Off Plan Real Estate Contract In Dubai: All things you need to know

Due to the increasing investments and capital flow from many countries worldwide, the United Arab Emirates has opened its property market for all. Many new investment and payment plans are coming up to help the investors and buyers. Moreover, investors from around the world, be it from the UK or India, are welcome to buy and own a property in any of the UAE’s freehold areas. Buying off-plan can be understood as committing to buy a property before it’s finished being built or constructed. This generally means prior to its construction, but not necessarily: even if the property is about to be finished, it’s still technically an off-plan purchase. 

Hence, off-plan property is an unconstructed property or a property that is still developing which can be bought from a developer directly or a first owner. In the case where the buyer is directly buying from the developer, the buyer at the time of purchase usually pays a 10-20% down payment and signs the Sales Purchase Agreement (SPA). Depending on the developer, the rest of the payments can be made through various payment plans.

 

Buying an Off-Plan property in Dubai and its Benefits:

1. Excellent payment plans with less money as down payment (i.e., 10%)
2. Buyer can buy brand new and at a discounted cost, as compared to completed prices
3. More options of locations and the ability to select your purchase from the entire locality
4. Transaction be beneficial if there is an increase in the cost of property during the construction period
5. Option to sell at a profit before completion, in case the market rises.

This can be better explained as, for example, ‘A’ has committed to buy a property off-plan. To do so, he will have to deposit a down payment that can be as low as 10% or higher of the whole property cost. The rest is payable only when the property is finished being constructed. ‘A’ year later, the property is still being constructed, but rising property prices in the area mean that the property’s market value when it’s finished has increased by 10%. ‘A’ might be able to find someone willing to pay double the deposit to buy the property as and when it completes – which effectively means they’re getting into a contract to lock a price of the property at that particular time – because they think prices will go up even further. Hence, ‘A’ has received 100% profit on the investment he made while buying an off-plan property. It is pertinent to note that: property prices don’t always rise up! If they fall, or can even stay the same, a buyer won’t sell it on further.

 

Risks of buying off-plan property:

1. Delayed Completion Time – Developments and construction don’t always go as per the plan, and there have been many cases where the projects get completed after their given completion dates. Therefore, it is always recommended that the buyer should do comprehensive research on the developer before buying. The buyer must ensure that the sale agreement signed states that he is compensated for any such delays. Interestingly, delays can be a good thing in case of a rising market, where a buyer has locked in a purchase, at the same time the cost of the property is going up. The buyers should be vigilant that as long as the developer is giving you regular updates and the reasons for the delay, it makes sense. Still, if the buyer is getting nothing but silence or excuses which are not genuine, it might be time to show some concern and start asking questions.
2. Instability in the Market: A downward trend in property prices can lead to a decline in the value of the property. However, this kind of risk is not confined to off-plan properties; in fact, it can affect them more as off-plan properties are harder to liquidate the ready properties.
3. Difficulty in obtaining Mortgage: On big developments and construction plans, the off-plan period may be long, extending to a couple of years – and a lot can change in the mortgage market over that time. A mortgage offer usually stands valid for a maximum of six months, so a buyer can’t lock his mortgage in at the same time as the reserve his plot. Hence it is difficult to find a willing lender.
4. Developer goes broke: Quite a few times it happens, that the developers can bear losses with a couple of bad projects or have difficulty in securing finance, and end up going bust before developing the project for the buyer or during the ongoing construction.

Therefore, to avoid any harm to the buyer in the circumstances mentioned above, the buyer should make sure that his deposit (he gave at the time of signing the SPA). The buyer can also have the deposit held in escrow, so the developer can’t get at it until they’ve delivered the property. Moreover, the deposit can also be protected by an insurance policy that can pay the buyer back if the developer fails to take the construction to completion.

 

Termination of Off Plan contract:

Default of the Buyer:

To bypass the courts and terminate the contracts, the Property developers shall notify the Dubai Land Department (DLD) of the buyer’s default. In 2017, His Highness Sheikh Mohammed Bin Rashid Al Maktoum issued Law No. 19 of 2017, which amended Article 11 of Law No. 13 of 2008 on the Interim Real Estate Register in the Emirate of Dubai. The provisions of Law 19 of 2017 are public policy matters, hence any contractual agreement that developers have with their buyers will come under the purview of the prescribed Law. Whereas the Law does not apply to sales of land, its main aim is to grant the Dubai Land Department (DLD) and the developer the right to terminate an off-plan sale without a court order or arbitral award. Before unilaterally terminating the off-plan sale for an investor (buyer) who is defaulting, the developer will be required to adhere to several procedures at DLD:
(i) Give notification about the defaulter DED;

(ii) After notification, DED will serve a notice to the buyer who is defaulting and

(iii) DLD will issue a Report of deregistration in case there is non-compliance on the part of the buyer. After the DED notice to the defaulting buyer, the buyer will have a 30 days deadline to rectify and correct the default.

In case there are reasonable grounds, the DLD can initiate an amicable settlement between the developer and the buyer. Only at the expiry of this period of 30 days the DLD will proceed and issue its report, comprising the below main points:

1. The developer is fully compliant with the obligations under Law 19 0f 2017; and
2. The present completion status of the project.

This report’s importance is that the DLD will deregister the Sales and Purchase Agreement (SPA) at the request of the developer, without the need of a prior court order or arbitral award to be issued, after the issuance of the DLD report:

A) Completion exceeding 80%: the developer may affirm the SPA and request the buyer to execute it. Otherwise, the developer can ask DLD to sell the property in a public auction, the gains of such sale being offset with the unpaid balance of the price, in favour of the developer or the developer can terminate the SPA unilaterally and retain 40% of the purchase price. Amounts paid by the buyer over the 40% threshold would need to be returned by the developer;
B) Completion between 60%-80%: the developer has the right to keep 40% of the price and return only the exceeding amounts to the buyer;
C) Completion below 60%: the developer has the right to keep 25% of the price and return only exceeding amounts to the buyer.
In all the above cases, the return of the amounts to the buyer must be made in one year from the termination or within 60 days of the property’s successful resale, whichever is earlier.
D) Construction not started: if the constructions have not started for reasons not known to the developer, the latter may keep up to 30% of the amounts paid by the buyer, the rest should be again returnable to the buyer within a period of 60 days after the termination of the SPA. Conversely, this is not applicable to cancelled real estate projects. The cancellation of real estate projects is foremostly done by the Real Estate Regulatory Authority (RERA), for reasons that can be related to the developer’s lack of action despite having the necessary licenses in order to start the construction. Such cancellation of a real estate project pertains to and proves the developer’s default in implementing a SPA, not the buyers. In a case of cancellation, the main principle is that the buyer has the right of full reimbursement or refund of the amounts paid, from the project’s ESCROW account.

 

Default of the Developer:

As per UAE Civil Law, the buyer can also terminate the contract if the developer fails to submit or deliver the property on time. However, if the buyer doubts that the estimated time of delivery of the property is not fixed, the buyer can claim compensation accordingly from the court. Moreover, the Force Majeure can also be one of the grounds for the cancellation and payment issue. Under Law 19 0f 2017, a buyer has the right to refer to courts or arbitration bodies in case he deems that the developer’s action to terminate the SPA was abusive or unjustified. To grant broader protection to buyers in off-plan projects, the Law has a valid retroactive effect, which is an exception from the Constitutional principle of non-retroactivity of laws. Consequently, Law 19 of 2017 can be seen as a progressive tool for safeguarding the off plan sale and purchase market in the UAE. The transactions benefit from predictability, transparency, and the Law allows developers to secure their projects cash flow without needing to recourse to litigation. This development is expected to bring more certainty and stability for the completion deadlines of real estate projects.It is interesting to note that, as per the new Law, developers will be prohibited from collecting registration fees from investors; instead, they will be allowed to take administrative fees, which are approved by the Dubai Municipal Authority.

 

RERA cancels project:

Under the new Law no 19 0f 2017, if the project is cancelled by a resolution from Rera (Real Estate Regulatory Authority), the developer should give back all payments done by the buyer, regarding Escrow Accounts for Real Estate Development in Dubai.

 

New Judicial Committee for Cancelled projects:

Issued on 23rd July 2013, the New Decree provided for the formation of a special judicial committee (the New Judicial Committee) to regulate the cases in which the developer of an officially-cancelled construction project has failed to refund the money of the buyer or any similar issue arising out of the cancelled project (As per Article 2A). The New Judiciary Committee’s main feature is the power to liquidate projects cancelled by RERA and take into consideration and further decide such issues and claims that may arise between the real estate developers and the purchasers, whose subject matter or cause is cancelled real estate projects. Moreover, the New Judicial committee can consider all executive proceedings, complaints, and grievances whose subject matter or cause is cancelled real estate projects. Article 3 of the New Decree establishes that no court in Dubai will be allowed to hear matters concerning a cancelled real estate project. All the running cases should be referred to the New Judicial Committee. This, in turn, establishes the New Judiciary Committee’s exclusive authority concerning cancelled real estate projects. Hence, judgments, orders, and resolutions issued by the New Judicial Committee shall be final and binding, not subject to appeal and enforced by the Execution Section of the Dubai Courts (Article 5).

 

Amicable settlement for off-plan Disputes:

Investors and developers can also amicably settle the disputes in arrears or any other breach of contract. Such settlement can relieve some part of the financial pressures by offering a grace period to pay the arrears and ensuring the investor will still be able to purchase the property.