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Dubai Real Estate – What is a contract ?

Posted by 7starsdubai on September 28, 2008


http://www.zawya.com/printstory.cfm?storyid=ZAWYA20080612103455&l=060642080616

Contracts are promises that the law will enforce.

Recently, the Dubai property market has witnessed an increasing spate of developers falling behind schedule on their construction milestones. In addition, some developers have even tried to abort entire property developments after off-plan sales, seeking instead to buy back unfinished properties from their investors. In this special report, PROPERTYworks investigates to find out more…

While local property investors get edgy about construction delays and compromises on quality, lawyers are experiencing a renaissance as disgruntled customers engage the legal system here to get back at certain developers.

But a court case is by no means a quick fix. It would be expensive and very difficult to rely on the courts when a developer gets behind schedule. Instead, making oneself aware of the basic elements of a contract and speaking up for one’s rights are the most effective ways to ensure that property developers deliver exactly what they promise and on time.
Currently, most real estate investors in Dubai purchase their properties ‘off-plan’, which means they wait for the construction to commence and for their homes to be completed. In all fairness, almost every property developer in the UAE, big or small, is very keen to promote the UAE as a good place to buy and a great place to live.

Most developers enter into their contracts with investors in good faith and with the full intention of meeting their deadlines. In fact, they themselves probably enter into similar back-to-back contracts with contractors for matching deadlines.
There are, however, a host of factors outside of the control of the developers, especially now, when there is so much strain on construction resources.

Rising construction costs in the UAE are putting extreme pressure on most property developers. The cost of construction has risen significantly in the past few years, with steel prices rising by 38 per cent in 2007 and cement prices by 30 per cent in the same period, according to figures from the construction consultancy EC Harris.

An EFG Hermes report said construction cost inflation is being driven higher by rising costs of building materials, as well as the rising cost of labour. A serious shortage of labour and raw materials and strong demand, as well as the mandatory adoption of green building codes and health and life insurance, are likely to increase construction costs in the UAE even further this year. A tonne of steel reinforcement bar (rebar) now costs about US$1,150 (AED4,223), up from US$980 in March. The wholesale price of cement was this month capped by the ministry of economy at AED340 per tonne, up from AED295.

Price increases have meant that building firms risk huge financial losses, or even bankruptcy, if they sign deals that do not make provisions for price escalation. In some cases, the pressures have resulted in concern that the quality of construction is being compromised.
News of the cancellation of Damac Properties’ Palm Springs development was the first to break into the media. Homes in the project were sold more than five years ago, but construction until today has yet to start.

Opprobrium for Damac’s announcement came from as far away as London, where investors threatened to sue the developer unless the properties they had paid for were built.

Palm Springs should have been completed by the end of last year, but Damac postponed construction of the homes and finally cancelled it completely in March. Damac offered to buy back the ownership rights to the properties at a premium of six per cent per annum for every year since investors bought it. An investment of US$1 million when the project was launched five years ago previously would only be bought back for US$1.33 million – hardly the return that the rest of the Dubai property boom was delivering over the same period.

Damac claimed the cancellation was due to planning changes imposed on it by Nakheel, the master developer of Palm Jebel Ali, on which Palm Springs was due to reside. Nakheel denied any responsibility. Following discussions between Nakheel, Damac and the industry watchdog, the Dubai Real Estate Regulatory Authority (RERA), Damac agreed to complete the project. Officials of the RERA said the major concern was to protect the interests of investors and the reputation of the real estate sector in Dubai.

The Damac case was a rather high profile project and a high profile development. Obviously, from the time of entering into contracts with initial buyers to the stage at which the development should have been delivered, prices in the market have increased significantly as well.

If investors had gone ahead with a court case to recover just their initial stake, not only would they have lost any further potential capital that they had invested and any interest on any loans that they had taken out, but also the capital growth in the market that they could have invested elsewhere.

According to Jane Dalton, a property lawyer with the law firm Trowers & Hamlins in Abu Dhabi: “At the moment, there is very little scope for individual investors to negotiate termination and compensation provisions with developers. It really is a take-it-or-leave-it attitude. And I think going forward, it would be helpful if developers were more open to negotiation of those original sales terms at an earlier stage.”

“Usually a purchase contract has certain provisions specified for delays, and usually depending on the reason for that delay, whether it is directly attributable to the developer, or a matter that is outside of their control, those provisions will dictate at which stage a buyer can actually withdraw from the contract and what is payable in terms of compensation,” she continued. “There do tend to be periods built into the contracts by which both parties accept that the developer may overrun for specific reasons.”

Of course, the consequence of withdrawing from a contract is that the only thing that is reimbursable to the buyer is his initial stake in the property. By the time or termination of the contract due to delays, the property value might have gone up many times. And obviously, if one has bought in the secondary or tertiary market, then one would only be entitled to the price put down by the original buyer.

“And so there could be quite a disparity between what you could actually reclaim by withdrawing from the contract and what one could potentially recoup by waiting and hanging on for the delays to finish,” added Dalton.

During the construction phase, a property investor has no ownership right to his property, and so his only security is found in the sale and purchase agreement that he signed with the property developer. Quite simply, the only option one has in case the developer gets behind schedule or doesn’t live up to promises before the construction has been completed and the property handed over, is to sue the developer in a UAE court – an option that could take years for a final decision.

“It very much boils down to the contract between the purchaser and the developer,” said Mohammed Kamal, associate at Al Tamimi & Company Advocates and Legal Consultants. “Now, usually the contracts allow flexibility to the developer. A developer will usually indicate at least a target date for estimated delivery and then allow room for going beyond that – typically, it can be up to 13 months.

That is quite acceptable in the market right now, both in Dubai and Abu Dhabi.”
“There really isn’t anything else in the laws and regulations, and I think it would really rest on the terms of the contract, and if there was a clear breach of the contract on the part of the developer, then the purchaser would be entitled to take action in the courts or any other alternative form of dispute resolution, if stipulated in the contract,” he added.

Particular attention should be paid by investors to clauses in the contract dealing with any delivery dates and under what circumstances these dates may be pushed back by the developer.
Contracts are promises that the law will enforce. The law provides remedies if such a promise is violated, and recognises the performance of that promise as a duty. Contracts arise when a duty does or may come into existence, because of a promise made by one of the parties.
In order to be a legally binding contract, a promise must be exchanged for adequate ‘consideration’. Adequate consideration is a benefit or detriment a party receives, which reasonably and fairly induces them to make the promise.

An example of this would be purchasing an off-plan apartment from a property developer. The developer and the buyer come together to discuss the terms of the exchange (in all likelihood, the purchase is outlined in a written agreement). Thus, they have fulfilled the first requirement of consideration. To meet the second requirement, there must be a mutual exchange. In this case, the property developer (if one of the main developers in Dubai) provides ownership if the apartment is in a freehold area of Dubai, while the buyer provides payment. Third, the bargain terms must be of value. The apartment is worth what the buyer hands over. Therefore, this contract has met its consideration requirement, because it fits all elements of consideration.
T

he UAE is essentially a Civil Law jurisdiction heavily influenced by French, Egyptian, Roman and Islamic law. The increasing presence of international commercial contracts has resulted in the application of English common law practices, further influencing the UAE legal system.

The law relating to contracts in common law specifies that the agreement must consist of an offer and acceptance, and also consideration for a contract to exist. It is important that buyers learn to recognise these elements in contracts they plan to sign.

 

An offer is an indication by one person to another of their willingness to contract on certain terms without further negotiations.

A contract is then formed if there is express or implied agreement. A contract is said to come into existence when acceptance of an offer has been communicated to the one making the offer.

Another important element to understand is misrepresentation. Misrepresentation is a false statement of fact made by one party to another party and has the effect of inducing that party into the contract.

For example, under certain circumstances, false statements or promises made by a seller of goods regarding the quality or nature of the product that the seller has may constitute misrepresentation.

In the UK, a finding of misrepresentation by a court of law allows for a remedy of rescission (termination of the contract), and sometimes damages depending on the type of misrepresentation found to have taken place. However, common law principles are not explicitly recognised under UAE law.
Despite the differences between legal systems, lawyers like Carol Alderson in Dubai, who has been practicing in the UK and the UAE for the last 25 years, vows to bring about more robust protection for property investors.

The way sales agreements are drafted in Dubai is very one-sided in favour of developers, and unless customers are aware of their legal rights, they will not know how to protect themselves from becoming unfairly disadvantaged,” said Alderson, who is a senior partner at Samial Al Midfa Advocacy and Legal Consultants in Dubai.

“If we get a precedent ruling in a Dubai court against a developer for construction delays, then it will deter future developers from making promises that they cannot keep and will change the way sales and purchase agreements are drafted here,” she explained.

Adopting previous court judgment is another principle of a common law practice that is not recognised in the UAE. However, such precedents may in Dubai be presented to the court for persuasion purposes.

“Precedents do deter people,” Alderson pointed out.

Dalton further added:

“Within the region, the terms and conditions of contracts that I’ve seen are fairly standard, and I don’t think you could distinguish between one project and one developer from another. It is just the state of the market here, and it is very much a developing market.”
Most lawyers are in agreement that developers are not being brought to task for their demands that customers sign contracts “as is”, regardless of whether the developers are actually able and willing to perform the obligations specified therein.

Developers are obviously going to want to protect their interests as best they can, and it is supply and demand that determines whether a developer will be able to adopt a “take it or leave it” approach with regard to the contracts they produce. The level of demand for property in the past has put developers in a strong position with regard to the contracts they produce, and if a particular buyer wasn’t prepared to accept the developer’s standard form of contract, then there were usually ten others that would have.

It remains to be seen whether there will be a slowdown in the UAE market that may result in buyers being placed in a stronger bargaining position than previously.

Some developers have given buyers the option of a full refund if there are delays beyond the 12 months, while others provide no recourse and buyers just have to sit and wait for them to complete the work.

“Penalties have been paid as well as interest to disgruntled purchasers by certain developers, but it is certainly not the norm. The developers have considerable flexibility,” said Kamal.
Consumer protection in DubaiIn Dubai, new consumer protection laws will protect the purchaser in the case of non-delivery or late delivery. There is also the regulatory watchdog, the RERA. So, a developer is now subject to further controls in terms of its construction progress and ultimate delivery to the buyer.

Specifically, the Trust (Escrow) Account Law has established the setting up of escrow accounts for property development to protect purchasers of off-plan properties by ensuring that the payments made to a developer in advance of handover of a completed unit are protected in a separate ‘escrow’ account until certain construction milestones are met.
The law is applicable to all property developers in Dubai, and they are required to set up trust accounts to deposit all monies received from customers for off-plan property sales.

The funds collected from buyers are to be held in escrow accounts that will be offered at banks that are licensed to offer such facilities by the Dubai RERA.

Funds will only be released to the developer (for the purpose of funding the project) once certain stages of construction are completed. An independent surveyor will assess the stages of completion of construction.
In addition, the Dubai Land Department will hold 10 per cent of the value of the development in the escrow account for one year after handover to act as a warranty for any defects in the construction or finishing of the property.

“I think the risk of non-delivery is somewhat less now for developments in Dubai. Developers are doing the proper budget allocations required so that they can make good on their promises. We don’t just have the contract now, but there are regulatory measures to protect the purchaser in Dubai,” said Kamal.

“The Trust Account Law applies retrospectively. In some cases, if a project is fairly advanced and is close to delivery, we have seen cases of the Escrow Law requirements being waived.”
He added: “I would say that anything that is 70 per cent or above completed is likely to be exempted from the Trust Account Law, subject to approval by the RERA, because the risk of non-delivery is less.”

Another thing off-plan property investors in Dubai should be on guard for is shoddy workmanship.

All sales agreements should specify a written schedule about the finishing and fittings included in the property. Brand names should be mentioned if applicable to the quality promised. If this is not done, a buyer should be prepared to accept whatever he gets, and will have no recourse to get this rectified later.

One cannot anticipate structural defects that may crop up, but in Dubai, buyers have the Joint Ownership of Property Law (the Strata Law), which assures that all property developers will remain liable for 10 years from the date of completion of a building to repair and rectify any defects in the structural elements of a property. This includes the main supports, roofs, foundations, walls, ceilings hallways, stairwells, etc.
I

n addition, according to the Dubai Strata Law, all developers also remain liable for one year from the date of completion to repair or replace defective installations in the common property, including mechanical and electrical works, sanitary and plumbing installations, etc. Thereafter, these liabilities devolve to the owners.

There have been a number of complaints about the quality going into the finishing of certain property developments in Dubai. Once again, the advice to buyers is to purchase a property from a developer that has already built properties that are completed, so they can have a look at them inside and out to assess the quality of the finish.

Is it a crime?

But do unfulfilled promises or delays in construction by developers add up to the crime of misrepresentation or fraud, as some lawyers allege they do?

Alderson said: “If written communication is made about what you intend to receive from the developer, and if you don’t receive that, then those written confirmations are misrepresentations by the developer.

If the first stage of construction (the ground breaking) has not even started by the end of the date stipulated in the sales contract, then it is a clear case of breach of contract, and it means the developer is guilty of fraud and had no intention of honoring the performance of its obligations.”

Kamal agrees: “It could be considered misrepresentation, yes. If a date for delivery has been stated somewhere in the marketing literature, the contract or some kind of assurance has been made to the purchaser that they would deliver the property by a certain date, and the purchaser could prove that it would not be realistically possible, then I think that a purchaser would be entitled to make such a claim.”

In order for the concept of misrepresentation in the UAE Civil Code to apply in a case, it would require that the party claiming misrepresentation shows that there was an element of “trickery” on the part of the party accused of misrepresentation.

The Dubai courts tend to require a direct link to be shown between any breach of contract and damages suffered, meaning that an investor, at best, is only likely to get his or her money back in the event of a successful court action (and possibly a minimal costs and interest award). Indirect, consequential or penal damages are very difficult to obtain.

Shahram Safai, partner at Afridi & Angell Legal Consultants, said it is theoretically possible to frame an action based on misrepresentation. However, it is much more difficult to prove in court.

“It should be noted that courts will want to see proof that the developer deceived the buyer by means of trickery to induce the buyer to sign the sale and purchase agreement, for example by stating that the completion date would be much earlier even though the developer knew that this was not the case. It may be difficult for buyers to assemble and to provide such proof to the court as evidence,” he explained.

“In my opinion, an action can be successfully maintained by a buyer on the basis of [what is in the written contract], assuming all material facts support his or her claim. In such an event, a court should order a refund of the payments made by the buyer, as well as interest and any penalties,” added Safai.

As stated before, most sale and purchase agreements in the UAE cover the consequences of delay of completion. These consequences are generally: (1) Interest or a penalty is paid and (2) If delay extends beyond a predetermined date, the buyer can terminate the agreement and receive back his payments along with applicable interest or penalties.

Property investors should make sure that such remedies are included in all contracts they sign to purchase off-plan, and that the terms are clear and explicit.
Kamal said: “Very few cases of this nature go to court. We have seen various investors raising the issue of delays, negotiating and settling with the developer by way of compensation or some other concession to account for the delays in delivery. But I have not seen cases going to court, because it is just not seen as worthwhile from the investor’s standpoint to pay the money to run a court case.”
If penalty clauses for construction delays were made compulsory as a mandatory part of all off-plan sales agreements, this may deter developers and act as a further incentive to ensure that properties are delivered on time.

The most important message that should get across to property investors is simply that they should read their contracts very carefully and ask questions about any provisions that they are unsure about.

Investors should not be afraid to ask for changes or clarifications to be made to the contract before they sign, and a developer’s response to any such reasonable request may give an indication of the respectability of the developer.

 

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