Category: inBriefs

The New Netting Law

A new netting law was published on 1 October 2024 as Federal Decree-Law No. 31 of 2024 on Netting (the Netting Law) and came into effect on 2 January 2025, repealing Federal Decree-Law 10 of 2018 on Netting (the Old Law). The Netting Law provides further clarification on both the legal recognition and enforceability of various financial contracts, and the ability to implement close-out netting (i.e., netting of obligations following an event of default or termination event), particularly following the insolvency of the UAE counterparty. The Netting Law applies to all qualified financial contracts, netting agreements and related collateral arrangements entered into by a person or entity in the UAE (other than persons and entities located in financial free zones, being the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM), which have their own netting regimes). As with the Old Law, the Netting Law is closely modelled on the 2006 and 2018 ISDA Model Netting Acts (as published by the International Swaps and Derivatives Association (ISDA)).

 

Why is netting important?

 

Close-out netting is essentially the process where, following a default under a contract (usually a master agreement, such as an ISDA Master Agreement), the non-defaulting party can request the termination of all transactions between the parties under the contract. The parties then determine the value of the unperformed obligations under all “open” transactions and then aggregate the obligations owed by each party to the other, resulting in a net sum (or close-out amount) owed by one party to the other. Effective close-out netting (particularly in post-insolvency situations) can provide a clear and reliable mechanism for parties to settle payments and/or obligations (including collateral transfers) across multiple transactions, thereby minimising the overall credit and settlement risk and, in the case of financial institutions, reducing the amount of collateral required to secure the counterparty’s obligations under contracts.

 

Financial institutions relay on close-out netting as a key tool for managing and mitigating credit risk associated with a variety of financial contracts, particularly over-the-counter derivatives trading. Financial institutions will use post-insolvency risk of a counterparty to set credit limits, thus if the counterparty is in a jurisdiction where the insolvency laws recognise netting arrangements then the credit limit will be calculated on the basis of net exposure, whereas, if the counterparty is a jurisdiction where the insolvency laws do not recognise netting arrangements (a non-netting jurisdiction), the credit limit will be based on gross exposure.

 

Therefore, entering into financial contracts with a counterparty in a non-netting jurisdiction can result in the financial institution becoming subject to very high capital adequacy requirements and increase the costs and collateral requirements for the counterparty.

 

Whilst the UAE Bankruptcy Law (Federal Decree-Law No. 51 of 2023 Promulgating the Financial Reorganisation and Bankruptcy Law) recognises the set-off on a net basis, this is limited to agreements and arrangements under the Old Law. Consequently, it is not clear whether the adoption of the Netting Law means that the UAE is currently a non-netting jurisdiction.

 

Key Concepts Under the Netting Law

 

Netting

 

The Netting Law allows parties to enter into netting agreements for the purposes of netting off their payment and delivery obligations under qualified financial contracts (netting). A netting may include the following features:

 

a.) any termination, liquidation and/or acceleration of payment/delivery rights or obligations under qualified financial contracts entered into under a netting agreement or to which a netting agreement applies;

 

b.) calculation, estimation or adoption of an index of close-out or termination value, market value, liquidation value or any other relevant value, which may arise from a party’s failure to enter into or perform a transaction under a netting agreement, where the rights and/or obligations of the parties under such netting agreement have been terminated, liquidated and/or accelerated under point (a) above;

 

c.) conversion of the values calculated or estimated under point (b) above into a single currency;

 

d.) determination of the net balance of values calculated under point (b) above to be paid or in respect of which an obligation may arise, as converted under point (c) above, whether by exemption, replacement or otherwise; and

 

e.) entry into an arrangement whereby the net amount calculated under point (b) above becomes payable directly or as part of either the (i) consideration for a specific asset or (ii) damages for non-performance of such transaction.

 

Netting Agreements

 

Under the Netting Law, netting agreements include:

 

a.) any agreement between two parties for netting of present or future rights to or obligations for payments or delivery, or transfer of title arising in connection with one or more qualified financial contract between the parties (a master agreement) or between parties to whom the agreement applies;

 

b.) any agreement providing for the netting of amounts due under two or more master netting agreements (a master netting agreement);

 

c.) any collateral arrangements such as credit support annexes or documents relating to or forming part of a master netting agreement or master agreement;

 

d.) any Shari’ah compliant agreement or arrangement which is intended to have a similar effect as the agreement or arrangements under points (a) through (c) above or any other netting agreement; and

 

e.) any agreements, contracts or transactions which fall within the definition of a qualified financial contract.

 

A netting agreement and all qualified financial contracts to which it applies will constitute a single agreement.

 

Qualified Financial Contracts

 

The Netting Law currently identifies 26 categories of agreements as qualified financial contracts (which create either a right to receive or an obligation to make a payment or delivery or to transfer title to assets/commodities for consideration) including (a) all types of swaps (in relation to currencies, interest rates, basis rates or commodities), forward rate agreements, currency or interest rate futures, currency or interest rate options, derivatives (relating to bonds, energy, bandwidth, freight, emissions and property index), securities contracts, collateral arrangements, commodities related contracts, (b) derivatives, agreements, contracts or digital asset transactions of the types under the other categories of qualified financial contracts, (c) any voluntary carbon credit derivatives, agreements, contracts or transaction or other types of carbon credit from the types of transactions under the other categories of qualified financial contracts, and (d) any Shari’ah compliant arrangement having an equivalent of the type of agreements and transactions under the other categories of qualified financial contracts.

 

The list of qualified financial contracts under the Netting Law may be reduced or expanded by the UAE Central Bank. This is a change from the Old Law, which contemplated the establishment of a Committee for Designation of Qualified Financial Contracts which would, amongst other things, determine the type of transactions that would constitute qualified financial contracts.

 

Collateral Arrangements

 

The Netting Law recognises collateral arrangements, including title transfer collateral arrangements (such as under repo transactions). Collateral arrangements are identified as mechanisms whereby collateral (including cash, securities, guarantees, letters of credit, repayment obligations and any other assets that are commonly used as security in the UAE) as security relating to or forming part of a netting agreement or qualified financial contracts including (a) security interest over collateral, (b) a collateral title transfer arrangement or (c) any obligation to provide collateral, letter of credit or repayment from one party to another party under a qualified financial contract.

 

The Netting Law provides that:

 

a.) Any sale, acquisition or liquidation of collateral under a collateral arrangement shall be enforceable without the need for any notice or consents from any person unless (i) the parties have agreed to such notice or consent requirements or (ii) UAE requires the sale, acquisition or liquidation to be effected in a fair commercial manner. The Netting law provides no guidance on what constitutes “fair commercial manner”.

 

b.) Any direct transfer of collateral under a collateral title transfer arrangement shall be concluded in accordance with its terms and shall not be characterised as an insurance arrangement.

 

No Ghurar

 

Under UAE law, futures, margin trading and derivatives transactions were often viewed as potentially unenforceable due to perceived gharar, an unacceptable level of risk or uncertainty that undermines contract formation. In the past, UAE courts had held in some instances, that derivatives are unenforceable “contracts of risk,” even when used to manage risk (as in hedging contracts) rather than to create risk or to speculate. Even for Shari’ah compliant hedging products in the market (for example, the ISDA/IIFM Tahawwut Master Agreement), which are supported by fatwas confirming that such products are Shari’ah compliant and free of gharar, there was no certainty on how the courts would hold. The Old Law had minimised, if not entirely eliminated, these uncertainties by providing that qualified financial contracts shall not be void, unenforceable, or not final by reason of gharar under the UAE Civil Code – the Netting Law has retained this earlier position. Further, under the Netting Law if a party pledges that a qualified financial contract or any agreement relating to a qualifying financial contract is Shari’ah compliant, then the pledging party cannot refuse to perform its obligations under such qualified financial contract, on the basis that the qualified financial contract is no longer Shari’ah compliant, whether on account of a change in the interpretation of Shari’ah rules and principles or otherwise. This provision may have been added as a consequence of recent cases in the UAE, where issuers of Shar’ah compliant financial products (mostly Sukuk) refused to perform their obligations on the basis that these products (or the transitions thereunder) were no longer Shari’ah compliant.

 

Bankruptcy

 

Effective close-out netting can limit a party’s exposure to the insolvency of its counterparty, thus allowing sums owing to an insolvent party to be netted-off against sums owed by the insolvent party to the other party. Under the UAE Bankruptcy Law, a debtor and creditor may only set off obligations (i) if the conditions for exercising the setoff are satisfied before initiating procedures under the UAE Bankruptcy Law, (ii) if conducted as part of the implementation of a preventative settlement or restructuring procedure or (iii) as approved by the court.

 

The Netting Law provides that the provisions of a netting agreement shall be deemed final and enforceable (including against a third-party security provider, even if such third party becomes insolvent), even following the insolvency and/or bankruptcy of one of the parties thereto. The arrangements under a netting agreement may not be suspended, delayed or made conditional merely by the appointment of a liquidator or the initiation of bankruptcy proceedings or under any other law applicable to insolvent parties. Insolvency and/or bankruptcy proceedings will not affect the netting arrangements under a netting agreement or a qualified financial contract (or any other financial contract) to which a netting agreement applies. Similarly, the provisions of a netting agreement shall not be affected by any limitations on setoff or netting imposed under any insolvency or bankruptcy laws.

 

In case of procedures under the UAE Bankruptcy Law, the liquidator or trustee of a party to a netting agreement (the insolvent party) may annul, stop or refuse the performance of a transaction constituting a preference to a non-insolvent third party (the third party). For example, such a transaction could be the transfer of cash, assets, property or collateral from the insolvent party to the third party under a netting agreement. However, the liquidator or trustee may do so only on the basis of clear and convincing evidence that such third party entered into the transaction with the intention to prevent, hinder, delay debt recovery by a current or future creditor of the insolvent party or defraud the creditors of the insolvent party or any party that becomes a creditor as a result of the relevant netting agreement or qualified financial contract. There is no definition of “clear and convincing evidence” (a term that has no antecedent in UAE law), but the concept would appear to present a higher hurdle than a mere preponderance of evidence. Significantly, there are no other grounds in the netting law for a liquidator or trustee to fail

 

Multi-branch netting

 

In line with the 2018 ISDA Model Netting Act and Guide, the Netting Law has recognised multi-branch netting agreements (the MBNA) as netting agreements between two or more parties, one of whom must be a foreign party (i.e., a party that is established, registered or regulated outside the UAE) under which a party can enter into qualified financial contracts through its home office (i.e., the office in the country where it is established, registered or regulated (home country)) and one of its branches or agencies in countries other than its home country.

 

In the event of the insolvency of a foreign party’s branch/agency (the branch), its liability (or the liability of its liquidator in the UAE) to the non-insolvent counterparty (the solvent counterparty) shall be calculated on the date of the termination of the qualified financial contract under the MBNA and limited to the lesser of (i) the foreign party’s net payment obligations (as adjusted by any payments to the solvent counterparty and the fair market value of any collateral provided by the foreign party under the MBNA) or (ii) the branch’s net payment obligation. The foreign party’s net payment entitlement from the solvent counterparty (as adjusted by any payments made to the liquidator of the foreign party and the fair market value of any collateral provided by the solvent counterparty under the MBNA) shall be netted against the solvent counterparty’s net payment entitlement from the foreign party. The solvent counterparty may liquidate any collateral (provided under, and in accordance with the terms of, the MBNA) and apply the proceeds against settlement of sums due from the foreign party under any related qualified financial contracts. Any excess collateral shall be returned.

 

Conclusion

 

The Netting Law is a sign of the UAE’s continued desire to participate fully in international markets for financial services. The addition of agreements relating to digital asset transactions and carbon credit derivatives as qualified financial contracts also demonstrates the UAE’s commitment to stay at the forefront of market developments and allow UAE counterparties to take advantage of the full range of financial products available in the international markets.

 

Whilst the Netting Law provides that it shall override any conflicting laws, it remains to be seen how the Netting Law will be implemented by the courts in certain circumstances, including the sale or title transfer of collateral under a collateral arrangement, where the relevant collateral is subject to a conflicting security interest in favour of a third party (including security interest perfected through registration on the EIRC movables security register or otherwise). We will continue to report as these and other issues are addressed in the coming years. ■

DIFC Court of Appeal overrules Sandra Holding in part and reaffirms itself as an international commercial court

“When you make a wrong turn you must make two right turns: one to correct the wrong turn and one just for growth.”

 

This ancient, Native American proverb still holds true today – at least, it seems, according to the eagerly-awaited decision in Carmon Reestrutura-Engenharia E Serviços Técnios Especiais, (SU) LDA v Antonio Joao Catete Lopes Cuenda [2024] DIFC CA 003 (Carmon v Cuenda).

 

The DIFC Court of Appeal in Carmon v Cuenda has overturned, in part, its own decision in Sandra Holding Ltd and others v Fawzi Musaed Al Saleh and others [2023] DIFC CA 003 (Sandra Holding), holding that the Court does have the jurisdiction to make freezing orders in support of foreign court proceedings. This landmark decision, issued by Justices Robert French, Sir Peter Gross and Rene Le Miere, is also the first time that the DIFC Court of Appeal has considered the circumstances under which it may depart from its own previous decisions.

 

Background

 

On 24 July 2023, Afridi & Angell, acting on behalf of the Claimant (an Angolan construction company), sought and obtained from Justice Wayne Martin (as he then was), sitting as the DIFC Court of First Instance, an ex parte freezing order together with an order for specific disclosure in support of proceedings in Hong Kong in which it was alleged that the Defendant had misappropriated in excess of USD 23 million of Carmon’s money.

 

The High Court of Hong Kong had already issued both a proprietary injunction over the funds, and their traceable proceeds, and a worldwide freezing order. A banker’s book order revealed that the Defendant had transferred the funds to other jurisdictions including Switzerland and the UAE.  Justice Martin’s Order accordingly restrained the Defendant’s bank accounts in onshore Dubai to prevent any further dissipation and required the disclosure of balances in those accounts.

 

Following a heavily-contested return date hearing, Justice Martin reserved judgment pending the Defendant’s compliance with his previous order for disclosure and, on the morning of 7 September 2023, ruled that the freezing order should continue – not least because new evidence revealed that the Defendant had, in apparent breach of the Hong Kong High Court orders, dissipated and/or transferred-on most of the funds in the UAE bank accounts.

 

The Wrong Turn: the CA decision in Sandra Holding

 

On the afternoon of 6 September 2023, the Court of Appeal handed down judgment in Sandra Holding which held that the DIFC Court of First Instance had no jurisdiction to make a freezing order in support of the prospective enforcement of a judgment in proceedings pending in a foreign court unless the Court had such jurisdiction established through one of the pathways specified in Article 5(A) of the JAL.

 

The Defendant then, relying on Sandra Holding, applied to set aside Justice Martin’s order for want of jurisdiction.  Justice Martin, accepting that he was bound to follow the decision of the Court of Appeal, discharged his own orders while staying the operation of the discharge (i.e., maintaining the freeze over the Defendant’s accounts) pending the decision of the Court of Appeal. Justice Martin also gave permission to appeal his order on limited grounds. Carmon then sought further permission to appeal from the Court of Appeal as to whether the recent decision in Sandra Holding was wrong in law and should, to that extent, be overruled.

 

The First Right Turn:  Correcting the Law

 

In a legal first for the DIFC Courts, on 4 April 2024, Justice Sir Peter Gross sitting as a single judge of the Court of Appeal, also gave leave to appeal in respect of Carmon’s further grounds, holding that there was “an arguable case that Sandra Holding was wrongly decided” and identifying a number of important policy issues which arose:

 

“(1) The power of the DIFC Courts, established (inter alia) to assist international trade, to grant freezing orders in circumstances where such relief could be crucial to avoid the dissipation of assets.

 

(2) The need to guard against the assertion by the DIFC Courts of an exorbitant jurisdiction.

 

(3) The proper limits of judicial (as distinct from legislative) development of the law by the DIFC Courts, whose jurisdiction is based on statute.”

 

In last week’s landmark judgment, the Court expressly held in summary: [1]

 

“It is the respectful opinion of this Court that the Court in Sandra Holding took a wrong turning in an unduly restrictive view of the powers of this Court which may be deployed in aid of its express jurisdiction ….. it is clear with the benefit of full and further consideration, that the past decision was legally incorrect ….. Further, it can be said to have generated inconvenience in the sense that the absence of the power to issue a freezing order in respect of a prospective foreign judgment may result in the jurisdiction of this Court to recognise the foreign judgment ultimately issued being thwarted. The correct analysis, in our respectful view, is whether the Court had power (and if it be necessary to say so, ancillary jurisdiction) to do so in order to avoid the thwarting of its undisputed express jurisdiction to recognise and enforce a foreign judgment. We are clear that the answer is Yes. We would add that considerations of policy for this Court are overwhelmingly in favour of granting the injunction. So too, are all discretionary considerations. The appeal should be allowed.” [2]

 

The Second Right Turn:  For Growth – the DIFC as an international court

 

The significance of the decision of the Court of Appeal in Carmon v Cuenda cannot be overstated.

 

First, it lays a strong foundation for the continued economic growth of the region and the promotion of the Emirate as an international centre for dispute resolution and settlement: [3]

 

“The ability of a potential judgment debtor in a commercial dispute to make a pre-emptive strike against enforcement of any judgment against it would be inimical to the rule of law in trade and commerce, domestically and transnationally. The DIFC Courts are part of a growing network of international commercial courts in a number of jurisdictions around the world. Where their jurisdiction and powers are amenable to constructions supporting the rule of law in transnational trade and commerce, such constructions should be preferred. In our opinion, Article 24 of the Court Law properly construed confers jurisdiction to entertain proceedings by way of an application for such relief as may be necessary to prevent its pre-emption by a dissipation of the assets of a prospective judgment debtor in proceedings in a foreign court whose judgment can be recognised and enforced in the DIFC Courts…..”

 

Second, the Court of Appeal provided carefully-considered guidance as to how in the future the question of whether the DIFC Court Rules confer jurisdiction on the DIFC courts in a particular case should be resolved.  Adopting what it termed an “expansive” approach “informed by public policy”, the Court ruled that “regard must be had to the function and purpose of the DIFC Courts, which are statutory courts integral to the operation of the DIFC as a Financial Free Zone”.

 

Third, an important conceptual distinction was made between the existence of a jurisdiction and the powers that may be exercised in aid of it.  Critically, it was said that jurisdiction may be implied from the grant of a power. [4]

 

Accordingly, the Court of Appeal held in Carmon v Cuenda that the grant of a jurisdiction to recognise and enforce a foreign judgment must encompass, if only by implication, the grant of power necessary to prevent that jurisdiction from being thwarted. The DIFC Court has express jurisdiction to recognise and enforce foreign judgments, and that jurisdiction would be thwarted if a defendant to a foreign proceeding which may yield such a judgment could dissipate its assets, whether within the DIFC or otherwise.

 

Finally, having been asked for the first time to overrule one of its own previous decisions, the Court of Appeal concluded that if one of its earlier decisions embodied an error of law that impeded the effective administration of justice then it would review the case having regard to the four considerations set out by the High Court of Australia in John v Federal Commissioner of Taxation[5], namely:

 

  • whether or not the precedent decision rested upon a principle carefully worked out in a significant succession of cases;

 

  • whether there were differences in the reasoning that led to the precedent decision;

 

  • whether a precedent decision had achieved no useful result but considerable inconvenience; and

 

  • whether or not a precedent decision had been independently acted on in a manner which militated against reconsideration.

 

The decision is also growing evidence of the progress of the DIFC Courts’ longer term mission to develop its own distinctive body of jurisprudence by broadening the base beyond its traditional roots in English common law. ■

 

Afridi & Angell successfully represented Carmon throughout the proceedings and instructed Zoe O’Sullivan KC of Serle Court Chambers for the set aside application and the appeal.

 

–

[1] Extracted from [204] and [205]

[2] The Carmon Court also found that the case for a WFO was not established on the merits in Sandra Holding Ltd and the result would therefore likely have been the same even had the court found there to be jurisdiction and power to make the order sought in that case

[3] Extracted from [154] – [155]

[4] See [31], [38] and [58].

[5] (1989) 166 CLR 417

The Long-Awaited Implementing Regulations for the Bankruptcy Law

Federal Decree-Law No. 51/2023 Promulgating the Financial Reorganisation and Bankruptcy Law (the Bankruptcy Law) introduced a new bankruptcy regime in the UAE, but left a number of key issues to be addressed under later implementing regulations. These regulations have now been issued under Cabinet Decision No. 94/2024 on the Implementing Regulation of the Financial Restructuring and Bankruptcy Law (the Implementing Regulations). The Implementing Regulations supplement the Bankruptcy Law and provide further guidance and clarity on several issues as highlighted below.

 

Regulatory Authorities

 

The UAE Central Bank (UAE CB) and the Securities and Commodities Authority (SCA) have been identified as “Supervisory Entities” that will be responsible for implementing the Bankruptcy Law for entities that are subject to their supervision (including banks, financial services providers and insurance companies). Given the key role that these regulated entities (particularly banks and insurance companies) play in the broader economy, it is appropriate that they be treated as a separate category under the Bankruptcy Law and that the Supervisory Entities oversee their bankruptcy proceedings, as they will have the most detailed information regarding their operations and financial condition.

 

Bankruptcy and Restructuring Register

 

The Implementing Regulations provide details on the information that will be recorded in the bankruptcy register (as established under the Bankruptcy Law) maintained by the Bankruptcy Unit to record applications submitted and actions taken by the Bankruptcy Court, as well as information about the bankruptcy proceedings, parties and trustees/controllers (the Register). To access information from the Register, an interested party must submit an application to the Bankruptcy Unit, specifying the information requested and the reasons for the application. The application will be subject to the approval of the Minister of Justice (or their representative).

 

Whilst the ability to access information regarding a bankruptcy application/case provides greater clarity and transparency on the bankruptcy exercise, the fact that such access is limited to interested parties who can demonstrate legitimate reasons for requesting the information (both of which are subject to the Bankruptcy Unit and Minister of Justice’s interpretation and discretion), suggests that such access to the information in the Register will be limited to parties with a direct interest in the bankruptcy action.

 

Revised Debt Thresholds

 

Under Federal Decree-Law No. 9/2016 (the Old Law), which was repealed by the Bankruptcy Law:

 

  • a debtor was eligible to file for bankruptcy if the debtor is unable to make payment of debts due to financial difficulty of insolvency for a period of 30 days from the due date; and

 

  • a creditor was eligible to initiate bankruptcy proceedings against a debtor if a debt of at least AED 100,000 was outstanding.

 

However, the Implementing Regulations have increased the required debt thresholds that the debtor has ceased or will be unable to pay under the Bankruptcy Law, as follows:

 

  • a creditor may initiate bankruptcy proceedings if the value of debts owed by the debtor is at least AED 1 million (or AED 10 million if the debtor is regulated by the UAE CB or SCA);

 

  • a debtor may file for bankruptcy if the value of the debts is at least (a) AED 300,000, if the debtor is a natural person; (b) AED 500,000, if the debtor is a legal entity and (c) AED 5 million, if the debtor is a regulated entity; and

 

  • a secured creditor/mortgagee may initiate restructuring or bankruptcy proceedings if (a) in case of one creditor, the aggregate value of the securities is AED 1 million less than the debts owed; (b) in case of a group of creditors, the aggregate value of the securities is AED 5 million less than the debts owed; and (c) in case of a regulated entity, the aggregate value of the securities is AED 10 million the debts owed.

 

The increase in the value thresholds for initiating proceedings under the Bankruptcy Law may, in part, have been designed to discourage frivolous actions. However, these changes may also have unintended consequences, in terms of limiting both debtors’ and creditors’ ability to access an orderly winding-up of a bankrupt company, in certain circumstances. For example, under the Old Law, if a company was bankrupt and had no prospect of rescuing its business, it could apply for a debtor led bankruptcy. However, under the Implementing Regulations, this is now only possible if the company has debts of over AED 500,000 (or AED 5 million if the debtor is a regulated entity). Consequently, a company with debts of less than AED 500,000 would not be able to initiate an orderly bankruptcy. Similarly, the threshold for a creditor led bankruptcy of a debtor company has increased tenfold under the Bankruptcy Law.

 

Bank guarantee required for commencing proceedings

 

The Implementing Regulations have also revised the amount of money or bank guarantee that an applicant must submit to the Bankruptcy Court treasury in order to cover the costs associated with the initial application review. Under the Old Law, the amount payable by the creditor, either as money or a bank guarantee, was capped at AED 20,000. However, the amount required for debtor-led proceedings, whether in cash or as a bank guarantee, was not specified. The Implementing Regulations now require a debtor or creditor applicant (other than the regulatory authorities) to provide a payment or the bank guarantee representing 5 percent of the debtor’s total debts owed to the creditor or 5 percent of the debtor’s total debts or assets as of the date of the application.

 

As with the increased thresholds for initiating bankruptcy proceedings discussed above, the changes to the money or bank guarantees (which are now uncapped) may act as a barrier, particularly for small creditors, to accessing proceedings under the Bankruptcy Law. Creditors may find it difficult to deposit the required money or bank guarantee, particularly if their financial position has also deteriorated due to the payment defaults of the debtor company.

 

Small claims procedures

 

Although the Bankruptcy Law introduced simplified procedures for “small debtors”, it did not define what constitutes a “small debtor”. The Implementing Regulations identify small debtors as those whose assets value does not exceed (i) AED 1 million, in the case of a natural person, and (ii) AED 2 million, in the case of a legal entity. In such circumstances, the Bankruptcy Court may, on its own motion or pursuant to an application filed by the debtor, the trustee or a creditor, order that preventive settlement, restructuring or bankruptcy proceedings be initiated in accordance with the procedures set out in the Bankruptcy Law.

 

Approval for actions undertaken by the debtor

 

The Bankruptcy Law provided that, following the initiation of bankruptcy proceedings, the debtor would require the approval of the trustee in order to undertake certain actions relating to the business and operations of the company under restructuring proceedings. The Implementing Regulations identify these actions as (i) the provision or renewal of guarantees, (ii) paying liquid debts or pre-paying debts, (iii) forming a subsidiary or purchasing shares in another company, (iv) transferring ownership of its property, business, or assets outside the ordinary course of business, and (v) waiving legal claims or enter into financial settlements.

 

These restrictions ensure that the debtor’s actions do not undermine the restructuring process or negatively impact creditors’ interests during the restructuring proceedings.

 

Auction of the debtor’s assets

 

The Implementing Regulations also introduces certain pricing, conditions and procedures relating to the sale of assets of a company in bankruptcy. Prior to the sale of a debtor’s assets by way of an action, the Bankruptcy Court must approve the liquidation and distribution plan. The base price of the assets shall be established by the trustee in accordance with the appraisal conducted by a court-appointed valuation expert. This however does not apply to the sale of securities issued by government bodies, public institutions or joint-stock companies and other financial instruments accepted by the SCA, which shall follow separate market procedures under the supervision and control of the SCA.

 

Details of the auction must be advertised at least five business days in advance, in both Arabic and English newspapers, as well as on the Bankruptcy Court’s website. Bids will be submitted either in sealed envelopes or electronically, in accordance with the conditions determined by the trustee and the Bankruptcy Court’s approval. If the highest bidder fails to deposit the required payment within five days, the next highest bidder is given the opportunity, and the process repeats if necessary.

 

Conclusion

 

Whilst the Implementing Regulations provide valuable clarity and input on key provisions of the Bankruptcy Law, they also further demonstrate that the debtor friendly bankruptcy regime adopted in the UAE (in contrast to the creditor led regimes in most Western jurisdictions). It also reinforces the UAE’s preference for restructuring and corporate recovery, and prescribing bankruptcy only in cases where a corporate rescue is impossible or impractical. This is a welcomed approach.

 

It remains to be seen exactly how the Bankruptcy Law and Implementing Regulations will be adopted and applied in practice by the Bankruptcy Court, in particular whether the increased value thresholds for initiating proceedings and the uncapped advance money and bank guarantees identified under the Implementing Regulations will undermine the ability to effectively access proceedings under the Bankruptcy Law.

 

We will continue to monitor developments in the UAE bankruptcy regime. ■

Dubai’s Resilient Property Market in the face of Climate Change

Climate change is affecting the world, and its impact is notably most seen in the rise in sea levels and flooding from major weather systems, as evident in the recent events in Florida in the US. These changes directly threaten oceanfront communities and the local real estate market.

 

Oceanfront properties, once considered prime real estate, are now facing significant devaluation globally due to the encroaching threat of rising waters. However, interestingly, while this trend is evident in many parts of the world, Dubai presents an anomaly where oceanfront property prices continue to defy the global trend, with property prices showing resilience and, in some places, even increasing.

 

The Global Scenario: Rising Water Levels and Falling Property Prices

 

Climate change has accelerated the melting of polar ice caps, leading to rising sea levels. According to a report by the Intergovernmental Panel on Climate Change (IPCC), global sea levels have risen by about 20 centimetres since 1880, with the rate of increase doubling over the last two decades. This rise poses a significant threat to oceanfront communities, leading to frequent flooding, erosion, and the potential eventual submersion of low-lying areas.

 

In US states such as Florida, a region notorious for its vulnerability to rising seas, property prices in certain oceanfront areas have dropped by as much as 20% since 2013. Additionally, the demand for houses with higher elevation has risen. Similarly, the same trend has occurred in other states, such as New York, Massachusetts, and California where oceanfront property prices are losing significant value. In Nantucket, Massachusetts, a beachside residence that should have sold for $2 million sold instead for a fraction of the price at $600,000. Notably, the drop in prices reflects the evident risk not just to the properties but also to life. The drop in property values has occurred over the last 10 years with the increase in flooding, along with the increase in hurricanes and their power.

 

However, although the UAE’s long coastline increases its vulnerability to rising sea levels and with the UAE Ministry of Climate Change and Environment estimating sea level rises in the Gulf by as much as 50 centimetres by 2050, the UAE continues to see a rise in oceanfront property values, unlike other areas of the world.

 

Dubai: The Exception

 

In contrast to the global trend, Dubai’s oceanfront property market continues to thrive. The city, known for its ambitious real estate projects, has managed to maintain, and even increase, the value of its oceanfront properties.

 

Dubai has made significant investments in infrastructure to address the risks of rising sea levels most notably the use of innovative architectural design, preventative measures and future planning:

 

i.) Palm Jumeirah and Palm Jebel Ali are artificial islands which were designed using advanced engineering techniques to guard against flooding and erosion.

 

ii.) Plantation of Mangroves; Dubai is already looking to bolster its sea lines and reduce the impact of climate change in the reintroduction and addition of mangroves. Success has already been seen in Abu Dhabi on this front.

 

iii.) Responsible and regenerative development; new up and coming developments are dealing with environmental and climate issues at hand, most notably the rise of and introduction of greener living spaces, and forest landscaping.

 

Further, in order to combat the environmental challenges posed by global warming, the Government of Dubai has implemented certain programmes and zoning laws which include the Green Building Regulations & Specifications, Coastal Zone Management Framework, and the Dubai Urban 2040 Master Plan. In Dubai, the government and real estate developers have invested in sand banking i.e., raising the natural elevation of the ground level from the sea level.

 

Dubai’s ability to use technology and advances in engineering alongside its driven and notable advanced plans to tackle and deal with climate change issues such as erosion and flooding in advance, arguably, is what drives investors and realtors’ confidence in the oceanfront real estate market. Notably, Palm Jumeirah has seen an increase of 54% in the mean property price recently.

 

But what are the legal considerations and implications that investors should be aware of?

 

Disclosure: ahead of any purchase an Investor should enquire and request a full disclosure of the property’s history, including any flooding history.

 

Insurance and Liability: investors should be aware of the potential risk of increased insurance premiums with the potential that an oceanfront property becomes uninsurable.

 

Zoning and Development Laws: although other global cities are having to review and implement stricter zoning laws, Dubai’s rapid development is factoring in the laws and codes implemented by the government including, Dubai Municipality’s Green Building Regulations and Specifications and Dubai 2040 Urban Master Plan.

 

Conclusion

 

Going forward, the risks posed by rising sea levels are a threat to oceanfront real estate. Innovative real estate development solutions will need to be utilised and invested in by developers and governments. Further, alternative approaches to development and areas of development shall need to be considered, including developing inland water bodies such as lakes or lagoons that replicate the aesthetics and lifestyle of oceanfront living without the rising sea level risks. Dubai has already developed master communities with inland lakes and lagoons, and continues to be at the forefront of this design with new lakes and lagoons developments underway. These inland real estate developments combine luxury living with a practical response to the growing threat of coastal erosion and flooding.

 

Climate change is a global issue, and rising sea levels do not respect national borders. Therefore, there needs to be a cohesive and robust international response to dealing with the increasing challenges of rising sea levels.  ■

Changes to the UAE economic substance reporting regime

The UAE Federal Government has issued Cabinet Decision 98 of 2024 (2024 Cabinet Decision) and has, as a result, substantially revised the application of the UAE economic substance reporting requirements. The present economic substance requirements were first introduced through Cabinet Decision 57 of 2020 (the 2020 Cabinet Decision). The 2024 Cabinet Decision amends these requirements and provides that the economic substance requirements originally specified under the 2020 Cabinet Decision shall apply only to financial years starting from 1 January 2019 and ending on or prior to 31 December 2022.

 

The 2024 Cabinet Decision further stipulates that: (a) any administrative fines imposed on a “licensee” or an “exempt licensee” in accordance with the 2020 Cabinet Decision for a financial year ending after 31 December 2022 shall be extinguished; and (b) in the event that any administrative fines have already been collected in respect of any financial year ending after 31 December 2022, these fines shall be returned and any ongoing enforcement proceedings withdrawn. ■

The new DIFC prescribed company regulations

The Dubai International Financial Centre (DIFC) has introduced the DIFC Prescribed Company Regulations 2024 (the 2024 Regulations), replacing the DIFC Prescribed Company Regulations 2019 (as amended in 2020 and 2022) (together the Former Regulations). The 2024 Regulations came into effect on 15 July 2024 and expand the range of applicants eligible to incorporate a so called “prescribed company” in the DIFC.

 

Evolution of eligibility criteria

 

Under the Former Regulations, the following could establish a prescribed company in the DIFC:

 

1.) Qualifying Applicants: entities that could demonstrate an existing nexus to the DIFC, such as already being registered within the DIFC or affiliated with a DIFC-registered entity, or meeting specific criteria (e.g., being an ‘Authorised Firm’ or a ‘Government Entity’).

 

2.) Qualifying Purpose Applicants: applicants engaged in specific activities such as ‘Structured Financing,’ ‘Aviation,’ or ‘Crowdfunding Structures’.

 

Key changes

 

Expanded eligibility

 

The 2024 Regulations require that an applicant wishing to incorporate or continue a prescribed company in the DIFC must satisfy the DIFC Registrar of Companies of one of the following criteria:

 

1.) the prescribed company is controlled by:

 

GCC Persons: individuals who are citizens of a GCC member state, bodies corporate controlled by citizens of a GCC member state, entities with securities listed on a GCC exchange, and so called ‘Government Entities’;

 

Registered Persons: a body corporate incorporated, registered, or continued within the DIFC, excluding prescribed companies and non-profit organisations incorporated or continued within the DIFC; or

 

Authorised Firms: any person holding a license granted by the Dubai Financial Services Authority or by a recognised financial regulator within the UAE or certain other jurisdictions.

 

2.) the prescribed company is established or continued in the DIFC for the purpose of holding legal title to, or controlling, one or more GCC Registrable Assets[1].

 

3.) the proposed prescribed company is established or continued in the DIFC for a Qualifying Purpose[2].

 

4.) the prescribed company established or continued in the DIFC has a director who is an employee of a “Corporate Service Provider[3]” and that Corporate Service Provider has an arrangement with the DIFC Registrar of Companies in accordance with Regulation 3.3.2 of the 2024 Regulations.

 

Employment restriction

 

The 2024 Regulations have introduced an express prohibition on a prescribed company employing staff. This restriction does not extend to the appointment of directors.

 

Conclusion

 

The 2024 Regulations mark a significant shift in the DIFC regulatory landscape, making it more inclusive and flexible for a wider range of applicants and purposes. We anticipate that the 2024 Regulations will make the DIFC prescribed company more attractive for use in corporate structuring. ■

 

 

 

–

[1] A GCC Registrable Asset is defined in the 2024 Regulations as: an asset or property interest that must registered with a GCC Authority to establish legal ownership, secure rights, or encumbrances against it, and to provide public notice of such interests, including: (a) land and real property; (b) shares in companies; (c) partnership interests; (d) intellectual property; and (e) aircraft and Maritime Vessels.

 

[2] A Qualifying Purpose is defined in the 2024 Regulations as being any of the following: (a) an “Aviation Structure”; (b) a “Crowdfunding Structure”; (c) an “Intellectual Property Structure”; (d) a “Maritime Structure”; (e) a “Structured Financing.

 

[3] A Corporate Service Provider is defined in the 2024 Regulations as: a person registered with the DFSA as a Designated Non-Financial Business or Professional that undertakes corporate services business in the DIFC.

Amendments to the Labour Law – employers, en garde!

On 29 July 2024, the UAE enacted Federal Decree Law 9 of 2024 (the Amendment) introducing some significant changes to Federal Decree Law 33 of 2021 (the Labour Law), UAE’s principal legislation on employment. The Amendment replaces Article 54 of the Labour Law pertaining to individual labour disputes, and, Article 60 of the same law which sets out the penalties applicable for certain violations by employers. The Amendment comes into force on 31 August 2024.

 

The key amendments are as follows:

 

Article 54 (individual labour disputes)

 

  • The time bar for labour disputes is now two years from the date of termination of employment- i.e., a labour dispute may be filed within two years from the date of termination of employment.

 

  • Final appeal in small claims matters (i.e., claims below AED 50,000) is now before the Court of First Instance, and not before the Court of Appeal.

 

Article 60 (penalties)

 

Enhanced penalties for violations.

 

The penalties applicable to employers under this provision for certain violations have been substantially enhanced under the Amendment. The previous penalty ceiling of AED 200,000, for these violations, has been raised to AED 1 million under the Amendment. Accordingly, employers should take note that once the Amendment becomes effective, they may be exposed to penalties ranging between AED 100,000 and AED 1 million for the following violations:

 

a)Employing an employee without obtaining a work permit;

 

b) Recruiting an employee and not providing work;

 

c) Misusing work permits for purposes other than those for which they were issued;

 

d) Closing an establishment or suspending its activities without settling workers’ rights or entitlements; and

 

e) Employing a minor in violation of the Labour Law.

 

Penalty for engaging in fictitious employment.

 

Significantly, the Amendment also imposes an identical penalty (between AED 100,000 and AED 1 million) for fictitious recruitment of employees. The Amendment specifies that this penalty is multiplied depending on the number of employees who are employed fictitiously.

 

The Amendment also provides that the Ministry of Human Resources and Emiratisation may institute criminal proceedings against employers for fictitious recruitment of employees.

 

This stringent fine is intended to deter employers and employees from subverting government policies and public benefit measures, such as the Emiratisation programme.

 

The award-winning dispute resolution team at Afridi & Angell has significant expertise in UAE employment law and are well positioned to advise on employment disputes and risk mitigation. ■

The UAE’s New Abortion Decision: Expanding Cases of Permissible Abortion

The UAE recently amended its legal framework on abortion to expand the circumstances under which abortions are permitted and ease the rules regarding the circumstances under which abortions are permissible. Cabinet Decision No. 44/2024 (the Decision) came into effect on 21 June 2024 and progressively changed UAE’s law on abortion.

 

Prior to the Decision, abortions were only allowed in two cases: if the pregnant woman’s life was at risk (Case 1), or if the foetus had a severe deformity (Case 2). Article 4 of the Decision recognises three additional cases where abortions are permissible:

 

Non-consensual Pregnancy – This includes a pregnancy that occurs because of an act committed against the woman’s will, without her consent, or through coercion, such as rape (Case 3).

 

Incestuous Pregnancy – In cases where pregnancy is a result of incest (Case 4).

 

Spousal Request – If both spouses request an abortion, which is subject to approval by a specialised medical committee (Case 5). This is considered to be the most significant change introduced by the Decision.

 

The Decision applies to both Emiratis and expatriates. However, an expatriate woman seeking an abortion must have legally resided in the UAE for at least one year before making a request for an abortion. The Decision also sets conditions and certain controls for performing abortions, including:

 

  • Only medical facilities authorised by the Health Authority (i.e. the Ministry of Health, or any federal or local government entity responsible for health affairs in the UAE) may conduct abortions.

 

  • Only doctors specialising in obstetrics and gynaecology may perform the procedures.

 

  • The performance of the abortion should not result in any medical complications or pose a risk to the woman’s life.

 

  • At the time of the abortion, the pregnancy should not have exceeded 120 days.

 

  • Unless in an emergency, the woman’s written consent is required (if she is unable to give consent, the consent of her husband or guardian is required).

 

The Decision requires the formation of a committee at the level of each Health Authority in the UAE, which must include three doctors and a member of the Public Prosecution Department. The approval of a committee is required prior to performing an abortion.

 

Nevertheless, the Decision does not set out the criteria to be considered by the committee in making its decisions. It is expected that this will be addressed by the legislature in due course. ■

Corporate Tax Registration Deadline: Have you registered?

With the first UAE corporate tax registration deadline looming (31 May 2024), companies and other businesses need to ensure that they have checked their deadline to register as a taxable person.

 

The registration process under the Federal Law No. (47) 2022 (CT Law) is still new to the UAE and 2024 marks the first mandatory year for companies to register with the Federal Tax Authority (FTA) as a taxable person. Since this is the first year for such registration, companies and individuals (where applicable) should be aware that additional requirements (documents and/or fees) may be requested from the FTA following submission of the company’s registration via the EmaraTax portal (Portal).

 

When evaluating whether one has an obligation to register for corporate tax, a prudent question that arises is whether or not you are captured under the CT Law provisions as a taxable person. To the extent that the answer to this question is yes, you will then need to look at whether you are required to register. In the majority of cases, if the answer to the first question is yes, the answer to the second question will also be yes, save for certain automatic exemptions, which we have discussed below.

 

Am I a taxable person?

 

i) Individuals

 

CT Law shall apply to natural persons engaged in a business or business activities in the UAE. This will include sole establishments or proprietorships and individual partners in an unincorporated partnership conducting business in the UAE. As a general rule, whether an individual is engaged in a business that is subject to CT will depend on whether the activity requires a commercial license or equivalent permit from the relevant competent authority.

 

ii) Companies, Partnerships and other Legal persons

 

CT Law shall apply to UAE companies, partnerships and other legal persons incorporated in the UAE, as well as to foreign legal entities that have a permanent establishment in the UAE or that earn UAE-sourced income.

 

For the application of CT Law, legal persons incorporated in a foreign jurisdiction that are effectively managed and controlled in the UAE will be treated as if they are UAE-incorporated entities.

 

Limited and general partnerships and other unincorporated joint ventures and associations of persons will be treated as ‘transparent’ for corporate tax purposes, meaning, the income generated from such establishments will ‘flow through’ and be taxed in the hands of the partners or members only.

 

I am a taxable person; do I need to register?

 

UAE branches of domestic companies are considered an extension of their ‘parent’ or ‘head office’ and are therefore not considered separate legal entities and are not required to separately register or file for UAE corporate tax. However, the parent and/or head office of the UAE branch is required to register.

 

In contrast, UAE branches of foreign businesses likely will be required to register via the Portal, on the basis that the income earned shall be included and deemed taxable income. It is notable that such entities may be eligible to apply for certain corporate tax exemptions and we can advise on this further on a case-by-case basis. However, such tax exemptions do not negate the requirement for these entities to register as a taxable person under the CT Law.

 

Freezone companies, that are engaged in business or business activities in the UAE, must register via the Portal, even if they are eligible to apply for, and avail certain exemptions in relation to corporate tax liability.

 

Foreign individuals may also be required to register via the Portal as a taxable person should they undertake a licensed business activity within the UAE. However, it should be noted that wages earned by individuals are not taxable, therefore, a foreign individual (being a natural person) shall not need to register via the Portal as a taxable person if they are earning an employment wage in the UAE.

 

What if I don’t register?

 

The current fine for failing to register as a taxable person within the specified deadline is AED 10,000.

 

In its latest reports, the FTA conducted 40,000 inspection visits in local markets across all emirates in the UAE in 2023, marking an 80% increase from 2022. This intensified supervisory effort is aimed at combatting tax evasion and promoting tax compliance. Therefore, companies, businesses and individuals should be aware that although corporate tax is new to the UAE, the authorities are taking a firm approach to ensuring compliance.

 

Do I still have to register if exemptions apply?

 

Under CT Law a company and or an individual undertaking a business activity or business must register whether or not that entity may be eligible for certain tax exemptions unless an exemption already applies. Please refer to below.

 

So, who should not register?

 

Companies who may not need to register pursuant to the current guidance released by the FTA are as follows:

 

Government Entinty

Automatically exempt unless conducting a business or business activity under a license as issued by licensing authority.

Government Controlled Entity

Exempt if the entity carries out ‘Mandated Activities’ (an activity conducted by a company directly or indirectly wholly owned and controlled by Federal, Local Government, ministries, governmental departments, agencies, and/or public institutions). Otherwise, shall be subject to corporate tax if conducting a business or business activity under a license as issued by licensing authority.

Extractive Business

May not be required to register unless they conduct a business which is within the scope of corporate tax.

Non-Extractive Natural Resource Business

May not be required to register unless they conduct a business which is within the scope of corporate tax.

 

What if an automatic exemption doesn’t apply to a company?

 

Should a company not fall into one of the above automatic exemption categories, then the company must register via the Portal (whether established or not in a freezone) and following such registration, may apply for an applicable tax exemption from being subject to corporate tax on the company’s earnings. These tax exemptions include but are not limited to:

 

– Qualifying Freezone company, undertaking a qualifying activity, earning qualifying income;

 

– Qualifying public benefit entities, including but not limited to charities; and

 

– Public and private pension/social security funds.

 

Additional tax exemptions may assist in resulting in a lower or zero percent tax rate:

 

– Permanent Establishment rules

 

– Foreign Permanent Establishment rules

 

– Double Taxation agreements

 

What about individuals?

 

Individuals once again shall need to register if they undertake a business or business activity. Notwithstanding this, individuals shall not be taxed and therefore shall not need to register for corporate tax where the income is generated as a result of the following:

 

– Wages earned from a company, including income earned as compensation for duties carried out as an executive on a board.

 

– Personal Investment Income: for example; where an individual uses personal savings, invests into a listed company, and earns income from the investment, this shall not be deemed a taxable income. In this context, the individual will not need to register.

 

– Real Estate Income: being income earned from rental income or the sale of a property.

 

However, although certain income may be taxable, individuals may be eligible for certain tax exemptions and may avail a more favourable corporate tax rate of zero percent benefiting from applicable exemptions (to be evaluated following registration) such as:

 

– Turnover threshold;

 

– Withholding Tax rate; and/or

 

– Exempt income.

 

***

 

Afridi & Angell advises international and domestic clients with respect to corporate tax structuring, corporate tax exemptions/reliefs, coordination with taxes paid abroad/foreign tax credits, compliance and registration. ■

The Unprecedented Rains and Floods in the UAE – Who is responsible for all of the damage?

Over a period of less than 24 hours on the 16th of April, the United Arab Emirates experienced its heaviest rainfall since records began 75 years ago, with sources recording a years’ worth of rain falling in one day. The record-breaking rains created destructive flooding and chaos. Properties in the UAE were under attack by natural elements – rain, wind and flood. Many suffered from severe flooding, rising groundwater, and water through the walls and windows as well as through roofs. Whilst many parts of the UAE have now returned to normal, there are a number of neighbourhoods such as the Mudon development in Dubai which are still under water, including numerous luxury properties. Further rains and floods are also predicted for the next few days. Pricing for UAE real estate has now added another factor which will determine real estate valuation: the capability to withstand/susceptibility to rain, wind and flood (elevation, drainage, access, waterproofing).

 

But who do owners turn to? Who is at fault and liable for such repairs? Many homeowners do not have insurance. Can homeowners look to developers, master developers and building management companies for responsibility? Some developers have already stated that they will cover all costs necessary to repair communities affected by the flooding, including addressing any structural damage, restoring affected properties, and any additional restoration works. But is this a gesture of goodwill, or are they obligated to do so?

 

Are Developers responsible?

 

Developer’s liability – Article 40 of Law No. (6) of 2019 Concerning the Jointly Owned Real Property Ownership (JOP Law):

 

Article 40 (a) – Developers remain liable for a period of 10 years from the date of the completion certificate of the project being issued for structural defects.

 

Article 40 (b) – Developers remain liable for a period of one year from the date of the handover of the unit to the owner for repairing or replacing defective installations, including mechanical, electrical, sanitary and sewerage installations and other similar installations.

 

Owners may (subject to the time limitation period) be able to rely on the one-year and 10-year warranties as provided under the JOP Law. Owners/buyers should also check what if any, other warranties were provided to them on completion by the Developer. Owners may be able to hold developers liable for failure to comply with building construction and maintenance standards, including lack of sufficient and/or enough sump pumps for drainage.

 

In turn, developers may be able to rely on warranties provided to them by master developers, contractors and architects. Developers may rely upon the UAE Civil Code, Articles 880-883 and the ‘Decennial Liability’ period, which consists of a 10-year liability period for structural defects. The developer may hold the architect and contractors liable for structural defects, and potentially towards wider design defects.

 

Are Master Developers responsible?

 

With owners paying service charges to master developers for community services, there are obligations owed by the master developers to these owners. Questions arise regarding the proper design and maintenance of properties and surrounding community areas, including infrastructure such as roads and drainage.

 

Are Building Management companies responsible?

 

Article 18 of JOP Law:

 

For most real estate properties/developments, either the developer, or an appointed management company shall manage, operate and maintain the community, and where applicable common areas of the property. Such maintenance includes sewerage and drainage.

 

Article 41 of JOP Law:

 

Management companies and developers must also ensure that they have sufficient insurance in place to cover maintenance and reconstruction, in case of fire, damage or destruction for any reason whatsoever, and owners, contribute towards the insurance premiums through their service charges.

 

Developers, master developers, architects, engineers and contractors will argue that the rain and the floods were a force majeure event and that they cannot be responsible for an act of God. But what if the design or maintenance is not up to standard and damage would have been far less had it been designed or maintained properly? What if the developers, master developers, building managers, architects or engineers did not abide by their obligations under the law which caused or partially contributed to the damage suffered by real estate owners? What about those owners who had already raised concerns with regard to leaks during heavy rainfalls, sewerage and drainage issues but nothing had been done to address those concerns? The above considerations regarding developers’, master developers’, building management companies’, architects’, engineers’ and contractors’ liabilities are relevant in determining who may be responsible for paying for some or all of the damage. Who is liable and who pays will be the next major consideration in this saga.

 

With the April 16th unprecedented rainfall and floods, many have called for changes in the current construction and development requirements of projects including the increase and improvement of sewerage and drainage systems. The government has already announced as part of the Dubai Economic Agenda D33, that it has pledged AED 80 billion towards a new and updated sewerage system. The government has been fast to react by stating that developers and building management companies should restore and repair properties and communities at no additional costs, and where needed, assist with alternative housing, pest control and additional security. Master developers and developers will need to carefully consider whether they should be investing in better drainage in their relevant developments. The question will continue to be whether this cost should be borne by the owners, and if so, will owners see a future hike in their service charges? ■