Growing demand for good properties in Dubai is resulting in many owners backing out of deals, even after signing a Memorandum of Understanding (MoU), which has legal implications in place.
“I signed a deal for a villa in Springs. We signed the MoU and I paid the 10 per cent deposit. After a few days the agent called me and said that the landlord doesn’t want to sell the property as he thinks he’s giving it away at a lesser price than the market rate.
“The agent had not taken a similar deposit from the seller, something which was revealed to me later. I was told it’s a hassle to chase things legally. They returned my money and that was it,” said a potential buyer in the Springs area.
This practice goes beyond ‘gazumping’, where the owner backs out on the deal after verbally agreeing to a price.
Now, sellers are backing out of deals after putting pen to paper and this has increased since the beginning of this year as they believe they may get more on their property.
However, there are legal rights of the buyer and if she/he wishes, action can be taken against the seller for not respecting a MoU.
“Yes, a seller can be penalised for backing out of a deal in favour of a higher price, but only if the contract provides a penalty clause, which the buyer is prepared to act upon.
“Additionally, barring a penalty clause existing in the MoU, the buyer has a claim in court against such action by a seller under contract law but once again must bring an action against the seller in court and then buyer can only sue for damages,” Tom Bunker, Investment Sales Consultant, Head Office, Better Homes told Emirates 24|7.
“The payment of the deposit and the binding effect of the MOU are subject to agreement by the seller and buyer,” Mohammed Kawasmi, Head of Property - Northern Emirates, Al Tamimi & Company told this website.
Elaborating on Article 148 of the Civil Code (which governs a MoU), he elaborates: “[Firstly, the] payment of earnest money shall be regarded as evidence that the contract has become final and irrevocable unless the agreement or custom are to the contrary.
[Secondly,] if the two parties agree that the earnest money shall be forfeited in the event of reneging, each of them shall have the right to renege, and if the person who has paid the money reneges he shall lose it, and if the person receiving it reneges, he shall pay over double that amount”.
“There is no law that prevents the seller from paying compensation to the buyer if he cancels the deal.
“On the contrary, the law allows for the parties to agree in advance on the liquidated damages pursuant to Article 390 of the Civil Code which provides the contracting parties may fix the amount of compensation in advance by making a provision therefore in the contract or in a subsequent agreement, subject to the provisions of the law.
“[Secondly],the judge may in all cases, upon the application of either of the parties, vary such agreement so as to make the compensation equal to the loss, and any agreement to the contrary shall be void,” he added.
“We have provisions that penalise both the buyer or the seller should one of them default, and a buyer should insist on such provisions in his MoU.
"In practice it is easier to penalise a buyer as he puts down a deposit and you can take the funds from there and pay these to the seller.
"However, even that cannot be done without involving RERA because the brokerage company does not want to be caught in the middle of a dispute between buyer and seller.
It is therefore better to have an arbitration clause in the MoU, say using the DIFC Arbitration procedure ,as the award would be made quickly against the seller if he were to default and would be enforceable under Dubai Law or any jurisdiction around the world which has signed the New York Convention.
"In addition the buyer would be able to get his legal costs covered if he won the case so it would be quite an expensive affair for the seller in that scenario if he did not pay up for defaulting,” explained Charles Neil, Chief Executive Officer at Landmark
The Al Tamimi expert recommends to get the land department involved right earnest to avoid friction between the seller and the buyer. “In order for the purchaser to secure his interest, the sale and purchase agreement must be registered with the land department even if the purchase price is not paid in full.
“Dubai Land Department allows for registration of the sale contract as ‘deferred sale’ and upon making the final payment the purchaser can obtain the title deed,” he explained.
Moreover, the buyer, before entering into any kind of agreement should stress that the seller also put in a similar amount (10 percent of the property price) with the broker agency to safeguard his interest.
However, this is not a common practice and the sellers often bypass this.
“A buyer does have to place a deposit so as to secure a deal but with many real estate agencies, the MoU signed between the parties also has a clause stating that seller is to lodge a security cheque in escrow of the same amount in the event seller decides to back out.
“This sounds simple on paper, but sellers rarely agree to this,” said Bunker.
In the case of a dispute, the process of taking a defaulting seller to RERA and/or court can be long drawn and painful.
“Similar to any property case, it is expected to take around one year for a judgment from the first court and another year for the judgments from appeal and Cassation Court,” said Kawasmi of Al Tamimi.
“The process of pursuing a seller in court is not a simple one.
“RERA has no jurisdiction here. RERA will simply advise the parties to settle the matter in court and this can take several months. The best measures a buyer can take against a morally bankrupt seller is to ensure that seller has deposit cheques in place as well,” added Bunker.