Abu Dhabi’s new Real Eastate law Effective from January 2016

The much awaited new real estate law – No. (3) of 2015 Regulating Real Estate Sector in the Emirate of Abu Dhabi – has now been published, and will take effect as of January 2016. This law is mostly good news for the average person, but as with anything, we will have to see how it is implemented. Here are 10 the most interesting bits from the new regulation for residential buyers and sellers in the emirate’s investment zones:

It had been anticipated that this law would introduce some sort of rent cap or calculator as there has been much speculation as to how it might work. However, if it is coming it isn’t in this law, so rents will continue to be set by landlords as the market will allow.

Abu Dhabi’s Department of Municipal Affairs (DMA) has been tasked with regulating the real estate sector. The DMA’s responsibilities will include implementing the law, issuing licences, controlling escrow accounts and cancelling real estate projects. The DMA will now essentially perform the same function as RERA in Dubai. Let us hope its regulations (when published) come with some real teeth to dissuade the sharp practices that are still common in the emirate.

The law prohibits developers from collecting registration fees from investors and only allows developers to charge administrative fees, which must first be approved by the DMA. This means that the existing customary 2 per cent registration fee applicable on resales would be abolished.

• Owners associations to be created

The new owners associations will have constitutions, legal status, hold title to common property and be responsible for the property’s repair and maintenance. The new law even states that owners associations will have the right to apply to the courts for an order to sell the unit of an owner who hasn’t paid their services charges.

• Off-plan sales

A developer will now not be allowed to sell units off-plan unless it proves that it owns a real estate right over the project land and that it has opened an escrow account for the development. There will also be a requirement for a “disclosure statement” to be attached to the sale and purchase agreement that provides prescribed information on the development to ensure that purchasers are informed of all the relevant facts before buying.

• Escrow accounts will be set up for off-plan sales

One of the requirements for the sale and marketing of off-plan units will now include that the developer has set up an escrow account. The proceeds from off-plan sales will need to be paid into this account and only taken out in stages to fund construction. Given the restrictions on withdrawals, the developer will effectively have to self-fund (or obtain finance) for the first 20 per cent of construction works. These accounts also apply to existing projects as well, unless the building has reached at least 70 per cent completion.

• Right to terminate an off-plan purchase

Off-plan buyers can terminate their purchase of the unit in the case of “substantial prejudice”. Certain examples are given in the law, such as substantial changes the specifications contained in the unit SPA or delivery of a unit that is unusable due to fundamental defects in construction.

• Compensation for delayed projects

The DMA may fine developers to compensate purchasers where the developer is delayed beyond six months. Importantly, this may apply to existing developments depending on the stage of completion. The new law also includes provisions for the cancellation of projects or appointment of a new developer where there is significant delay.

• Building liability for developers

There will now be a 10-year liability for developers relating to fundamental structural building defects. It means developers will be legally responsible to fix any defects that manifest 10 years after handover and this will also include a one-year defects liability period

UAE consider changes to end-of-service gratuity policy for expatriates

Under UAE law, all employers must pay employees an end-of-service gratuity. It is meant to serve a similar role as pension schemes do in the West and parts of Asia.

UAE officials have had preliminary discussions with the International Labour Organisation and several consultants in the region about requiring companies to set aside the money for employee gratuities, instead of paying them out of the operating budgets. This would ensure the funds remain available in case the company encounters financial problems.

An end-of-service gratuity: the name makes it sound so generous, like a tip received from an employer in exchange for outstanding service.In fact, the gratuity foreign workers in the UAE receive is mandated by the UAE Government to compensate for the absence of a true pension scheme. But the payment is not fully guaranteed nor widely understood and as a result, there are talks about reforming the current system.

The UAE is in talks with the International Labour Organisation (ILO) about either establishing a Government-run pension fund for expatriates or requiring employers to set aside employee gratuities in a separate pool to ensure it is available when employees qualify for it.

Currently, almost all companies pay gratuities out of their general operating budgets, which can lead to problems if a company runs into financial trouble.

"It is not always paid. I receive letters every day from employees who say they do not receive their salary or end-of-service benefit," says Maurizio Bussi, the deputy regional director for Arab States at the ILO, who adds that the UAE Government is "looking seriously" at the proposed changes. "There is a commitment from the Government in principle that the workers should be paid."

The combined liabilities of companies in the UAE for end-of-service benefits is more than US$4 billion (Dh14.6bn), according to research last year by the consultancy Watson Wyatt. For the GCC, it totals more than $15bn. Those figures are believed to be growing rapidly as employees stay in their jobs longer after the financial crisis. This is significant because gratuities are paid out based on an employee's final salary, although many employees leave their jobs without knowing what they are owed.

"We are seeing that the employee, more often than not, just does not understand it," says Jahangir Aka, a Dubai-based senior executive officer with SEI, a global investment firm that helps to manage pension funds. "He thinks it is like pension law in the West [and parts of Asia] and it is not."

The current UAE system works like this: each foreign employee earns 21 days' pay for each full year of service for the first five years, and 30 days for each year of employment more than five years. The maximum gratuity is two full years' pay. However, the amount owed is slashed by two thirds if the employee leaves voluntarily before serving three full years, and by one third if an employee leaves before the end of five years.

If employees are made redundant, they qualify for the full gratuity.These rules only apply to foreign workers. Emirati workers are eligible for a Government pension.

These are the minimum requirements as established by the Government. Watson Wyatt recently surveyed more than 100 Gulf companies to see if many were offering enhanced gratuities or formal pensions to recruit and retain staff. Only 30 per cent were offering extra incentives.

"Up until now, cash has been king. The companies have said, 'We are paying you loads of money so you can go out and get your own pension'," says Iain Collins, a Dubai-based senior consultant at Watson Wyatt. "The overriding message was that most companies are simply providing what they are told to provide by the law."

Further, it is common practice for UAE companies to pay a modest base salary to an employee and increase the total compensation with add-ons such as utilities and housing, in part because the gratuity is based solely on the base salary. "Most companies structure their compensation to minimise that final payment," says Mr Collins.

Mr Collins says this is "slowly but surely changing" as companies adopt western-style standards of employee retention. The old model was created in the pre-financial crisis era, when employee turnover was much higher and companies mostly assumed a large portion of the workforce would be moving on in a year or two.

"The hot employees have churned and gone back [to their home countries]. We've got a different employee base than we did five years ago. Most of us are comfortable with a longer-term view now," says Mr Aka.

But as the gratuities get larger, it becomes more important that the money is somehow ring-fenced to ensure that it is available when needed.

The money could be allocated to a fund controlled by the Government or by individual companies. Employees are the obvious beneficiaries of either structure because their gratuities are protected, but the financial industry in the Gulf is also making the case that companies will benefit as well.

"Right now, to pay Dh100, you have to take Dh100 off the balance sheet. If you do it smartly, to pay 100, you only have to take 93 off. We can grow the money for him," says Mr Aka, whose firm administers and manages pension funds.

There are potential ancillary benefits as well. In most emerging markets, there are rules requiring that a certain percentage of the funds are invested within that country (in Oman, for example, only 20 per cent of pension assets can be invested outside the country).

In the UAE, that could provide a much-needed boost to liquidity in the markets. Also, bringing in executives to administer and manage the funds could aid the local financial sector. "You incubate the growth of an asset management industry," Mr Aka says.

At the moment, Bahrain is the only Gulf country with something like a pension plan for foreign workers. Mr Bussi, of the ILO, says the UAE "could set the standard" for Gulf countries if it enacts the proposals being discussed.

Most experts caution that a change in the law is not imminent, not least because most UAE companies are not having difficulty attracting skilled workers."It is still an attractive region to work, given what is going on elsewhere in the world," says Mr Collins.

New bad cheque court urges changes in the law

A new Dubai court has been set up to specifically handle cases relating to bad cheques and has led to calls for a change in the law relating to bounced cheques, it was reported on Sunday.

Judge Ahmed Saif, chief justice of the Dubai Criminal Courts, said around 100 bad cheque cases are heard before the weekly court, The National newspaper reported.

It is a criminal offense to bounce a cheque in the UAE, but the increase in cases relating to this has led to calls within the legal community for a review of the law and how the cases are heard.

“People have to sign blank cheques to rent, borrow, purchase and do business in Dubai. If conditions make it the only method of [doing] business, the courts must not criminalise non-payment,” criminal lawyer Harun Tahlak is quoted as saying in the report.

“Article 401 of the UAE penal code needs to be changed or dropped. [It] states that one who defaults on a cheque with criminal intention can be jailed or fined. But the courts routinely sentence people to jail,” he added.

Fellow lawyer Ali Musabah from PanGlobe Advocates and Legal Consultants argued that the courts rarely issue fines for cheque cases and that jail time should only be for repeat offenders.

“I believe the courts should issue fines for first-time offenders [owing] small amounts. If a person was unable to repay his credit card or bank loan for good reason, he should be fined not jailed,” he told The National.