FalconZ Articles

Legislation in response to concerns arising is the normal way in emerging marketssuch as the UAE, say Steven Henderson and Brett Scrymgeour of Clifford Chance.

The recognition of the need to diversify their economies and attract foreign investment led the governments of Abu Dhabi and Dubai to introduce a legal framework for property ownership in 2005 and 2006 respectively. For foreign investors and developers, these laws created greater confidence in their legal ownership rights in a market that is experiencing unprecedented growth in the real estate sector.

In Dubai, foreign interest in real estate ownership began early, in fact even before formal property laws were introduced. Foreign investors’ entry into the market followed the issue of a decree in May 2002, by the then Crown Prince of Dubai, Shaikh Mohammad Bin Rashid Al Maktoum, to allow foreigners to buy and own freehold property in specified areas of Dubai. Until Dubai’s property law was introduced four years later, however, the nature of such ownership rights was uncertain. Foreign purchasers essentially obtained a series of contractual rights from developers to obtain title at some stage in the future, which is a long way from the state-backed ‘guarantee’ of title more familiar to many foreign investors.

The law has been constantly evolving since the introduction of Dubai’s property law. In most instances, the laws have been introduced to address a concern that has arisen in the real estate market, which is expected in an emerging market.

For example, the introduction of the foreign ownership laws saw the entry into the real estate market of a number of developers looking to ‘cash in’ on what continues to be one of the best markets for real estate in the world. Because there was initially little regulation or ‘checks’ in place, buyers were left with no guarantees that instalments of the purchase price made by them to developers were being used to undertake construction of the property. This becomes a real issue when there are delays to the development, which have been reasonably common in Dubai over the last few years. Incidents like this can have severe consequences on an otherwise strong real estate market because of the negative impact on consumer confidence. This highlighted the need for regulation both to complement and complete the existing property laws. The government of Dubai, in recognition of this need, has introduced a number of new laws aimed at increasing consumer confidence, including:

- Escrow Law — the escrow law introduced by the Dubai government in 2007 requires developers (when they sell units off the plan) to set up escrow accounts. The law requires developers to pay any money received from buyers into the escrow account (i.e. the purchase price is no longer paid directly to the developer) where it is held subject to release in stages as the development is constructed. Even after the development is completed, a portion is retained as further security.

- RERA — the Real Estate Regulatory Authority known as RERA was established in July 2007. RERA has been given wide-ranging powers including licensing all real estate activities in Dubai, and it is now a legal requirement to be registered on RERA’s Developers Register for any party undertaking developments in Dubai. RERA has also imposed certain rules in relation to registered developments, one of which requires that all developments must commence construction within six months of launching sales in relation to the development to the market.

- Strata Title Law — the strata title law in Dubai came into effect earlier this year. It seeks to give certainty to owners of units in apartment buildings of their rights to ownership (i.e. it confirms that they may sell, lease or mortgage their unit). One of the fundamental features of an apartment building where various different parties own units is a common set of rules for all of the owners to follow (such rules deal with a number of issues, including the payment of expenses for the maintenance of common-use areas within the development). In recognition of the importance of these rules, the strata title law includes a requirement for owners to comply with the rules for their particular development. However, the key feature in terms of consumer confidence is the introduction of a requirement for an owner’s society to manage the development. Each owner of a unit in the development will be a member of the owner’s society and have voting rights that gives owners some comfort over the management of the development.

In Abu Dhabi, the property ownership laws evolved differently. Unlike Dubai, there was no decree with regard to the right of foreigners to own property and no right for foreigners to own property until 2005. However, to attract and retain foreign interest and growth in the real estate sector, Abu Dhabi had as much need for the introduction of property ownership laws as Dubai. Since the introduction of a legal framework for the ownership of property in the emirate in 2005, foreign interest in the real estate sector has been ‘red-hot’, so much so that phases of particular developments have sold out within hours of their release.

The appetite for real estate in the UAE and in particular in Dubai and Abu Dhabi has been unmatched anywhere in the world. To sustain the growth in the real estate sector, and to keep the current momentum going in the current global environment, the governments of both Dubai and Abu Dhabi need to maintain consumer confidence and expand investment, including foreign investment.

The government of Dubai has already taken active steps to increase consumer confidence with the introduction of the escrow law and the strata title laws, as well as the establishment of RERA. The laws passed to date and the establishment of RERA provide a solid legal framework that protects all players in the real estate market — but more laws (and the regulations contemplated in the current laws) still need to be enacted. The government of Abu Dhabi will need to follow suit and take steps similar to those already taken in Dubai if it wishes to maintain the foreign interest in its real estate market.