Developers hang on to defaulters initial payments

Trend is to cancel agreements rather than risk monies paid

Developers in Dubai are no longer moving court against defaulters but are cancelling their sales and purchase agreements (SPAs) instead, retaining whatever monies have been paid till the time of default.

“We find that developers are generally looking to cancel sale and purchase agreements (SPA) using the provisions of Decree No 6 of 2010 with the assistance of the Land Department of Dubai, rather than take investors to court,” Brent Baldwin, Associate, Hadef & Partners, told this website.

“Decree No 6 allows the developer to retain certain penalties in the case of a purchaser default and our observation of the market is that developers will look to use the remedies in Decree No 6 in preference to going to court, as it is a much faster process and avoids the need to incur litigation costs.”

Mohammed Kawasmi, Senior Associate, Property Department, Al Tamimi & Company, says: “We have many cases where the developers canceled the SPAs for defaulters as per the procedures mentioned in Decree No 6. The procedure is available for developers only and not purchasers. The only remedy for a purchaser is to refer this matter to court or arbitration if they want to sue the developer.” 

With the exception of a few cases, Ludmila Yamalova, Partner, Al Sayyah Advocates, says developers have not been pursuing investors in court for outstanding payments. 

She believes one of the main reasons for this is that developers themselves may be in default of contractual obligations.

Particularly where construction has been significantly delayed, escrow funds mismanaged and regulatory registration requirements ignored. 

“In such circumstances, under the UAE law, if the developer defaults first, the investor has the right to suspend his/her obligations to the developer. Therefore, before developers decide to sue investors in court for outstanding payments, they will first have to assess their legal positions to ensure that they have a legitimate claim,” Yamalova says.

KK Sarachandra Bose, Corporate Partner, Commercial & Contract Lawyer, Dar Al-Adalah, says that not many developers are taking investors to court and are presently terminating agreements instead.

“They are also waiting to see if they can recover the dues by selling the properties in auction,” he adds.

Kawasmi of Al Tamimi & Company says the law (Decree No 6) specifies the amount that can be retained by the developer, adding, “The developer must follow the law to terminate any SPA otherwise the termination will be unlawful.”

Baldwin adds: “The law requires the developer to refund to a defaulting purchaser any surplus amounts over and above the penalties set out by it. However, a purchaser can challenge the developer's use of Decree No 6 by going to court.”

What Decree No 6 of 2010 says:
Law No 13 of 2008 as amended by Law No 9 of 2009 and pursuant to the Executive Council Decision No 6 of 2010, if the purchaser is in default and did not rectify his default after sending him a notice from the developer, the developer has the right to approach the land department and request the termination of the SPA and in this case the land department will send a 30 days notice to the purchaser to rectify his default, if not the land department will cancel the SPA from the Interim Real Estate Register and the developer can retain an amount of the purchase price based on the percentage of completion of the project, i.e. if the project is 80 per cent or more completed then the developer can retain the full amount paid and claim for the balance of the purchase price or terminate the SPA and retain 40 per cent of the purchase price.

If the project is 60 per cent or more completed then the developer can retain 40 per cent of the purchase price.

If the project is less than 60 per cent completion then the developer can retain 25 per cent of the purchase price.
If the developer did not commence the project for reasons beyond his control then the developer can retain 30 per cent of the amount paid.

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