Bahrain: Acquiring And Disposing Of Real Estate In Bahrain – Some Traps To Avoid

Last Updated: 30 April 2013
Article by Simon Green and Reem Al Mahroos

Introduction

This article briefly examines the typical conveyancing process in Bahrain and highlights some of the main issues which may need to be considered and / or avoided. Essentially there are 5 stages involved in the conveyancing process in Bahrain:

  • Pre-contract;
  • Exchange;
  • Pre-completion;
  • Completion; and
  • Post-completion.

A straightforward real estate transaction will typically take between 3-4 weeks to achieve completion. Registration of the transfer of title from the seller to the buyer at the Survey and Land Registration Bureau (SLRB) usually takes a further 3-4 weeks (but this could be pushed back significantly depending on the capacity of the SLRB).

Trap 1: Freehold vs. Leasehold

The current position in Bahrain is that only freehold interests are capable of registration in the register at the SLRB. This means that leases do not create a proprietary interest and are therefore purely contractual. This raises a number of issues for a buyer as there is generally less of an appetite for a leasehold interest and this may affect a buyer's ability to subsequently 'sell' its leasehold interest.

A buyer may also find it more difficult to obtain financing (both conventional and Islamic) in relation to acquiring a leasehold ownership interest as a financier's ability to take security over a leasehold interest may be diminished.

If the interest being acquired is a leasehold interest, we would suggest ensuring that the lease is notarised at the Notary Public as under Bahrain law, a lease will bind third parties to the extent that its existence is known about or disclosed. Notarisation acts as a notice to the public to some extent which will offer some protection to a buyer's interest.

Trap 2: Due Diligence

Unlike jurisdictions such as the UK, title information relating to a property is not readily available for public inspection unless the owner has provided its consent for the SLRB to release such information.

Due diligence is therefore normally limited to reviewing title information and other relevant documentation provided by a seller, raising standard enquiries with the seller and undertaking an inspection of the property (which may be accompanied by a survey indicating the state and condition of the property).

However, it should be noted that other searches and investigations can (and should) be made depending on the nature of the transaction and the identity of the parties. For example, we would usually expect the following to be undertaken in addition to the 'usual' due diligence referred to above:

  • A search of the SLRB to provide confirmation of the status of any registered mortgages or encumbrances at the property;
  • A court search to determine whether there are any claims against the parties which may be attached to the property (the above SLRB search will also usually identify whether the property is the subject of an outstanding claim);
  • If the seller or the buyer are companies, a search at the Ministry of Industry and Commerce to confirm the relevant party has an up to date Commercial Registration.

Trap 3: Deposit

It is standard market practice for a buyer to pay the seller a deposit upon exchange of a sale and purchase agreement (SPA), which would comprise a percentage (normally 10%) of the purchase price of the property being acquired. However, it should be noted that under Bahrain law, where a seller has defaulted on the transaction, the buyer is entitled to the return of the deposit as well as to receive a compensatory amount which is equivalent to the value of the deposit.

Consequently, the above could be a significant amount and a seller should either seek a specific waiver from the buyer that it will not be entitled to any compensation or limit the compensatory amount to a specific sum.

Conversely, where a buyer defaults, it is clear under Bahrain law that the seller will be entitled to retain the deposit. Article 429 of the Civil Code (Civil Code) provides that the seller may also claim compensation in connection with a default by the buyer. However, the level of compensation is not specified. Consequently, and similar to the above, a buyer should either seek a specific waiver from the seller that it will not be entitled to any compensation or limit the compensatory amount to a specific sum.

Alternatively, and from the seller's perspective, it may require specific wording so that the compensatory amount provides the seller with clear recourse to claim compensation from the buyer in the event that, for example, and as a result of the buyer's default, the seller is obliged to sell the property at a lower price.

Trap 4: Security of Tenure

Where a buyer is purchasing a property that is subject to occupational leases, a buyer should be wary of the rights afforded to occupational tenants under Bahrain law as the occupational leases will be effective against the buyer (Article 549 of the Civil Code) and the landlord's respective rights and obligations under the occupational leases will be transferred to a buyer (Article 551 of the Civil Code).

Article 1 of Legislative Decree No. 9 of 1970, amending the Law for Leasing, provides a tenant the right to renew a fixed-term lease after the expiry of its term. Therefore, a tenant of a property in certain areas of Bahrain (such as Manama) can unilaterally extend the term of its lease on the same terms and conditions. Unless the parties agree otherwise, the lease will be renewed for the term fixed for payment of the rent (Article 511 of the Civil Code).

This will be an important consideration for a buyer if the intention behind purchasing the property requires vacant possession of the property.

Article 6, paragraph (e) of Publication No. (12/1373) 1953 expressly provides that a landlord is entitled to the right to request a tenant to vacate the building if a landlord wishes to renovate the structure of the building. In such circumstances, the landlord must not lease the building prior to completion of the building works and must give the tenant a right of first refusal. However, Court of Cassation rulings have established that to be able to rely on Article 6 (e), a landlord must also prove to the satisfaction of the Court that the works (whether refurbishment, redecoration, remodelling, restoration, repair or maintenance works) are necessary and required to ensure the building or the leased premises remain fit for purpose and use. The purpose and consequence of this is to ensure that a landlord does not use this right arbitrarily.

A buyer may be able to terminate the occupational lease where a tenant is in default. However, securing vacant possession will require a Court Order which may prove time consuming and costly. Please also see our article entitled 'Landlord's rights against tenant default under a commercial lease'.

Trap 5: Foreign Ownership

Article 1 of Edict No. 67 of 2006 which replaced Article 1 of Edict No. 43 of 2003 provides that foreign nationals or corporate entities are permitted to own property situated in certain parts of Bahrain such as tourism and investment projects of a private nature. Whilst these provisions continue to be in force, a recent additional requirement has been placed on foreign buyers by way of an internal circular to the Notary Public whereby a foreign buyer must obtain approval from the Ministry of Justice in order to purchase property in those areas referred to above. It is anticipated that such a decision by the Ministry of Justice will take 3-5 weeks and will require a draft of the prescribed form of transfer to be given to the Notary Public in order to obtain such approval.

Trap 6: Requirements of the Notary Public

In order to execute the transaction, the parties or their legal representatives will be required to sign the prescribed form of transfer before a Notary Public. The parties must also ensure that they have satisfied all the requirements of the Notary Public which include the following:

  • Certificate of Incorporation / Commercial Registry of the parties;
  • Articles of Association and Memorandum of Association of the parties;
  • Valid Power of Attorney authorising the attendee to sign the transfer;
  • The original Title Deed of the property; and
  • Board resolution by the parties authorising the sale / purchase of the property.

In the event that one or more of the parties are a foreign entity, the documents will need to be notarised, legalised and translated to Arabic in order for them to be accepted by the Notary Public. Additional documents may be required by the Notary Public depending on the nature of the transaction and the circumstances of the parties.

In particular, as the Notary Public will need to satisfy itself that the parties have the relevant authority to effect the transaction, and where the seller and the buyer are companies, the parties should ensure that their respective objects and Articles of Association permit them to dispose of / acquire the property (as the case may be). It is not uncommon for the requirements of the Notary Public to significantly delay the completion of a transaction and such requirements should be considered at the outset of a transaction and not left to the 'last minute'.

Trap 7: Third Party Approvals

The parties should consider whether there are any third party approvals which may be required in order to effect the transaction. For example, licensed entities by the Central Bank of Bahrain (CBB) may require the CBB's approval to purchase property. As part of the approval, the CBB may specify the use of the property (i.e. approving the acquired property to be used solely for the licensee's purposes), which may restrict a buyer from acquiring the property for an alternative use.

Trap 8: Registration Gap

Legal title to a property remains vested in the seller until registration has been completed at the SLRB. It should be noted that the date of registration is not backdated to the date of completion or the date the application for registration was made.

The above gives rise to a gap between the completion date (which takes place when the prescribed form of transfer is completed at the Notary Public) and the date actual legal title is transferred. This gives rise to an inherent risk that a buyer may have paid the full purchase price but not received the legal title.

Trap 9: Transaction at an Undervalue

The CBB Financial Institutions Law 2006 (CBB Law) provides that in the event that a licensed entity is placed under administration or liquidation within 6 months from the date a transaction is made, it may run the risk of being deemed as a transaction at an undervalue. The 6 month 'look-back' period may be extended to 2 years in certain circumstances.

The CBB Law does not define or provide guidance as to what will be determined as a transaction at an undervalue and therefore this is subject to interpretation. In the event that the seller, being a licensed entity enters administration or liquidation within a 6 month period following completion, a buyer would be at risk of the transaction being set aside as void (or the buyer being required to pay the difference in the actual value of the property and the consideration paid).

The above risk is a potentially significant one where the seller of a real estate asset is in distress.

Conclusion

This article has set out some of the key issues and traps involved the acquisition or disposal of real estate in Bahrain.

Professional guidance and expertise should be sought at the outset of any transaction, ensuring that the transaction runs smoothly and any traps or issues are dealt with or avoided.

Charles Russell LLP has considerable expertise and experience in relation to advising both buyers and sellers on property investment in Bahrain and across the region. In particular we regularly advise clients in relation to how to avoid or resolve some or all of the traps mentioned above or to otherwise mitigate such risks so as to be acceptable to our clients and meet their aims, objectives and commercial requirements.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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