property rights include, usufruct, freehold and musataha. Each Emirate has the respective laws that govern long term leases.

A freehold is right in rem which is granted in perpetuity. Usufruct contract is an investment contract between the person(s) or entities developing the land and the owner of such land. It is important the vacant land must be intended for commercial use only. Further, under a usufruct contract, the land developer must be a UAE national where such land is not in a freehold area. Musataha Agreement invariably is a right in rem that entitles the real estate holders to construct, invest in, lease, sell, mortgage, purchase a plot of land of a third party for a term of up to 50 years with condition that such acts are not contravening any Executive Council resolutions. This term is further extended to 50 years by mutual agreement of two parties. Amongst the above-mentioned property rights, freehold is the most superior form which allows full ownership. On the other hand, musataha and usufruct are a tad bit stringent in terms of allowing ownership only for a limited time and with some restrictions.

This article shall focus on musataha agreements.

Dubai

As the central land register, all real estate transactions in Dubai must be registered with the Dubai Land Department (DLD).  The ownership of property in Dubai is largely governed by Law Number (7) of 2006 concerning registration of real estate property in Dubai, which allows only the UAE and Gulf Cooperation Council (GCC) nationals to purchase real estate in the UAE, with some exceptions. Indubitably there are certain restrictions that prevent foreign companies and nationals to own real estate in Dubai. UAE nationals, GCC nationals and companies incorporated in the UAE (excluding free zones) which are wholly owned GCC/UAE nationals are able to own any property interest in the Dubai (except public joint-stock companies which are listed in Dubai which are not wholly-owned by GCC or UAE nationals). However, non-UAE and GCC nationals may own property interests like musataha leasehold in certain designated areas including but not limited to, Downtown Dubai, The Palm, Dubai Marina, Emirates Hills, etc.

The direct ownership of property of Dubai International Financial Centre (DIFC) registered companies is permitted within the DIFC only for the reason that it has its own property laws, thereby maintaining a separate property register for real estate in the free zone.

The courts in Dubai have a definite stand when it comes to deciding whether a leasehold is musataha agreement and whether the due procedure has been followed to register the same. In a decision by the Dubai Court of Cassation (Civil Appeal Number 498/2016) dated 9 February 2017, it was held that registration of the lease is essential. In the abovementioned case, the owner of the land wished to terminate the rental relationship that she had with the defendants upon payment of an amount of AED 3,629,581. However, the defendants pleaded that the registration of the lease was not done in accordance with the law, hence, they are not obligated to pay her the sum as well as evacuate the land. In the plaintiff’s defence, she presented a letter from the Dubai Land Department which stated that she is the owner of the land and that she could conclude contracts with others, rent or lease the same to use the plot of land upon fulfilling relevant registration procedures. The plaintiff has leased the plot of land to the defendants for a period of thirty years and claimed that in accordance with tenancy contract, the obligation was on the tenants for the registration fee, issuance of approval of government permits for building, etc. The Court of First Instance was of the opinion that the present contract was, in fact, a musataha agreement. Further, the court in the present case disregarded the contract and directed the defendants to evacuate the land and return it to the plaintiff without making the payment. When this decision was appealed, the Court of Appeal seconded the decision of the Court of First Instance. When the decision was further appealed before the Court of Cassation, the present court agreed with the Court of First instance in deeming the contract to be a musataha agreement. The Court of Cassation further held that the registration of the lease was the responsibility of the plaintiff, and since the same was not done by her, she was not entitled to the payments she was claiming, though the defendants were directed to evacuate and return the plot to the plaintiff.

Another judgement by the Court of Cassation in Civil Appeal 30/2010 and Civil Appeal 208/2010 further provides more clarity with regards to the provisions which apply to musataha agreements. The facts of the case are: the owner of the plot passed away without a valid will, and the legacy was kept with the public treasury since there was no inheritor. However, the land was being used by the defendant. The treasury being the claimant, filed a suit against the defendant for unlawfully using the land that belonged to them. In the defendant’s defence, he mentioned that the owner of the land before her death provided him with a will wherein he inherited the plot. However, when the will was brought in question, it was held that adequate procedures were not followed in accordance with the law for the registration of the will, thereby not being accepted by the courts. The defendant further contended that he had been residing in the plot for several years and spent his hard-earned money to build a house on the plot. He mentioned that he did not forcefully utilize the land, and only in good faith resided and built the plot. The Court of Cassation relying on Articles 1317 and Article 1318 of the Civil Code which states that a person who possesses an unregistered immovable property considering himself to be the owner of such property, and such possession continues uninterrupted for a period of 15 years, he shall not be actionable in property or the rights in rem by any person who does not have a legitimate justification; though the claimant had a valid justification. Further, the Court of Cassation also mentioned that the valid cause is a document which provides proof of possession of real estates, like a transfer of title by legacy or inheritance, gift with or without consideration or a sale and bartering. It is pertinent to note that none of these were fulfilled by the defendant in the present case, as the mere possession of the property does not give the defendant the ownership irrespective of the period of time whether short term or long term with good faith. In case the property was not registered, the defendant may have been able to get possession/ownership of the plot, however, in the present instance, the plot was registered with the claimant. The Court of Cassation further highlighted Articles 1353, 1354 and 1358 of the Civil Code with regards to musataha agreements, stating that musataha agreement gives the owner the right to establish a building on a land which belongs to another individual which is acquired by agreement or over time, and this gives rise to obligations under the agreement such as paying dues, registration fee, etc. In this case, the defendant did not have a musataha agreement with the claimant. Therefore, the court held that the right of benefit/use, as well as the musataha, are not transferred except by registration. Since the property which was registered in the name of the deceased, post which the claimant, the defendant is obligated to pay dues to the claimant in return of him enriching or benefiting from the property.

Abu Dhabi

In the Emirate of Abu Dhabi, a lease is essentially a personal contract of hire which is more akin to a license, and not an interest in land. The non-owner occupiers in both commercial and residential sectors are lessees under the leases. Companies owned in whole or part by a non-UAE national as well as non-UAE nationals are only granted long leases (a minimum of 25 years) within designated investment areas, much like Dubai. A musataha agreement in Abu Dhabi is considered an investment interest which allows exploitation, development and occupancy of the land. The Abu Dhabi Municipality (ADM) have deemed leases for a term of over four years which is granted in favour of a non-UAE national or a company which owned wholly or partly by a non-UAE national with regards to land outside the investment zone coupled with the land that contain rights to sublet, to be considered as usufructuary rights.

  1. Registration with regards to leasehold interest which is located within the Emirate of Abu Dhabi but outset the ADGM (short of Abu Dhabi Global Market) are different for leases over less than and over four years. For leases of four years or less, the buildings and units in the Emirate are required to be registered under a system which is known as Tawtheeq. The registration process and fees for the same is the responsibility of the lessor. The registration fee differs for building, new lease, renewal, termination as well as further administration. There are various requirements of the Tawtheeq system wherein a number of fields including trade license, issuance authority, company activity, the rental value of the lease, expiration of the lease, etc need to be filled out. STA Law Firm’s real estate lawyers in Abu Dhabi assist individuals as well as entities at various stages of registration of the Tawtheeq on a regular basis. For a lease of over four years, the buildings and units in the Emirate are required to be registered under a system which is known as Tamleeq, and two different types of registration fees are payable which depends on the term of the lease:
  • For lease over four years (but less than 25 years): 1 per cent of the first year’s rent
  • For lease over 25 years: 4 per cent of the value of the consideration.

Resolution Number 127 for 2019 by the Abu Dhabi Executive Council amends the Resolution Number 49 for 2018 by reducing municipal fees for Musataha agreements in Abu Dhabi from 4 per cent to return value of 0, 1 or 2 per cent, depending on the land classification. There is a fee cap stipulated in the resolution for projects in the educational, services, industrial and healthcare sectors, to increase the investors’ appetite by acting as a catalyst for all new projects.

  1. With regards to leasehold interest located within the ADGM, the free zone maintain the ADGM Land Register which provides a defined list of conveyances as well as subsequent variations which must be registered with the ADGM Land Register. It is also pertinent to note that the obligation for registration is on the grantor. Following the common law system, the ADGM required the conveyances to be executed in English, and if not, a translation to English must be provided. the registered owner holds such interest free from the other interests excluding:
  • Easements or public rights of way
  • Statutory charges
  • Rights in favour of a relevant authority
  • Pre-registered interests, and
  • Implied easements.

The registration fee for a term of fewer than 10 years which includes renewal is AED 100 per annum, and for a term of 10 years or more (inclusive of renewals) is 2 per cent of the total value of the contract. Further, there is no maximum limit to the fees for lease with a term of 10 years or more.

The types of arrangement where the law in Abu Dhabi recognizes the occupation, as well as the use of the real property for a limited period of time, includes:

  • Residential
  • Commercial
  • Offices
  • Hotels
  • Furnished apartments

 

Saudi Arabia

In contrast, both GCC nationals and foreigners are entitled to purchase own land in the region for development, lease or sale, on the condition that they have a legal presence in the Kingdom of Saudi Arabia (KSA). In the case of foreigners, they must obtain and have a valid license to carry our activities with regards to real estate development.

 

Bahrain

Under Law Number (27) of 2017 concerning promulgating the real estate sector, a musataha right is defined as “a right which authorizes the holder of such right to construct buildings or facilities on land which belongs to another for a limited period.” In accordance with Article 78, a musataha terms cannot exceed 99 years. Under the same article, if the musataha right is for a period of more than 10 years, the holder of such right may dispose it or mortgage it without the permission of the owner, unless it has been agreed otherwise in writing.

Conclusion

Therefore, to distinguish a lease from musataha or usufruct can be fairly difficult and the substance of the document is what determines its nature, rather than its form.  Regardless, in the UAE, leasehold interests are treated as personal rights, and not real rights between the two parties. However, in all cases, usufructs are restricted to a term of a maximum of 99 years, whereas musatahas to a term of a maximum of 50 years (subject to one renewal of 50 years).

 

 

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