Al Tamimi & Company hosts RERA seminar as part of market awareness campaign

The seminar focused on the real effects the new Law will have on developers, real estate investors, brokers and banks is a part of a collaborative market awareness campaign.

The event was attended by Marwan Bin Ghalita, CEO of RERA, Lisa Dale Partner and Head of Al Tamimi & Company's Property division, Husam Hourani Partner and Head of Al Tamimi & Company's Banking & Finance department and over 160 real estate and banking professionals.

Delegates were urged by Al Tamimi & Company and RERA to ascertain first and foremost how the new Law affects them and the appropriate registration measures required by Dubai Land Department to avoid non-compliance with the Law, which attracts a penalty of imprisonment and/or a fine of not less than AED100,000.

Bin Ghalita described the ramifications of the Law and the reasons behind the Government of Dubai's decision to enact the Law at this time.

"Our objective is to solidify the real estate sector's foundations in terms of rules and regulations while at the same time keeping it attractive to local, regional and international investors."

He went on to highlight RERA's main responsibilities within a framework of eight specific areas: licensing all real estate activities, managing developers' trust account, licensing and organizing real estate agents, regulating and authenticating rental agreements, regulating and supervising owners' associations, regulating real estate related media advertising, regulating and licensing real estate related exhibitions, publishing and circulating official sector research and studies, enhancing national participation in the real estate sector and increasing real estate awareness.

"The central aim of this Law is to protect purchasers who contract to buy property from developers 'off-plan', before the property has been constructed. The main mechanism for achieving this is through the introduction of mandatory 'Guarantee Accounts' into which purchasers' money is paid and from which, until completion of the development, only approved expenses can be met," said Dale "However, in addition to providing financial security for purchasers, the Law also protects purchasers by helping to ensure that their properties will be completed in accordance with the contractual specifications and timetable."

This is because no off-plan sales in a development can commence until architectural plans have been approved by the relevant authorities, a financial model has been approved by the project's consultant and auditor and the developer is in a position to commence construction within six months.

"Certainly, developers will now need to have undertaken considerably more preparatory work and reached a more advanced stage in the project before they can start to sell their properties," she continued.

Developers looking to sell property 'Off Plan' must first obtain a permit from the Dubai Land Department to authorize marketing activity in connection with the sales. This process should eliminate the threat of bogus projects and qualify developers and categorize developers in a more appropriate manner. Then opening a 'Guarantee Account' with an 'Account Trustee' which will hold all monies received from purchasers or their financiers, all monies advanced by a bank or financial institution financing the project on behalf of the developer and the developer's own capital contribution.

"As a general rule, monies can only be paid out from the Guarantee Account to settle the invoices of contractors and consultants engaged in the project. Not all the expenses incurred by the developer in connection with the project qualify to be paid from the Guarantee Account," said Dale. "For example, only an amount up to 5 percent of the Guarantee Account proceeds may be applied toward the costs of marketing the project. The developer's general business overheads cannot be paid from the Guarantee Account."

For banks and financial institutions involved in housing finance, the 'Guarantee Accounts' law provides an additional revenue stream as a low risk value addition to the real estate industry. Banks and other financial institutions are required to register with the Land Department as an authorized 'Account Trustee' provided such institutions fulfill the Land Department criterion.

"If a bank acting as an 'Account Trustee' is also the financiers to the project or development then such a bank maintains a level of control over the funds being pooled for such a real estate project or development. Such protection was not present earlier and banks would have to rely on contractual undertakings of the developers vis-à-vis registrations of title and mortgage," said Husam Hourani Partner and Head of Al Tamimi & Company's Banking & Finance department. "The 'Guarantee Account' is opened strictly in the name of each real estate development (of the relevant developer) therefore preventing the developer to allocate funds in the 'Guarantee Account' to any other project or development.

The law also provides comfort to the mortgage financiers that the funds provided to the each purchaser or borrower are directly deposited in the 'Guarantee Account' and as a consequence the developer may not have access to such funds but in accordance with the 'Guarantee Account' Agreement. The risk albeit minimal, being that such mortgage financier has to rely on the 'Guarantee Account Agreement' negotiated between the developer and the Account Trustee bank.

"From a consumer protection standpoint, in the event a project is abandoned by the developer, the funds would be refunded back by the Accounts Trustee bank to the depositors (individuals and banks alike) after consultation with the Land Department," continued Hourani. "This is due to the fact that the Land Department would have provided a certain level of flexibility to negotiate the Guarantee Account Agreement with registered developers. Therefore it is imperative for banks and financial institutions to move forward to a market standard Guarantee Account Agreement structure with a suitable mechanism of depositing of funds, release of funds (on the basis of completion of milestones), retention of amounts and other necessary provisions in accordance with the rules and guidelines of the Land Department."

In terms of compliance, Article 18 of the Law requires developers to complete all required steps within 6 months of its enactment, or by 28th December 2007. "If off-plan sales have commenced, the project will fall into one of three categories: projects where 70 to 80 percent of the construction has been completed have no requirement to open Guarantee Account. Projects where construction is beyond shoring stage have to open their 'Guarantee Account' by 28th December 2007, and project where construction has not yet started or are up to shoring stage need to open their 'Guarantee Account' immediately," stated Dale.

The Law also comes with teeth. Penalties of imprisonment and/or fines starting at AED100,000 are applicable for offences which include a developer dealing with a real estate broker who is not registered in the Land Department's Brokers Register. A developer's registration at the Land Department may be cancelled in case of bankruptcy, failure to commence construction within six months of receiving approval to sell off-plan, cancellation of license, violation of this new law and any other laws and/or by laws regulating real estate development activity.

"RERA was established and launched as a part of Dubai's 2015 vision for economic development and falls in line with the current developments within the real estate sector," continued Bin Ghalita. "As a government entity under the Land Department, RERA's main objective is to establish the foundation for a globally attractive real estate sector that satisfies and guarantees all stakeholders' rights and expectations."