This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.
Summary and implications
In the second of two articles looking at recent changes to the legal and regulatory framework relating to the real estate sector in Abu Dhabi, Ian Arnott looks at some of the key provisions of the recently issued Abu Dhabi Law No.3 of 2015 Concerning the Regulation of the Real Estate Sector in the Emirate of Abu Dhabi (the New Law).
Following a period of wait and anticipation of almost Beckettian proportions, the New Law has finally arrived. It was published in the Abu Dhabi Official Gazette on 30 June 2015 and comes into force on 1 January 2016 (the Effective Date). It aims to provide much greater certainty on issues such as title registration and strata ownership. This will hopefully boost investor confidence, particularly in the Abu Dhabi “Investment Areas”. It includes provisions relating to:
- the regulation of the real estate industry by the Department of Municipal Affairs (the DMA);
- the licensing of developers and real estate professionals;
- the creation of a new register at the DMA where developers must be registered before commencing and development activities, as well as an “Interim Real Estate Register”, similar to that already established in Dubai, where purchasers’ interests in property bought off-plan can be registered prior to project completion;
- the introduction of mandatory escrow accounts for developers into which the proceeds from the off-plan sale of units or financing must be deposited and used solely in relation to the relevant project;
- delays in commencement and delivery, and non-completion and cancellation, of projects;
- termination of the off-plan unit sale and purchase agreement (Unit SPA);
- strata ownership; and
- penalties for non-compliance.
This law does not appear to have any application to developments located within the Abu Dhabi Global Market (ADGM). ADGM has its own distinct, separate real estate laws governing issues such as registration of property interests, escrow accounts, mortgages and strata ownership. The ADGM Application of English Law Regulations 2015 are also clear that onshore Abu Dhabi law is only applicable within the ADGM free-zone to the extent that the relevant onshore law makes specific reference to ADGM (the New Law currently does not).
Licensing and regulation
The DMA will be responsible for regulating the real estate sector in what shall be a wide ranging role. It will be mandatory for all developers, brokers, surveyors, valuers, auctioneers and co-owners’ association managers (Licensees) to be licensed by the DMA before carrying out any business activities. Such licences will be renewable on an annual basis and may require Licensees to carry out training programmes as a condition of renewal. Licensees will also be subject to a code of conduct and professional ethics to be drawn up by the DMA as well as other prescribed obligations under the New Law. These steps are welcome in terms of raising industry standards and practices.
Those already carrying out the real estate related activities referred to above as at the Effective Date have 90 days in which to comply with the licensing requirements (although this is subject to the DMA extending this timeframe for particular classes of Licensee). The exception to this are developers that have projects that are completed or under construction as at the Effective Date. Here the timeframe for compliance is 12 months (which is also subject to extension at the DMA’s discretion).
The “Real Estate Development Register” and the “Interim Real Estate Register”
The New Law establishes a Real Estate Development Register on which developers must be registered before commencing work or selling any units in the relevant project. Development plans and other key documents, information and approvals relating to the relevant project must also be filed on the register.
There are other requirements that a developer selling units off-plan must satisfy before it starts its sales and marketing process. These include:
- obtaining all other requisite competent authority consents;
- having proof of possession of, and the requisite proprietary or contractual rights allowing it to construct the project on, the relevant piece of land;
- opening an escrow account (discussed below);
- obtaining a separate approval from the DMA to commence marketing the project; and
- in what is a consumer protection measure already implemented in Dubai, obtaining the DMA’s approval of the developer’s disclosure statement to be provided to purchasers setting out key information relating to the development (a standard form of disclosure statement is to be issued by the DMA in due course).
Similar to the Oqood registration system already in place in Dubai, the New Law introduces an Interim Real Estate Register where developers are obliged to register the details of units sold off-plan in order for the transaction to be legally effective and binding. Units that have already been sold off-plan must be registered within six months following the Effective Date (subject to such timeframe being extended). The requisite timeframe for registration of units sold off-plan following the Effective Date is not stated, although this may be clarified in secondary legislation. If a developer fails or delays in complying with these obligations, it may be subject to a fine and there is scope for the purchaser to effect the registration itself at the developer’s cost.
The New Law also describes a procedure whereby, following completion of the relevant project, the interest registered on the Interim Real Estate Register shall be converted into a fully registered title on the main land registry at Abu Dhabi Municipality in favour of the purchaser. All of which is very positive in terms of consumer protection and for providing certainty for investors and end users (subject to such measures being practically implemented).
In line with other jurisdictions in the region, the New Law now makes it mandatory for developers to apply to the DMA to establish an escrow account into which all monies paid to the developer by purchasers of units and lenders must be paid. Separate escrow accounts must be established for each separate development and, where projects are to be staged, separate escrow accounts must be established for each distinct phase. The monies in the escrow account are then ring-fenced so that they may only be exclusively used in relation to the particular development, or phase of development, for which it has been set up.
A developer must enter into a standard form of escrow agreement, to be issued in the future by the DMA, with a DMA accredited “account trustee”. The account trustee has certain reporting obligations to the DMA and its role shall be monitored by the DMA. It shall not be permitted to release any monies to the developer unless the project is at least 20 per cent completed. This means that a developer will not be able to entirely finance the development through the proceeds of off-plan sales, which is a positive restriction.
As well as new projects, the escrow requirements will also apply to those projects under construction as at the Effective Date unless the project is 70 per cent or more completed at such time. The methodology of calculating the percentage of development completion will be set out in secondary legislation.
Following the completion of the project, the account trustee is required to retain at least five per cent of the total value of the project for at least a year in order to cover the costs of any latent defects. A developer may request the withdrawal of this retention amount prior to the lapse of one year following completion if it can provide a suitable bank guarantee in its place.
Project delays, non-completion and cancellation
The New Law provides that, where a developer is in breach of its contractual obligations in commencing construction of a particular development, purchasers of units in such development (comprising not less than five per cent of the total number of purchasers) may submit a complaint to the DMA. Upon consideration of such complaint and the facts of the matter, the DMA then has the power to cancel the project and distribute the monies held in escrow to the purchasers.
The DMA also has the power to impose fines on developers where the relevant project is delayed for more than six months beyond the anticipated completion date, as previously notified to the DMA, and the developer cannot provide the DMA with an acceptable reason for such delay.
It should be noted that these provisions in the New Law relating to late commencement or delivery do not apply to projects that are 50 per cent or more completed as at the Effective Date.
Similarly, if a project is not completed by a developer (no specific timeframes are mentioned) then the DMA and the account trustee will look at ways to resurrect the project through a lender or another developer stepping in to complete it. If such measures prove unsuccessful (after a six-month period following the DMA providing the account trustee with an approval to preserve the position of investors in relation to the escrow account) then the funds remaining in the escrow account shall be distributed by the account trustee in a prescribed order of priority.
Termination of the Unit SPA and some mandatory provisions relating to off-plan sales
The New Law introduces some mandatory provisions that, seemingly, developers will not be able to contract out of through their form of Unit SPA.
The most concerning of these to developers is a non-exhaustive list of events constituting a “fundamental breach” or that are of “substantial prejudice” (depending on the translation that you read). These appear to be circumstances that can be relied upon by purchasers to terminate the Unit SPA even if termination in such circumstances is not expressly provided for in the relevant Unit SPA. The list includes the developer:
- not providing the purchaser with its copy of the executed Unit SPA;
- not linking instalments of the purchase price to construction milestones;
- substantially changing the specifications contained in the Unit SPA; and
- delivering a unit that is unusable due to fundamental defects in construction.
However, the DMA has the power to consider any other events as grounds for termination. Hopefully, secondary legislation will provide further clarity on this issue.
Other mandatory provisions include:
- the developer being prohibited from collecting registration or transfer fees from purchasers. This will seemingly put an end to developers charging the industry standard two per cent fee that is usually levied upon re-sale or transfer. In the future, developers will be limited to only charging for administrative expenses up to a maximum to be determined by the prescribed rules on adjustments to the purchase price and potential termination of the Unit SPA in the event that the floor area of the actually built unit is greater or less than that recorded in the “Interim Real Estate Register”;
- express decennial (10-year) liability for developers relating to fundamental defects that threaten the structure and safety of a building. This is the same as the position under the Dubai strata laws which also diverge from the UAE Civil Code where decennial liability only applies to contractors and architects; and
- a one-year defects liability period for developers.
The New Law also provides some welcome clarity regarding the financing of off-plan unit purchases.
The contractual right of a purchaser as registered in the Interim Real Estate Register may be mortgaged provided that the loan is used purely for the purchase of the unit and the loan is paid into the developer’s escrow account. This may make the practice of the lender taking a conditional assignment of the purchaser’s contractual rights under the Unit SPA an outdated and unnecessary form of security.
A developer may not mortgage a plot unless the financing is used solely for the construction of the development to be built upon it and is placed directly into the escrow account. The developer also has an obligation to notify the purchaser that the plot is mortgaged with details to be expressly included in the Unit SPA. The developer, with the approval of the lender, must also pledge to release its mortgage over the unit once the purchaser has paid the full purchase price.
One of the key aspects of the New Law is the introduction of long awaited strata laws to the Abu Dhabi market. Despite the fact that many developments in the Emirate are already contractually structured in accordance with a strata model of ownership, there has not been, until now, a proper underlying legal framework.
The New Law provides for developments to be subdivided both horizontally and vertically into units and sold to multiple purchasers, with the common areas of such developments owned communally in undivided shares. As with the existing strata laws in both Dubai and ADGM, the New Law also allows for so-called “volumetric subdivision”. This is a form of stratification suitable for mixed-use developments that allows for certain use components within the overall development (e.g. a hotel) to be held in single ownership and then subsequently sold to an investor separately with its own distinct title.
The New Law also provides for co-owners’ associations, comprised of the owners of the multiple units within a development, to be established with their own legal personality to own and manage the common areas. This will allow such co-owners’ associations to take legal action in their own right as well as carry out other essential activities such as opening up bank accounts and entering into contracts with third parties. The DMA shall, in due course, issue a standard form of constitution to be adopted by all such co-owners’ associations.
The non-payment of service charges has historically been a problematic issue in the region. It is therefore of note that the New Law states that co-owners’ associations have a statutory lien over each unit in the development in the event of unpaid service charges. This is similar to the position under the Dubai strata laws. However, the New Law goes further in expressly stating that such lien entitles the co-owners’ association to apply to the court for an order to sell the relevant unit to satisfy the service charge arrears. This gives some teeth to co-owners’ associations on this issue.
However, there is a significant caveat at the heart of the New Law that allows the chairman of the DMA to issue a resolution under which the developer of a project, or any other party, may step in to the shoes of the co-owners’ association by taking over all of its powers and functions. This has the potential to leave the co-owners’ association with a role that is limited to merely expressing collective opinions which may or may not be listened to or acted upon. Depending on your viewpoint, this is either:
- a position that is far removed from the original spirit and intention of this model of ownership, potentially depriving owners of the right to actively manage and operate their own jointly owned property; or
- a reality check acknowledging the limitations of the model in a local context and the historical problems with establishing co-owners’ associations that have been experienced throughout the region.
It may also just be a safeguard mechanism to allow the DMA to step in where a particular co-owners’ association is having difficulty in mobilising and establishing itself.
The New Law sets out the following penalties for non-compliance:
- Licensees carrying out their activities without a licence: imprisonment up to six months and a fine of between AED50,000 and AED200,000.
- Real estate developers that carry out development activities without being licensed or engaging in certain fraudulent behaviour: a fine of between AED100,000 and AED2,000,000.
The DMA also has powers to strip Licensees and real estate developers of their licences in the event of them violating the law or where there is evidence of other wrongdoing.
The New Law is undoubtedly a great step forward for the Abu Dhabi real estate sector. However, as always, the proof of the pudding will be in its practical implementation.