Dubai property law - Part 1 (Escrow / Trust Accounts)

Several laws have been developed to address property-related matters in Dubai and many of these have been revised and amended as the relatively young market has matured. 

The Dubai Executive Council via the Legal Affairs Department of Dubai Government issues all laws taking into account the recommendations of the Land Department (LD) in Dubai and the emirate’s Real Estate Regulatory Agency (RERA).  Both of these authorities are then charged with implementing the laws once they have been published in the Official Gazette.

RERA will often act on its own recommendations before a law has been published.  It also issues circulars interpreting the laws and regulations which should be taken into account when considering a legal issue.

All laws take into account the existence of Regulation No. 3 of 2006 specifying the areas where non-UAE nationals may own real properties in Dubai – known as ‘Freehold’

Law Concerning Guarantee Accounts of Real Estate Developments in the Emirate of Dubai No. 8 of 2007

This law is commonly referred to as Escrow or Trust account law. It establishes the basic rules for legalising developers and how investors’ money can be used in the development and sale of off-plan real estate. 

The law decrees that developers must sign up to a register and submit details of their development projects.  This register can be found on the RERA website and if a developer or project is not listed you should double-check with RERA as non-listed developers are not licensed to operate.

This piece of legislation also calls for developers to get authorisation from the authorities for local, regional and overseas advertising.

The law established that a trust account has to be opened for each individual project.  Developers are asked to provide details and all documents about the project and its financing.

Note (1) Project financing
This law initially allowed developers to finance projects through pre-sales alone.  In the wake of the property crash it now requires either 20 percent of construction to be completed or 25 percent construction financing from the developer to be placed in an escrow account before selling can begin.

In addition the developer cannot take more than 30 percent of payments upfront subsequent instalments must adhere to a RERA approved construction schedule.

Note (2) Money deposits and land
The law establishes that a developer can only use money in an account for the project registered with that account.   

Developers had to produce title deeds for land before opening an account but in practice land was acquired, often via installments (post-dated cheques),  before the law was implemented.  In some cases, developers became unable to meet land payments and used investor money to fund land instead of construction.

Anyone registering a project today has to prove that the plot of land has been 100 percent paid for.

Note (3) Checks & balances
The law requests that the bank where the trust account is held appoints a trustee to monitor spending and to release money in accordance with construction milestones and then make this information available to RERA, the investors and their representatives.

Trustees, consultants etc are liable to fines (AED 100,000) as well as criminal & civil proceedings if they provide any misleading information. 

The trustee’s role is also to safeguard depositors’ cash in the event a project cannot be completed due to force majeure. Investments must be returned if there is no solution to complete a project however the law does not specify timelines. 

RERA’s Escrow Account Department used to investigate cases reactively (i.e in response to complaints) but they have now caught up with monitoring and rating developers according to their level of compliance with the laws. A new auditing and monitoring system is now in place which lets them know the exact status and activity of developer’s trust account.

Note (4) Selling via registered brokers
Developers can be penalized for selling their units via a broker, who is not registered with RERA pursuant to by-law No (85) of 2006 regarding the Real Este Broker’s Register in the Emirate of Dubai.  

Decree No (5) added that the marketing agreement must be provided for the registered project and that the broker must pay the sales proceeds into the project’s trust account before receiving any commissions.