Dubai: With project cancellation announcements doing the rounds in Dubai, investors may finally be in sight of recovering their funds — or at least a portion — tied to such developments. Even then, it may not be a straight and narrow path that leads the investors to their intended destination.
According to diktats (order) issued by the Real Estate Regulatory Agency (Rera), developers with cancelled projects are to return the funds from the respective escrow accounts within 14 days of receiving notice. It also applies to those funds which were withdrawn by the developer from the account.
If the funds in the escrow accounts prove insufficient — and it may well be the case given the track record of many of these developers — they are then obliged to make repayments from their own resources. This must take place within 60 days of the cancellation notice from Rera. (However, there is a rider which states that Rera can extend the timeline.)
"Initially, Rera will order a bank holding the project escrow account to return all funds into its effective control which will then be involved in distribution to purchasers," said Shahram Safai, partner and head of real estate at the law firm Afridi & Angell.
"It is contemplated that all purchasers will have the same priority for receiving a refund of payment. It remains to be seen how this is implemented in practice."
According to sources, the refunds are yet to reach the investors, given the maximum 60-day timeframe that developers have been given to do so. While investors can use the time to get all their papers in place to ensure their rights will be honoured, it also gives developers a bit of a wriggle room.
According to the rights vested with Rera, if developers do fail to comply, the government agency can take whatever procedures necessary to protect investor rights, including referring the matter to the competent judicial authorities.
"The refunds will be a difficult issue to navigate given the multitude of existing issues between developers and purchasers," said Safai.
"The process will most likely also result in some disputes which will take several years to resolve."
How the whole process of the project cancellations are conducted and funds returned will be a litmus test for the Dubai real estate market's revival. And where developers mount challenges and the way local courts interpret them will create the necessary legal precedents, which are just as vital in creating a mature property marketplace.
In early 2010 Decree No 6 came into force, which provides for Rera to cancel a development once it has received a technical report. There are a number of scenarios under which Rera may exercise its power, including of course one where the developer has failed (without an acceptable excuse) to commence construction.
It may cancel a development where there has been a breach by the developer of its obligations under the Escrow Law No 8 of 2007 or where the developer is bankrupt.
"It is our experience that Rera will often rely upon a variety of reasons for cancellation, sometimes referring to more general justifications such as the developer is not serious in carrying out the project," said Safai.
On its part, Rera must notify the developer in writing of the decision to cancel. Under Decree No 6, the developer has seven working days, commencing from the date on which the developer was notified of the cancellation, to challenge the decision.
The developer's challenge to cancellation should include copies of all relevant correspondence with Rera, the Land Department, the master-developer, and other third parties, in support of his position.
For example, the developer may have paid the master-developer the purchase price for the plot and obtained all necessary consents and licences to commence construction, but may be prevented due to factors beyond its control.
Once legal challenges are mounted, it may be that only the courts can provide a final verdict on the status of these developers and their projects. Only then will investors know how near — or far — they are from getting their funds back.
Final clarity not available
Dubai: A final clarity on the identity of the cancelled projects in Dubai is still not there.
"We have not yet had sight of a definitive list of cancelled projects from Rera," said Shahram Safai of Afridi & Angell.
"However, we anticipate that such a list would include a good portion of the ‘on-hold' projects that Rera has already publicised in the past."
Given that most of the cancellations relate to single-project developers, they do not even have the leeway that master-developers have of offering options in any of their other developments in lieu of refunds.
"It was in the media that Nakheel had offered buyers to either swap for another project that is closer to completion or poised to restart construction, or to wait five years for a refund of their down payments," said Richard Paul, associate director at Cluttons.
"I think however that those developers who don't have the same presence as Nakheel may struggle to offer such a solution — they simply don't have the funds."
Project cancellations have been making the headlines in Dubai. But in terms of plugging the supply-demand gap, has the market already discounted these cancellations?
Project cancellations by themselves will not have much of an impact on the fundamentals currently at work in the local property market.
Final picture still hazy
To go ahead with a project cancellation, the Real Estate Regulatory Agency must take the following steps:
- It must prepare a technical report explaining the reasons for cancellation.
- It must notify the developer in writing either by registered post or e-mail of the cancellation decision.
- It must (at the expense of the developer) appoint an accredited auditor with the task of (a) assessing the financial position of the project, (b) verifying the monies that have been paid to the developer or credited to the escrow account and (c) identifying the monies that have been disposed by the developer.
- It must ask the escrow account trustee (or the developer, in respect of any monies that have been withdrawn from the escrow account) to repay the unit purchasers the sums deposited in the account (or withdrawn by the developer from the account). This repayment must take place within 14 days of the date of cancellation.