Bahrain: Reviving The Skyline: The New Stalled Projects Law And Its Implications

Last Updated: 25 March 2015
Article by Unkar Chanian and Reem Al Mahroos

Legislative Decree No.66 of 2014 regarding the Settlement of Stalled Real Estate Projects came into force on 6 December 2014 (New Law). The New Law has been introduced to re-start real estate development projects in Bahrain where units have been sold off-plan, payments have been made, and the projects have either stopped (through a default situation) or have stalled causing a detrimental effect on the economy of Bahrain.

What is a stalled project?

Pursuant to the provisions of Decision No. 1 of 2015, a real estate development project will be considered as ''stalled'' for the purposes of the New Law where one or more of the following criteria apply:

  1. If the developer's lack of seriousness to complete the project is proven;
  2. If the developer has not, without valid reason, commenced the development work despite obtaining the necessary permits and approvals from the relevant government authorities; and/or
  3. If the developer fails to execute the project as a result of gross negligence.

For the remainder of this article, references to "Stalled Project" will mean a project which has met the criteria set out above.

The Committee

Under the provisions of the New Law, an entity shall be appointed by the Cabinet of Ministers (Entity). The Entity will have the responsibility of investigating Stalled Projects referred to it and will determine all debts, obligations and rights in relation to each Stalled Project by reviewing all statements, information, contracts, agreements and any other documents relating to the Stalled Project.

After undertaking a review of a Stalled Project, the Entity will submit its findings to a committee (Committee) which shall consist of three judges from the Supreme Civil Court of Appeals, with the senior of the three being the chair (Chairman) and two experts nominated by the Cabinet.

Ministerial Order No. 14 of 2015 has confirmed that the Committee will comprise of the following members:

Consultant Sameh Mohammed Fehmy Amer (Chairman)
Judge Dr. Mona Jassim Mohammed Al Kowary (Member)
Judge Mohammed Mirza Mohammed Aman (Member)
Dr. Abdulla Yousif Taleb (Member)
Aref Haidar Ali Rahimi (Member)

The Committee's main roles and responsibilities are governed under the provisions of Decision No. 12 of 2015, which also confirms that its role will be to decide upon the settlement of each Stalled Project referred to it by the Entity on an urgent basis.

The Committee will have the power to take all necessary measures to remove the causes of the stalling and for settlement. In particular, The Committee will have the power to:

  1. Undertake a financial, administrative and technical overview of a Stalled Project;
  2. Refer any suspected criminal activity to the Public Prosecution;
  3. Take all necessary provisions and precautionary measures;
  4. Hear witnesses, or appoint experts and auditors; and
  5. Request all information and documents including statements which it deems appropriate to reach a decision.

Process to settle stalled project

In order to achieve an amicable settle, the Committee will grant the developer of the Stalled Project (Developer) not more than one month to present a proposal to the Committee for the settlement of the Stalled Project (Proposal). If the Proposal is approved by the Committee, the Developer will then be granted 3 months to implement the Proposal and to settle any issue/matters with the majority of the stakeholders in the Stalled Project. The Committee may at its discretion extend this period for a further 3 months. The Committee may choose to amend the Proposal and will also have the prerogative to reject it. The Committee will also have the power to submit its recommendations to any Government authorities to take the necessary steps in order to contribute to the agreement of the Proposal.

If the Developer has been unable to reach an amicable agreement with the stakeholders in respect of the Proposal within 6 month period referred to in the preceding paragraph, the Committee will the n have 8 months to implement a final decision and in order to achieve this it may take all measures it deems appropriate including:

  1. Appointing a new board of directors of the Developer, if it becomes apparent that the Developer is not co-operating, is not competent to manage the Project or is not able to reach an agreement without the shareholders (e.g. end users) suffering financial loss;
  2. Notifying the SLRB not to approve any ownership transfer or the registration of any mortgage until the Proposal is settled and accepted by the stakeholders;
  3. Introducing a new investor to the Stalled Project who will be required to provide sufficient guarantees to complete the Stalled Project;
  4. Integrate/merge some of the Stalled Projects in the event that there is no interested investor, and take all measures it deems necessary in this regard; or
  5. Sell the Stalled Project in a public auction and place the proceeds in a fund at the Ministry of Justice and Islamic Affairs. In this regard, and as an exception to the general rule, all creditors will be ranked equally and the proceeds of the sale will be distributed amongst creditors who have a right in the Stalled Project and in accordance with their interest/shareholding.

Any decision of the Committee shall include its reasoning and shall be issued by a majority vote. In the event of a tie, the Chairman will have the casting vote.

The Committee's decisions will be final and will be akin to a judicial ruling. However, a decision may be appealed within 10 days from the date it is published in the Official Gazette before the Court of Cassation.

Jurisdiction of the court

No other Court in Bahrain will have jurisdiction to hear matters within the purview of the Committee. In addition, a moratorium will be placed on all claims relating to a Stalled Project during the one month period mentioned above for the Committee to reach a determination in relation to a Stalled Project.

The Developer and any concerned agencies are obliged to present all information and documentation required by the Committee or the Entity.

Penalities

The Developer and any concerned agencies are obliged to present all information and documentation required by the Committee or the Entity.

Without prejudice to more severe penalties of the Penal Code of Bahrain, a person/company may be imprisoned for a period of not less than one year and not more than 5 years and /or subject to a fine of not less than BHD10,000 and not more than BHD30,000 if it deliberately:

  1. Conceals or withholds statements, information or documents to the Entity or the Committee;
  2. Provides invalid statements, information or documents to the Committee; and / or
  3. Engages in activities which obstruct the work of the Committee.

Conclusion

The overhaul in new real estate regulations in Bahrain demonstrates the Government's continued commitment to restore confidence levels and maximise investor interest in the property market.

Given the fact that a number of the stalled projects in Bahrain date back to the beginning of the global financial crises, there is certainly a preserving need to seek a resolution to these projects for the benefit of the stakeholders.

However, the powers which are now vested in the Committee are wide ranging and give rise to some very significant legal ramifications. For example, if the Committee imposes if right to acquire a public auction, this essentially defeats one of the key principles of property ownership; that such ownership (if on a freehold basis) is a right in perpetuity.

The consequence of the above may give rise to uncertainty in relation to the nature of property rights in Bahrain, which in turn may actually discourage investment into the property market.

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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