Q We purchased two office units off plan under two reservation agreements in Business Bay in March 2007. Although a draft SPA was sent, it hasn’t been signed. The units are registered in our individual names and the escrow accounts are in place although no funds have been transferred to or from the account. The reservation agreements do not contain any substantive contract provisions relating to this property, for instance, default on the part of the seller. Also there is no completion date but the last instalment before completion in the payment plan was scheduled for January 15, 2009, bringing total payment to 70 per cent. The remaining 30 per cent is due on completion.
On February 8, 2009, the developer issued a notice (force majeure) stopping payments while payment plans were revised in accordance with the anticipated completion date. Another letter was sent on April 30, 2009, confirming work on the project had restarted (although this appears not to be true) and stating a revised payment plan had been submitted to Rera and the master developer for approval. The draft SPA doesn’t contain any provision for termination of the agreement by the buyer in the event of default by the seller.
Construction has recommenced with work on the piling and shoring substantially complete. The substructure building permit has been obtained. Piling foundation has been completed and pile caps are under preparation. However, the contractor only recently remobilised and there is only limited machinery on site.
We have tried to get in touch with the developer to negotiate and come up with a solution but they are refusing to communicate with us. They sent us final payment notices twice (according to a supposed Rera-linked payment plan), one last year and another one this year. We sent them two responses via our lawyers requesting for clarification as well as the SPA but they have failed to respond.
Can we ask the court to cancel the contract for this reason? Instead of going to the courts, will Rera or the Land Department assist us in this issue? If we were to stay in the project, how can we ensure our payments are protected? Do you think we are in a position to enforce some kind of guarantee agreement?
A Decree No. 6 of 2010 provides that a purchaser may ‘request a competent court’ to rescind the contract where the “developer refuses, without a justifiable reason... to deliver the purchaser the final real estate unit sale contract”. From what you have said, however, a draft SPA does appear to have been sent to you and so the requirement to deliver that document has arguably been satisfied by the developer.
If you didn’t sign the SPA due to some fundamental variation between what had been agreed in the Reservation Contract and what appeared in the SPA, and it can be shown that the reason for not signing was highlighted to the developer, then you may still be able to argue that there has been a breach of Decree No. 6 by the developer. In pursuit of a solution Rera can assist to the extent of facilitating discussions between the developer and yourselves. You will be able to establish, at the Land Department, whether the units are registered and consult their records as to construction status and nature of delays.
However, the Land Department has shown reluctance to become involved in any discussions or arguments on legal issues, such as a purchaser’s right to terminate for delay and recover funds. Having said that, there is a streamlined mechanism for developers to cancel contracts through the Land Department’s Legal Affairs Centre, where purchasers are in breach of contractual payment schedules.
Unfortunately, a similar process doesn’t yet exist in favour of purchasers where developers are in breach of construction schedules. Given the lack of regulatory support for you in this situation, the most prudent way to proceed would be to try to enter into discussions with the developer in an attempt to find an amicable solution.
My advice when entering into such discussions, or when making requests such as the consolidation you are suggesting, is to view the situation from the developer’s point of view. By following the cancellation procedure in Decree No. 6, it is likely that the developer will be able to retain all funds you have paid towards the units to date and, in due course, to recover the units for resale. Any proposal made will, therefore, have to include some element of commercial incentive to make it worthwhile for the developer. Remember, the developer will be keen to maintain some cash flow and to guarantee eventual occupation of units, thus adding to the development’s short-term value. In the real estate market, we are currently seeing a lot of consolidations, credit transfers, price reductions and similar commercial deals that are beneficial to both purchaser and developer. In our experience, where the parties involved show flexibility, a compromise is usually possible.
In relation to your final question, the mandatory requirement for a project escrow account is intended to safeguard, to a certain extent, funds paid by purchasers towards the price of a unit. That extends as far as ensuring that the developer uses your funds for the project in question, rather than applying them across other developments. It doesn’t mean that your funds are kept in escrow pending completion of the project, as happens in some other jurisdictions.
While it is possible, in principle, for purchasers to obtain construction guarantees from developers, such guarantees are rare in the Dubai market and I gather from your query that you do not hold such a guarantee at the moment. It is unlikely that the developer would consider entering into such a guarantee at this stage. Under the circumstances you should look to the escrow arrangement for the (albeit limited) protection it gives you.
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