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Off Plan Real Estate Dubai - The Risks, Rules and Due Diligence

Off Plan Real Estate Dubai - The Risks, Rules and Due Diligence

04 Aug 2022
Off Plan Real Estate Dubai - The Risks, Rules and Due Diligence

Introduction

Buying off-plan real estate refers to buying unconstructed property, during the planning phase or in the early stages of construction, usually directly from a developer, or an authorised real estate brokerage.  In this article, we will discuss the rules, risks, and due diligence to be considered when purchasing off plan in Dubai.

The greatest incentive for purchasing off-plan is the potential for capital growth and return on investment; such properties are typically sold at a discount to raise capital during the planning and build stage of the project. When purchasing directly from a developer, a buyer usually needs 10%-20% of the sale price upfront when signing the Sale and Purchase Agreement (SPA), the remainder is usually spread across flexible payment plans which often include post-handover payments allowing buyers to maximize their return on investment. These distinguishing features make off-plan property an appealing investment opportunity, with the expectation that once delivered, the property will be worth more than the price paid; resulting in significant financial returns for the buyer. However, there is, of course, no guarantee that your property will have increased in value when you wish or need to sell the property.

Off-plan property include villas, apartment developments, and commercial buildings. Whether you buy off plan or a pre-built home, there are always risks involved, and any return on investment is at the mercy of the property market. However, buying off plan can be a potentially risky business, as buyers have made a substantial deposit and are contractually obligated to continue making payments for several years before realising their asset.

A particular point of concern for an off-plan buyer, is delayed construction and extended completion dates. Significant delays can push out handover dates by years, and this is not an unusual occurrence in large scale construction. If you bought the property to live in, a delayed handover may necessitate additional expenditure on housing, and as an investment property, such delays will undoubtedly diminish return on investment and delay your ability to generate rental income.

In extreme cases construction delays can lead to the freezing or the cancellation of projects due to cash flow issues for the developer. In these unfortunate circumstances there is often little recourse available to buyers to recoup their investments, particularly where the developers themselves have become insolvent. It can be the case that a cancelled project is transferred to an alternative developer with a view to being completed, but this can also cause further delays and financial implications for the buyer.

A change to your own financial position as a buyer is also not to be overlooked. As previously mentioned, off plan purchasers take on considerable contractual obligations, which do not lend favorably to economic downturn. Where a buyer may need to reduce liabilities, it is important to note that some off plan SPA’s may stipulate that the property cannot be resold before a certain percentage of the purchase price has been paid. Even where that threshold has been met off plan properties, as an illiquid asset, can be difficult to sell and could force a buyer into a distress sale, where they must sell their property at a lower price than the market rate. The implications of defaulting on off plan payment plans will be discussed in more detail below.

When it comes to the law, the Dubai Land Department (the ‘’DLD’’) and the Real Estate Regulatory Agency (‘’RERA’’) play a crucial role in regulating Dubai's off plan real estate market and the most significant legislation includes Law No. (13) of 2008 Regulating the Interim Real Property Register in the Emirate of Dubai the (the ‘’Law’’), its amendments, and Law No. (8) of 2007 Concerning Escrow Accounts for Real Property Development in the Emirate of Dubai (The ‘’Law Concerning Escrow Accounts’’).

RERA has taken various measures to alleviate some of the risks described above. According to the Law, a developer cannot sell a property off plan until they acquire possession of the land on which it will be built. In accordance with the Law Concerning Escrow Accounts, an escrow account must be opened for each development in which all payments made by off-plan purchasers or by financiers of the project must be deposited and managed by an external escrow agent.

No attachment may be imposed on the payments deposited into this account for the benefit of the developers’ creditors. The escrow agent is also required to retain 5% percent of the total value of each account once the developer obtains the completion certificate for the project, this money can only be released one year from the registration of the units in the name of purchasers.

Dubai Law No. (19) of 2017 (the ‘’New Law’’) which amended Article 11 of the Law addressed breaches of contract in the event of a buyer's default and clearly outlined the recourse available to developers without requiring the developer to obtain a court order. 

Where a buyer fails to meet their contractual obligations, for whatever reason and are unable to reach an amicable settlement with the developer, the developer can report the position to the DLD who will then review the complaint and usually issue a document stating that the developer has fulfilled his obligations and identify to what percentage the property has been completed.

Based on that document, the following will be applicable -

Where construction is more than 80% completed, developers are entitled to continue the SPA and collect the full purchase price agreed. This is achieved by retaining the installments previously paid and requesting that the DLD sell the property at public auction to collect the balance.

Developers can also terminate the SPA, however in this case they are entitled to 40% of the purchase price only, and where a balance remains, this must be refunded to the buyer within one year from date of termination or within sixty days from the re-sale of the property to another buyer, whichever occurs first.

Where construction is between 60-80% completed, developers are entitled to terminate the sale agreement. Again, where a balance remains, this must be refunded to the buyer within one year from the date of termination or within sixty days from the re-sale of the property to another buyer, whichever occurs first.

Where construction is below 60% the developer is entitled to terminate the SPA and to retain no more than 25% of the purchase price. Where a balance remains, this must be refunded to the buyer within one year from the date of termination or within sixty days from the re-sale of the property to another buyer, whichever occurs first.

Most notably, where the project is still in the planning phase and no construction has begun, the developer is entitled to terminate the SPA for whatever reason, through no fault of his own, and retain up to 30% of the amount paid but must refund any balance to the buyer within sixty days from the date of termination. However, where a project is terminated on instruction from RERA, all amounts paid to the developer by the buyer must be refunded in full pursuant to the Law Escrow Accounts.

Although laws and regulations have been implemented to protect both parties, when it comes to purchasing off plan, it is vital that buyers carry out legal due diligence before handing over a deposit and signing any reservation agreement or SPA.

As a starting point, buyers should ensure that the developer is registered with the Dubai Land Department and RERA and that it has obtained all the required permits and approvals from both government bodies. In addition to that, buyers should check the project itself has been registered, and has an associated escrow account. Buyers can search the DLD for any mortgages or charges against the project and identify the project's status or completion dates by searching the project on the Dubai REST mobile application to ensure it aligns with any representations that have been made by sales agents.

Aside from this, it is imperative buyers investigate the developer’s track record in the region, confirming the status and history of other projects the developer has constructed, and if those projects were delivered on time.

In terms of the SPA itself, a buyer should seek legal advice before signing the reservation agreement and/or SPA, as they may include unfavorable terms such as completion date extensions, penalties, onerous dispute resolution mechanisms, or technical challenges where the contracting party is not in fact the registered developer, which can cause difficulties for a buyer should things go awry.

Most importantly however, buyers should familiarise themselves with the concept of an Oqood.

Oqood is a centralized system which developers use to manage off plan properties and to streamline property sales. Once the SPA is signed for an off-plan property, and after the deposit has been paid along with the DLD registration fees, the property should be registered on the Oqood online portal and an Oqood certificate will then be issued. The issuance of the Oqood certificate gives peace of mind to a buyer that his/her interest in that property has been registered with the DLD, thus preventing the same property from being sold to numerous buyers (which unfortunately was a practice carried out historically by some unscrupulous developers).

If purchasing on off plan property from a buyer rather than directly from the developer, the Oqood Certificate can also be verified on the Dubai REST app to ensure that it is valid.

Although property market conditions are out of a buyer’s control, if a buyer undertakes the necessary due diligence and obtains legal advice in relation to the contents of the sale documents (reservation agreement and/or SPA), buying off plan can be a very favorable way to get onto the property ladder and//or to start or increase his or her property portfolio and maximize returns on investment.

This is a general guide on the subject matter and should not be construed as specific legal advice.

Contact details

Nichola Reece Burton | Head of Litigation & Dispute Resolution

Charlotte O’Neill | Paralegal Litigation & Dispute Resolution

Please click here to send an email.

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