Following the events of 2020, real estate project developers have faced increased hardship in completing projects, which often led to the cancellation and liquidation of such projects.
Acknowledging the considerable losses suffered by all parties involved upon the liquidation of a project, the Emirate of Dubai has sought to develop an alternative method to address this situation, through an approach referred to as the "takeover of an incomplete real estate project", whereby the project is transferred to a new developer who possesses the financial capacity to complete the unfinished works.
The takeover of an incomplete real estate project occurs as an alternative to liquidation in the event of a real estate project being cancelled by the Real Estate Regulatory Agency (RERA) in Dubai, following difficulties too insurmountable for developers to complete the project. It is generally done when liquidation provides no economic benefit or real advantage for investors who have contracted to purchase one or more units within the project.
To give effect to this approach, the legislator issued Decree No. (33) of 2020 which created the Special Judicial Committee for Unfinished and Cancelled Real Estate Projects in the Emirate of Dubai. As per Article 6(a) of the Decree, the Committee is tasked with issuing the necessary decisions to assign the responsibility of completing an unfinished real estate project to another developer. Further, it is vested with the authority to determine the rights and obligations of both the original developer from whom the project was transferred, and the new developer who will undertake its completion, as well as the rights of the investors and buyers associated with the project.
Despite the legislator's ongoing and commendable efforts to provide an effective legislative framework for the real estate development market in Dubai, ensuring the Emirate's leading position in real estate and attracting foreign investment, the provisions of the Decree require additional clarification to comprehensively regulate the takeover of an incomplete real estate project. In particular, the Decree would benefit from clearly specifying and defining the rights of the original developer and investors in the incomplete project, while outlining the obligations of the new developer who takes over its completion.
These existing uncertainties result in practical issues concerning the implications of such takeovers for the parties involved. For instance, there is a lack of legislative guidance on whether the original developer will be entitled to recover the development costs incurred before the project's cancellation from the new developer, given that the new developer will now benefit from these works. Additionally, it is unknown whether the new developer will be bound by the sale and purchase contracts executed between the original developer and other parties, or whether new contracts must be drafted with different terms and conditions with the new developer. In case of the latter, consideration needs to also be granted to any disagreements between the new developer and other parties relating to the new contractual terms, and the methods for resolution thereof.
Likewise, it is uncertain which party will bear the liabilities arising from contracts an original developer may have had with government or non-government entities, and the amounts paid to these entities under such contracts. One such instance concerns the Roads and Transport Authority, which requires real estate development companies to contribute to the cost of road and transport contracts necessary for servicing the development activities. In this case, it is not known whether the original developer will contribute to these costs as they were the contracting party, or whether the new developer, who now benefits from these contracts, will do so.
Moreover, the fate of the amounts paid by investors to the original developer remains unknown, especially if these funds were not deposited in the project's escrow account.
Judicial precedents and principles have also not provided sufficient guidance to address the existing gaps in the legislative framework, save for clarifying the rights and obligations of developers in the case where the contract for purchasing the unit is annulled. Should this occur, the new developer is obligated to refund the purchase price paid by the unit buyer to the original developer, jointly with the latter. This obligation will only arise in the following three instances:
- If the new developer was aware of those contracts;
- The original contract was registered in the preliminary real estate registry at the Dubai Land Department irrespective of the new developer's knowledge of it; or
- In the case the unit buyer deposited the purchase price in the project's escrow account with RERA in Dubai.
The Need for Comprehensive Legislation to Regulate the Takeover of Incomplete Real Estate Projects:
Given the legislative gap and lack of judicial guidance on how to address the practical issues that have arisen concerning the takeover of incomplete real estate projects, there is an urgent need for comprehensive, standalone legislation to regulate the takeover of such projects. This legislation should safeguard the rights of all parties involved, including ensuring that the original developer can recover the costs of development work carried out on the project prior to its cancellation from the new developer taking over the project. This is crucial as the new developer benefits from these works, provided that these costs are documented, necessary for development, and did not yield any financial gain for the original developer. Failure to address this could discourage real estate development companies from investing in the Emirate due to concerns about losing funds spent on developing projects that might be transferred to another developer.
Additionally, there is a need to establish "model contract terms" through RERA, in collaboration with the aforementioned judicial committee, to govern the relationship between the new developer and the original buyers of project units, unless they agree on other terms. This would protect the rights of all parties concerned and those with interests in the incomplete real estate project. Such measures would enhance Dubai's real estate development market, making it more attractive to investors and development companies, as all parties would be clearly informed of their rights and obligations in the event of project stagnation and its transfer to another developer for completion.
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