Cancellation of contract: a bit more clarity on Law No.9 of 2009

Report courtesy of Hadef & Partners, lawyers, in Dubai
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31/05/2009
Law No. 9 of 2009 sets out new provisions relating to the termination of a unit sale and purchase agreement by a developer and the cancellation of projects by RERA. Yet, many questions remain about how the Law will work in practice.

Brent Baldwin explains.

In brief:

Despite the new found emphasis on the role of the DLD in termination proceedings, the Law should not be viewed as a method of reducing the importance of the courts in disputed off-plan property transactions. The DLD has a critical role to play in unlocking termination procedures and it is yet to be made clear how this will work in practice. The DLD and now RERA are instrumental in determining how the competing interests of investors and developers play out under the Law, and the health of the Dubai property market might partly hinge on these interests being handled equitably in order to bring clarity and calm in these turbulent times. Further to our article of 16 April 2009, the amendment to Article 11 of Law No.13 of 2008 (the Pre-Registration Law) has been published in the Government Gazette taking effect as of 30 April 2009.

The amendment known as Law No.9 of 2009 (the Law) deals with two broad and very important issues:

1. The termination of a unit Sale and Purchase Agreement (SPA) by a developer2. The cancellation of projects by the Real Estate Regulatory Authority (RERA).
It is clear however, that many questions remain over how the Law will work in practice and regulations governing these two areas are expected to be published by the Dubai Land Department (DLD) shortly.

INTRODUCTION

Given the global downturn, Dubai has witnessed a dramatic increase in the number of investors defaulting on their obligations in relation to off-plan purchases. There are a wide range of circumstances that have led to such defaults which might be due to speculation on price increases, lack of financing, lack of job security and also developer default or fear of developer default. The Law does not cater for all such circumstances and therefore,despite the new found emphasis on the role of the DLD in termination proceedings, the Law should not be viewed as a method of reducing the importance of the courts in disputed off-plan property transactions.
Article 11(1) of the Law states that termination must be effected by the developer through a notice from the DLD. The DLD therefore has a critical role to play in unlocking termination procedures and it is yet to be made clear how this will work in practice. Interestingly, an investor does not have a right to terminate their SPA under the Law, and it appears investors must rely on existing provisions under Dubai and/or Federal Laws of the UAE or rely on RERA cancellation of a project to terminate an SPA.

Article 11(2) of the Law sets out the remedies available to developers who validly terminate an SPA and their remedy depends on the stage of construction of the relevant project. Linking termination remedies to the stage of construction would make sense where payment obligations are also linked to construction milestones. This is not the case however with the majority of SPAs currently used in Dubai, where payments are generally date based. As a result of this, the Law might prove to be inequitable for the developer or the investor depending on the factual circumstances that exist.

TERMINATION

The relevant provisions of the Law in relation to how much investor money a developer may retain are summarised as follows:

Article 11(2)(a)If the developer has completed at least 80% of the project the developer may keep 100% of all amounts paid and seek payment of any outstanding amounts. It should be noted that Article 11(2)(a) does not expressly allow a developer to terminate the SPA, however, if the payment of any outstanding balances is not made, the developer may request the unit be sold by public auction in order to collect the remaining amounts due to it. We have been advised by the DLD that public auction is not the only option a developer has when seeking to on-sell a unit subject to a SPA with a defaulting investor, and private sales may be permitted subject to the provision of a valuation.

Further, it appears that a developer must account back to the investor for any amounts it receives from an on-sale that is over and above the original purchase price of the unit after deducting the developer’s on-sale costs, although the Law is not yet clear on this issue.
Article 11(2)(b), 11(2)(c) and 11(3)Under Article 11(2)(b) of the Law, if the developer has completed at least 60% of the project the developer may revoke the contract and deduct up to 40% of the purchase price for the unit.

Under Article 11(2)(c), if the developer has commenced construction but has not reached a completion level of 60%, the developer may revoke the contract and deduct up to 25% of the purchase price for the unit.

Article 11(3) provides some broad principles that determine whether construction has started which include the approval of relevant building permits by the authorities and the site being handed over to the contractor approved to undertake the permitted works.

Article 11(2)(d)If construction of the project has not yet started due to reasons beyond the control of the developer, without any negligence or omission on the developer’s part, the developer may revoke the SPA and deduct up to 30% of the total amounts paid by the investor.
The circumstances that are “beyond a developer’s control” are expected to be set out in implementing regulations, however, we foresee a lot of debate over termination where the developer has not commenced construction, as many investors are extremely sceptical about whether developer’s have the financial capability to deliver ambitious projects. Further, some investors might see Dubai Law No.8 of 2007 (the Escrow Law) as a flawed means of safeguarding their investment in the current market. Therefore, many investors might be refusing to throw good money after bad by paying where construction has not yet started just to avoid being in default. Where money is paid into escrow accounts it is still made available for the developer to spend on the project, and if the project is a bad project then it might still not be delivered. The net result of this might be increased emphasis on RERA assessments on whether projects should be cancelled or not.

CANCELLATION

Pursuant to Article 11(5) of the Law, the cancellation of projects is an option that falls under the responsibility of RERA and given the implication under the Law that an investor’s main rights in seeking a refund of its money relies on RERA cancellation of projects, we foresee that investors await with interest to see how RERA will investigate and make determinations on the cancellation of projects.

The Law does not specify the grounds on which RERA can exercise its right to cancel a project, however it does specify that upon cancellation, all monies paid by investors must be returned. The process and the reasons for cancellation are likely to be made clear under new regulations, and we expect valid reasons for cancellation would include breaches of relevant laws (for example, the Escrow Law and the Pre-registration Law) and failure to start or continue with construction and loss of the land (for example, default under a development plot SPA or acquisition by the government).

CONCLUSION

The Law does not provide all the answers and there is a need for more clarity on how the Law will be applied. We also subscribe to this clarity being made widely available so as to ensure that both investors and developers alike do not make misguided assumptions about their rights or lack of rights under the Law. Most modern economies rely on freedom of contract and for the enforcement of those contracts to be applied in a fair and even-handed manner. We would expect the Law to be interpreted in a manner that takes into account all the relevant factual circumstances that have lead to the purported termination of the SPA.

We are now seeing the effects of the SPA trading by speculators that has occurred over the past few years in Dubai but not all investors are speculators and therefore each default and/or termination should be assessed on its merits. The DLD and now RERA (by virtue of the Law) have a pivotal role to play in how the competing interests of investors and developers play out under the Law, and the health of the Dubai property market might partly hinge on this being handled equitably in order to bring clarity and calm in these turbulent times.

Authors: Michael Lunjevich m.lunjevich@hadefpartners.com
Brent Baldwin b.baldwin@hadefpartners.com

We've got your money - and we're keeping it!

Investors rally to the cause
The National Newspaper: 24th November 2008

An amendment to a property law in Dubai has brought together a group of angry off-plan buyers who are fearful of losing a third of their investment to developers they believe may not even proceed with construction. According to the new amendment, off-plan buyers wishing to halt their payments have to cancel their contract and forfeit 30 per cent of the total value of the property, instead of only 30 per cent of the money they have paid.

The investors, who formed their group after an online forum on the issue, have yet to see evidence of construction on their projects and fear losing more of their money to developers in the current global slowdown if they continue their payments – but under the new amendment they could lose a third of their properties’ value if they do not. The new administrative circular was issued by the Dubai Land Department on Nov 10 concerning amended Law 13 on the pre-registration of off-plan properties, which was issued in August.

“Many investors have already paid 20 per cent to 50 per cent in projects which haven’t even started, hence they stopped payments in order to avoid further losses caused by possible bankruptcy of the developer,” said Tommy Carlsson, one of the organisers of the Dubai Property Investors group.

“Developers are misusing this interpretation of the law to terminate as many contracts as possible and forfeit our funds instead of finding solutions together with investors.”
Investors fear that developers who already know they cannot proceed with a project will keep the 30 per cent and then later on cancel the project without needing to refund buyers.

The group, which met for the second time on Sunday and is planning to hire a lawyer to represent them, is asking for two things. It suggests that before allowing a developer to cancel contracts, the developer must first submit the audit of its escrow to the Land Department.

According to Law 8, developers must audit their accounts, but many of them have not done this yet. “We want developers to prove they have the ability to build,” said Nigel Knight, a co-founder of the group.

Second, contract cancellations should be put on hold if the client has already paid 20 per cent and construction has not started, with the payment plan proceeding only when construction actually starts.“We see that as the responsibility of the Government to make investigations about the developers and find out whom we can trust and who is not OK. We only ask the Government to protect us,” Mr Mohammed said. “We got e-mails from a developer saying we were not allowed to form a group. Somebody even tried to hack [into] our e-mail account.”

Among the developers that investors are concerned about is Schön Properties.

“Some people paid over 60 per cent of [Schön’s] Dubai Lagoon,” said Mr Mohammed, the co-founder of the investors group who did not wish to give his family name. “People ask why they should continue to pay. The developer hasn’t even started construction of their units. The developer is saying that if they don’t continue [to pay] they will cancel the contract and forfeit their money.”