Trust accounts are used by property brokers in many parts of the world to deposit funds for real estate transactions, typically down payments and fees paid by clients when they make an offer to purchase real estate. A trust is an English common law term whereby a person (the trustee) holds something on behalf of another person (the beneficiary). The UAE being a civil law system does not have trust laws (the Dubai International Financial Centre, an independent free zone, has its trust law). A similar concept in a civil law system is the concept of holding something in “escrow” such as the escrow account, which is used by off-plan developers in Dubai.
“The whole point of a trust or escrow account is that it provides an intermediary to the two parties [the seller and buyer]; somebody independent of the two parties, who can promise these parties that they will hold something but only release it when the contract is fulfilled,” explains Jeremy Scott, partner in the real estate practice at Al Tamimi & Company.
Referring to his experience in New Zealand, Scott says if a broker does a deal, quite often the deposit would go into the broker’s trust account, but it would only be a small amount, around 10 per cent. The deposit, less the broker’s commission, would be released to the seller’s lawyer after a statutory period.
“Real estate brokers are heavily regulated in New Zealand in terms of their training and operation of trust accounts,” says Scott. “There’s a separate disciplinary body that undertakes disciplinary proceedings against brokers for ethical or other breaches of their duties. It can strike them off if they misbehave, so there are strict codes of practice.”
In Dubai, brokers are not required to have trust accounts as they are not allowed to keep money from clients in the first place. “Only companies with a full property management license, who have submitted a large bank guarantee with the Land Department in case of the company closing down, can accept money into their banks from tenants for rents and then forward to owners,” explains Laura Adams, managing director of Dubai-based Carlton Real Estate.
Even if brokers were allowed to take deposits or handle money, they would probably choose not to as this makes them a target in any dispute between the buyer and the seller, says Scott. Furthermore, an escrow agreement is required, which, due to the risks involved, can be a complex legal undertaking.
But Iftikhar Ali, senior property consultant at Vintage Real Estate Broker, believes a trust account could be useful to brokers. “Agent escrow accounts could play a role to ensure that brokers get their commissions on time from developers, buyers, sellers and from the companies where they are working,” he says. “If the money in any real estate transaction is paid to a third party acting as an escrow agent, the escrow agent could then be authorised on the basis of the presented agreements to pay the commission directly to the broker and deduct it from the amount that is to be paid to the developer.”
For now, escrow accounts are only required by developers and Rera has not indicated any plans to introduce escrow accounts for brokers. “Any regulation of that nature needs to be thought through very carefully and all of the rights and obligations of the brokers and their clients need to be considered and evenly balanced,” notes Scott.
He adds it is unlikely we will see escrow accounts for brokers as the current practices are not creating significant problems and any regulation would need to be comprehensive. “It is not where the need is at present,” he says.
Adams agrees, saying that with the law as it is, where brokers do not hold clients’ money, the introduction of trust accounts for brokers would not be necessary.