In 2010, Dubai’s Real Estate Regulatory Agency’s (Rera) indicated that the agency was commencing a review programme of Dubai’s real estate developments, with a view to establishing their respective viabilities and likelihood of reaching completion.
According to a government of Dubai’s recent bond prospectus posted on the London Stock Exchange, Rera, the regulatory arm of Dubai Land Department, has cancelled 217 property projects as of May 31, 2011.
Now some developers are beginning to challenge the cancellations.
Where does that the project you have invested in?
What are the terms and conditions for cancellation?
Afridi & Angell, a top regional law firm, has put together a ready reckoner below here:
What is the ultimate purpose of this programme?
In early 2010, Decree 6 of 2010 (“Decree 6”) came into force.
Decree 6 provides that, after Rera has considered a technical report on a development, Rera has the power to cancel that development.
Through the cancellation of projects, the supply of completed units into the marketplace can be more accurately controlled, something that has attractions to Dubai’s troubled real estate market.
We are aware that Rera has issued cancellation notices to a number of projects, of many differing types and affected by a variety of circumstances.
Our lawyers have been involved in advising and responding to all aspects of the cancellation process.
Given the short timescales that are involved in cancellation, it is crucial for all parties to ensure that prompt and effective action is taken.
In what circumstances is Rera able to exercise that right to cancel a development?
Decree 6 details a number of differing scenarios in which Rera may exercise its power.
The scenario that has garnered the most publicity is, perhaps understandably, where the developer has failed (without an acceptable excuse) to commence construction.
Rera may cancel a development where there has been a breach by the developer of its obligations under Dubai’s Escrow Law No. 8 of 2007 or where the developer is bankrupt.
It is our experience that Rera will often rely upon a variety of different reasons for cancellation, sometimes referring to more general justifications such as “the developer is not serious in carrying out the project”.
How does Rera exercise the right to cancel and is the developer bound by their decision?
Rera must notify the developer in writing of the decision to terminate. Under Decree 6, the developer then has 7 working days, commencing from the date on which the developer was notified of the cancellation, to challenge Rera’s decision.
If the developer decides to challenge the cancellation, this must be done in writing.
The developer must clearly state the reasons why it believes the cancellation is invalid.
The developer’s challenge to cancellation should include copies of all relevant correspondence with Rera, the Land Department, the master developer, and other third parties, in support of the developer’s position.
For example, the developer may have (a) opened the escrow account and deposited all monies into that account, (b) paid the master developer the purchase price for the plot, and (c) obtained all necessary consents and licences in order to commence construction, but may be prevented from commencing/completing construction due to some factor beyond its control.
If the developer makes a timely challenge to the decision to cancel, what is the next step?
Decree 6 states that Rera is to consider the challenge by the developer and must issue its decision within 7 working days of the date of submission of the challenge.
Given the number of cancellation notices that have been issued by Rera, it remains to be seen whether Rera will adhere to this “seven” working day deadline.
We anticipates that in certain circumstances developers may try to exploit any failure by Rera to keep to the deadline.
In the event that Rera does accept the challenge, the cancellation will be overturned subject to the developer complying with such conditions as may be specified by Rera.
The developer is obliged to commit in writing to complying with the conditions.
Alternatively, if Rera rejects the challenge and confirms the cancellation, the Rera then moves to carry out the cancellation procedure detailed in Decree 6.
What is the Decree 6 cancellation procedure that Rera is obliged to follow?
* Rera must prepare a technical report explaining the reasons for cancellation.
* Rera must notify the developer in writing either by registered post or email of the cancellation decision.
* Rera must (at the expense of the developer) appoint an accredited auditor with the task of (a) assessing the financial position of the project, (b) verifying the monies that have been paid to the developer or credited to the escrow account and (c) identifying the monies that have been disposed by the developer.
* Rera must ask the escrow account trustee (or the developer, in respect of any monies that have been withdrawn from the escrow account) to repay the unit purchasers the sums deposited in the account (or withdrawn by the developer from the account). This repayment must take place within 14 days of the date of cancellation.
Prompt and efficient legal advice will assist developers in scrutinising whether the necessary procedure has been followed in all respects.
The developer may seek to make a legal challenge to the cancellation where it perceives Rera has gone beyond its powers or breached its obligations.
Cancellation of a project is one thing, but what about the unit purchasers? How are they affected?
As mentioned above, within 14 days of the date of the cancellation the escrow account trustee (or the developer, in respect of any monies that have been withdrawn from the escrow account) must repay the unit purchasers the sums deposited in the account (or withdrawn by the developer from the account).
If the funds in the escrow account are insufficient to refund the unit purchasers, the developer is bound to repay the unit purchasers from its own pocket.
This must take place within 60 days of Rera’s cancellation decision (although Rera may extend that timeperiod).
If the developer fails to comply with this obligation, Rera may take “whatever procedures necessary to protect purchasers’ rights, including referring the matter to the competent judicial authorities”.
Developers will be keen to take legal advice with a view to reducing the risk of potential liability in the event that they become involved in a purported project cancellation.
The authors of the article are Shahram Safai, Partner and Head of Real Estate Team; Andrew Yule, Associate; and Arsalan Shaikh, Associate, Afridi & Angell, a regional law firm.