Bahrain has issued the much anticipated Law No. 28 of 2014 in relation to governing real estate developments in Bahrain (New Law).

The New Law has not yet been officially published. As such, our review is based on the version which we anticipate will be published in the official gazette.

Real estate developments are defined in the New Law as "property development works or projects which are licensed in accordance with the provisions of the New Law irrelevant of its nature (infrastructure or construction of buildings) or objects thereof (commercial, industrial, residential private or public) or method of financing (off plan sales, lease to own, Musataha arrangements, or BOT ("Build, Operate and Transfer) or the person undertaking them (natural or corporate) (Development). For the purposes of this article, any entity or person who carries out such an activity in accordance with the provisions of the New Law will be referred to as a developer (Developer).

The New Law applies to any Developer undertaking Development activities or selling property units off plan and receiving payments from purchasers of those units.

We have summarised the key provisions of the New Law in relation to Developers below.

Licence for Developments and Developers

The New Law prescribes that Developers will be required to obtain a licence (Developer's Licence) from the designated authority within the relevant Ministry (Authority). The Authority will issue an implementation regulation, which will set out the criteria and scope of the Developer's Licence as well as a number of other provisions to support and enhance the New Law (Implementation Regulations).

A Developer is required to obtain a licence from the Authority with respect to each Development it intends to carry out prior to commencing the relevant Development (Development Licence). The Authority will determine the length of validity in respect of the Development Licence on a case by case basis but it will not exceed more than 3 years.

In order to obtain a Development Licence, the Developer must submit to the Authority a master plan of the Development together with the following:

  • The title deed or instrument relating to the Development which evidences that it is free of any rights in-kind or benefits from the approval of the title holders to develop and sell the Development;
  • A permit to execute the Development's master plan and building permit in accordance with the construction guidelines regulations;
  • An undertaking from both the Developer and sub-developer to commence works in relation to the Development within the period indicated in the building permit;
  • Confirmation from a consultant engineer with respect to ascertaining an estimate value of the Development which has been approved by the Committee of Professional Engineering Practice;
  • An undertaking from the Developer to maintain the ownership of the common areas as identified in the engineering plans;
  • The prior approval to reclaim the area on which the proposed site of the Development will be built on (if applicable);
  • A sample sale contract in accordance with the provisions of the New Law;
  • Confirmation from the Development's escrow agent that the Developer has deposited 20% of the Development's estimated value in the Escrow Account with the value of the land being included in this calculation;
  • Other documents stipulated by the implementation regulations issued by the Authority in relation to verifying the Developer and sub-developer's experience.

The Authority will establish and maintain a register entitled the "Register of Property Development Projects and Developments" (Development Register) which will include details of the licensed Developers and Developments.

Sale of Off-Plan Units

The Survey and Land Registration Bureau in Bahrain (SLRB) will establish and maintain a register (Off-Plan Register) which will contain the following information:

  • The Development Licence;
  • The units which the Development Licence preside over;
  • The unit sale agreements and all disposals affecting them;
  • Details of any entry which is required to be included in the SLRB Property Newsletter by Law; and
  • Any other information which may be determined by a resolution from the SLRB.

The Developer is responsible for providing the SLRB with the information listed above and any such sale agreement which has not been submitted to the SLRB will be deemed null and void.

The New Law seeks to protect purchasers and end users throughout the various stages of the Development. It requires Developers to obtain the Development License and submit details of the relevant units in the Off-Plan Register prior to undertaking any promotional or marketing activities of the Development within or outside of Bahrain.

Template Sale Agreement

A resolution will be issued by Ministerial Order with a template off-plan sale agreement that will include provisions relating to the details of the unit's specifications and size, the right of a purchaser to receive the unit's plans, a payment schedule linked to construction milestones and any other requirements in which the Ministry deems necessary.

The Authority will assess any off-plan sale agreements submitted for the purposes of obtaining the Development Licence against the template off-plan agreement provided by the Ministry in order to ensure that the provisions are aligned.

Escrow Account

The Developer will be required to open an escrow account (Escrow Account) in a bank or financial (Escrow Bank) for each project it undertakes. The Escrow Account will be used to hold any proceeds from purchasers and any finance obtained for the project. Withdrawals are restricted to the development and administration of the Development.

In addition, the Developers are required to retain 5% of the relevant project's construction cost in the account for a period of 1 year from the date the relevant units at the Development are handed over.

The New Law further protects stakeholders by ring-fencing the funds deposited in the Escrow Account against creditors of the Developer other than the depositors.

The Escrow Bank is required to be licensed by the Central Bank of Bahrain (CBB) and be governed by the rules and restrictions which the CBB will publish. A copy of the written escrow agreement between the Developer and Escrow Bank must be submitted to the Authority. The Escrow Bank is required to regularly provide the Authority with financial statements and the Authority may request further information or enlist the assistance of an auditor if required.

The Authority will establish and maintain a register which will include details of the Escrow Agents for each particular Development (Escrow Register). Access to the Escrow Register will be limited to the depositors of the Escrow Account in relation to their deposits, parties implementing a Court order, or the Public Prosecutor.

Restrictions on the Developer

The Developer is required to implement the Development in accordance with the documents submitted as part of its Development Licence. The Developer must seek the prior approval of the Authority should it seek to alter or deviate from its agreed plan.

The Developer may not change its legal status prior to the completion and handover of the Development unless it is in the interest of the Development and does not prejudice the rights of the stakeholders and the Developer has received the prior written approval from the Authority.

The Developer must commence works in the Development within 6 months from the date it has been granted the Development Licence.

Penalties

The New Law will impose strict financial and criminal penalties on Developers for noncompliance. These include:

Offence Penalty
  • Sold or offered to sell units without or in breach of a Development Licence;
  • Operating without a Developer's Licence;
  • Failure to handover the unit and a copy of the plans within the contractual date;
  • Failure to submit details of the Development to the SLRB; or
  • Marketing or promoting the Development prior to the receipt of the Development Licence and submission of details to the Off-Plan Register;
 Imprisonment of up to 1 year and / or a maximum fine of BHD 1,000
  • Selling units in a 'fictitious' development or a development which has not been registered in the Development Register;
  • Providing false information to the Authority in order register the Development; or
  • Misrepresentation or fraud in relation to the sale of an off-plan unit.
 Imprisonment of a minimum of 1 year and up to 5 years and / or a fine of BHD 10,000 to BHD 30,000

The New Law will also impose the following financial and criminal penalties:

Offence Penalty
  • Failure of the performance of the Ministry's officers of their duties under the New Law;
  • Audits prepared by auditors which have been subject to fraud or prepared with false documentations or reports in relation to the Developer's financial position; or
  • Approval of documentation by consulting engineers for a Development knowing that the documentation was false.
 Imprisonment of a minimum of 1 year and up to 5 years and / or a fine of BHD 10,000 to BHD 30,000

Disputes

The Ministry will establish a committee for the resolution of real estate development disputes arising under the New Law (Committee). The Committee and its members will be reviewed every 3 years. The Committee will manage disputes on an urgent basis and all judgements will be immediately enforceable.

Delays and Defaults

The New Law provides that if handover of a unit is delayed by the Developer, without any acceptable justification, a purchaser may, following 90 days from serving notice to the Developer and Escrow Agent, request the Committee to terminate the sale agreement and be entitled to damages (if applicable).

In the event that works within a Development have temporarily stopped, the Committee will consult the Escrow Agent and take all necessary measures to ensure the Development completes or return the funds to its investors. If a Development has been determined to have permanently stopped, then the Committee may oblige a Developer to complete the Development at its own expense or sell the Development and distribute the sale proceeds to the depositors.

Further details in respect of the ability to take action in this regard will be published in the Implementation Regulations.

Alternatively, if a purchaser breaches its contractual obligations without any acceptable justification then the Developer may, following 10 days from serving notice to the purchaser, request the Authority to terminate the sale agreement and return the funds it has received to the purchaser less an amount of not more than 10% of the unit price by way of compensation.

Conclusion

The New Law seeks to establish a balanced framework to attract property investment and build consumer confidence in Bahrain. In order to further enhance the Bahrain real estate sector, we believe that further new legislation will be required to deal with a number of other key areas such as:

  • The establishment of the Authority to act as a real estate regulator;
  • Changes to the land registration and mortgage system; and
  • Changes to the current strata laws.

Further new legislation (including in relation to the above) will need to be implemented in the short to medium term if Bahrain is to attract significant levels of inward investment into its real estate sector but the New Law should be viewed as the first positive step to achieving this objective.

Originally published in the Middle East Real Estate & Construction Quarterly Newsletter - September 2014.

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.