Dubai’s Escrow/Trust Law Promises Property Investors Peace of Mind
The real estate boom in Dubai is by now a well-known phenomenon. This small Principality has become the commercial, financial, transportation, tourism and cultural dynamo of the Middle East. Investors in Dubai properties come from all over the world and Dubai has been transformed from a desert backwater, which at the turn of the 20th Century relied upon fishing and goat-herding, into a world-class urban center.
Legal reforms set the stage-foreign freehold property ownership
There is no doubt that encouraging this real estate explosion has been the policy of Dubai’s government. Public policy decisions and legal reforms by Dubai’s crown prince, Sheikh Mohammed Al Marktoum, have, in important respects, set the stage for the property boom in Dubai. In May 2002, a decree was issued allowing foreigners to buy and own freehold property in selected areas of the city. The government announced its intent to further liberalize the property ownership laws, stimulating foreign investment. In March 2006, Dubai’s government issued a law permitting foreign ownership of properties in designated areas of Dubai.
The need for reforms to protect off-plan investors in Dubai properties
The Dubai property market kettle may have overheated, however and the Emirate has become increasingly concerned about its international reputation as a safe place to invest. Many real estate sales in Dubai are off-plan sales, and there was real concern that investor’s money - often that of foreign investors - might not be going where it was expected to go. Property investors had no guarantee that the installments they were remitting to the developer were being used to construct the particular development in which they were investing. There was also no assurance that a particular stage of construction would be reached before the next payment was due. A widely-publicized recent example of this unfortunate phenomenon was the Damac Properties Palm Springs fiasco that we have discussed on this blog. The time was ripe for the Dubai authorities to do something to win back the confidence of property investors and give them peace of mind. And they did.
Dubai’s Escrow (Trust) Account Law promises to restore confidence in real estate
In an effort to bolster international confidence in the Dubai property market, Dubai instituted its Escrow (Trust) Account Law (Law No. 8 of 2007). This law enacts major changes in the manner in which real estate development is managed in Dubai. What have been called the “freewheeling” days of Dubai real estate seem to have come to an end with the institution of this law, which puts very strict controls on how developers can use money paid to them by off-plan property purchasers.
The Escrow/Trust Law is administered by Dubai’s land department (DLD) and an agency called the Real Estate Regulatory Authority (RERA), has been established by the department to regulate activities relating to Dubai real estate, including the Escrow law itself. Under this law, all funds received by property developers have to be administered through an “escrow” or “trust” account, opened with a financial institution which is approved by the DLD. The developers must be registered, and the registration process requires that the developer satisfies a number of conditions before it can even open the trust account and begin selling property. These include the filing of architectural plans and a financial statement in compliance with the law, among other things.
The Dubai Escrow/Trust Law also has a provision that requires the developer to hold back five per cent of the total value of the trust account for one year in order to cover claims for defects arising from the construction of the project.
The law also provides for stiff fines and imprisonment for violations and provides for a developer’s registration to be cancelled under a number of circumstances.
Needed reform or skunk at the garden party?
So now everybody’s happy, right? Well, not quite. The new Escrow/Trust Law certainly could have the effect of throwing a fair amount of cold water on property development in Dubai. This isn’t a bad thing, of course, if the real estate market is overheated and speculation-driven. But there is certainly concern that the stringency of this new law, and the expense of complying with it, will cut down the number of players who are able to afford to participate in this market. Some legal experts are predicting that the new law will present problems for property developers who usually release payments in stages to contractors. Often such payments come from the money received from purchasers. There are predictions that the restrictions imposed by the new law could cause delays in projects, particularly because the shortages of labor, expertise and materials in Dubai often permit contractors to drive hard bargains.
Nevertheless, the predominant view expressed in the Middle Eastern news media is that the Escrow Law is a badly needed reform that will solidify Dubai’s place as a venue for international real estate investment.
Thailand’s Escrow Law
Thailand is another country with an exciting real estate market has passed, but not yet implemented, an Escrow Law. The same concerns about protecting the investor and preserving the reputation of the country as a place for investment motivated the passage of Thailand’s law and many of these same concerns about the effects of the new law are being raised there. Some lament that the increased costs imposed by Thailand’s new law will seriously reduce the number of participants in that burgeoning real estate market.
All things considered, I see these laws as positive developments, however. It would seem that there is nothing more important to an emerging property market than its reputation for investment safety. These Escrow Laws may have some undesirable consequences, but they put first things first. It will be interesting to watch how things play out in both Dubai and Thailand.
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