What is Trust Account Law and how does it apply in the UAE?

The introduction of the much-awaited escrow account law in Dubai in 2007 has been an important move in winning the confidence of people buying properties in Dubai, and improving the emirate's reputation as a reliable real estate market. According to the escrow account law (also called the Trust Account law) number eight, all funds received by real estate developers for a property have to be administered through an escrow account opened with a designated bank. Several banks and financial institutions such as HSBC Bank Middle East, Standard Chartered, Tamweel and Amlak have already been certified to act as account trustees.

The initiation of escrow accounts has meant that issues related to real estate developments, including delays due to the lack of funds, now stand to be scrutinised closely by the authorities, in particular, the real estate regulatory agency (RERA), a government body that operates under the purview of the Dubai land department (DLD). The trust account law also works to protect investors on several other fronts.

Allan Dueck, Regional Head of Products, Global Transaction Banking, HSBC Bank Middle East Limited, says that the fact that developers are registered with the DLD means that purchasers know that developments are only being conducted by reputable developers, and that there is a mechanism to cancel the registration of developers that fail to perform.

Stringent conditions

There are also stringent conditions that have to be fulfilled when a developer registers. Duek says that before a developer can open an escrow account and begin marketing, the development needs to be approved by the land department.

"This approval includes project budgets and architectural drawings, which provides investors the comfort that the vision of the building they are buying into will not change. Finally, the channeling of funds into an escrow account gives purchasers increased confidence that the funds they have paid will be used exclusively for the construction of the property," he says.

The law also protects investors from 'substandard' projects by issuing a directive to the escrow agent (bank) to hold back five per cent of the total value of the trust account for a period of one year to cover any defects arising in the property during that period, says J. R. Gangaramani, Chairman, Al Fara'a Construction Group.

These factors will definitely boost the emirate's thriving real estate sector and strengthen its reputation among investors both on home ground and internationally. Azeem ur Rahim, Managing Director, Transactional Banking, MEPA, Standard Chartered Bank, says that the total value of land transactions in Dubai touched Dh175 billion in 2007 compared with Dh62 billion in 2006 — an increase of 170 per cent on a year-on-year basis. "These numbers reflect the developer's confidence in Dubai's real estate sector. The sector has also gained more credibility locally and internationally after the regulations came into effect. Investors and real estate funds and financing institutions have gained immensely from these regulations as more investments were routed through the securitisation route."

Rahim also says that a properly controlled and regulated property development attracts better credit assessment, resulting in a favorable rating, which in turn attracts investors and reduces the cost of funding.

RERA licensing

The property sector, in particular, has responded well to the law with RERA licensing more than 350 real estate developers since the law was introduced last year. The fear of penalties and restrictions linked to promoting their properties in the media are important factors in motivating developers to sign up. "Any developer who hasn't registered with the Dubai Land Department and has failed to open an escrow account may be subject to large fines and/or imprisonment. As far as advertising is concerned, all media outlets have been prohibited from carrying advertisements for unlicensed real estate projects, making it difficult for unlicensed companies to sell and market their projects. In addition, unregistered developers will also not be permitted to participate in exhibitions or advertise in local/foreign media for the promotion of their off-plan properties," says Ahmad Shaikhani, Managing Director, Memon Investments.

Developers who register have to open a specific bank account with one of the accredited banks in the UAE for each real estate project they launch. "This bank account must be used solely for the purpose of that particular project. The escrow account is established based on a written agreement between the escrow agent (the bank) and the developer, a copy of which has to be deposited at the DLD. It is this agreement that regulates the operation of the account and specifies the rights and obligations of the parties. It is also worth mentioning that the creditors of the developers are not entitled to seize any sum contained in the escrow account," says Gangaramani.

He adds that a developer delaying the commencement of construction for more than six months after obtaining the DLD approval, without any legitimate reason, can be de-registered.

Security factor

Banks approved for operating trust accounts also work closely with RERA to ensure that the developers comply with the law. "Funds cannot be paid from the account, unless the payment request is in line with the law, RERA's guidance as well as the project budgets agreed with RERA, hence there is a strong incentive for developers to ensure that they do comply," says Duek.

Rahim from Standard Chartered Bank says that in order to ensure that both developer and the escrow bank are in compliance with escrow law, the bank engages (commercial and law) experts to prepare standard agreements to cover all requirements of the law and explain in detail the obligation of each party. The bank also has a dedicated team that oversees the implementation and management of escrow accounts.

Such checks and balances will go a long way in ensuring that the escrow law is successfully implemented by the real estate sector, and work towards attracting more investors to emirate's property market. However, buyers also have some responsibility in protecting their investments. Duek says that buyers should research the development as well as the developer, to ensure that they are comfortable with whom they are doing business and that they understand the investment that they are making. He says that the combined effect of the law and the appointment of a reputable financial institution acting as the trust agent means that buyers now have a transparent framework of registered developers, approved projects and licensed trust agents for making that research easier to complete and easier to draw comparisons between projects and developers.

Rahim advises that the once the buyer has decided to buy into a particular project, they should ensure that they make the payment directly into the escrow account. "Furthermore, while making the payment in to the account, the end buyer should use their unique reference number given to them by the developer. This will help the developer and the escrow bank keep appropriate records for all the payments made into the escrow account. In addition to this, buyers are required to register their purchase with the land department so that they can enjoy the full benefits of the law," he says.