The cooperation of developers and purchasers is likely to continue to play a central role in procuring the completion of off plan projects, protecting investments and, ultimately, restoring confidence to Dubai's real estate market.
The challenges facing Dubai's off plan real estate market are significant for developers and purchasers alike.
With a significant downturn in property prices and a tightening of lending conditions, developers are now facing substantial reductions in cash flows resulting from purchaser payment defaults. In many cases, payment defaults are at a level where resulting cash flow is insufficient to meet project costs. Escrow balances have been diminished by land payments and other withdrawals, and developers are rarely able to procure new finance in the current climate.
Equally, those off plan purchasers which can afford to pay face considerable uncertainty regarding the viability of their investments. The fear of throwing good money after bad has resulted in many purchasers withholding payments or demanding refunds of amounts paid.
Although there are no straightforward solutions to this impasse, rushing to pursue legal claims or termination of sale agreements may not always result in the best outcome. In many cases, developers and purchasers are negotiating revised purchase terms or alternative settlement arrangements which take account of difficult situations and create ways to move forward.
For developers, the most common response to a purchaser default is to seek termination of the sale agreement in accordance with Dubai Law 13 of 2008 (as amended by Law 9 of 2009) ("Law 13"), which prescribes a mandatory notice procedure. If successful, termination of a sale agreement can assist a developer by allowing the retention of purchase monies (depending upon the level of construction achieved) and removing legal claims against a project. As the resale market is currently undesirable, however, termination may not result in any significant new cash flow, and may not at the end of the day enable project completion. In these circumstances, the developer's best hope may be that, with a reduced number of purchasers, those remaining may be able to be consolidated into a smaller area and, possibly, the development commitment reduced.
By negotiating revised purchase terms, whether on the basis of a discount or on the basis of a reduced or "consolidated" purchase commitment (or a combination of both), a developer may be in a position to procure fresh income from purchasers who have otherwise abandoned their purchase or who are considering legal action. Alternatively, by negotiating to consolidate purchasers into smaller areas, a developer may be in a position to reduce its development commitment, or otherwise phase a project over a period of time, to a level which is affordable.
For purchasers, pursuing legal claims against developers can be expensive and time consuming. Litigation, in particular, carries an inherent risk. Recent decisions suggest that Dubai courts are conscious of the challenges facing the off plan real estate market and are reluctant to order refunds or compensation against developers which can demonstrate they are committed to completing a project, even where that project is significantly delayed. Where a purchaser does have a strong legal claim, the financial standing of the developer and the likelihood of recovery in the event of successful litigation needs to be considered. With these points in mind, negotiated arrangements which afford purchasers with a reduced purchase commitment (such as "consolidation" of multiple units), a discounted purchase price or greater certainty of project completion may have merit.
In order to be effective, any negotiation strategy adopted by a developer needs to be carefully planned in consultation with professional advisors, and appropriate feasibility studies undertaken. Purchasers equally need to be aware of the risks and implications of accepting any revised purchase arrangement, and take advice on their legal rights. Any settlement documentation should be properly drafted taking into account the terms of any existing sale or reservation agreement as well as prevailing laws, and issues such as interim registration under Law 13 need to be considered.
Of course, negotiation may not always be possible or appropriate and, after consideration of available options, action to preserve or enforce legal rights may be the preferred or only alternative. In this regard, new regulations are expected shortly which will supplement Law 13 and provide greater certainty regarding issues such as project delays. In particular, the regulations are expected to clarify legitimate delays or other events beyond the control of developers, as well as conduct that will be considered "negligent". Specific rights for purchasers to apply to courts for cancellation of sale agreements in certain circumstances are expected, as well as clarity regarding the right of the Dubai Land Department to require cancellation of real estate projects (a right which, to date, has not been exercised). The right of the Land Department to mediate disputes between developers and purchasers, with a view to reaching negotiated settlements, is also expected to be confirmed.
Although it is hoped that the new regulations will provide clarity in relation to the legal rights of developers and purchasers, and other issues relating to off plan projects which are (or may potentially be) unviable, they are unlikely to afford a complete solution. The cooperation of developers and purchasers is likely to continue to play a central role in procuring the completion of projects, protecting investments and, ultimately, restoring confidence to Dubai's real estate market.
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