The rapid evolution of Ras Al Khaimah's real estate sector, particularly in the branded residences space, has created new opportunities and challenges for developers, financiers, and purchasers alike. With the introduction of Law No. 12 of 2023 On Regulating Real Estate Development in the Emirate of Ras Al Khaimah ("RED Law"), the legal landscape now provides a clear and robust framework for off-plan projects.
In this article, we look at whether a Developer can mortgage their off-plan branded residence project during construction to fund the often significant construction costs associated with Off-plan branded residence projects.
Legal Basis for Project Mortgages
Article 21 of the RED Law permits developers to mortgage off-plan units within an off-plan project during construction to obtain financing for the completion of construction works, subject to the following terms and controls:
- the project must have achieved a construction completion rate exceeding 50%;
- the mortgage must be registered over the off-plan units that are recorded in the name of the developer within the project;
- the full amount of the financing obtained through the mortgage must be deposited directly into the project's escrow account;
- the off-plan sale contract must explicitly state that the off-plan unit is mortgaged by the Developer and must identify the Developer's mortgagee (the financier); and
- the initial land register must record that the off-plan is burdened with the mortgage in favour of the Developer's financier.
In practice
We are currently aware that a Developer must obtain the prior approval of RAK RERA to mortgage the off-plan units in the project.
Further, the Developer's financier who is to be granted the mortgage must be a UAE licensed bank.
Lastly, Article 52 of the RED Law may impose a limitation in that it does not permit enforcement against the development project itself or the project's escrow account. As such, even if a mortgage is registered over a project and its off-plan units, the ability of the Developer's financier to enforce the mortgage may be restricted, potentially undermining the practical value of such security.
Integration with Branded Residence Agreements
Developer's obtain their right to use the applicable 'brand' at the branded residence project through a brand license agreement from the legal owner of the 'brand' and other associated management agreements ("Branded Residence Agreements") for a set term, typically 20 to 35 years, in exchange for payment of a brand fee and compliance with the brand standards during construction and post construction.
Developer's obtain their right to use the applicable 'brand' at the branded residence project through a brand license agreement from the legal owner of the 'brand' and other associated management agreements ("Branded Residence Agreements") for a set term, typically 20 to 35 years, in exchange for payment of a brand fee and compliance with the brand standards during construction and post construction.
Such Branded Residence Agreements typically contain a prohibition on the Developer mortgaging the project without the prior written consent of the brand licensor. This is to protect the brand as any enforcement of a mortgage on a branded residence project would cause damage to the brand.
Conclusion
Registering mortgages over branded residence projects in Ras Al Khaimah is a developing area and we which this space for further progress on the matter.
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.
