Monday, September 13, 2010

Cancellation of sale and purchase agreements for off-plan properties in Dubai

The recently published Executive Council Decree No. 6 of 2010 changes the way in which sale and purchase agreements (SPAs) for off-plan properties in Dubai can be cancelled. The decree supplements the provisions of Law No. 13 of 2008 which established a registration system for off-plan sales. Although the decree covers a range of important issues in this area, it is the articles that deal with the cancellation of SPAs that will be of most interest to purchasers of off-plan properties

Streamlining the notice procedure prior to the publication of the decree, in order to cancel a SPA, the developer had to notify the Land Department of a breach on the part of a purchaser. The Land Department would then serve on the purchaser a termination notice, giving 30 days for the breach to be rectified.
The decree subtly changes this relatively new process by allowing the developer to notify the purchaser directly, albeit with an obligation to copy the notice to the Land Department. There is still a requirement for the Land Department to notify the purchaser but the decree suggests that time for compliance will run from the date of the developer's original notice.

Therefore, a purchaser may have very little time from receiving the Land Department notice to remedy the breach or come to an arrangement with the developer to prevent a cancellation. Certainly, these changes streamline the cancellation process and call for even greater caution on the part of purchasers when faced with payment requests and notices from developers.
Retaining funds
As well as the notice procedure, the consequence of a cancellation by a developer has also been slightly varied by the decree. Following a cancellation, provided there has been some construction (or the lack of construction cannot be attributed to any fault on the part of the developer), the developer is entitled to retain certain funds, depending on the level of completion. Where construction is beyond 60 per cent, the developer may retain up to 40 per cent of the purchase price. Where the project is less than 60 per cent complete, the developer may retain up to 25 per cent of the purchase price.

The most notable change brought about by the Decree relates to cases where construction is beyond 80 per cent complete. Here, as well as the pre-existing right to sell the unit at auction to recover the amount due from the purchaser, the developer now has the option of cancelling the SPA and retaining up to 40 per cent of the purchase price.
There are express provisions in the decree allowing a developer to apply to the courts for an order to claim any shortfall between the amount it is entitled to retain under the decree and the amount that has actually been paid by the purchaser. Similarly, where an excess amount has been paid by the purchaser, there are provisions detailing how this excess should be returned to the purchaser.
Where construction has not commenced, the consequence of cancellation depends on whether the lack of construction is due to some fault on the part of the developer. Where there is no such fault, 30 per cent of the amount paid by a purchaser can be retained. However, if the developer is deemed to be at fault, no retention is allowed and the full amount paid must be returned. Although the decree provides a list of causes that are deemed to be outside the developer's control, and gives examples of negligent actions — the decision is ultimately determined by the Land Department based on the facts presented to it. It should be noted that the decree confirms that leveling works and installment of infrastructure will be deemed to be evidence of
construction having commenced for the purposes of determining the parties' financial liability on cancellation.

Limiting arguments
In summary, whatever the motivation of the Land Department, the result of this new decree has been a marked increase in the number of cancellation notices served, often with little or no regard for the underlying reasons for the purchaser's default. Although purchasers may dispute the validity of a developer's cancellation claim, the Land Department has issued an administrative circular limiting the arguments they will consider as constituting valid defenses.
Unfortunately, delays under six months, failure to complete infrastructure works and failure to provide previously promised finance are just a few legitimate reasons for purchaser's non-payment that are not included in the list of ‘approved' defenses. In those circumstances, while a purchaser may have strong technical grounds to dispute a cancellation, it seems that those grounds will not be considered by the Land Department and so the SPA will be cancelled, with the consequential retention of purchaser funds by the developer.
And so, while containing some important safeguards of purchaser's rights, mainly in relation to ongoing projects, in the area of cancellations the decree has simply encouraged developers to take advantage of a streamlined cancellation procedure with its limitations on possible purchaser defenses. In that regard, in Dubai's real estate game the playing field may still not be regarded as entirely level.
The writers are a partner and an associate at law firm Taylor Wessing