Ever Sheds

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19 theoath-me.com the Oath DRAFT TANWEER LAW/FEATURE Tanweer: ‘IllumInaTIng’ enOugh? The draft Real Estate Investor Protection Law or Tanweer law aims to boost the real estate market of the region by safeguarding investor rights. Will it live up to expectations? Sean Yates of Eversheds illuminates the various clauses of the law. A new generation of investors are entering the region with an appetite for purchasing real estate. The new initiative from Dubai Land Department, Tanweer, is set to address many of the issues faced by investors in recent years and, if imple- mented as planned, will go some way towards changing the image of what can still be seen as a high risk market. Some of the main aspects of the proposed law will be discussed and consideration given as to whether they might go further. This analysis is undertaken from an investor perspective given the aim of Tanweer is to provide increased protection to investors. The question of the proposed law’s implications for developers and how they might best adapt to or mitigate against its effects is of course a separate discussion. The proposed law legislation prohibits any provision within a reservation deed or sale contract that is contrary to the law (Article 29(2)), so it is not possible to contract out of its provisions. COOLING OFF PERIOD An investor should be given 15 days to consider a sale contract prior to signing, to allow him to review the terms and seek any legal advice (Article 10). STANDARD RESERVATION DEED OPTION Parties may enter into a “Reservation Deed” prior to the final sale contract. If they do so, then the Reservation Deed must contain certain information and provide certain rights to the investor including an entitlement to receive the sale contract within 15 days (Article 19). TERMINATION BY INVESTOR An investor may terminate a sale contract: » if he establishes that the seller or broker deliberately concealed essential information and that this is likely to cause harm or loss to him (Article 34); » if delay to completion exceeds 12 months (Article 36 (1)); (it is anticipated that the law will provide for 12 months); » if the unit is materially different from its contract specifications (including if it is 30% or more smaller) (Article 36(2)); or » if the unit’s specifications are changed without obtaining the proper permits from the relevant authority (Article 36(4))

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  • 19theoath-me.com the Oath

    DRAFT TANWEER LAW/FEATURE

    Tanweer: IllumInaTIng enOugh? The draft Real Estate Investor Protection Law or Tanweer law aims to boost the real estate market of the region by safeguarding investor rights. Will it live up to expectations? Sean Yates of Eversheds illuminates the various clauses of the law.

    Anew generation of investors are entering the region with an appetite for purchasing real estate. The new initiative

    from Dubai Land Department, Tanweer, is set to address many of the issues faced by investors in recent years and, if imple-mented as planned, will go some way towards changing the image of what can still be seen as a high risk market. Some of the main aspects of the proposed law will be discussed and consideration given as to whether they might go further. This analysis is undertaken from an investor perspective given the aim of Tanweer is to provide increased protection to investors. The question of the proposed laws implications for developers and how they might best adapt to or mitigate against its effects is of course a separate discussion.

    The proposed law legislation prohibits any provision within a reservation deed or sale contract that is contrary to the law (Article 29(2)), so it is not possible to contract out of its provisions.

    Cooling off PeriodAn investor should be given 15 days to consider a sale contract prior to signing, to allow him to review the terms and seek any legal advice (Article 10).

    StAndArd reServAtion deed oPtionParties may enter into a Reservation Deed prior to the final sale contract. If they do so, then the Reservation Deed must contain certain information and provide certain rights to the investor including an entitlement to receive the sale contract within 15 days (Article 19).

    terminAtion by inveStorAn investor may terminate a sale contract:

    if he establishes that the seller or broker deliberately concealed essential information and that this is likely to cause harm or loss to him (Article 34);

    if delay to completion exceeds 12 months (Article 36 (1)); (it is anticipated that the law will provide for 12 months); if the unit is materially different from its contract specifications (including if it is 30% or more smaller) (Article 36(2)); or if the units specifications are changed without obtaining the proper permits from the relevant authority (Article 36(4))

  • 20 the Oath JUNE 2013

    FEATURE/DRAFT TANWEER LAW

    A Building Register will record information relating to any

    permit for building or development, any approval for zoning or urban planning, any court order or effective arbitrators award that affects the title. A developer is obliged to register any appropriate details within the Building Register.

    Developers have a vested interest in a market that allows the purchase and immediate resale of an off plan unit as it provides a ready market of purchasers, namely those with ready cash who want to make a quick profit.

    inveStor ComPenSAtionCompensation is payable to the investor: if there is delay of between 1 and 12 months

    in the completion of the property (Article 37(4));

    if the specifications of the property as delivered are at variance with the contractual specifications ((Article 37(3)); and

    if there is misrepresentation (Article 37 (2)) or breach of warranty or undertaking (Article 37(1))

    fundAmentAl defeCt remedy Any fundamental defect in the property must be rectified within 12 months of handover, in default of which the developer must take the unit back and return the amount paid or provide an alternative similar unit (Article 26).

    limited reStriCtion on re-SellingThe draft legislation specifies that an intending investor cannot sell or trade a unit using a reservation deed and cannot offer to sell the property before signing and registering the sale contract with the Dubai Land Department. This offers a degree of protection in relation to so-called flipping where an off plan unit is purchased and sold on within a short period at a higher price, often numerous times before completion is complete. Subsequent purchasers can now check in the Real Estate Register to ensure they are receiving good title to the property.

    enhAnCed reAl eStAte regiSterAn Investors Register will be created that will record the names, addresses and contact details of every investor in the property. A Building Register will record information relating to any permit for building or development, any approval for zoning or urban planning, any court order or effective arbitrators award that affects the title. A developer is obliged to register any appropriate details within the Building Register.

    The Real Estate Register search is therefore set to become a much more comprehensive tool and should help reduce the risk associ-ated with hidden or undisclosed encum-brances. An investor and any other person who has a legal interest can make a search and obtain full details of title information, details of all mortgages over the property and finance agreements with funders.

    There are still a number of issues to be addressed if some of the main mischiefs of the past are to be avoided.

    forCe mAjeure ClAuSeSThe international variant of the plain utilitarian force majeure clause underwent a transformation in Dubai sale contracts. Its traditional role of releasing contracting parties from their respective obligations in the event of an act of God or nature, political upheaval or war was sidelined and it became the darling of developers

    everywhere. Variously drafted, it was used by developers to avoid the obligation to deliver a project on time if such delay was beyond their control. Typically, investors sought no legal advice before signing (unlike the developers) and contracts were signed in which apparent safeguards for the investors were compromised by the force majeure clause. The clause was called upon whenever a developer wanted to claim delay was not its fault, with the result that risk of delay shifted entirely onto investors. The use of such modified clauses was widespread in the market. Investors were seldom in a position to challenge the developers reliance on the clause because of the cost of pursuing litigation.

    Under the new law, there must not be any provision in the reservation deed or sale contract allowing delay of the project for more than 8 months (Article 29(1)). It remains to be seen whether such prohibition will attach to force majeure clauses which typically have value in international contracts by apportioning risk between the parties in the event of certain catastrophic unforeseeable events. The previous abuse of force majeure clauses may well have led to an intention to limit the effect of a force majeure clause to a duration of eight months. It is, however, undesirable for both investors and developers for the issue not to be specifically addressed, as uncertainty is likely to lead to opposing stances being taken by parties to a sale contract in the event of construction delay.

  • 21theoath-me.com the Oath

    DRAFT TANWEER LAW/FEATURE

    ServiCe ChArgeSFor investors fortunate enough to see their property completed, unexpectedly high service charges taken together with lower (corrected) rents and high initial purchase prices left many new landlords receiving a negative return even if they found a tenant. The promise of association-appointed management with accountable charges often failed to materialise and well publicised disputes arose between management companies and the tenants whose landlords had refused to pay the service charges. Access to parking and swimming pools was blocked. Such is the potential profitability of service charge collection, that some developers having sold the development on to a third party, reserve their capacity as management company. Their foresight rightly anticipates that the owners associations appointment of their own management company can often take a long time.

    Under the proposed legislation, if a developer reserves a right to be the ultimate provider of management services relating to a unit, this must be disclosed within the Reservation Deed of sale contract and an estimate of the annual service fee must be provided (Article 13). This may well give warning to investors, but there is no provision for holding a developer to its estimate, and

    Text by: Sean YateS, head of real estate, Eversheds LLP, UAE

    (research assisted by Anish Ghosh)

    indeed the realistic cost of providing such services may increase between the date of the sale contract and the date of completion. Perhaps the most that might be hoped for is a breakdown of how the estimate has been arrived at, so that it can be scrutinised.

    effeCtS of fliPPingDevelopers have a vested interest in a market that allows the purchase and immediate resale of an off plan unit as it provides a ready market of purchasers, namely those with ready cash who want to make a quick profit. Those looking to purchase for the longer term, who may wish to occupy or let usually follow, having acquired on the secondary market. These ultimate owners typically miss out on the opportunity to queue outside the sales office to make the initial purchase. The effect is an aggressive rush to purchase and an artificial spiking of prices.

    Developers have the ability to curb this behaviour for the long term health of the market. The secondary market of off-plan units requires the developer to consent to the onward sale. An express provision within the sale contract prohibiting onward sales within the first two years or until completion, along with a provision within the Tanweer legislation that such clauses within sales contracts cannot be avoided, could control

    some of the excesses that f lipping has previously caused.

    The new legislation is unlikely to be retrospective. It would lead to hundreds if not thousands of existing contracts becoming terminable due to delay in excess of one year. A backlog therefore still needs to be cleared of cases where delay continues. These should not become the forgotten investors, and indeed Dubai Land Departments Tanmia initiative to put new developer investors and banks together with investor purchasers shows Dubais determination not to leave behind those caught up in the frenzy of real estate purchasing in 2004-2008. For new investors, if the new law is seen to work, it should increase confidence levels and it would no doubt be welcomed if other emirates followed Dubais example.

    The promise of association-appointed management with accountable charges often failed to materialise and well publicised disputes arose between management companies and the tenants whose landlords had refused to pay the service charges.