Legal issues when dealing with property

It is beyond any doubt that the UAE in general and Dubai in particular is experiencing an unprecedented construction development boom. Mega projects such as Palm Island, Emirates Hills, Dubai Marina and many others, led by major real estate developers such as Emaar and Al Nakheel, are shaping Dubai's new face.

The volume of investments in such projects is in the tens of billions of dirhams. New models of ownership are being introduced such as long-term leases, ownership of individual apartment units, community ownership and freehold ownership for non UAE nationals, all of which mark an interesting departure from the long established practice of the simple form of ownership of independent properties by UAE nationals and, in some cases, by GCC nationals.

Such new models of ownership pose legal challenges that have not been addressed before in the UAE. One such challenge which shall need to be addressed is that which banks and financial institutions will face in their respective role as financiers of projects.

Banks and financial institutions alike have been instrumental in the construction development, both to the purchasers as well as the project developers.

In particular, they have been a key factor in the purchaser's ability to buy property by financing their respective purchases. Despite the UAE's enjoyment of a relatively liquid market, purchasers have had to turn to the banks and financial institutions to fund their respective purchases. Accordingly, it may not be incorrect to say that the banks' involvement in financing consumers' purchases in these projects is a key factor in the success of this process.

Therefore, banks financing the purchase of real property should be aware of the legal issues and challenges which will arise in relation to their role as financiers.

In this article I shall address a number of the legal issues/challenges banks and financial institutions shall face when acting a financiers to the prospective purchaser of real property in Dubai in particular, as it is Dubai from which these new models of ownership have emerged.

As real estate issues are largely regulated by the laws and the practices of individual emirates as shall be discussed here, the legal position in respect of other emirates may vary from that described herein.

Some of the questions, which I shall respond to here, embody the legal issues and challenges banks and financial institutions may face. The questions are as follows:

— What are the laws which govern real estate matters?

— What securities can banks and financial institutions take against such finance?

— How can inheritance issues affect the finance structure and how effective is the enforcement scheme of the securities that banks obtain?

Constitution

In respect of the laws which govern real estate, the starting point here is the Constitution of the UAE. Article 121 of the Constitution vests legislation, in the area of real estate ownership, with the federal government. Accordingly, the federal government has the right to legislate in matters relating to real estate.

The UAE Civil Transactions Code 1985, "the Civil Code", contains various provisions which deal with certain aspects of real estate ownership. However, the UAE law falls short of containing any provision which may restrict ownership of real estate to UAE nationals. The only clause which embodies a restriction to this effect is found in Article 298 of the UAE Civil Procedures Code 1992 which restricts the sale of immovable property, in auctions organised by courts, to UAE nationals only.

The article states: "Real property may only be sold to a (UAE) citizen, subject, however, to the rules for the transfer of real property". Although it can be argued that this article gives an indication of the intention of the legislature to restrict ownership of real estate to UAE nationals only, failing to have an express provision to this effect means there is no federal restriction on the ownership of real estate by non UAE nationals.

Similarly, there is also no legislation to this effect found in the laws of the individual emirates. Restricting ownership of real estate to UAE nationals has merely been a long established administrative practice. The rules of conflict of laws between federal and local legislation prescribes that individual emirates may issue laws in areas that the federal government has not exercised its right until federal legislation has been passed.

Accordingly, one is correct to assume that until such time when federal legislation is passed, the individual emirates may legislate in matters pertaining to real estate.

Security

Regarding the security a bank or financial institution may take from such prospective purchasers, the banks and financial institutions generally require a legally valid and enforceable mortgage on the real property. Therefore, the ability to conclude a valid and an enforceable mortgage on real property, which is financed by a bank or a financial institution, is a key factor in the success of the whole process. Accordingly, one must examine the laws which govern mortgages in the UAE.

As stated earlier, the Civil Code contains provisions relating to real estate. One full section is dedicated to mortgages of real estate. Articles 1399 to 1447 deal with the issue of real estate mortgage. Article 1400 of the Code provides: "Security mortgage shall not become effective except upon its registration, and the mortgagor shall be liable for the expenses of the contract unless it is otherwise agreed".

Therefore, any mortgage which is not properly registered runs the risk of being declared invalid. Therefore, the issue which should be considered is whether the Dubai Lands Department, being the authority in charge of registering mortgages, will accept registering a mortgage when the purported owner of the property is not a UAE citizen. This doesn't seem to be the case yet and one has to see how the Lands Department will deal with the situation.

It is noteworthy, however, that when obtaining a mortgage, the law does not draw a distinction between a national and a non national mortgagee, which means that branches of foreign banks operating in the UAE may be able to finance property purchases and can take, as security, mortgage on the property financed.

The privilege extended to foreign banks seems to be an exemption from the general rule of not allowing any form of real estate disposition to be in a foreign name rather than an application of the law.

An ancillary point which arises from the mortgage issue relates to mortgaging properties, which is granted by the government. Although proper titles are issued for these properties, such titles are restricted ones in that the owners do not have the right to dispose of these properties.

Accordingly, mortgaging these properties had always presented obstacles until May 14, 1996, when a local Dubai order was issued, which allowed these properties to be mortgaged. On June 5, 1996, another local order was issued which attached certain conditions to this mortgage. These conditions included the following:

— The mortgage should