Overview On Real Estate Development In Egypt

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I. Introduction

The Egyptian real estate sector has experienced a rapid evolution over the past decade, driven by the expansion of public-private partnerships and the rise of large-scale development projects. This growth has given rise to a distinctive form of contractual relationships known as “Co-Development Agreements” or “Revenue Share Agreements”, which provide landowners and developers with the opportunity to combine their resources and capabilities to jointly carry out the development of real estate projects. Despite this significant growth, the regulatory framework governing relationships between landowners, developers, and customers has remained limited.

Accordingly, and without prejudice to the general applicable Egyptian laws and regulations, this Article will be divided into two (2) sections, as follows:

• The first section will cover the “Legal Framework Governing Real Estate Development in Egypt”, focusing on the current two (2) specialised key instruments that regulate real estate development activities in Egypt, which are: (i) the Prime Minister's Decree No. 2184 of 2022 (the “Decree”), which sets out the specialised legal and procedural framework for development projects, including the principles governing the relationship between landowners, developers, and customers; and (ii) the Draft Law of the Egyptian Union for Developers (the “Draft Law”), proposing the creation of a unified body to regulate and represent developers nationwide.
• The second section will cover the “Contractual Analysis of Co-Development Agreements”, focusing on the definition and objectives of co-development agreements, the roles of the parties involved, and examples of contractual clauses that must be carefully structured to ensure enforceability and risk allocation.

II. Section One: Legal Framework Governing Real Estate Development in Egypt

A. Prime Minister's Decree No. 2184 of 2022

1. Scope

The Decree, issued by the Prime Minister and effective as of 17 June 2022, governs the operation of real estate development projects in Egypt. The Decree introduced a compliance framework for developers operating on lands allocated by the competent state authorities or companies fully or partially owned by the State, including but not limited to, residential, commercial, administrative or touristic real estate development projects.

The Decree's application extends to all projects and new phases of existing projects that are to be executed following the Decree's entry into force. More importantly, the Decree determines the financial, procedural, and operational framework in relation to real estate development projects' structuring, financing, sales, and compliance with execution timelines approved by the developers. The Decree explicitly excludes construction activities from the Decree's scope, as such works do not constitute development under the Decree.

Although this Decree is a key instrument governing real estate development in Egypt, many of its clauses are not actively applied in practice.

2. Key Obligations and Principles

2.1 Separate Project Accounts

2.1.1 Revenues and Expenses Bank Account: The Decree sets a key obligation on the developer, who operates on a land of one thousand (1,000) acres or more, to maintain a separate bank account for the revenues and expenses of each project or phase (except for the expenses relating to main facilities and services), regardless of whether these revenues and expenses were made in the form of a cheque or in cash.

2.1.2 Units Refund Bank Account: The developer shall maintain a reserve equal to five percent (5%), of the total collections deposited in the bank account for each phase, or provide a bank guarantee of an equivalent value, to cover the potential refunds to customers. This reserve is proportionately released in a manner which corresponds to the actual delivered units, based on a certificate issued by the project's auditor confirming the actual delivered units. The remaining balance of the reserve shall be released upon completion of the phase's delivery.

2.1.3 Project Financing Bank Account: In the event that the developer wishes to obtain financing for the project or phase (e.g., bank loans), the developer is required to open a separate debit account dedicated to this specific project or phase, whereby repayments of this financing must be made directly from the project's revenue account or any other account of the concerned debit account, in line with the credit rules issued by the Central Bank of Egypt.

2.1.4 Financial Security Deposit Bank Account: The developer shall provide a security deposit amount into the project or phase's separate bank account proportionate to the area of the project or phase, intended for sale. Such security deposit may be made in cash, cheques, or by a bank guarantee. The deposit amount shall be calculated based on the construction cost of the relevant phase in relation to the project or phase area. Once the developer provides the said security deposit, the competent authority may authorize the developer to offer that project or phase for sale, in compliance with the approved execution timeline.

2.2 Project Phases and Adherence to Execution Timeline

The Decree stipulates that the project is to be divided into multiple phases, unless the developer wishes to designate the entire project (i.e., 100% of the project) as a single phase. Moreover, while the project may be divided into multiple phases, and multiple phases may be launched separately, each phase must independently satisfy all the procedural and financial requirements stipulated by the Decree. Also, the developers must execute the project in accordance with the approved execution timeline.

2.3 Marketing of the Project

In alignment with the Egyptian Consumer Protection Law, it is prohibited to: (i) advertise the reservation of real estate units; (ii) contract for their sale; or (iii) sell or divide the lands designated for construction, except after obtaining the building permits in accordance with the Egyptian Building Law No. 119 of 2008 (the “Building Law”). Moreover, the Decree stipulates that no announcement for the sale of units in any project shall be made prior to obtaining the ministerial decree approving: (i) the master plan; and (ii) the detailed plan for the phase intended to be announced. Additionally, new phases may be announced if the developer has ensured full compliance with the approved timeline of the previously announced project phase.

2.4 Developer's Delay in Delivery

Subject to the contractual terms agreed between the developer and the unit purchaser, where the developer fails to deliver a sold unit by the agreed delivery date, and provided that: (i) the competent authority has fulfilled its obligations with respect to permits and approvals in accordance with the applicable laws; and (ii) the unit purchaser has complied with all its contractual obligations, including timely payment of price instalments, the following rules shall apply:

1. The developer shall be allowed a grace period of up to twelve (12) months beyond the contractual delivery date to complete and hand over the unit.
2. If the delay extends beyond twelve (12) months, the payment schedule of the unit installments shall be postponed for a period equivalent to this delay.
3. If the delay exceeds twenty-four (24) months, the unit purchaser shall have the right either: (i) to maintain the contractual relationship and postpone the payment for a period equivalent to the delay; or (ii) to request termination of the contract and a full refund of all amounts paid, which must be reimbursed within three (3) months from the date of the unit purchaser's request.

As an exception to the general rule relating to the Decree's scope mentioned under Item (II.A.1), the aforementioned rules on the developer's delay in delivery, applies to all real estate development projects, including those for which execution has started prior to the issuance of the Decree.

Moreover, in case the concluded agreement between the developer and the unit purchaser provides for more favourable terms to the unit purchaser, such contractual terms shall prevail over the provisions of the Decree in this respect.

2.5 Maintenance of the Project and Post Sales Operations

The Decree explicitly stipulates that all amounts collected from customers for the maintenance and operation of the project shall be deposited into a dedicated separate maintenance account. These amounts shall be managed and used solely for maintenance and operational purposes. Also, the maintenance and operational fees shall be reviewed by independent auditor(s) and paid from the revenues of the maintenance deposit collected from the customers. The customers shall bear any maintenance fees variances.

Furthermore, developers are obliged to manage and operate the projects, and carry out the responsibilities of the Occupiers' Union, as set forth in the Building Law.

2.6 Breaches and Penalties

The Decree establishes sanctions for a developer's non-compliance therewith. First, the developer is formally notified of the breach and given a six (6) month grace period to remedy the breach. If the breach is not rectified within that period, the competent authority may suspend approvals for the sale commencement of any subsequent project phase. In addition, the competent authority can publicly announce the developer's non-compliance to ensure transparency and protect customers. These measures are without prejudice to the competent authority's right to impose additional legal penalties provided under the agreement concluded with the developer.

B. The Draft Law of the Egyptian Union for Developers

1. Scope

The Draft Law seeks to institutionalize the real estate development sector through the establishment of the Egyptian Union for Real Estate Developers (the “Union”). The Union is an entity that has a juristic legal personality and is mandated to represent, regulate, and organize the affairs of real estate developers across Egypt. Furthermore, upon the entry into force of the Draft Law, all existing institutions, including but not limited to the chambers, councils, and associations currently representing developers, shall be dissolved ensuring unified representation across the sector nationwide.

In light of the foregoing, the Draft Law shall apply to all member entities engaged in real estate development, including both residential and non-residential real estate development projects. The Draft Law excludes construction activities as well as the individual development of private units, which do not constitute real estate development for the purposes of this Draft Law's membership framework.

Consequently, developers operating in the market upon the Draft Law's enactment will be required to register and become members of the Union; they must regularize their status and fully comply with the Union's registration and governance requirements within one (1) year from the enforcement date of the Executive Regulations of the Draft Law.

2. The Union's Objective

The Union aims to: (i) safeguard and protect the collective interests of its members; (ii) represent its members before the competent authorities; (iii) establish the specific controls and traditions governing its practice, thereby ensuring its protection and elevating its standards; (iv) set a code of professional ethics, and internal regulatory and disciplinary frameworks to fulfil its objectives; (v) study economic and technical matters to provide its members with market insights and guidance on real estate development activities; (vi) build regional and international partnerships to promote the exchange of expertise; (vii) propose any measures deemed necessary to achieve its objectives; and (viii) resolve disputes arising among its members or between its members and third parties.

3. The Union's Membership Criteria

The Draft Law sets the membership in the Union as a mandatory condition for any entity to engage in real estate development activities in Egypt. Accordingly, only registered members of the Union may undertake, be assigned, or participate in works falling within the scope of real estate development.

Furthermore, to ensure fairness, the Union's Board of Directors will establish a comprehensive categorization system for its members, defining the categories of developers eligible to undertake projects and participate in tenders. The developer's categorization will be based on an objective criteria, including but not limited to the following: (i) technical competence; (ii) financial strength; (iii) proven development experience in similar real estate development projects; (iv) previous projects' delivery record; and (v) the developer's paid-up capital and its legal structure.

4. TheUnion's Membership Subscription

The financial resources of the Union are primarily generated through mandatory contributions from registered developers, structured in three (3) parts:

• Initial Registration Fee: A one-time payment upon enrollment or re-enrollment.
• Annual Subscription: A yearly fee determined based on the developer's category.
• Service Fee: A mandatory payment equivalent to 0.5 per thousand (0.05%) of the contract value for every sold unit.

It is worth mentioning that, as stipulated by the Draft Law, the Union's funds are classified as public funds under the Egyptian Penal Code, making them subject to the supervision and audit of the Egyptian Central Auditing Organization to ensure full transparency and accountability.

5. Breaches and Penalties

Without prejudice to any more severe penalties provided under the Egyptian Penal Code or any other applicable law, the Draft Law introduces a financial sanction of an amount, ranging from EGP 10,000 (ten thousand Egyptian pounds) to EGP 10 million (ten million Egyptian pounds), that may be imposed on any entity that: (i) undertakes or contracts to perform any real estate development activity without being duly registered with the Union; (ii) submits false documents or information for registration or categorization purposes; or (iii) fails to pay the Union's service fees (being 0.5 per thousand of the contract value for every sold unit) for a period exceeding one (1) year.

III. Section Two: Contractual Analysis of Co-Development Agreements

A. Definition and Objectives of Co-Development Agreements

A Co-Development Agreement, also known as a Revenue Share Agreement (the “Agreement”), is a contract concluded between a landowner and a developer, to develop a real estate project, encompassing all or some of the real estate units categories (e.g., residential, commercial, and administrative).

This Agreement is founded upon the complementary nature of its parties' roles. The landowner owns and possesses the land but lacks the necessary technical expertise and capabilities for developing the land. On the other side, the developer may not have the will or financial resources to purchase the land; accordingly, the developer enters into the Agreement with the landowner to furnish the requisite expertise and capabilities to execute the development project. As such, the landowner provides the land plot essential for the project and the external infrastructure and the developer finances the entirety of the project, undertakes the construction activities, and handles all subsequent sales, marketing, operation, and management of the project.

The primary objective of the Agreement is to enable the parties to share and benefit from the project's revenues according to a pre-agreed revenue-sharing percentage that reflects their respective contributions and commercial arrangement.

B. The Roles of Parties to Co-Development Agreements

1. Landowner

The landowner is obligated to: (i) deliver the project land to the developer and warrant clear title, meaning that the land must be free of all encumbrances, disputes, and legal or physical hurdles; (ii) cooperate with the developer to procure the necessary licenses, permits, and approvals; and (iii) issue and execute all requisite delegations and powers of attorney to empower the developer to deal with all the governmental and non-governmental entities and customers throughout all stages of project development.

2. Developer

The developer is responsible for fully executing and implementing the project at its sole cost and expense, including financing, designing and planning approvals, construction and infrastructure works, marketing and sale of units, and timely project delivery. The developer also manages all contractual relationships with project managers, engineers, consultants, and contractors to ensure proper and efficient implementation.

3. Other Parties Involved

While the following parties are not actual parties to the Agreement, they play key roles in the project development and the implementation of the Agreement.

• Banks

Co-Development Agreements necessitate opening a joint bank account, governed by an escrow agreement between the landowner, developer, and a designated bank, specifically to manage and control all project cash flow and funds. This account is essential for distributing and tracking each party's share of revenues and expenses, and overseeing the developer's spending on the project implementation through the sub-accounts of this joint bank account.

• Engineers

Engineers, appointed by one (1) or both of the parties are crucial for project oversight. Their main role is to supervise and inspect the construction and development processes, ensuring the work complies with all the agreed legal and technical requirements, and the approved master plan and timeline. Accordingly, the developer must grant the engineers full access to the project site and provide any necessary information to facilitate the performance of their duties.

• Contractors

In the Agreement, construction works may be executed directly by the developer, through its affiliated or related-party construction companies, or by third-party contractors. Such contractors are usually appointed by the developer to perform all or part of the construction works assigned to the developer in the project. They usually have no contractual relationship with the landowner. Accordingly, the developer will not be relieved of its obligations under the Agreement as a result of assigning constructions works to third-party contractors and the developer shall remain liable for all the acts and ommissions of the contractor to comply with the standards and obligations set out in the Agreement.

C. Examples of Essential Contractual Clauses in Co-Development Agreements

The Agreement includes multiple clauses that govern the relationship between the landowners and developers during the implementation of the project, and in some cases, after its completion. The roles and responsibilities of each party, as well as their level of oversight and involvement in specific aspects of the project, will depend on various factors, including the project's location, size, and type, the developer's reputation and market position, and the landowner's financial requirements. We set out in this section examples of the essential clauses that are typically included in the Agreement.

1. Inspection and Handover

The inspection clause entails the developer's right and obligation to inspect the project land beforehand to identify and mitigate any defects or issues that could impede the project's implementation.

The handover clause is essential as it enables the developer to take possession of the land to commence development of the project. The landowner's obligation to comply with the timeline for delivering the project relies on the landowner's satisfaction of its obligation to handover the land. Also, the landlowner must guarantee that the land is free of all legal and physical obstacles that may hinder the developer's implementation of the project.

2. Planning and Licensing

The Agreement must include the developer's obligations with respect to preparing all the plans, designs and drawings of the project, managing all aspects of planning (including the master plan, and detailed plan) and getting them approved by the competent authorities. Also, the developer, at its own cost and expense, shall be responsible for obtaining the building permits, and other licenses, permits, and approvals necessary for fulfilling its obligations under the Agreement.

3. Construction

The construction clauses must comprehensively detail the specific scope of work of the project, which typically encompasses establishing the project units, executing internal infrastructure, landscaping, fit-out, external enclosures (e.g., fences and gates), and the installation and connection of utilities (electricity, water, and gas).

4. Marketing

The Agreement should clearly define the developer's marketing and sales obligations, which entail developing a comprehensive marketing strategy, establishing a dedicated sales office, and implementing marketing campaigns across various channels, such as billboards, social media, or brochures.

5. Management of Sales

The developer is responsible for the complete management of sales, which includes developing and executing sales plans, arranging site visits for customers, and signing reservation forms and sale contracts. These obligations also extend to after-sale management, such as collecting customer payments, managing bounced checks, overseeing unit handovers, and resolving disputes with unit purchasers.

6. Project Operation and Maintenance

The developer is typically responsible for the operation, maintenance, and management of the project after its completion until the formation of an Occupiers' Union. Additionally, the Building Law specifically mandates that such Occupiers' Union must be formed once the occupancy reaches a specified threshold, in addition to mandating the owners and occupants of residential complexes to establish one (1) or more companies responsible for the management and maintenance of such complexes that should have the competencies of the Occupiers' Union.

7. Financial Management

The Agreement must clearly outline the revenue-sharing structure, detailing each party's share, calculation method, and payment conditions. The parties typically appoint financial auditors to supervise and oversee the escrow bank accounts, verify withdrawals from the accounts, refunds to customers whose contracts are canceled or terminated and ensure that the spendings align with the project's progress.

8. Termination

The Agreement must incorporate a termination clause detailing an end to the contractual relationship between the landowner and developer in case of default by either party. Also, the Agreement should specify the consequences of termination, including the financial settlements, depending on the nature of the default, and the project's status at the time of termination. A clear and detailed termination clause minimizes disputes between the landowner and developer and ensures a fair and practical conclusion of their contractual relationship.

IV. Conclusion

There have been increasing calls from various stakeholders to implement a regulatory framework in Egypt's real estate development sector to enhance accountability and transparency. This has been partially achieved through the Decree, which imposes strict controls on project financing and implementation. However, the effective enforcement of this Decree remains challenging in practice. Also, the contemplated issuance of the Draft Law, which would establish a professional body to govern developers' conduct and categorization, is expected to further strenghten regulation and promote stability in the sector. This evolving regulatory framework is intended to protect customers, while safeguarding developers' interests, and align the sector with global standards.

Within this evolving regulatory framework, co-development agreements are highly relevant as a flexible, resource-sharing mechanism for executing real estate development projects. Although their success remains contingent on careful legal drafting and the equitable allocation of rights and obligations between the parties, they play a vital role in boosting and stimulating growth in the real estate development 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.