B R I E FING

SUMMARY

AUGUST 2007

New Dubai escrow law

This briefing explains the provisions of Dubais new escrow law and how to comply with it. The rules affect all property developers who sell units off-plan and receive monies before completion of the development. All those subject to the escrow law must comply with it by 28 December 2007.

Introduction
Dubais new escrow regime has wide-ranging implications for the Dubai property market. Law No. 8 Concerning Guarantee Accounts of Real Estate Developments in the Emirate of Dubai (the escrow law) regulates property developers by requiring all funds received in relation to a development to be administered through an escrow account controlled by the Dubai Lands Department (the Department). The escrow law allows a six-month transitional period from the date of publication (28 June 2007) for developers to comply with its requirements. Therefore all persons and entities to which the escrow law applies must comply with it by 28 December 2007. The practical considerations of the escrow law are set out below.

unless they are registered. Registration forms may be obtained from the Department. The requirement to be registered is in addition to the requirement to have a valid trade licence.

Can a developer advertise a development without being registered?

A written permit must be obtained from the Department before a development is advertised in local or foreign media. The Department has indicated that obtaining such permit is an additional requirement to being registered with the Department.

Who does the escrow law apply to?

All developers who sell units off-plan (whether the development is in the planning or the construction phase) and receive payments from buyers or financiers before completion of the development.

Once a developer is registered with the Department, can he sell units from a development?
After a developer has been registered, he must make a separate application to open a guarantee account for the administration of funds received from financiers, investors or purchasers in the development. This application should include the following: the developers trade licence and certificate of registration with the Dubai Chamber of Commerce & Industry; the original title deed of the plot to be developed; a copy of the contract for the sale and purchase of the plot between the developer and the master developer; a letter of approval for the development from the master developer;
New Dubai escrow law

Will there be a record of who is licensed in accordance with the escrow law?
The Department will administer a register setting out the names of all developers licensed to carry on such business in Dubai. Developers will be unable to conduct any property development activities (including advertising)

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architectural plans approved by the master developer and the concerned authorities (the Dubai Municipality); a financial statement, prepared by the developers consultant and certified by an accountant, that details projected cash flows and all sums payable to the developments creditors; a building permit issued by the concerned authorities; a copy of the developers pro forma sales contract for off-plan sales; and an undertaking by the developer to commence construction after obtaining the master developers approval to sell off-plan.

Once the funds are deposited into the guarantee account, how are they dealt with?
The escrow law does not specifically deal with payments to third-party consultants or contractors. However, the Department has confirmed that, provided consultants and contractors costs can be linked to the development to which the guarantee account relates and an invoice is issued, the developer will be able to receive payments from the guarantee account for such costs. This is subject to further rules that may be issued by the Department. If a developer wishes to draw from the guarantee account (for example, for construction payments to be made to the contractors), he must apply to the account trustee, submitting a claim for payment and a certificate from its project manager describing the completed stage of the development. The account trustees engineer will then inspect the development to confirm that the construction milestone has been achieved before issuing any payments.

The Department has acknowledged that it may not be possible to provide all of the above items before the guarantee account is established. However, all items that are in the developers possession at the date of application must be provided to the Department and all outstanding items must be provided when they are obtained by the developer.

When are the developers profits released?

The Department will keep 5 per cent of the total amount of the guarantee account in the account for one year after the developer has obtained a certificate of completion for the development. It is unclear how the total amount will be calculated. The release of such funds to the developer will not be made until one year after all units in the development are registered in their purchasers names.

Who administers the guarantee account?

The developer will enter into an escrow agreement with the account trustee, which is a bank or financial institution certified by the Department. A copy of the escrow agreement must be lodged with the Department. The account trustee administers the guarantee account under the supervision of the Department and must provide regular statements to the Department.

Which funds must be deposited into the guarantee account?

The escrow law states that any funds raised by way of a mortgage secured for the development must be deposited into the guarantee account. Such funds may be used only in accordance with the provisions of the escrow law. While the escrow law does not specify that progress payments from purchasers must be paid into the guarantee account, the account is defined as one into which sums paid by buyers of units on the plan or by financiers must be deposited. If a developer has more than one development, a separate guarantee account must be opened for each development.

What are the costs involved in complying with the escrow law?
The escrow law provides that the Department may collect fees for the services offered under the law. The size of such fees is not given. The developer must also pay for any costs of the account trustee and any establishment and management costs of the guarantee account. The Department has confirmed that there are no costs involved in registering or in applying for the written permit for advertising a development.

New Dubai escrow law

 Freshfields Bruckhaus Deringer, August 2007

This material is for general information only and is not intended to provide legal advice. Freshfields Bruckhaus Deringer 2007 www.freshfields.com

What are the penalties for non-compliance?

The escrow law provides that a fine of not less than DH100,000 and incarceration (for an undefined period) will be imposed on anyone who: develops property without a licence (presumably a trade licence); submits false documents or makes mis-statements to any concerned authorities to obtain a licence for property development; knowingly advertises the sale of units in bogus developments; embezzles or misappropriates funds provided to the developer for the purposes of the development; being an auditor, prepares a false report or conceals facts; being a consultant, knowingly approves false documents; or being a developer, deals with a broker who is not registered with the Department. A developer will have his registration cancelled from the registry if he: declares bankruptcy; cancels (or has cancelled) his licence (presumably a trade licence); violates any laws regulating real estate development; or does not commence construction within six months of obtaining approval to sell off-plan from the Department.

What is the RERA?

The RERA has been established under a rulers decree issued on 31 July 2007. It is affiliated to the Department but will have administrative and financial autonomy. It was established to administer the escrow law and to regulate property development and brokerage activities in Dubai. In particular, it will regulate developers, real estate brokers, financiers and co-owners associations.

For further information please contact

Joseph Huse
T + 971 4 5099 141 F + 971 4 5099 111 E joseph.huse@freshfields.com

Duane Keighran
T + 971 4 5099 143 F + 971 4 5099 111 E duane.keighran@freshfields.com

Can we expect further regulations or direction from the Department on the escrow law?
Yes. The escrow law states that the Department will issue decisions regulating the terms and conditions for advertising developments. The Department has also advised that, through the newly established Real Estate Regulatory Authority (RERA), it will issue further guidance on the interpretation and application of the escrow law and any applicable fees. It is not clear when such clarifications will be issued.

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New Dubai escrow law