Now do due diligence to avoid bounced cheques

UAE developers need to carry out a level of due diligence at the outset and consider alternative means of securing payments from investors so to reduce the number of bounced cheques cases, according to Clyde and Co.

“As such, it is likely we will see the Dubai market moving towards a more sophisticated environment for real estate development transactions.  Other countries in the region may adopt a similar practice, or will continue to look generally at ways of reducing the number of bounced cheques,” the legal consultancy said in its latest legal update on the issue of post dated cheques (PDCs).

In the article titled, “Are we seeing an end to post dated cheques?”,, it said that in many other jurisdictions, it is common practice for developers to carry out credit checks in order to limit their exposure to buyers who are not credit-worthy.
 
For individuals in those jurisdictions, a variety of companies can perform credit checks and issue a credit rating based on pastrecords and data.
 
For companies, company searches can be carried out;research into an investor's trading history and filing of accounts can be undertaken.
 
The introduction of Emcredit in Dubai has gone some way tomaking credit information available to lenders and members.

Clyde and Co, however, believes it is “unlikely to see an end to the practice of collecting PDCs in the near future, particularly by banks, and landlords of short terms leases.
 
However, it is important that both issuers and recipients of such cheques are clear on the issues surrounding them.”

The creation of the committee under Decree 56 of 2009 will go some way towards reducing the large volume of criminal cases before the Dubai Courts involving bounced cheques issued in connection with property transactions, it added.

The decree, which came into force on 1 November 2009, established a special judicial committee ("the Committee") to resolve all complaints involving bounced cheques issued to developers in connection with real estate transactions in Dubai, with an obligation on the police, and any other judicial investigation authority, to refer all complaints relating to such cheques to the committee.

Judge Fahd Rashid Al Shamsi, a member of the special judicial committee established to address issues related to real estate transactions, told Emirates 24/7 that not a single person has been sent to jail for a bounced property cheque since thesetting up of the committee.

The committee strives to promptly reach an amicable settlement while making efforts to preserve the rights of both parties (developers and investors) involved in the dispute.

According to Clyde & Co, the practice of using PDCs as security for payments is not unique to Dubai and the UAE, and PDCs are frequently used throughout the Gulf Cooperation Council.

Recent changes to law in Qatar (which reversed a 2006 law to remove legal protection of PDCs by May 2010) show that PDCs are still in favour and likely to continue to be used for the foreseeable future.

Saudi Arabia has recently introduced a law to increase penalties on those who issue cheques and fail to honour them, in an attempt to uphold their use, but reduce the increasing number of defaults.
 

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