Project cancellations hit Dubai developers

By Andrew Yule, Afridi & Angell
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Dubai’s Real Estate Regulatory Authority (RERA) has completed a programme that reviewed the emirate’s real estate projects, seeking to establish the viability and likelihood of completion of each project.

The Dubai Prospectus posted on the London Stock Exchange website states that: “In the last two years, RERA has … completed a review of more than 450 projects and, of these reviewed projects, 237 are expected to be completed in due course. 217 registered projects have been cancelled by RERA as at 31 May 2011.”

Concerns have been voiced by some commentators that there is oversupply to the Dubai real estate market and that this is driving down unit prices. The cancellation of projects that are unlikely to be completed is one way to help stabilize the market and to provide more clarity about the completed units that will be released to the market in future. This could in turn lead to lead to recovery in price levels.

Andrew Yule Associate Afridi & Angell
Andrew Yule
Associate
Afridi & Angell

Decree 6

Dubai’s Decree 6 of 2010 gives RERA the power to cancel a project after giving consideration to a technical report on the project. RERA started to exercise that right in May this year and issued cancellation notices to a variety of projects across the retail, commercial and residential sectors during May and June.

There are several different circumstances in which RERA is entitled, under Decree 6, to cancel a project. These include where the developer is bankrupt, where the developer has breached Dubai’s Escrow Account Law, and where the developer has failed (without an acceptable excuse) to commence construction.

Decree 6 sets out a specific procedure that RERA must follow to cancel a project. Given the serious consequences of cancellation, a developer whose project RERA is seeking to cancel can be expected to carefully study the facts to establish if the procedure was correctly followed.

Cancellation procedure

RERA must notify the developer in writing of the decision to terminate. Starting from the date on which the developer is notified of the cancellation, the developer then has seven working days to challenge RERA’s decision.

If the developer challenges the cancellation, the challenge must be in writing and must state the developer’s arguments why cancellation is invalid. Arguments that are often put forward by developers are:

• The developer has opened an escrow account and deposited all monies into that account as required by law;

• The developer has paid the master developer the purchase price for the plot and has taken possession as required by law; and

• The developer has obtained all necessary consents and licences in order to commence construction, but the developer is being prevented from starting construction due to some factor beyond its control.

If the developer makes a timely challenge to the cancellation, RERA must then consider the challenge and issue its decision within seven working days of the date of submission of the challenge.

The consequences are uncertain where RERA is unable to comply with the seven working day deadline. Indeed, for some projects RERA has ordered a whole new report on the project, perhaps reviewing the conclusion of the original report that led to the cancellation notice being issued.

Consequences of cancellation

In the event the developer’s challenge is rejected, the developer is obliged to provide all unit purchasers with a full refund of all monies paid. The refund must be made within 60 days of RERA’s cancellation decision, although RERA may extend that deadline.

If the developer fails to make the necessary refund, RERA has the power to take “whatever procedures necessary to protect purchasers’ rights, including referring the matter to the competent judicial authorities”.

Decree 6 does not provide that, in the event a project is cancelled, the contract under which the developer bought (from the master developer) the plot of land on which the project was to be built is also terminated. Accordingly, and subject to further action by either party, that contract remains in place and the developer is not entitled to a refund from the master developer.

The obligation under Decree 6 for the developer of a cancelled project to give a full refund to unit purchasers is onerous. It is therefore anticipated that developers will be increasingly focused on enforcing their rights against master developers, ideally securing a refund of monies paid for the plot of land on which the project was to be built.

Andrew Yule is an associate at Afridi & Angell, a UAE-based law firm. He can be contacted at [email protected] Afridi & Angell has offices in Abu Dhabi, Dubai and Sharjah.

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