As contemplated by the Dubai Real Estate Alert circulated by Clyde & Co on April 15, 2009, Law No9 of 2009, amending Article 11 of Law No13 of 2008 has now been published in the Official Gazette and took effect from April, 30, 2009. We understand that executive regulations will also follow to give guidance on the interpretation of Laws No9 and No13.
Article 11 (as amended) provides a sliding scale of amounts to be forfeited by defaulting purchasers, based on the levels of construction achieved by the developer. The developer is only entitled to enforce the termination and forfeiture provisions of Article 11 once it has notified the Land Department of the purchaser's default and the Land Department has served the defaulting purchaser with a notice to remedy the breach within 30 days.
An amendment to Article 11 has been highly anticipated by developers and purchasers alike in Dubai who have been uncertain in relation to: i) whether 30 per cent of the total price or 30 per cent of the amounts paid would be forfeited in the case of purchaser default; and ii) whether Article 11 applied to sale agreements entered into before August 31, 2008, the date Law No13 was published.
Law No9 has clarified the amounts purchasers must forfeit in the case of default, it has clarified that developers may not terminate sale agreements and claim forfeiture amounts without the Land Department's involvement and importantly it has confirmed that Article 11 will apply to terminations of sale agreements entered into prior to the date of Law No9. However, there are a number of other questions arising from Law No9, such as:
i) Does Article 11 apply to the sale of land, as well as off-plan units?
Article 11 (as amended) states that the sale of land not made "off-plan" will not be caught by Law No9 and will continue to be governed by the provisions of the agreement in place. This implies that the "off-plan" sale of land is caught by Law No9. What constitutes an off-plan sale of land is not defined in Law No9. It could be that it relates to plots of land that are sold on a payment schedule to sub-developers but do not benefit from infrastructure or access routes at the time of the sale. It is not clear how it would be possible to assess the level of construction reached in the case of a land sale. We think the answer is that the mandatory default procedure and registration requirements will apply, but that forfeiture amounts will be determined by the terms of the agreement between the parties. We await further clarification on this.
ii) How are the levels of construction measured, and who measures them?
Commencement of construction is defined in Article 11 (as amended) to mean "handover of the site by the developer to a contractor and commencement of construction works in accordance with the designs approved by the relevant authorities". If construction has commenced but less than 60 per cent of the project has completed, developers are entitled to retain 25 per cent of the purchase price. Where construction has not commenced (for reasons beyond the control of the developer) the developer may retain 30 per cent of all monies paid.
In order to avoid having to repay 70 per cent of the amount received to purchasers, developers will be keen to argue that construction has commenced and may point to very minor works as evidence that this has happened. There is potential for dispute here and clear and specific guidelines are needed as to what works the developer must have undertaken to claim construction has commenced. It is also important to confirm who determines the levels of construction reached or who has the final say. Ideally, an independent expert would be appointed to determine issues relating to the levels of construction completed. We anticipate that this will be dealt with by way of executive regulation.
The above comments also apply to how a developer or purchaser determines whether other construction milestones have been reached. For example, there is a significant difference in amounts lost by the purchaser if the developer is able to claim 80 per cent construction has completed, as opposed to 79 per cent. In the later case, the purchaser will forfeit 40 per cent of the purchase price whereas in the former, the developer may retain all monies paid and request the purchaser to settle the remaining amount of the purchase price.
iii) Who is responsible for paying the pre-registration fees and when are they payable?
There has been some uncertainty surrounding the payment of fees to register sale agreements on the interim property register. Law No13 specified that the developer must register all sales on the interim property register within 60 days from the date the law was published in the Government Gazette. However, developers and purchasers have been relying on further guidance from the Land Department to establish what registration fees are payable and who is responsible for paying them. It is currently thought that both the developer and the purchaser must pay a fee equivalent to one per cent of the purchase price to register a sales contract on interim register, unless there are explicit provisions in the sale agreement to the contrary. This fee is effectively an advanced payment of the two per cent registration fee that, prior to Law No13, was payable to the Land Department to effect registration of title on completion.
iv) Does Law No9 apply to notices of termination served prior to April 30, 2009?
Law No9 confirms that the new Article 11 will apply to all sale agreements entered into prior to April 30, 2009. It does not go as far as to confirm whether the new Article 11 applies to defaults that occurred or notices that were served prior to April 30, 2009. This will be of significance to a large number of purchasers (particularly those who signed sale agreements before Law No13 came into force) who have already been served with a notice of default or notice of termination from a developer who has not notified the Land Department.
v) What rights of appeal does the purchaser have?
Notably, Law No9 does not deal with the situation where a purchaser wishes to object to a notice of default or believes that the developer has wrongly terminated a sale agreement. Equally, the ability of a developer to avoid sending a notice of default to a purchaser until a more advanced stage of construction is reached is not clear.
vi) Is a developer entitled to enforce the terms of the sale agreement?
Law No9 does not give a developer the option to seek to enforce the terms of the existing sale agreement. Cases where the developer does not wish to terminate the agreement but wishes to force the purchaser to perform its obligations under the agreement are not dealt with in the amendment. In conclusion, whilst Law No9 provides much anticipated clarification to the procedures developers must follow when purchasers are in default, it also raises a number of points relating to the implementation of the changes. We expect that these points will be addressed by executive regulation and guidelines issued by Rera and the Land Department in due course.
- The author is an Associate (Qualified in England & Wales) Real Estate Group of Clyde & Co. The opinions expressed are her own
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