Authors, legal professionals, bankers and jurists have written several papers on the increased foreclosure rates preceding 2008 in the United States' real estate market. This predicament led to a domino effect of issues on mortgages, (the infamous) collateral debt obligations and other financial instruments in the sector. However, this ripple did not stop within the borders of the United States. Various developing and developed economies observed the after-effects of the burst of this bubble over the (then) years to come. This ripple, in turn, changed the stringency level of legal provisions governing both financial and real estate sectors with governments across the globe, increasing the regulatory control. While STA's lawyers in Dubai have discussed on these aspects in the past, we will endeavour to explain the importance and requirement of conducting due diligence from an investor's perspective in Dubai before investing in the Emirate's real estate sector. Over the past few decades, Dubai has evolved to become one of the premier jurisdictions in the world for real estate investment due to its attractive projects and investor-friendly legal framework. Numerous investors from across the globe flood to the Emirate for purchasing from the lucrative array of real estate units that the Emirate has to offer.
Broadly, there are two types of real estate units available to investors in the UAE: off-plan units and developed units. While each of these options has their own commercial and legal implictions, it is pertinent for any investor first to understand the reason why they are investing in real estate to understand the most suitable option. The Dubai Land Department (the DLD) is a reputed and effective regulator of real estate sector in Dubai, that has implemented numerous regulations and circulars to safeguard the
interests of parties to a real estate transaction in Dubai.
Investors should carefully examine various aspects when entering into a real estate transaction: namely legal, due diligence, financial due diligence and physical due diligence (commonly known as snagging). In addition to other matters that their counsels may advise on the transaction. Investors should understand the due diligence requirements and contact real estate lawyers in Dubai once they identify the particular unit (or project) that they wish to purchase.
- Legal Due Diligence:
Legal due diligence requirements could broadly cover the following
aspects of a real estate unit: -
- Regulatory Check: The DLD is the primary authority governing real estate in the Emirate of Dubai and issues title deeds to investors for the ownership of the real estate unit. It is also advisable for investors or their attorneys to contact the DLD for confirming the title of the property before initiating the process or handing over any token monies. Investors should primarily contact the seller or developer of the unit and confirm that the registration of ownership of the unit as per the records of the DLD and they have the authority to sell the property. For example, if the property is under the name of a corporate entity, then only the authorized signatory or actual power of attorney holder of the authorized signatory would have the ability to sign the sale purchase agreement and other documents. It would be prudent to undertake due diligence checks with the Dubai Municipality and other governmental authorities based on the type and utility of the particular real estate project. This is to ensure that there are no fines or other penalties on the said property.
- Judicial Search: The investor’s should also undertake search on any attachments or inclusions of the particular real estate unit in any litigation matter, i.e. confirmation that that unit is free of any legal liabilities. Parties holding a court judgment in their favour for obtaining monies from UAE courts are opento initiating execution proceedings and attaching real estate unit(s) of the judgmentdebtor in the event the latter defaults on the payments as stipulated in such judgment.Therefore, investors should be fully aware of any such judicial lien or liabilities on the unit before proceeding with the transaction.
- Conveyance: This is one of the primary and and most crucial aspects to be managed by the investor before intusing any funds into the investment. It is pertinent for the investors to understand the specific clauses, payment terms, mortgage options and other provisions of the sale-purchase agreement and the reservation form (if provided) before signing the same. In certain situations, investors may be unaware of the rules of right to resell the unit, obtain mortgages, provisions regarding unit handover etc.This issue may occur when the investors may sign the sale-purchase agreements in haste without consulting lawyers or professionals specializing in the field. Foreign investors are often not aware of the laws and regulations in the real estate sector and tend to contrast interpretation of transactions with similar situations in their home countries (other jurisdictions). Therefore, it is pertinent for investors to understand their rights and liabilities as per the law of the land and a simple study of the documentation will not suffice. Ideally, a vigilant investor from a foreign jurisdiction may review the paperwork and make sure that the sale-purchase agreement is vetted by a real estate lawyer. However, this will not suffice if the investor does not have an understanding of their rights (such as right to take handover of the unit on agreed date, right to mortgage the property as per law, right to resell the real estate unit etc.) and liabilities (like processing payments as per the instalment dates agreed upon, to pay Oqood Registration fees etc.).
- Check on arrears in service charges and other utilities: Investors should also check on any outstanding payments due to the Dubai Electricity and Water Authority, respective owners’ association, chiller charges etc. to understand the existing liabilities on the units. Generally, the seller is required to obtain a no objection certificate from the master developer, owners’ association/management company and transfer the name of the unit owner with the utilities’ provider at the time of selling the unit(s). This is to safeguard the investors’ interests and ensure that there are no hidden liabilities or charges on the particular unit.
- Financial Due Diligence: This aspect of the due diligence process is twofold. First, to check and confirm the existence of any underlying mortgages, loans or other liabilities with financial institutions; and second, to identify the exact value of the particular real estate unit after checking with authorized and independent personnel/ companies. Investors should conduct a financial due diligence as well to ensure that there are no unknown financial obligations (or liens) on the particular real estate unit and to ensure that the unit is basically, worth the money - for instance, lack of knowledge of the market prices of units by foreign investors.
- Snagging: In simple terms, snagging is a process by which investors ascertain whether the physical property is in line with market standards and the conditions as mentioned by the seller or developer.It helps the buyers to route the liability to remedy or fix any specific issues that the property may pose with regards to the unit area, plumbing and electric, flooring, walls, doors and other movable or immovable fixtures. Investors should ideally appoint a company that specializes in this field of work at the time of obtaining the handover of the units and report the same to the seller or developer within a limitation period of one (1) year, provided they do not waive off their rights towards the same or accept the property as-is.
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.