PROPERTY LAW TO TACKLE FINANCIERS’ CONCERNS
Azlin Ahmad from UAE-based corporate law firm Al Tamimi investigates what Abu Dhabi’s new property law means for off plan property lending in the emirate.
This article provides a brief overview of Law No. 3 of 2015 on the Regulation of Real Estate Sector in the Emirate of Abu Dhabi (the “Property Law”) which is expected to take effect from January 2016. It replaces the current land law, and its scope has been expanded to many aspects which were previously either unclear or unaddressed especially for property financiers.
FINANCING OF OFF PLAN UNITS
The Property Law now tackles many issues which had previously been of concern to property financiers and mortgagees within the Abu Dhabi market, particularly in the areas of off plan financing and mortgage enforcement.
Prior to the Property Law, there was no clear legislation to safeguard property financiers lending on off-plan sales in Abu Dhabi. Whenever financing the purchase of off-plan property, lenders were dependent on the developers maintaining an accurate interim registry to register the real estate rights in the property. Lenders were also reliant on the contractual undertakings by the developers to register the off-plan property upon completion, leaving the lenders in a position where they were contractual mortgagees but without the benefit of rights in rem over the financed property pending registration of their mortgage. There were also limited statutory safeguards against the delay, non-completion or defects of the property.
The Property Law has attempted to remedy this situation through the introduction of various provisions. For example, there are requirements to be complied with by a property developer before consent is granted by the Department of Municipal Affairs (“Department”), the regulatory and supervisory authority over property developers, for a property developer to be licensed and for a specific project to be approved.
The Property Law has also introduced a requirement for the maintenance of an escrow account (to be operated by a bank or a financial institution approved by the Department) prior to approval being given for a property developer to commence a project and make off plan sales. As such, the developer must have first met a 20% milestone in the development project before withdrawals can be made from the escrow account. If the developer fails to complete a project, the escrow account bank is obligated to safeguard the depositors and ensure the successful completion of the project within a specified period, failing which property financier and end buyers are granted priority to the funds in the escrow account.
A notable development that further strengthens the position of financiers of off-plan units is the establishment of the Initial Real Estate Register to record all dispositions over units sold off-plan during the construction period. Dispositions over off-plan units shall not be binding unless they are registered in the Initial Real Estate Register.
The Property Law now explicitly allows the purchaser of a real estate right to mortgage his contractual right on an off-plan real estate unit, in order to pay the price of the real estate unit, provided that the real estate unit is registered in the Initial Real Estate Register and that the mortgagee pays the loan amount directly to the escrow account. It also imposes an obligation upon the developer to inform the lender/mortgagee in the event of a default by the purchaser/mortgagor under the sale and purchase agreement.
Under the previous regime, developers had a contractual right to impose fees for registering a mortgage or transfer over property, the cost of which can be prohibitive to the debtor. The Property Law has abolished the right of developers to collect fees other than administrative expenses paid to third parties (subject to a maximum set by the Department).
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